The Biggest Retailer in the World vs. the TABC

Wal-Mart sells spirits in 25 states, and it would very much like to sell spirits in Texas.  However, Wal-Mart can’t sell spirits in any of its 543 Texas stores because of several bizarre legal restrictions on package store ownership in Texas.  So last month Wal-Mart filed a suit in federal district court in Texas against the Texas Alcoholic Beverage Commission challenging those statutes on constitutional equal protection, commerce clause and general “these crazy statutes don’t make any sense at all” grounds.

Wal-Mart does not qualify to sell spirits in Texas because (a) Wal-Mart is a publicly traded company, and (b) Wal-Mart does not operate hotels (publicly traded hotels may have package stores inside their hotels).  Texas’ ban on publicly traded corporations holding package store licenses goes back to 1995.  Before 1995, Texas prohibited any out of state company from owning a package store license in Texas, but this was struck down by the Fifth Circuit, as the court found the state couldn’t offer a justification substantial enough to authorize such discrimination against non-Texans. 

Immediately after the Fifth Circuit put the kibosh on barring non-Texans from holding package store permits, the Texas legislature passed the bill that prohibits public corporations from doing so, though it made an exception for publicly traded hotel corporations.   The Texas Package Store Association was the principal supporter of the bill, not surprisingly.  The fact that Walmart would be the largest private employer in Texas apparently held no sway in the legislature that year.

Walmart stores and Sam’s Clubs now hold 543 beer and wine off-premise permits in Texas, which are called “Q” permits, but if Wal-Mart got even one package store permit (ignoring the fact that they can’t, as a public corporation), they would have to give up all 543 of those permits.  So Wal-Mart is challenging that restriction as well.

Then there's the five package store limit.  Even if Wal-Mart were able to qualify for a package store license (ignoring for the moment that it would have to give up its 543 beer and wine store permits to do so), it would be limited to five package stores in the entire state.  There are similar restrictions in other states - MA comes to mind - but Texas has a Texas-sized loophole in its law. If you are a Texan and own five package stores, and your Texan parents own five, and your Texan sister and brother both own five, the law allows you to consolidate all twenty of those stores into one entity.  Not only that, but you can sell your business and transfer all of those licenses to another entity who doesn't have to be related to you. That's how Spec's and Twin Liquors own so many package store in Texas; 160 and 76, respectively.

Wal-Mart isn’t challenging the three-tier system in Texas in any way. Its claims revolve solely around the discriminatory laws that Texas imposes on package store licensure, and it does a good job of arguing that those laws should not stand up under the Equal Protection Clause and the Commerce Clause of the U.S. Constitution. It's true that Wal-Mart can be seen as a Goliath in a lot of ways, but everyone should be cheering for them this time. 

New Marketing Model for New York – Lot 18 and the NYSLA

On April 23, the New York State Liquor Authority held a hearing on Lot 18’s request for declaratory ruling on (as worded in the request for ruling), the “validity of using nationally recognized marketing companies to market wine clubs in New York State, which are offered for sale by a New York State licensed package store.”  The hearing was interesting and informative for anyone in the business of marketing wine to NY consumers. Lot 18 told the NYSLA in the hearing that it has secured a NY retail package store license (and location) and plans to provide product and fulfill orders for third party marketers, including the Forbes wine club.    As a licensed retailer, Lot 18 will be doing most of the work in connection with the Forbes Wine Club orders (accepting the orders, taking the consumer’s payment, customer service, and making the delivery arrangements).  Lot 18 will be purchasing the inventory for the Forbes Wine Club in advance of taking customer orders.

Based on the comments and questions by the SLA Board members at the meeting (most questions were friendly and the approach was approving), it appears likely that the SLA will approve Lot 18’s model as presented.

During the meeting representatives of other NY package stores spoke, or rather, aired their grievances regarding the Lot 18 model.  Most of the remarks addressed the concern that if third party marketing entities were allowed to utilize the services of a NY retailer,  the perceived result would be the lack of a “level playing field” for regular retailers (regular retailers being, in this case, those who do not affiliate themselves with third party marketing entities).  The NY retailers also voiced concern that they wouldn’t have access to the same products that were being sold by Lot 18 for the Forbes club. Lot 18 responded that about 40% of their products are true private labels (owned by Lot 18), which can be lawfully restricted to Lot 18.  The other 60% would be available to other retailers through the NY wholesale system.

