Beer Distribution 3tier System

Beer is at the heart of American culture and is about as American as baseball and apple pie.

But before examining the specifics of beer distribution law, one must understand the process by which American consumers get their beer. That process is known as the three-tier system.

Prior to 1919 and the passage of the 18th Amendment, brewers and producers of alcoholic beverages sold their products directly to retailers and often held unfettered ownership interests in taverns (known as “tied houses”), which led to anti-competitive business practices and unscrupulous marketing tactics aimed at inducing excessive consumption.

To combat that problem, the States ratified the 18th Amendment ushering in the prohibition era and outlawing the manufacture, distribution and sale of alcoholic beverages. The 21st Amendment repealed the 18th Amendment in 1933 and gave states the primary authority to regulate the distribution of alcoholic beverages, including beer, within their borders. The three-tier system of alcohol production, distribution and sale was born.

The three-tier system is designed to prevent pre-prohibition style marketing tactics, to generate revenues for the states, to facilitate state and local control over alcoholic beverages and to encourage temperance. Its three tiers consist of brewers (top tier), distributors (central tier) and retailers (bottom tier).

Brewers produce the product and sell it to distributors, also called wholesalers, who then sell the product to retailers (retail stores, taverns, etc.), who, in turn, sell the product to consumers. In many states, importers are treated as brewers, placing importers in the top tier of distribution. In less-populated states, however, large retailers may act as distributors by distributing beer products to smaller retailers, thus creating a four-tier distribution system. In a decision handed down in May 2005, the U. S. Supreme Court, in Granholm v. Heald[1], found the three-tier distribution system to be “unquestionably legitimate.”

Licensing vs. Control

State statutory and regulatory schemes establishing the three-tier system vary substantially, however states generally fall into one of two categories: license states and control states. License states, or open states, are the most prevalent and regulate alcohol distribution using a hierarchical licensing system through which these states approve and sell different licenses to businesses in each tier.

There are 32 license states. Under a typical licensing scheme, brewers who brew beer in another state, but who wish to sell it in the license state, must obtain a manufacture’s license, or register with a regulatory body, in advance of signing a distribution agreement with a distributor to distribute its beer. Beer distributors/wholesalers are required to purchase a beer wholesaler’s license, which allows for the distribution of beer only, but must purchase an additional license to distribute distilled spirits or wine.

Eighteen states (Alabama, Idaho, Iowa, Maine, Maryland, Michigan, Mississippi, Montana, New Hampshire, North Carolina, Ohio, Oregon, Pennsylvania, Utah, Vermont, Virginia, West Virginia and Wyoming) operate as control states. Control states have licensing requirements, too, but what distinguishes control states from license states is that at some point in the distribution process, these states obtain a direct interest in the revenues obtained through distribution by taking an ownership stake as distributors or retailers of the product. The control jurisdictions grant licenses to private enterprises to buy and sell beer only at the state’s discretion and only in compliance with required conditions and the general discretion of the licensing authority.

Brewer’s Self-Distribution of Beer

16 states (Alabama, Delaware, Florida, Georgia, Kansas, Kentucky, Louisiana, Maryland, Michigan, Missouri, Mississippi, Nebraska, Nevada, North Dakota, South Carolina and South Dakota) and the District of Columbia forbid brewers’ self-distribution of beer, while 34 states (Alaska, Arkansas, Arizona, California, Colorado, Connecticut, Hawaii, Idaho, Illinois, Indiana, Iowa, Maine, Massachusetts, Minnesota, Montana, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Tennessee, Texas, Utah, Virginia, Vermont, Washington, Wisconsin, West Virginia and Wyoming) allow brewers to distribute their products directly to retailers, with some restrictions.

See The Brewers’ Challenges and The Distributors’ Challenges for more information.

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