The state Liquor Control Board, from left, Ruthann Kurose, Chairwoman Sharon Foster, and former state Sen. Chris Marr.

OLYMPIA, May 30.—The state Liquor Control Board, the agency that will shutter the state’s 78-year-old liquor store chain at the end of the business day Thursday, approved a set of regulations Wednesday that will govern the new free market in Washington booze. Critics say the rules will drive up consumer prices and undermine what they hoped to accomplish with last year’s Initiative 1183 – and the state will see them in court.

Among those huddling with lawyers is Joe Gilliam, president of the Northwest Grocery Association. His group was part of the coalition that put the state out of the liquor business. But as supermarkets and big-box stores get set to sell hard liquor Friday, they say the dream of a competitive market for booze is being scuttled by state regulators. Retailers and restaurateurs say the new rules give distributors control over the marketplace that their initiative never envisioned. “They are so far outside the scope of 1183 that litigation is extremely likely,” Gilliam said.

Barring intervention by the state Supreme Court, which has yet to rule on a challenge from the Washington Coalition Against Substance Abuse and Violence, private merchants will take the wraps off store shelves at 6 a.m. Friday and begin selling hard liquor for the first time in this state since 1915. Since the end of federal Prohibition in 1934, Washington has sold hard liquor through a chain of 328 state-owned and contract stores. Washington voters last fall voted overwhelmingly to end the old system, 59-41.

Competition Was Dream

The state liquor store, a familiar sight on Main Street across Washington state for the last 78 years, fades from history Thursday night.

The new rules, adopted Wednesday without comment by the board on a 3-0 vote, have left retailers and restaurateurs aghast. As far as consumers are concerned, the most visible element of the new system is the shutdown of the state liquor stores. But the initiative also enacted sweeping changes to the back end of the business that were aimed at breaking the power of distributors and changing the way alcohol is marketed. In every state of the union where private sales of alcoholic beverages are permitted, state laws impose a “three-tier” system, requiring manufacturers to sell to distributors, who in turn sell to retailers, bars and restaurants. It was an arrangement born in the wake of Prohibition, when unbridled competition in the alcohol trade was seen as a social evil. By routing sales through distributors, manufacturers were barred from marketing to the public.

Nearly 80 years later, retailers and restaurateurs in this state are eager to see a more competitive marketplace. In an age when big buyers negotiate volume discounts with manufacturers for everything from canned chili to detergent, they say the same sort of practices should be allowed in the liquor trade. And that is what made I-1183 a groundbreaking measure that drew national attention from distributors and retailers alike. An unprecedented $35 million was spent on the campaign, some $22 million of it from one source alone, Costco Wholesale, the Issaquah-based warehouse chain.

Among other things, I-1183 makes Washington the first state to allow retailers to deal directly with manufacturers – though at least for now, most name brands of hard liquor are locked up in long-term distribution contracts with national distributors. The measure also envisioned other points of competition, including deals with distillers to produce “house brands” for chains operating in Washington. But it left room for interpretation by the state Liquor Control Board – and the permanent rules adopted by the agency tend to shunt sales to the distributor channel, by restricting sales by retailers and imposing big license fees at points where I-1183’s sponsors say they were never intended.

Board Says Fairness is Issue

In comments last week, board members said the initiative clearly meant to carve out a special status for distributors, who are required to pay the state $150 million on March 1 – essentially buying the business from the state. And Liquor Control Board staff has a decidedly different reading of the initiative’s language. It maintains the license fees and sales restrictions are mandated by the initiative, existing state law, or reasonable interpretations of 1183’s provisions. “The rules that we are implementing are simply those needed to implement the new law,” said executive director Rick Garza. “The Liquor Board doesn’t gain anything by the changes we have been talking about.” If the law doesn’t work as advocates had hoped, it is because most distillers have chosen to sell through distributors, he maintains.

Hogwash, says Gilliam, “We wrote the initiative and we understand the intent. Their comments are all about what is fair. But that is extremely subjective. They have imposed taxes and built in costs that were not part of the initiative. And they are intentionally impairing a competitive market with the rules.”

Now members of last year’s coalition are contemplating their next legal move. And they may not be the only ones. It’s possible that another group of stakeholders will enter the fray – the owners of the small contract stores, who remain in business for themselves, and those who purchased the state’s old liquor stores at auction last month. One of the board’s new interpretations essentially takes them out of the business of selling to restaurants, because they will be hit with a 17 percent fee on gross sales to the restaurant trade, and distributors will not. The board also has adopted a daily volume restriction on sales by most retailers which tends to take them out of that line and gives the business to distributors. The initiative restricted most retail sales to 24 liters, but said nothing about a daily limit.

Critics say the question isn’t whether they’ll sue, but when. The permanent rules take effect July 1, but because they were imposed on a temporary basis in February, litigation could begin sooner. And so whatever the Supreme Court does with the current challenge, it appears that the court battles have only begun.

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