In response to the accusations that Lot 18 is not a bona fide retailer since its store is only 800 square feet and only open 30 hours a week, Chairman Rosen observed that the SLA had held two public hearings on Lot 18’s license application, and that after investigation, the SLA does in fact consider Lot 18 to be a bona fide retailer.  Chairman Rosen also noted that the SLA has no policy against just in time inventory models.

Chairman Rosen mentioned that the SLA has been receiving complaints that the agency is not  offering more guidance regarding the subject of Internet marketing, unlike – for example – the CA ABC, with its 2011 Advisory.  Chairman Rosen pointed out that the SLA’s declaratory ruling on ShipCompliant was lengthy, offered good guidance, and that rather than having strict parameters, using the “rule of reason” is a better method by which to evaluate Internet marketing programs.  This observation comported with H&C’s blog post following the ShipCompliant hearing making the same point.

The next event will be the Wine Cellar’s hearing on its similar request for declaratory ruling, which has been rescheduled for June 4.

Sweeping Changes in Proposed NYSLA Bill Include Expansion for Craft

The New York State Liquor Authority has been busy working on a series of statutory revisions that are intended to revise and streamline the provisions of the NY ABC law governing manufacturing and wholesale licenses. Retailers will also be affected. The SLA plans to submit the proposals to the Governor (who has announced he will be introducing a bill this session to address supplier issues) for his consideration, and held a meeting on April 17 to get input from the industry on the proposed revisions. Stay tuned for an update on the final outcome of this process because the politics and the lobbying from all sides may be fierce; especially over provisions softening the three-tier system in NY.  In the meantime, here are some highlights from the 122-page proposed legislation in its current form:

DTC:  Direct to consumer shipment rights would be extended to craft brewers and craft cider producers.  In addition, any producer with a NY direct shipping permit (winery, brewery or cider producer) would be able to ship products produced by others, in addition to their own, so long as those other producers were located within a 50-mile radius of the shipping producer. The 50-mile radius requirement is interesting because, for example, it would bring most (if not all) of Napa and Sonoma, for example, into the shipping radius for one winery.

Supplier Tastings: The bill would expand the categories of applicants eligible for marketing permits, which allow the holder to conduct tastings and bottle sales at other locations, to certain suppliers and “brand owners.”  Licensed wholesalers and importers would be allowed to obtain a “distributor’s tasting permit” for consumer tastings. “Brand owner” is not defined in the current version, and is likely to spark a battle if it includes, for example, foreign producers, celebrities, and non-producers.

Special Events: Manufacturers and “brand owners” would be able to obtain a permit to sell wine, beer or cider by the glass at special events.

Retailer Tastings:  Grocery stores licensed to sell beer would be able to conduct consumer beer tastings, though all beer poured must be from kegs, not bottles or cans. (The keg requirement was apparently intended to provide some assurance to certain local jurisdictions that have experienced problems with open container violations, though the SLA did indicate that it could be changed down the road if grocery beer tastings go smoothly in the interim).

Wine Growlers:  Retailers would be able to sell wine in growlers.  There is no indication yet how the legislation would address the fact that the TTB currently requires a federal basic permit as a tax-paid bottling house for a retailer to sell growlers; perhaps there would be an exemption provided in the final enabling legislation.

The significance of these proposed measures lies in their potential effect on the three-tier system, not just in NY but in every state that looks to NY for guidance.  Will the proposed changes be viewed by the distribution tier as an attack on their privileges, or as reasonable measures designed to facilitate routes to market for small producers?

Growlers: Not Just for Beer Anymore

In the past few years, wine packaging and dispensing in the U.S. has taken on new forms, going beyond the now-ubiquitous screw caps on bottles.  These include the various permutations of wine “in a box,” Tetra Paks, and single servings of sparkling and still wine in cans.  On-premise retailers are also increasingly offering wines on tap by the glass or carafe, which retain their freshness better than wines from open bottles. These new technologies offer a range of benefits, from environmental (reduction in the use of glass and the supplier’s carbon footprint) to economic (cheaper packaging and lighter, more efficient freight loads), to widening wine’s appeal to new consumers—particularly the younger set, who are more likely to welcome innovation and are less bound to tradition.

