Manufacturing, distribution and the sale of alcoholic beverages in the United States is a highly regulated industry at the federal, state, and, in many instances, local level.
Historically, the 21st Amendment to the United States Constitution, repealing Prohibition, was ratified on December 5, 1933. Shortly thereafter, in August 1935, President Roosevelt signed the Federal Alcohol Administration Act (the FAA Act) and the Department of Treasury began regulating the alcoholic beverage industry.
On March 10, 1934, the Department of Justice’s Prohibition enforcement duties folded into the Alcohol Tax Unit (ATU), Bureau of Internal Revenue, Department of the Treasury. At the same time, the Federal Alcohol Administration (FAA) continued to collect data to establish license and permit requirements, and define the regulations that would ensure an open and fair marketplace for the alcohol industry and American consumers. In 1940, the FAA merged with the ATU, but the FAA Act continues today as part of the foundation of TTB’s enabling legislation. (link: TTB Background)
In addition to repealing Prohibition, the 21st Amendment of the United State Constitution granted the states and US jurisdictions the power to regulate the transportation and importation of alcoholic beverages within their jurisdiction. Current US Supreme Court case law balances the States’ rights under the 21st Amendment against the Commerce Clause. Within this system of regulation is the concept of licensing and other regulatory and trade compliance requirements necessary for industry members to follow in conducting their operations, including excise tax requirements under the Internal Revenue Code. It is important to be aware that laws and regulations relating to the manufacturing, distribution, and sale of alcoholic beverages vary significantly across state lines.
Common themes within the federal laws and regulations and state laws and regulations are the inter-linked concepts of the three-tier system and tied house laws.
The three-tier system was established following the repeal of prohibition as a way to prevent the consolidation of power in the industry and to ensure a level playing field for all market participants. The three-tier system governs the distribution of alcoholic beverages by requiring a separation of each of the tiers in the supply chain, i.e. manufacturers/producers, distributors, and retailers. Typically, subject to certain exceptions (e.g., craft manufacturers having certain retail privileges), this means that manufacturers/suppliers (tier 1) sell alcoholic beverages to wholesale distributors (tier 2), who then sell to retailers (tier 3), who ultimately sell to consumers. In general, the US Supreme Court has upheld the constitutionality of the three-tier system.
Tied-house laws have been adopted on the federal level and by every state as a way to preserve the three-tier system and to regulate how alcoholic beverages are marketed and sold in the US. In general terms, tied-house laws are meant to prevent any of the tiers of the alcoholic beverage industry from having an “interest,” directly or indirectly, in another tier, or from exercising an undue influence, by way of providing an unauthorized gift or service to another tier. These “trade practices” can range from holding ownership in another tier to providing unlawful advertising or discounts and beyond. There are specific exceptions to federal tied-house prohibitions as well as varying exceptions within each state’s laws and regulations.
FEDERAL LAWS AND REGULATIONS
The Alcohol and Tobacco Tax and Trade Bureau (TTB) (link: TTB homepage) overseas the implementation of federal alcoholic beverage laws and regulations.
The FAA Act (link: Federal Alcohol Administration Act (Title 27 United States Code)) provides for regulation of those engaged in the alcohol beverage industry, and for protection of consumers.
- To ensure the integrity of the industry, the FAA Act includes provisions to:
- Require a permit for those who engage in the business as a producer, importer, or wholesaler of alcohol beverages;
- Issue, suspend, and revoke permits;
- Ensure the integrity of the industry by preventing persons who are not likely to operate in accordance with the law from entering the trade;
- Protect the revenue and consumers by ensuring the integrity of the industry members;
- To protect consumers, FAA Act provisions:
- Ensure that labeling and advertising of alcohol beverages provide adequate information to the consumer concerning the identity and quality of the product;
- Require that alcohol beverages bottlers and importers must have an approved certificate of label approval (COLA) or an exemption certificate before the product may be sold in the United States
- Prevent misleading labeling or advertising that may result in consumer deception regarding the product.
- The FAA Act includes provisions to preclude unfair trade practice. These provisions:
- Regulate the marketing promotional practices concerning the sale of alcohol beverages; and
- Regulate practices such as exclusive outlets, tied house arrangements, commercial bribery, and consignment sales.
Amendments to the FAA Act are reflected in Title 27 of the United States Code of Federal Regulations (link: Title 27 Code of Federal Regulations) and in TTB’s industry circulars (link: TTB Industry Circulars).
STATE LAWS AND REGULATIONS
As previously noted, the 21st Amendment granted the authority to regulate alcoholic beverages to each state and jurisdiction. For that reason, there are over 50 sets of laws and regulations, each with different interpretations, definitions, exceptions, and policies. While there is generally commonality in concept, one state’s laws and regulations should not be relied upon in another state. For that reason, each state’s regulatory structure should be evaluated before engaging in the production, distribution or sales of alcoholic beverages. See Helpful Links page for state agency websites (link: TTB list of state regulators).
Navigating the alcoholic beverage industry requires more than just an understanding of the complex laws and regulations. The attorneys at Buchman Law Firm, LLP have over 100 years of collective experience practicing in the industry, and are well qualified to assist with any questions you may have about alcoholic beverage control laws.