Three-Tier System Essentials: Self-Distribution Permissions

This blog was last updated on April 6, 2022

The three-tier system, under which beverage alcohol is predominately sold in the United States, establishes a clear distinction between the different “tiers” of the market. As it is designed to work, alcohol suppliers sell solely to wholesalers, who in turn sell solely to retailers, who then are the entities that consumers purchase alcohol from. In practice, this arrangement is specifically required by law.

Despite the benefits of the three-tier system, it’s not necessarily easy to manage. For small suppliers in particular, it can be prohibitive as consolidation in the distributor tier has led to massive companies that are interested only in the most profitable brands. As such, the prospect of self-distribution, where a supplier sells directly to retailers, bypassing the distributor tier, can seem very attractive.

Many states have, in the last few decades, established limited self-distribution permissions. These have been a major boon for craft producers who have come to rely on self-distribution to get their products into local restaurants and package stores. However, when those same producers move to sell nationally, they quickly realize that self-distribution is almost never allowed when selling from one state into another.

We’ve highlighted important things to remember about self-distribution considerations in the three-tier system.

The value of self-distribution in the three-tier system

Self-distribution can be a lifeline for small producers who otherwise may not be able to get the attention of distributors. Especially when selling beyond your local community, it can be difficult to get noticed by distributors who don’t see the worth in carrying new or growing brands. For example, smaller wineries that focus more on limited runs, producing only a few hundred bottles at a time of a given product, could struggle to find a distributor willing to carry those brands.

However, where state law requires producers to sell only through a distributor, then craft producers have very few options to get their craft alcohol in front of customers. Self-distribution allowances can have great value for furthering market access to small businesses.

States that historically have developed more liberal and open permissions for craft producers (such as tasting room sales) tend to have more robust craft industries. This can be due to having that better brand build up, giving smaller producers more options to getting their product in front of consumers. Self-distribution fits well into those supporting permissions.

Self-distribution can in turn further proper three-tier sales, as a producer who personally builds demand for their craft brands can make them appealing for a distributor to pick up and sell. There are plenty of benefits to working with distributors, from having ready access to retailers and logistical support. That way even where producers can self-distribute, they will continue to look to sell through distributors.

As always, be aware of state laws

Producers that may be benefiting from local self-distribution permissions, however, need to be aware that most states do not permit self-distribution from out-of-state suppliers. Understanding those state laws is essential when looking to enter a new state. Just because you were able to do something locally does not guarantee that you will be able to do the same when selling into a new state.

For the few states that do allow out-of-state suppliers to self-distribute, there are often additional licensing requirements that go along with that permission. The supplier will also need to otherwise step into the compliance shoes of a distributor, such as paying state excise taxes.

For example, Montana requires out-of-state wineries to hold a Foreign Winery License to sell to Montana wholesalers. But the state also offers an additional “endorsement” to self distribute, which requires paying a $50 fee and remitting state excise tax. Overall, be aware that there may be an extra level of licensing and follow-up reporting required by a state.

While not common, interstate self-distribution can offer clear benefits to smaller producers looking to gain a national foothold. The Treasury Department’s February 2022 report on competition in the beverage alcohol industry signaled clear federal interest in supporting small businesses, including enabling greater market access. Perhaps more states will enact more self-distribution permissions for craft producers as a means of accomplishing that goal.