Three-Tier System Essentials: Getting Licensed

Rachel Hoffman | February 15, 2022

The three-tier system is the prevailing way that alcohol is distributed and sold in the United States, based on a clear cut distinction between different sectors (or “tiers”) of the beverage alcohol market. In the three-tier system, suppliers, such as producers and importers, are required to sell to wholesalers and distributors, who in turn sell to retail businesses, including liquor stores and restaurants, who then, finally, sell the products to consumers. Any supplier who wants to have their products sold and consumed in the U.S. must have at least a passing awareness of the three-tier system and its many regulatory requirements.

When a supplier wants to engage with a new state’s alcohol market, it is critical to first identify the legal paths established by that state for selling to local distributors. As with most arenas of the alcohol industry, DtC alcohol shipping included, this generally requires getting a license issued by the state, the rules and requirements for which vary among states.

Three-tier compliance requires adherence to detail, as everything from the licensing process to renewal deadlines could be different in different states. Additionally, variations can exist depending on the type of alcohol that is being produced and subsequently shipped. Beer distribution rules within the three-tier system are not necessarily going to be identical to wine distribution rules. Here are important takeaways when it comes to three-tier distribution.

Why do I need a license in the three-tier system?

With the enactment of the 21st Amendment at the end of Prohibition, each state established its own individual rules for the sale, production, transportation and consumption of alcohol. States enforce their rules on any business engaging in these activities within their jurisdictional borders.

The first step in distributing into a state is almost always to get licensed. This requires identifying the specific license the state requires for out-of-state suppliers to sell to distributors, which often varies between product types. A major supplier, selling beer, wine and spirits in every state could have dozens, even hundreds, of licenses.

Are there different licenses for three-tier distribution?

Don’t assume that every state has the same regulations surrounding three-tier compliance. For every state you distribute into, there’s a whole new set of laws that must be followed. For example, each state has adopted rules that make it easier for in-state sales like free samples at an on-site tasting-room and self-distribution to local restaurants and retailers. In this scenario, a production license is required.

Suppliers should also be aware that not every state requires them to get a license to sell to local distributors. Alaska and D.C. do not have a license for out-of-state suppliers to engage with distributors. Florida and Rhode Island also do not mandate a specific license, though a supplier still needs to register with the state agencies as the Primary American Source of their brand/labels in order to sell them to distributors in those states. It is important to outline which products you plan to sell in each state to ensure compliance with all local laws.

Compliance is key for three-tier distribution

It’s important to get licensing taken care of in a timely manner, as delayed licensing can halt sales. Selling outside of the permissions granted by a state is one of the most basic and clear violations of state law out there, and states will enforce this law strictly. Repeated violations can result in heavy fines and could even impact a supplier’s home state or federal licenses. Once those licenses are lost, then a supplier is effectively outcast in the beverage alcohol market and will find it nearly impossible to regain them.

Consider compliance with federal and state laws the baseline of success. Failure to follow beverage alcohol regulations can have a variety of consequences—most commonly monetary penalties, but in severe situations it can lead to a loss of license. As your organization expands its reach to more customers, regulations and compliance deadlines will increase. Working with the right partner can ensure visibility and accuracy across all aspects of your licensing compliance efforts.


Take Action

Ready to take your three-tier distribution to the next level? Find out how Sovos ShipCompliant’s Market Ready solution can streamline your compliance processes.