Virginia Alcohol Laws Continue to Spit in the Face of the Supreme Court

The newly funded Virginia Brewery Distribution Company is a cynical end-around the Supreme Court

Small Virginia brewers are very happy these days. The Virginia legislature just approved funding for a new Virginia Beer Distribution Company (VBDC), a jerryriged contraption that will allow these small brewers to self-distribute up to 500 barrels of beer annually directly to Virginia retailers and restaurants.

But you know who is even happier than these brewers? Virginia beer wholesalers. They, with the cooperation of Virginia brewers, Virginia lawmakers, the Virginia Alcohol Beverage Control Authority, and the Virginia Department of Agriculture and Consumer Services, have figured out a loophole by which they can screw consumers and out-of-state brewers.

There’s a good story here. And as with so many good stories, it begins with wine.

FIRST IT WAS WINERIES
Let me take you back to 2005, a month before the U.S. Supreme Court issued its landmark Granholm v Heald decision on winery-to-consumer shipping that barred states from passing laws allowing only in-state wineries to directly ship to their state’s consumers. At this time, Virginia allowed its farm wineries to self-distribute their wines to Virginia retailers and restaurants without going through a wholesaler. The state did not, however, allow out-of-state wineries to do the same.

Virginia wineries had the privilege of working outside the three-tier system for twenty years and it allowed them to build an industry unencumbered by the necessity to give away their profits to wholesalers they did not need and who largely did not want them in their portfolios.

However, the discriminatory nature of this Virginia winery self-distribution privilege was challenged in federal court.

In April 2005 a Virginia Federal District Judge who had been asked to determine if this kind of discriminatory distribution scheme was legal, ruled that it was not; and that this violated the non-discrimination principle of the Dormant Commerce Clause of the U.S. Constitution.

In response, the state of Virginia could have extended self-distribution privileges to out-of-state wineries, thereby leveling the playing field and assuring Virginia wineries remained able to self-distribute. That’s not what happened.

Virginia, instead of giving out-of-state wineries the same rights as Virginia wineries to self-distribute, took away the self-distribution right from Virginia wineries.

In stepped Virginia State Representative Christopher Saxman, a Republican from Augusta County. He filed legislation that allowed any winery located inside or outside of Virginia that produced up to 250,000 gallons of wine annually to self-distribute to Virginia retailers and restaurants. That’s approximately 105,000 cases annually.

Virginia wineries were counting on the passage of this bill in order to restore their self-distribution privileges. Without this legislation, they would have had to 1) try to find a distributor and 2) cut the prices they had been getting self-distributing by 30% in order to stay competitive AND give wholesalers a cut of their sales. Given the already meager margins, that price cut would have meant the demise of a number of VA wineries or a severe cutback in production and the accompanying lost revenue.

Saxman’s bill was tabled (killed) in January of the next year.

The bill was killed because wholesalers insisted upon its death. It’s worth noting that just because a group like liquor wholesalers insists a bill die doesn’t mean it must die. The death itself can only be carried out by lawmakers.

In the year before and after the 2006 death of Saxman’s self-distribution bill, Virginia alcohol wholesalers gave more than $2.2 million to Virginia lawmakers. But that’s not all they gave them. They also gave them cover by arguing it was imperative to protect the three-tier system of alcohol distribution in the state and allowing out-of-state wine producers to self-distribute in Virginia by going around the wholesalers and selling directly to retailers, would kill the three-tier system. They made this argument despite the fact that Virginia wineers had been legally going around Virginia wholesalers for more than 20 years.

The conundrum: Without being able to self-distribute, the Virginia wine industry would be decimated. Allowing Virginia wineries to self-distribute would “kill” the three-tier system and with it any reason for Virginia lawmakers to expect $2.2 million in campaign contributions.

There was another possibility that was raised by some folks: mandate that Virginia wholesalers represent any Virginia winery that asked for distribution. However, this was about as distasteful to the wholesalers as the notion of having to actually engage in fair competition. Something had to be done.

