Hard liquor made its appearance on Washington supermarket shelves last June 1 — but the interests behind I-1183 say Liquor Control Board rules have undermined their plans for the back end of the biz.
OLYMPIA, April 30.—A Thurston County Superior Court judge has thrown out a rule written by the state Liquor Control Board that aimed to protect the role of liquor distributors in Washington’s brave new world of privatized booze sales. It’s one small step for the coalition of restaurateurs and retailers who pushed Washington’s precedent-setting Initiative 1183 back in 2011, which closed the state’s liquor stores and aimed to establish a competitive marketplace unlike any other in the country.
But the biggest battlefront remains the Washington Legislature, where the coalition continues its push to repeal rules written by state regulators that it says undermined the intent of the measure. The retail and restaurant interests are battling liquor distributors in a fight that will resume when lawmakers return for a special session May 13.
The latest development comes in a decision from Thurston County Superior Court Judge Erik Price, who ruled Monday that the state Liquor Control Board overstepped its authority when it limited hard-liquor sales in stores to 24 liters a day. What it meant was that restaurants and bars could purchase no more than two cases of booze from a retail store during any given 24-hour period. And it ensured that hard-liquor sales would be dominated by the two large out-of-state distribution companies that immediately took over the market when booze went private in this state last June 1.
“It is an important decision, but it is only one step of the way along the journey toward getting 1183 implemented the way it was envisioned and written into law,” said Bruce Beckett of the Washington Restaurant Association.
Indeed, that’s one rule down, but there are several more to go. The coalition is pushing a bill in the Legislature to eliminate another Liquor Board rule that made it virtually impossible for retailers to compete for the restaurant trade, because they were hit with a 17-percent tax that distributors don’t have to pay. There’s plenty of pressure for a fix – small retailers say they are being driven out of business. And the big dogs in the fight, the big retail and restaurant interests and the distributors, are bringing all their lobbying muscle to bear. The upshot is that the attack on the Liquor Board rules could dismantle one of the last remaining bulwarks of the so-called “three-tier system” in this state, and set a precedent that could give the alcoholic beverage industry nationwide a nasty headache.
Agency Rulemaking is Issue
Bruce Beckett, government affairs director for the Washington Restaurant Association.
The Monday court decision and the current battle in the Legislature call attention to a facet of the initiative that went virtually unnoticed by the public during the 2011 campaign. The measure closed the state liquor stores, to be sure, and it allowed booze sales by private retailers in this state for the first time since 1915, when Washington enacted its own Prohibition law. Some 1,500 private sellers entered the business. But while the public toasted the arrival of Jim Beam and Johnnie Walker in local supermarkets, the measure also made complicated changes to the back end of the biz – the part consumers never see.
In every other state of the union where private retailers are allowed to sell alcoholic beverages, manufacturers must sell to a middleman – the distributors – before the product reaches stores and restaurants. The interests behind the Washington initiative, led by Costco Wholesale, the Issaquah-based retailing giant that put up $23 million for the campaign, call it an archaic arrangement whose time should have passed long ago.
Though the initiative left beer untouched, it permitted wholesale discounts for large purchasers of wine and spirits for the first time. It allowed retailers to buy directly from manufacturers. And it let retailers sell to restaurants and bars – essentially creating wide-open competition on the back end much like exists for any other commodity.
Here’s the hitch: The state Liquor Control Board sided with distributors and wrote rules to implement the initiative that had the effect of blocking new avenues of competition. Though the board maintains it had good legal reasons, the I-1183 coalition is challenging those rules before the Legislature and in the courts. Monday’s court ruling was its first clear victory.
Board Went Too Far
Costco, the Restaurant Association and the Northwest Grocery Association went to court last summer to overturn two key rules – and in what might be described as a split decision, Judge Price said that the state Liquor Control Board went too far on one of them. The initiative imposes a 24-liter limit on sales by retailers, but it says nothing about the number of purchases any single customer can make. The Liquor Control Board maintained that the limit was meaningless unless it was a daily limit. The judge said that is not a proper decision for the board to make.
The board’s argument makes sense, he said, “but the question is not whether the rules are more meaningful with this added restriction, the question is the board’s authority to impose them.”
Numerous court precedents suggest that state agencies cannot “correct” what they consider poorly considered laws simply by writing an administrative rule, he said. “It is not the board’s place, nor this court’s, to infuse a policy into statutory language that is not there, even if that policy improves the statute,” he said.
The decision could allow retailers to make bulk sales to restaurants and bars by the simple expedient of ringing up two cases at a time. Or they might even make deliveries and simply write multiple invoices.
