OLYMPIA, Jan. 25.—Washington’s long-awaited liquor showdown opened Thursday as a House panel heard complaints from the state’s retailers and restaurateurs that regulators handed over the state’s lucrative new liquor marketplace to two big distribution companies.

That wasn’t the idea behind Initiative 1183, the measure that got the state out of the liquor business and put hard liquor on supermarket shelves, they said. And they ought to know, because they wrote it.

“For three people [on the state Liquor Control Board] to go against the will of the voters who really wanted to vote for a competitive industry out there was extremely frustrating and not what we signed up for,” said Travis Rosenthal, owner of Tango Restaurant and Rumba Lounge in Seattle. “We did not want to take a monopoly from the state and hand that monopoly over to distributors,” he said.

A packed hearing room before the House Government Accountability and Oversight Committee illustrated the high stakes involved in House Bill 1161. Teamsters Union members, restaurant owners, merchants and a suited-and-tied legion of lobbyists filled every seat and every bit of standing-room space from the windows to the doors.The measure, backed by the restaurant-and-retail coalition behind I-1183, would open up a supply channel for hard liquor that exists nowhere else in the country.  It would allow hard liquor to be sold direct from manufacturers to retailers, and thence to bars and restaurants, without passing through the distributors who control the business in every other state of the union.

Technically speaking, Washington voters already said yes to that idea when they voted overwhelmingly to approve the initiative in 2011, shutting down the state liquor stores after 78 years. The measure, bankrolled by Costco Wholesale, poked big holes in the strict three-tier marketing system that prevails elsewhere in the American alcoholic beverage industry. But when it came time to draft rules for the new liquor marketplace, regulators imposed such high taxes and strict limits on retailer sales that merchants, restaurateurs and saloonkeepers say the new, more-direct channel just can’t work. The restaurant trade accounts for 30 percent of the liquor business, and some of the small-store owners who saw big dollar signs when hard-liquor sales were launched last June now even say they’re on the verge of shutting their doors.

But it’s no simple argument. Distributors and regulators say there are good reasons the market rules were set that way. And every interest with a stake in the new $900-million-a-year booze biz that trooped to the mike Thursday seemed to have a differing set of issues.

Changing the Rules in Midstream

HB 1161 would declare that a new 17 percent tax on sales by retailers does not apply to restaurant and bar purchases, as the state Liquor Control Board ruled last May. Regulators said they were following the strict wording of the law, which refers to “all sales” by retailers. But the I-1183 coalition contends Washington tradition is not to tax products for resale and that should have been understood. The bill also says a 24-liter limit on in-store purchases is per transaction, not per day, reiterating language in the initiative. Regulators imposed the daily limit because they said the restriction was meaningless if restaurateurs could make multiple purchases.

Distributor interests say the big retailers are trying to take advantage of the system they established with the initiative. Though distributors opposed the initiative, it has meant big business for two distribution companies, Young’s Market Co. and Southern Wines and Spirits, which immediately took over the bulk of the business when the old state liquor stores closed May 30. To quell voter concerns about lost tax revenue, the measure required distributors to pay $150 million for the business. They will have to make a balloon payment of approximately $100 million in May; the other $50 million will be paid in the form of taxes. John Guadnola, director of the Association of Washington Spirits and Wine Distributors, who did not testify at Thursday’s hearing, said in a statement, “Costco is trying to have their cake and eat it, too. They want to act like a distributor but not pay into the system.”

Costco itself was not represented at the hearing. But Bruce Beckett of the Washington Restaurant Association, another key player in the initiative campaign, said lawmakers need to keep in mind the intent of the initiative. Opposition to the bill comes largely from business interests that want to establish an advantage in the marketplace, he said. He noted that the state Office of Financial Management, which analyzed the initiative during the campaign, assumed the 17 percent tax would not be imposed on retailers selling product for resale to the restaurant trade, nor did the Liquor Control Board in its early reviews of the issue. He said the board reversed its position the week before the new regime began, “under some sort of pressure.”