Enter the concept of growlers for wine.  A “growler” is a container that most commonly is filled with beer from a tap at a brewery or on-premises beer seller for the consumer to take home, drink, and then refill and use again. Originally a growler might have been a simple metal pail, but today’s growlers are likely to be glass or ceramic jugs.  Since they are reusable, they are better for the environment, fitting right in with the modern day “reduce, reuse, recycle” ethos.

Starting before Prohibition, when wineries sold most of their wines in bulk rather than bottles, wineries in California and elsewhere have been allowed to fill reusable containers for customers at the winery.  This has also been a longstanding practice in Europe (in France, where it is referred to as wine “en vrac,” it’s not uncommon to see a winery employee filling up a customer’s 1.5 liter plastic Evian bottle with wine from a hose).

Filling 'er up with Côtes de Provence AOC Rosé - Photo courtesy of Gastrocycling.com.

But while many states also allow retailers to sell beer by the growler, very few states allow retailers to sell wine by the growler.  Oregon is one of the first.

Oregon passed House Bill 2443 in April 2013, which, for the first time in that state, permitted wine and cider to be sold in growlers (or, as worded in the bill, “securely covered containers provided by the purchaser”).  The new law also expands the privilege to off-premise licensees, so now restaurants, wine shops, and grocery stores can join breweries and wineries in offering growlers of wine and cider (as well as beer) to their customers.

The law restricts the size of growlers to a maximum of 2 gallons each, and any employee who dispenses alcoholic beverages into a growler must hold a valid service permit issued by the Oregon Liquor Control Commission.

Some winery associations in Washington hope to have a similar law soon in their state, which currently only allows wineries to sell growlers of wine at the winery location itself, and not at additional tasting room locations.  They would also like to see wine growlers become legal for Washington retailers to sell.

Could California be next?

Electronic Invoices in California: Welcome to the 19th Century

Electronic invoicing is one of the simplest and most effective ways to efficiently run a modern business. You can create, send, and archive electronic invoices in a fraction of the time it takes to do the same task with traditional, paper-based methods.  Electronic invoices eliminate the problems that inevitably come with paper-based processes such as misplacing paper, duplicating or overpaying invoices, or making late payments.  Electronic invoicing services can be set up to include online notifications that remind approvers that an invoice needs to be processed.  Electronic invoices also help facilitate audits, because AP departments can more quickly provide access to electronic invoices than to paper invoices buried in files. Last but not least, electronic invoicing is better for the environment.  Hundreds of thousands of trees are harvested each year to support paper invoicing in the US alone, not to mention the related energy and pollution costs; and although digitizing a single invoice may not lower greenhouse gas emissions significantly, the cumulative effect of removing millions of paper invoices from the financial supply chain would have an impact.

However, despite these benefits, despite the fact that there is no California law or regulation that explicitly prohibits electronic invoicing, and despite the fact that many other states’ alcohol regulatory agencies permit it (at least 25 other states by our rough count), the California Alcoholic Beverage Control does not allow suppliers (including wholesalers) to use electronic invoices instead of paper-based invoices when making sales and deliveries to retailers:

“Neither the Alcoholic Beverage Control Act nor the Department’s business regulations specifically authorizes electronic invoicing. A written invoice must accompany the alcoholic beverages when sold by a supplier to a retailer and theses invoices must be maintained on the licensed premises for inspection by Department personnel.”  (Email from the Trade Enforcement Division of the California ABC on December 12, 2012)

As a state agency in a state that is a world leader in developing information technologies and considers itself an environmental leader as well, the ABC’s position on electronic invoicing demonstrates a frustrating reluctance to adapt to the modern world, and effectively keeps alcoholic beverage licensees decades behind other businesses in the modern use of their accounting systems.  As more and more businesses cross state lines, the requirement that in California all suppliers and retailers must maintain (at the risk of license revocation) paper-based and manually-filed invoices seems strangely anachronistic and, for those who have adopted electronic invoicing systems without checking with the ABC, dangerous to their continued licensure.