America as a nation has a long and intertwined history with alcohol as the pilgrims relied on beer for a sterile drink in the same way that the founding fathers did days before signing the Constitution. The alcohol industry and attempts to regulate it have led to rebellions, prohibition, and a Supreme Court ruling. As attempts to regulate the lucrative and profitable industry continued and have given rise to multiple sets of rules, the industry and its many consumers have experienced many changes along the way. The largest and most well-known of the changes was prohibition, brought forth by the 18th Amendment as a result of the temperance movement. While the success of prohibition was limited, the eventual repeal gave rise to the modern system today.
The 21st amendment repealed the 18th amendment and allowed states to determine how they would handle liquor distribution. As states now had specific authority to control different aspects of alcohol rules, the system became more complex with different laws, as seen in Pennsylvania compared with a state like New Hampshire. With the myriad different laws making it confusing for customers, manufacturers, and distributors the efficiency present in a direct system disappears. The three tier system which exists presently means that the journey from manufacturer to wholesaler to retail store has an additional middleman and inherently limits direct to consumer sales.
Exceptions exist, however, on a state-by-state basis for wine and craft beer distribution under certain circumstances. Craft breweries, for example, can sell directly to customers who visit a taproom in states. Some states allow direct to consumer shipping of beer from out of state breweries while also allowing for shipment of beers within their borders. Direct to consumer shipping offers many advantages to craft breweries as they avoid the need to pay money to a middleman and can simply drop off the package to an authorized shipping agent. While few states offer the advantage of legal, interstate shipping, the grey market has existed before and will likely continue to exist for the foreseeable future.
Wine on the other hand enjoys slightly more freedom due to the Supreme Court ruling in Granholm v. Heald. The 2005 case arose from a conflict in appellate court rulings where in-state direct to consumer shipping was allowed but interstate direct to consumer shipping was prohibited. The Court held that the laws were unconstitutional since the 21st Amendment did not have the power to overrule the commerce clause. This ruling forced states to reevaluate their laws and push for greater reciprocity. Over 30 states supporting interstate wine shipments means that the proof of concept works and allows for massive efficiency for small wineries.
A big issue of the three tier system is that the system is nearly mandated for the vast majority of sales. And, along with the inherent cut of the middleman, it also means that the consumer bears the cost. As states are the ones who can determine who gains the status of distributor, an out-of-state entity has limited points of access for entering the market, and is therefore forced to pay additional costs. These costs are borne by the customer when the product is finally sold to be consumed. Looking at the totality of the systems reviewed above reveals a veritable smorgasbord of rules designed with oddly specific carveouts.
While wine enjoys a relative robust set of direct shipping laws, the same cannot be said for beer and liquor distribution. These complexities cause smaller producers of craft beer and liquor to be immediately locked out of certain markets. This in turn limits these producers to taprooms, where they are forced to then sell to distributors and a handful of select states (if the laws permit), which greatly and artificially constricts the markets. While the 21st amendment allows for each individual state to set their own specific rules as to the production and distribution of alcohol, the continued inefficiencies present an odd issue.
While distributors have advantages in scale and ability to keep strict records, the tremendous power that they are able to wield means that they can slow down inventory turnover, impose extra costs due to their mandated legal status, and create hurdles for entering markets. Finding a solution that all states agree to will be difficult because the 21st amendment grants states the ability to determine their own regulations. The prevalence of wine and its ability to be directly shipped to consumers in over half of the states, however, shows that progress, while providing an eventual blueprint for other alcoholic beverages to adopt.
Pushing for a system where states honor reciprocity for all of alcohol introduces a heavy incentive that includes taxes, better business, and inherent efficiency with no middleman. Distributors may lose out on a small percentage of sales, but for the benefit of a healthier market that has far greater variety and lower entry barriers. Removing bottlenecks by creating a reciprocal system of direct to consumer shipping for all states can help create a stronger market overall. This can in turn lead to greater variety, higher tax revenue from increased sales, and lower prices for consumers as a result of direct shipping.
About the Author: Randy Nandlall is a current 2L at Cornell Law. He graduated from Hunter College where he majored in Political Science with a minor in Accounting, Law and Tax Track. In his spare time, Randy enjoys traveling and finding innovative local spots to eat. He is an associate for The Issue Spotter, the online edition of Cornell Law School’s Journal of Law and Public Policy, and a member of the First Generation Student Association.
Suggested Citation: Randy Nandlall, Lasting Effects of Prohibition, Cornell J.L. & Pub. Pol’y, The Issue Spotter, (Mar. 8, 2022), http://jlpp.org/blogzine/lasting-effects-of-prohibition/.