For wine professionals or enthusiasts in the United States, the term “three-tier system” can be confusing at best and, at worst, controversial. It’s the system that regulates alcohol, from those who make it to those who consume it — it’s that simple.
Like many things in history, the three-tier system was designed to resolve a conflict. In 1920, the U.S. instituted a nationwide ban on the importation, production, and sale of alcohol, known as Prohibition. After more than a decade and increased public scrutiny, the 21st Amendment of the U.S. Constitution repealed Prohibition. However, it also included an interesting note in section 2:
The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.
Translation: we’re going to leave it up to the individual states. Consequently, the three-tier system is not just one idea; it’s a concept with up to 50 different interpretations. Thankfully, many states have similar versions of the system, but that doesn’t mean it is easy to understand.
Here are three things to know about the three-tier system:
1. What are the three tiers?
On one end are the producers/wineries, winemakers, vignerons, and anyone allowed to make the wine. On the other end are the wine shops, restaurants, and other establishments where consumers can purchase wine. In the middle are distributors or importers. This group is like a mediator between the producers and the retailers. They speak with the producers, buy the wine wholesale, and then work with the retailers to get it into the stores or restaurants.
Here’s where complications arise, as the three groups often overlap. Wineries can sell wine directly to consumers (known in the industry as DTC). Distributors and importers often own wine shops and sell the alcohol themselves. Restaurants can private-label their own wine or create their own wine shop next door. In many states, this is totally legal.
Also, a little invention was created 60 years after the end of Prohibition: the internet — making interstate commerce and shipping inevitable and the idea of section 2 in the 21st Amendment a lot more challenging. And that yields lots of national implications for a state-based rule.
2. How does it work federally vs. state-to-state?
Though the legislation claims the three-tier system is largely for the states to decide, multiple court cases have proven its national significance. One of the most famous is Granholm v Heald. The case includes two groups. First is Michigan Governor Jennifer Granholm v. wine collector Eleanor Heald and 11 other plaintiffs. Second is Virginia winery owner Juanita Swedenburg and other out-of-state winery owners against Edward Kelly, chairman of the New York Division of Alcoholic Beverage Control in the State Liquor Authority.
Both plaintiffs claimed that the states violated the Dormant Commerce Clause, or DCC, which prohibits states from discriminating against interstate commerce without permission from Congress. Both states had laws in place that would ban the direct sale of out-of-state wines but did not ban the direct sales of wines within their own state. This was seen as anti-competitive because smaller wineries struggled to meet the necessary volume for wholesale distribution. The states claimed that the 21st Amendment, Section 2, gave them the power to regulate alcohol however they saw fit. The Supreme Court ruled in favor of both plaintiffs in a 5-4 decision.
Under these circumstances, the system varies a lot depending on the state. For example, there are 17 “alcohol beverage control” states, or simply “control states.” These are states where the government controls the sale of alcohol, via ABC Stores, rather than privately owned liquor stores. In most cases, the government only controls off-premise sales of distilled spirits (beer and wine can be sold by private companies). However, in Utah, for example, all beverages with an ABV (alcohol by volume) of 5% or higher are controlled by the state.
Some states don’t follow any rules that are similar to other states. For example, Wyoming is a control state but only for distribution, whereas the state of Washington does not have a three-tier system at all.
Unfortunately, it’s a bit of a web, which is why many consumers and private companies have urged states to eliminate the three-tier system altogether. Meanwhile, state governments, regulators, and advocacy organizations like the Wine & Spirits Wholesalers of America (WSWA) ardently defend the system’s value in the U.S.
3. What are the pros and cons of the system?
Arguments favoring the three-tier system typically come from local governments and regulators. These groups tout the benefit of having three different levels bound by laws, which increase safety and consumer confidence. Therefore, things like product recalls are easier to catch and manage with three distinct groups focusing on the product. Additionally, from an economic standpoint, the tax revenues from all three tiers benefit citizens in education, infrastructure and more.
Associations like WSWA and the National Alcohol Beverage Control Association help to lobby in favor of regulators. In addition to the economic and regulatory benefits, both organizations highlight the safety benefits and increased choice for consumers.
However, most consumers and wine professionals oppose the system. While the tax revenue may appear to benefit citizens, it comes at a big cost to those making and selling alcohol and those purchasing alcohol. Accordingly, it can be difficult to start a business without sufficient resources for licensing and regulatory fees. Many also emphasize the disproportionate benefit to the distributors and importers. These individuals have outsized control over which producers can enter the market and what is available to retailers. As a result, well-known brands are more visible to the consumer than newer, unproven products.
This is especially true in the beer industry, where a Treasury Department report found that Anheuser-Busch InBev and Molson Coors controlled 65% of the beer market. Ultimately, these factors can cost the consumer due to markups, limited choice, and more.
The three-tier system is imperfect in its complications. However, it is a massive part of the American wine framework — knowing how it works and how it doesn’t make it easier to navigate and buy wine.