Good Beer Hunting

Three-Tier System vs. Two-Day Delivery — SCOTUS Ruling Could Impact Sales, Shipping of Booze

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In a 7-2 ruling Wednesday, the U.S. Supreme Court handed down a decision that could have wide-ranging and long-lasting impact on the country’s system for selling and shipping alcohol.

For decades, the most complex aspects of beer laws have related to products crossing state lines. Interstate commerce was at the heart of this ruling, setting up potential for a variety of lawsuits down the line that could change how the three-tier system works across the producer, wholesaler, and retailer segments.

A decision on Tennessee Wine and Spirits Retailers Association v. Russell F. Thomas came more than a year after SCOTUS proceedings began in April 2018, and the lawsuit dates back to 2016. The case pitted Tennessee’s retailers association against a collective that included multi-state retailer Total Wine & More, and Affluere Investments, a company owned by Tennessee residents Doug and Mary Ketchum. 

The husband-and-wife pair challenged a state law that required a two-year residency to own a retail liquor-store license. The family had relocated from Utah, and opened Memphis’ Kimbrough Wine & Spirits, as a way to better care for their daughter, Stacie, who suffers from cerebral palsy.

Full details of the ruling can be found on the Supreme Court's website, and additional backstory on the family can be found here. This decision is also connected to 2005’s ruling on Granholm v. Heald, which loosened shipping laws for wine across state lines.

This case began with a literal mom-and-pop business and reached the highest court in the country. Now, amidst the fallout, there are numerous reasons why beer drinkers—and most importantly, businesses—should pay attention to this decision.

"To be clear, there are a lot of potential barriers in the way of getting from Point A to Point B to have 'Amazon Prime Booze,'" says Jarrett Dieterle, a senior fellow and director of commercial freedom at the R Street Institute, a think tank that identifies as non-partisan, but is labeled by others as center-right. "But it's conceivable on the horizon."

Here is the biggest takeaway from the SCOTUS ruling: it’s a potential first step toward challenging three-tier laws that could lead to a new kind of nationwide wholesaler. Starting with the Granholm decision and continuing with this week’s decision, these rulings are beginning to chip away at Prohibition-era laws that minimized, if not prevented altogether, the ability of national companies (like today’s Amazon or Walmart) from fully engaging in the sale and delivery of alcohol. During arguments leading up to this week’s ruling, Justice Neil Gorsuch wondered aloud if changing residency standards would actually create an "Amazon of liquor.”

What Granholm did over a decade ago was give producers (in that case, wineries) the ability to sell across state lines. So far, Dieterle says, states have taken a narrow interpretation of the ruling: wineries could take part, but not necessarily other alcohol manufacturers. 

This time around, the Thomas decision is about retailers preventing states from discriminating between in- or out-of-state commercial enterprises. It opens up the future possibility of companies like Amazon using their massive delivery networks to sell alcohol. The argument against loosening restrictions was that the Granholm precedent only applied to producers and their products, but in this decision, Justice Samuel Alito wrote that there was "no sound basis for this distinction." 

"...Granholm never said that its reading of history or its Commerce Clause analysis was limited to discrimination against products or producers," he continued. "On the contrary, the Court stated that the Clause prohibits state discrimination against 'all out-of-state economic interests.'"

In practical terms, it’s a court ruling that pushes alcohol commerce forward.

"We can get every product at our doors in two days, and alcohol is one of the biggest exceptions to that," says Dieterle, author of the forthcoming book Drink For Your Country, a history of U.S. liquor laws. "This could be one of the first steps toward that."

This is, of course, what Amazon has already started to explore. Earlier this year, it hired a lobbyist to directly "help lead state and local engagement and public policy activities" related to alcohol regulation. There’s still a long way to go before Prime members in Pennsylvania can order a merlot from California with two-day delivery, however. Most notably, states will need to start addressing a variety of decades-old laws related to alcohol. They’ll also need to update regulations to ensure they’re not in violation of this most recent court decision, which prevents state governments from discriminating against alcohol retailers. (There’s even that pesky issue that the U.S. Postal Service still can’t ship booze at all.)

“There is still going to be a lot of litigation and follow-ups because so much of our laws are under these immediate, post-Prohibition rules that make no sense in our modern economy,” Dieterle says.

It’s also worth remembering that the online retailer had previously tried—and failed—in this arena with Amazon Wine, which functioned as a broker that allowed wineries to sell directly to customers through Amazon. There might be the assumption that Amazon is ready to blow up and take over wholesaling, but they’re not the only ones who stand to benefit from this new court ruling.

“People tend to focus on the big boys, but the thing that may be most exciting is for craft spirits and brewery enthusiasts,” Dieterle says. “What’s lost in a lot of this is how it could very much help the smallest of small businesses. A new, interstate shipping market isn’t just helping corporations, but it opens the chance for smaller producers to expand their market in a way they wouldn’t have been able to do.”

In theory, the new ruling could act as the opening salvo for additional, direct-to-consumer sales, which have already been a key growth area for craft breweries. Own-premise, taproom sales increased by about 400,000 barrels in 2018, according to the Brewers Association, and now comprise 3–3.1-million BBLs. That’s about 12% of all Brewers Association-defined craft beer. A future where over-the-bar sales could move across state lines creates a powerful revenue stream.

Because Supreme Court rulings now impact producers and retailers, Dieterle says there could feasibly be a future where Amazon or Walmart may have an advantage in volume and shipping, but small producers of all kinds of alcohol could take advantage of a freer, interstate shipping option.

This development also adds a new wrinkle to the ongoing evolution of U.S. wholesalers, who, for the last few years, have been consolidating into fewer and larger companies. Some businesses are already creating regional and national networks to add additional brand volume, and wholesalers like the Reyes Beverage Group have been pivotal in helping advance Constellation Brands’ “gold network,” meant to rival the collection of distributors closely tied to Anheuser-Busch InBev (red network) and MillerCoors (blue network). 

This week’s ruling leaves a variety of questions on the table related to distribution and the potential future of the three-tier system, one of which came from Gorsuch in his dissent: “If residency requirements are problematic, what about simple physical presence laws?” In essence, he’s sharing a worry that a company doesn’t need to physically be in a state to sell alcohol, à la his “Amazon of liquor” comment. Luckily for the company Gorsuch is worried about, Amazon already has a physical presence in many states thanks to its 2017 acquisition of Whole Foods.

So what’s next? 

As highlighted by's coverage, at least 16 states allow in-state stores to ship to residents while prohibiting out-of-state retailers from doing the same: New York, New Jersey, Texas, Illinois, Michigan, Ohio, Massachusetts, Washington, Arizona, Colorado, Missouri, Minnesota, Indiana, North Carolina, South Carolina, and Maine. Those state laws should now be considered unconstitutional. 

"Each state will have to either rewrite its law or see it struck down when NAWR or a similar organization takes it to court," W. Blake Gray wrote on the site. "But—and this is important—states do not have to allow any retailers to ship wine to consumers. What they must do is treat in-state and out-of-state stores the same."

This now opens up possibilities for a variety of additional lawsuits and lobbying by a host of organizations to either expand retailer rights or harden what remains of long-standing three-tier rules. It’s also, quite likely, where that Amazon lobbyist comes in to play.

More than a decade has elapsed between the Granholm decision and this week’s case. Further change in how business is done within the alcohol industry is certain, but—thanks to this week’s legal responses, and the powerful companies who are now on the playing field—it shouldn’t take another 14 years to manifest.

Words by Bryan Roth