Enter The Virginia Winery Distribution Company (VWDC)

THE CYNICAL AND CORRUPT BARGAIN
The brainchild of a talented Virginia industry lobbyist, the VWDC would thread the needle. The VWDC would be a virtual wholesaler. the VWDC was a creation of the state of Virginia, administered by the Virginia Department of Agriculture and Consumer Services

Virginia Wineries, and only Virginia wineries, wishing to self-distribute would essentially apply to distribute their wine through the VWDC. The winery would solicit orders from retailers. Retailers would order products through an online VWDC portal. The winery would take the wine ordered from their warehouse, walk it a few yards across the warehouse to a designated VWDC space, and place the wine in that space. Then they would take the wine again and deliver it to the retailer that ordered it. The VWDC would collect the funds for the wine, remit the excise taxes to the state for the sale, and subtract a transaction fee from the rest of the funds set to be paid to the winery that sold the wine to the retailer.

By this method, Virginia wineries would be using a wholesaler and staying within the framework of the three-tier system. Most importantly, it would remove the self-distribution privilege from Virginia wineries (ostensibly) and now neither in-state nor out-of-state producers would be self-distributing.

Virginia had created a loophole allowing the exact same discrimination against out-of-state producers as the Federal District Judge determined a year earlier was unconstitutional.

The VWDC was up and running by 2008 and has worked wonderfully ever since then. Even today, out-of-state wineries are barred from self-distributing to Virginia retailers, while Virginia wineries are allowed to do so. Wholesalers kept out the competition. Virginia wineries kept self-distributing and Virginia lawmakers kept getting paid in campaign contributions. Since 2008, when the VWDC began operations, Virginia wholesalers have contributed $15,000,000 to candidates for state office. $11 million of that has gone to incumbents. $350,000 has gone to challengers.

Now, Brewers are set to have their very own virtual distribution company—The Virginia Beer Distribution Company (VBDC)—modeled on the VWDC. Funding for this apparatus was approved by the legislature this year. We can expect that brewers will be self-distributing up to 500 barrels per year by sometime in 2024.

Just as with the VWDC, the VBDC is designed to discriminate against out-of-state brewers; to protect Virginia brewers from competition; to allow Virginia brewers to self-distribute, but bar out-of-state brewers from doing the same—exactly what a federal judge ruled in 2005 was unconstitutional and what the Supreme Court of the United States said was unconstitutiional in 2005.

Not to put too fine a point on it, but both the VWDC and the newly created VBDC are regulatory fig leaves for a corrupt and unconstitutional bargain.

Virginia wineries and breweries are able to see substantially more profit put into their pockets than out-of-state wineries and brewers who must, by law, see an additional layer (wholesalers) of margin tagged onto their product in order to get it on the same shelves as their Virginia counterparts.

GATEKEEPING AT THE EXPENSE OF EVERYONE BUT ONE
This is a classic example of gatekeeping. Problematically, it’s a matter of gatekeeping not merely by industry players, but also by the state, including its legislators and its alcohol regulators—both of whom know this system is a cynical ploy to discriminate against interstate commerce and enrich a specific element of the Virginia alcohol industry. The cost to the wholesalers is just under $1 million a year in campaign contributions.

I can’t blame the wineries and brewers for taking part in this corrupt bargain. They are as much under the thumb of wholesalers as anyone else and without self-distribution privileges, many of these small businesses would disappear. Moreover, if you ask any of them if they would complain if out-of-state producers could also self-distribute, few if any would do so. The wineries certainly applauded the idea in 2006.

Inertia is more than the steady motion of an object. Inertial forces have the power to drag secondary objects with them. This is partially what’s at play in states like Virginia where the power of the three-tier system to define the alcohol marketplaces drags a whole array of state actors and private companies to happily agree to game the system and game the courts of law for the sake of maintaining that system.

The three-tier system has so long ago outlived its usefulness. It benefits not the state. It benefits not retailers. It benefits not producers. It only benefits middlemen who, cynically defend it as though it is a public good, when in fact is its merely and system of unearned profit for them.

The system is slowly being dismantled, despite the cynical ploy that has recently come into existence called the Virginia Beer Distribution Company. We are just a couple of court decisions and a few good lawmakers away from seeing this ancient edifice fall apart. When that system is finally upended, we’ll look back at Virginia and the entire three-tier system and see merely cynics and corruption left lying on the ground.