Beckett said, “We ask you to evaluate against the law and what voters were provided from objective sources, and if you do that, you are going to have about 5,000 [restaurant and bar] licensee businesses and about 1,700 retailers competing for business, and the end beneficiary of that is the consumer.”

Tales of Woe

The fast-paced hearing presented testimony from all segments of the liquor biz. Executives of Young’s and Southern said they have spent big money to establish new distribution centers in Washington state and already are employing hundreds. Teamsters Union members said the companies are providing high-paying union jobs. Michael Transue, representing the state’s Beer and Wine Wholesalers Association, whose members have a sliver of the spirits-distribution business, observed that if retailers sell to restaurants, “our members would lose those sales, and that would be a detriment.”

On the other side of the issue, Holly Chisa of the Northwest Grocery Association, representing the state’s bigger supermarket chains, called the 17 percent tax “a misinterpretation of the initiative” and said retailers certainly never intended the 24-liter limit to be imposed on a daily basis, because retailers can’t tell whether they are making sales to individual restaurants or bars. “We have no way of tracking that,” she said.

But the most heart-rending tales came from the small-store owners, the proprietors of the state’s former independent contract liquor stores and the small businessmen who bid $31 million for the right to operate the state’s old liquor stores when they were sold at auction. Though the small stores obtain their product from distributors, they said they expected to compete on an even footing for the restaurant trade – and the 17 percent tax makes that impossible. Intent of the initiative was particularly clear with regard to the contract liquor stores that operate in the state’s smaller communities. It specifically said the 24-liter limit did not apply to them, with the idea that they might continue to deliver to the restaurant trade.

Julie Granas, owner of Leavenworth Wine and Spirits, said she used to do tens of thousands of dollars of business every week with the restaurants and bars of the Cashmere Valley. After the initiative passed, based on the public statements of the Liquor Control Board, she lined up customers, took out loans and made big investments in her business. Building improvements cost $100,000 and she purchased $125,000 of state-store inventory. But the door slammed when the liquor board reversed itself on the 17 percent tax. Though she does not have to worry about the daily sales limit, it doesn’t matter — today her store does about $600 in business a week to the bar and restaurant trade. “We made these commitments and they were irreversible at the time the Liquor Control Board changed its mind,” she said. “It has been devastating for us. I have two employees; I have already cut their hours. I am very seriously considering having to lay them off completely. And to be perfectly honest with you, if I look ahead six months from now, I cannot tell you with any confidence my business will survive.”

Many Voices

Complicating the issue is the fact that spirits merchants don’t speak with one voice. The state’s smaller supermarkets, represented by the Washington Food Industry Association, maintain that the initiative was written largely to benefit large chains and big-box stores, which have the muscle to buy in large quantities from manufacturers. If grocery co-ops do the same thing, said president Jan Gee, they will have to obtain distributor licenses and pay the same fees as the distributors – no fair if the big chains don’t.

And the owners of the former state liquor stores say their interests are distinct from the big chains. They want to nix the tax but keep the limit in place, to keep the big boys out. Though the liquor-store auction took place last April when it was clear the Liquor Control Board was leaning toward the crippling tax, the small merchants bid prices up nevertheless, assuming regulators would ensure their business was solid. Solomon Saliman of the newly formed Liquor Store Association said 80 to 90 percent of the purchasers are first-generation immigrants who “really believe that the government is right and any word of the government is believable, and they went into this business hoping that the retail law would be on their side. What we see now are a lot of cowboy firms picking winners and losers every day with predatory pricing. Those guys invested their life’s savings and every single day we see sad stories of destroyed families.”

Sorting it Out

Some lawmakers say the issue posed by HB 1161 is among the trickiest business squabbles they have had to referee. Leaders of the House Republican Caucus and the new Majority Coalition Caucus in the Senate said Thursday they hope to bring together representatives of all interests for a closed-door membership meeting and try to hash things out. Senate Majority Leader Rodney Tom, D-Bellevue, noted that distributors have agreed to pay $150 million with the expectation that the business will be theirs. “When somebody writes you a $150 million check, you don’t take it and say thank you very much – now we’re changing the rules on you.”