Washington State: Down the Rabbit Hole of the Tied-House Laws

Washington, as most people now know, is making the switch from being a solely state-run spirits distribution and retail system to having a fully privatized system. Initiative I-1183, which WA voters approved in November 2011 and which becomes effective in June 2012, created a new category of WA off-sale retail licenses (grocery stores, liquor stores) that will be available to private enterprise. The state is also closing all state-run liquor stores.  In addition to retail off-sale privileges, this new license gives privately owned stores the right to sell wine and spirits to on-premises licensees (restaurants, bars) in WA.  Unfortunately, this resale privilege triggers the tied-house laws in other states (including CA) for any WA off-premises retailers who are licensed in more than one state because the new law requires that retailers selling spirits to other retailers for resale must also hold a federal basic wholesaler’s permit. We are always concerned with the CA tied-house laws, but this tied-house problem applies with equal force in all states with a tied-house law that forbids a retailer in that state from having any interest in a business at the production or wholesale level, regardless of what state or country that production or wholesale business might be in.

In CA, the issuance of a federal basic permit anywhere in the US (or Canada or Mexico) to an entity holding a CA retail license requires the CA retail-licensed entity to report the issuance of the permit on a “tied-house certificate” to the CA ABC.  The certificate affirms that the retailer has no interest in a wholesale license except as disclosed on the form. Variations of this disclosure requirement are found in all states.

The CA ABC Act defines a wholesaler as “every person” doing any wholesale business anywhere in the US, or in Canada or Mexico.  See CA Bus. & Prof. Code § 23021.

The issuance of a federal basic wholesaler’s permit in WA to a retailer with retail permits in multiple states thus jeopardizes the retailer’s licenses in those other states. Industry lawyers in WA and in CA have proposed remedying this problem by allowing a retail spirits licensee in WA to opt out of selling spirits for resale. The WA Liquor Control Board agreed that the federal basic permit requirement should be waivable if the retailer involved elects not to sell spirits to other retailers for resale. The LCB proposed a rule change to accomplish this result (new Rule 314-02-106) by building an intent requirement into the proposed regulations:

(2) A spirits retailer licensee that intends to sell to another retailer must possess a basic permit under the Federal Alcohol Administration Act. This permit must provide for purchasing distilled spirits for resale at wholesale. A copy of the federal basic permit must be submitted to the board. A federal basic permit is required for each location from which the spirits retailer licensee plans to sell to another retailer.

The proposed new regulations are currently out for public comment, and testimony will be taken in WA on May 24, 2012. The new regulations are expected to pass and to be in place when the transition to a license system is complete in early June.

This is good for those multi-state retailers who opt out. However not all multi-state retailers are making that election and, for those that do not elect to opt out (and who obtain a federal basic permit in WA), there is another potential answer: use the Commerce Clause principle articulated by the Supreme Court in Healy v. Beer Institute, Inc., 491 U.S. 324 (1989).  Healy prohibited a state from requiring its licensees to affirm that prices in its state are no higher than prices in surrounding states. The thrust of Healy is that the Commerce Clause prohibits one state from enforcing laws that control activity taking place solely within another state.

We believe that CA and other affected states will have a difficult time enforcing their tied-house law restrictions based solely on out-of-state activity but the question now is: will they try?

To be continued…