Two Steps Forward, A Couple Back (or Maybe Sideways)

“Tied House” laws contain two categories of restrictions on licensed beverage businesses not found in other industries.

One is general prohibition of beverage suppliers’ furnishing things of value to retailers, with certain exceptions (notably goods the retailer has paid for). The other is general prohibition of ownership or investment by a supplier company or its investors in a retailing company and vice versa, again with certain exceptions. Details vary by state, and there is an overlay of federal tied house law, most of which kicks in only if the prohibited act to some degree excludes a competitor from trade.

Originally, tied house laws were intended to prevent return upon Repeal to the vertical integration, primarily brewery-saloon, that was a prime target of the Prohibition movement. As economic relations have evolved since the early 1930s, the purpose has shifted toward protecting interests of the middle distribution tier, and especially toward countering the growing influence of large chain retailers which, but for tied house legislation, would treat alcoholic beverages in the same stringent cost-reducing manner as other grocery items.

On May 15, 2009 the Washington governor signed a bill that has been loudly touted as loosening that state’s highly restrictive tied house law. Purported reforms permit some trade practices claimed to have been previously forbidden and introduce the possibility of investment and outright ownership between tiers, which had previously been limited to extremely narrow circumstances. However, a close reading reveals that the supposed relaxation is in large part illusory and may net out to tightening Washington’s tied house restrictions.

For a skeptical view of the bill’s particulars, go to the “Legal Developments” page at www.CorbinCounsel.com and click on the link to HB 2040.

The WSLCB Announces Online Tax Reporting and Payment System

Washington State Liquor Control Board (WSLCB) just made filing monthly summary tax reports and paying taxes a little easier by providing an online tax filing option for wineries shipping to consumers and retailers in Washington. The WSLCB encourages wineries to use their Online Tax Reporting and Payment System which saves time and simplifies the tax reporting and payment process. Users can access the system 24 hours a day, view previously filed reports online and confirm tax payments have been made.

Eligible users should contact the WSLCB Beer and Wine Tax Unit at beerwinetaxes@liq.wa.gov or (360) 664-1721 for account information. The system can be accessed by visiting the WSLCB website at www.liq.wa.gov.

Annie Bones, State Relations – Wine Institute

Half-Year Hullabaloo: New Laws Take Effect in Three States Today

Just a quick reminder of the legislative changes that take effect today, July 1st, 2008.

  • Georgia’s new permit system takes effect. All wineries can now apply for a permit, regardless of distributor representation. Click here to see how to apply for a direct shipping permit.
  • Ohio is increasing their capacity cap, making it possible for wineries that produce under 250,000 gallons annually to apply for a direct shipping permit.
  • Washington is implementing a destination-based sales tax for all in-state entities.

Washington: Making Change, Streamlined Style

On July 1st, 2008, when Substitute Senate Bill 5089 takes effect, Washington will join twenty-one other states that have conformed to the “Streamlined Sales and Use Tax Agreement”. The bill will change the way retail sales tax is collected for some Washington businesses. Beginning July 1st, 2008, any business with nexus in Washington must pay sales tax based on the destination of the shipped order. Previously, Washington businesses that shipped orders to Washington residents could pay sales tax based on where the order was originating from, making local taxes fairly easy to calculate.

The new taxing regulation requires Washington wineries to pay local taxes to every destination to which they ship (via a single sales/use tax return). This could be a bit of a jolt for Washington wineries. With over 300 different tax rates and location codes, based on special districts that cannot be defined solely by city and county designations, filling out the periodic tax return could become significantly more difficult.

Out-of state wineries will see no changes in their tax payments. Destination-based sales tax in Washington should be nothing new for them; out-of-state wineries have had to pay destination-based sales tax since July 1st, 2006, when the Wine Shipper’s License first became available.

If you are a Washington business that ships or delivers goods, be sure to check the Washington DOR’s website for useful information about the change. On this page, you can use a number of different tax lookup tools as well as watch online tutorials.

Costco Asks Court of Appeals to Think Again

On February 19, 2008, Costco Wholesale filed a petition for rehearing in the Ninth Circuit Court of Appeals, asking the original panel to reconsider a three-judge panel’s decision of January 29th, which upheld the ruling of a federal district court in Seattle that Washington’s price posting requirement is invalid under federal antitrust law, but reinstated other parts of the price posting statute the district court had struck down as part of the invalid statutory scheme, as well as the ban on central warehousing. The petition also asks that the entire appeals court hear the case if the original panel does not grant Costco’s request, in view of the importance of the antitrust issues, the inconsistency of the result with those in an earlier Ninth Circuit case and a recent Fourth Circuit case, and the necessity to interpret a leading Supreme Court opinion. The petition offers a clue to how an appeal to the Supreme Court might be structured.

Dulling the Cutting Edge

Yesterday’s decision of the Ninth Circuit Court of Appeals rejected almost everything about the trial court’s decision in Costco Wholesale Corp. v. Hoen that was innovative under federal antitrust law, turning the case into an expression of conservative deference to state law.

Appellate judges did not even throw Costco the scrap of a favorable word about the Granholm portion of the judgment, on which the state had already acquiesced by changing its statutory scheme to eliminate discrimination against out-of-state manufacturers. A small mitigating factor for trade in wine is that the Ninth Circuit did not attempt to expand the effect of the 21st Amendment , leaving in place both the district judge’s definition of the supposed Section 2 defense and her finding that it had not been proved.

The immediate effect of the decision, once a mandate is issued to the district court, will be threefold: (1) Washington will have to stop requiring suppliers to post prices and hold them unchanged for 30 days without actively supervising them for reasonableness, a practice the court agreed constitutes a per se violation of federal antitrust law. (2) The state may nevertheless enforce other restraints that have operated as part of the price posting scheme, i.e., the bans on quantity discounts and credit, the minimum 10% markup and the requirement that suppliers charge all retailers in the state the same price, irrespective of the point of delivery. (3) The state may also continue the two challenged restraints of trade operating only indirectly on price, the bans on central warehousing and on sales between retailers. It seems likely the mandate will take effect in due course, as there is no reason to expect the Court of Appeals to entertain a request for rehearing, and the odds are against the Supreme Court’s accepting the case for review, should a party attempt to appeal.

Practical compliance with the opinion will raise interesting administrative issues on which the Court of Appeals offered no guidance. The first unanswered question is, assuming the state wishes to retain the allowed price restraints, how it could operate a price posting system without the illegal “hold” requirement? Would some hold period significantly shorter than 30 days be legal? If not, how could one administer an instantly revisable posting? If there is can be no mandated time period for holding a price, can a uniform price rule apply to any transactions that are not exactly contemporaneous? Assuming posting is out for practical reasons, liquor price law enforcement would be mostly on the same footing as enforcement of trade laws generally, requiring investigation and often relying on competitor’s complaints, a scenario that invites cost-benefit analysis of interfering in a marketplace that is already regulated under general antitrust and fair competition laws.

All those uncertainties arise at a time when the Washington State Liquor Control Board is considering freer trade policies and some wholesalers are becoming less ardent in their support of post-and-hold price restraints. The state legislature is in a short session currently, with relatively little opportunity for profound and controversial changes in a major regulatory scheme, but the anomalies created by the Costco case suggest an attempt at a legislative fix, possibly including consideration of jettisoning the posting-related laws the Court of Appeals said the state could keep.