Why Don’t States Trust Each Other’s Three-Tier Systems?

Alex Koral | August 23, 2023

The District Court for Arizona recently ruled against a Florida retail shop in the latest in an ongoing series of lawsuits that seek to address the right of alcohol retailers to engage in interstate direct-to-consumer (DtC) shipping.

The Florida retailer in this case, which was joined by two Arizona wine collectors, argued against an Arizona rule that permits shipping of alcohol by instate retailers but denies access to that market to out-of-state retailers. While Arizona does allow DtC shipping of wine and spirits by out-of-state producers, out-of-state retailers are unable to receive any of the licenses that provide permission for DtC shipping in the state. As such, the relief the plaintiffs sought was access to the Arizona DtC market, which is only denied to them because they do not have physical presence in the state.

That the court ruled against the Florida retailer is in itself not all that surprising. Many courts in recent years have rejected similar claims by out-of-state retailers seeking equal treatment when it comes to DtC shipping rights, often with only a cursory look at the arguments being made. Generally, these cases come down to the conclusion that a state’s three-tier system is sacrosanct and because an out-of-state retailer is not a part of this state’s three-tier system, then they cannot ship in the state.

However, the Arizona case does bring up an important but thoroughly unaddressed question: why don’t states trust each other’s three-tier systems?

What did the District Court rule?

The court makes short work of the current standard of review for alcohol laws, quickly finding that Arizona’s law is 1) not discriminatory, and 2) even if it was, that the state has legitimate interests in preventing out-of-state interests from entering its market.

The court seems to scoff at the idea that Arizona’s laws are discriminatory, finding that both Florida and Arizona retailers are treated equally in the state in that they must abide by the same physical presence requirement in order to DtC ship in the state. That is, if a Florida retailer wants to ship DtC to Arizona residents, all it needs to do is follow the lead of an Arizona retailer and open a brick-and-mortar location in the state. Blithely, the court notes that if an Arizona company similarly didn’t have a physical premises, it also could not get the licenses necessary to DtC ship alcohol (ignoring the fact that without that license the company would also not be an alcohol retailer of any kind).

Such a ruling is almost proforma these days, as few courts have acknowledged the difficulty in opening retail stores in multiple states (apparently, these courts think that only major, national chains should have wide access to retailer shipping rights).

Regardless, the court’s real focus is not on whether the law is discriminatory or not, but on the sanctity of the Arizona three-tier system and the state’s interest in making sure that no unscrupulous retailer ever sells to one of its residents. But this begs the question, what makes Arizona’s three-tier system any better than Florida’s three-tier system?

Is Arizona’s three-tier system that much safer than Florida’s?

The District Court notes Arizona’s interests in prohibiting DtC shipping by out-of-state retailers, namely in ensuring the quality of the product sold, preventing sales to minors and getting tax revenue. Of course, then, the court also finds that these interests can only be upheld through the strict application of the state’s three-tier system. That is, Arizona residents can only be assured of the quality and legitimacy of the alcohol they consume if it was sold by a licensed Arizona retailer who in turn purchased it from a licensed Arizona wholesaler.

Arizona law itself shows that the three-tier system is not the only means of upholding these interests, in that the state permits DtC shipping by out-of-state wineries and distillers. To DtC ship, the states requires those out-of-state parties to get licensed, take affirmative action to prevent shipments going to minors even accidentally (steps that are not required under the law that allows in-state retailers to DtC ship), restrict the amount of wine or spirits they ship to individual consumers, and remit all sales and excise taxes to the state. Why similar requirements could not be imposed on out-of-state retailers is not addressed. Similarly, that many other states have non-discriminatory retailer DtC shipping laws is dismissed because the court appears to be more concerned with upholding the sanctity of Arizona’s three-tier system.

This focus solely on Arizona’s three-tier system hits on an unspoken issue. For whatever reason, seemingly no court that has reviewed an out-of-state retailer shipping case has acknowledged a simple fact: the retailer plaintiffs seeking redress for these discriminatory laws are part of a three-tier system. It may not be the Arizona or Michigan three-tier system, but almost every state employs some form of the three-tier system for sales made by their retailers. (The main exceptions being control systems, which are usually more stringent than private markets). And by and large, states’ three-tier systems are functionally similar.

The District Court fails to address why Florida’s three-tier system is any less capable of upholding Arizona’s stated interests than Arizona’s three-tier system. Just as in Arizona, Florida retailers must get their product from licensed wholesalers who are tasked with ensuring the quality of the product. And Arizona is fully capable of requiring out-of-state shippers to pay the state’s taxes and/or another fee associated with their shipping volume (notably, Florida’s alcohol taxes are much higher than Arizona’s, undercutting any claim that Florida retailers are at a price advantage). The other key interest, preventing sales to minors, applies to essentially every sale across the country and the steps that a Florida or Arizona retailer would take in that arena are identical.

Where there are differences between states’ three-tier systems largely comes down to details, like whether price lists must be submitted to the state or if products must come to rest at a wholesaler’s warehouse prior to being sent to retailers. While a state might think these are important rules to uphold, they have little to do with the key state interests of maintaining public health and safety.

No one is asking for unregulated shipping permissions; open access to an existing market, denied simply because of the retailer’s geographic location, does not equate to an everything goes market. Arizona has indicated that it does not consider DtC shipping by retailers inherently illegitimate, only that it doesn’t trust out-of-state retailers to be good actors, despite those retailers being licensed by and in good standing with their home state’s alcohol regulators.

So, it all comes down to the simple, unaddressed question: why don’t states trust each other’s three-tier system?

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