But the judge upheld the other Liquor Control Board rule – one which imposes a 10 percent distributor tax on distillers that sell directly to retailers. The initiative says only distributors have to pay that fee to the state, but the judge noted that another state law says that when an “industry member” acts as a distributor, then it is subject to the same laws and rules. So much for a provision of the initiative that at least theoretically might have allowed retailers to strike deals with distillers and enjoy a big advantage over distributors.
Doesn’t Open Up Market
Practically speaking, the decision by itself won’t do much to open up the market. That’s partly because the big players in the distillery biz already have exclusive marketing arrangements with distributors. Sales go through distributors anyway, and that’s where the retailers get their product. In this state, the distribution business is dominated by two companies, Southern Wines and Spirits and Young’s Market Co., which together have 93 percent of the market. There is still the possibility that a large retailer might strike a deal with a distiller for a low-price house-branded booze which might be sold to restaurateurs for well drinks – but another rule adopted by the Liquor Control Board imposes another hurdle for retailers who wish to sell to the restaurant and bar trade. Although language in various sections of the initiative appears to conflict, the board maintains that retailers must charge a 17 percent tax when they sell to any customer, including restaurateurs. Distributors don’t have to pay that tax – and so retailers are at a significant disadvantage in competing for that segment of the market, which comprises one-third of sales.
Right now the coalition is pushing bills in the Legislature, HB 1161 and SB 5644, that would eliminate that 17 percent tax when retailers sell to restaurants and bars. As with anything involved with the issue, the details of the legislation are infinitely complicated, there have been complex amendments along the way, and the various players, big and small, have different interests. And there has been plenty of thundering about the influence of big money, both Costco’s and that of the big distributors. Caught in the middle are the small retailers — the owners of former contract liquor stores in rural areas and those who bought the former state liquor stores at auction last year for $31 million. Because they can’t compete for the restaurant and bar trade, and because they don’t have the large-scale economies of the big retailers, they say they are on the brink of failure. Trent House, lobbyist for Clearview Spirits, a former contract store, underscored the urgency of the issue at a House hearing this month: “There is a lot of nastiness around this issue [but] if the tone of this conversation continues as it has and lawmakers feel as though there is no solution for the problem and want to walk away from the issue and wait for another year, my client will be out of business. There is no next year for my guys.”
The distributors have come back with a proposal, HB 2019, which among other things would eliminate the 17 percent tax for the small stores but would leave it in place for grocers and big-box stores like Costco. The issue remains alive during the Legislature’s special session because it affects state revenues, and therefore is considered a matter necessary to implement the budget. “We’re not accepting that there are good guys and bad guys here,” said Chris Hurst, D-Enumclaw, chairman of the House Government Accountability and Oversight Committee.
Will Anyone Appeal?
John Guadnola of the Washington Spirits and Wine Distributors Association.
The immediate question is whether any of the players will appeal the Thurston County ruling. No one seems to have made a decision on that score. Though they won on the 24-liter rule, the players in the I-1183 coalition might try to take it further and challenge the decision on the 10 percent tax. Beckett said no decision has been made. The state also might appeal. Assistant Attorney General Mary Tennyson, representing the Liquor Control Board, said her client is still digesting the ruling.
And the same holds true for the distributors, who intervened in the case and who presumably have standing to sue. John Guadnola, executive director of the Association of Washington Spirits and Wine Distributors, notes that the initiative, written by the distributors’ adversaries, singles them out by requiring them to make a $150 million payment to the state. The payment is supposed to compensate the state for the value of the business it lost when the liquor stores closed. Though some of that is covered by taxes paid during the first year, distributors will have to write checks to the state next month totaling $106 million. Distributors say that argues for special treatment.
Guadnola said his association believes the judge was right in upholding the 10 percent tax on direct sales between distillers and retailers, and wrong on the 24-liter rule. “By essentially eliminating any restriction on quantity of sales between retailers and restaurants, the court is in effect allowing Costco and other big retailers to set themselves up as quasi-distributors, even though they remain exempt from paying the hundreds of millions of dollars in fees that licensed distributors are required to pay. That is fundamentally unfair, will undermine free and fair competition, and puts at risk hundreds of well-paid, mostly union jobs.
“If the court’s conclusion is correct, then Costco snookered voters by including a meaningless restriction in the language of the initiative, and unfortunately the judge concluded that he was bound by the misleading language of the initiative. AWSWD does not agree with that conclusion, and is evaluating all options available to it, including an appeal of the ruling.”
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