Alcohol Law Basics

A variety of factors led the U.S. to adopt the 18th Amendment to the Constitution, which led to Prohibition in 1920, banning the manufacture, sale and transport of alcoholic beverages in the U.S. Central among those factors were the “tied-house evils,” which many believed led to intemperance and other societal issues that warranted Prohibition.

“Tied-house” refers to the practice of tying a supplier’s products to a specific bar or other type of retailer. For example, one supplier’s “house” would serve only that supplier’s brands of beer, while other suppliers secured their own “houses” that sold only their brands of beer. This arrangement was a common practice in the U.S. before Prohibition and still is common in England and other parts of the world today. In the U.S., tied houses were thought to lead to a variety of social problems, including intemperance, as bars competed for business and dropped prices, sometimes to below cost. One common practice was for bars to offer a “free lunch” with the purchase of a beverage to attract customers. They’d then recover their costs by aggressively promoting alcohol and encouraging overconsumption, typically by offering a lunch that was high in salt. This practice was the genesis for the expression, “there’s no such thing as a free lunch.”

Prohibition ended in 1933 with the adoption of the Twenty-first Amendment to the Constitution. The Twenty-first Amendment left the primary regulation of alcohol to the discretion of the individual states, and the end of Prohibition thus brought with it the immediate need on the part of each state to pass laws that sought to avoid the issues that led to Prohibition in the first place. The resulting laws are often referred to as “tied-house laws.”

As the states weighed the issue of responsible alcohol regulation post-Prohibition, a central concern was eliminating the “tied-house evils” that supposedly led to Prohibition. The states’ primary objectives were promoting temperance, collecting taxes, and ensuring orderly market conditions. One of the primary tools to achieve these objectives – adopted in one form or another by all states – was the three-tier distribution system. The three-tier system established three distinct levels of distribution: manufacturer, distributor/wholesaler, and retailer.

The three-tier system generally requires manufacturers (aka suppliers) to sell their products to wholesalers, who in turn sell the products to retailers, such as grocery stores, convenience stores, liquor stores, bars, and restaurants. As a general matter, the three-tier system functions to prevent manufacturers from selling their products directly to retailers, thus arguably preventing tied houses. The Alliance members work within each state’s three-tier system by delivering alcohol to consumers from the same licensed retailers that sell alcohol to consumers in the tradition brick and mortar environment.

Central to each state’s three-tier system and associated tied-house laws, cross-ownership between the tiers is generally prohibited, in order to prevent vertical integration and insulate retailers from the influence of manufacturers. In addition to establishing separate licenses for each tier and prohibiting entities and individuals from holding licenses in more than one tier, state legislatures adopted a variety of other laws to ensure adequate separation of the industry members in different tiers.

Following the repeal of Prohibition, and in the nearly 100 years since Prohibition ended, a complicated patchwork of state laws has arisen, in some cases to further the three-tier concept and in other cases providing exceptions to these general principles.

As states exercised their discretion to enact alcohol laws after Prohibition, some states opted for the state itself to play an active role in the sale of alcoholic beverages. These “control states” have state monopoly over the wholesaling or retailing of some or all categories of alcoholic beverages. The rest of the states opted to allow the private industry to handle the sale and distribution of alcoholic beverages, but continued to maintain oversight and control through licensing and taxation. These are referred to as “license states.” Some states have a mix of license and control systems. For example, a state may control retail sales of distilled spirits through state-run liquor stores, but allow private businesses to sell beer and wine upon issuance of a license. Likewise, a state may have control over the wholesale distribution of alcohol – deciding what products are available for in-state licensed retailers to purchase.

The current states that control some aspect of the wholesale or retail of alcoholic beverages include Alabama, Idaho, Iowa, Main, Michigan, Mississippi, Montana, New Hampshire, North Carolina, Ohio, Oregon, Pennsylvania, Utah, Vermont, Virginia, West Virginia, Wyoming, and Montgomery County, Maryland.

State alcohol regulatory agencies in both control states and license states regulate through licensure. Participants in the three tiers of the industry obtain licenses, which afford the industry member certain license “privileges,” which dictate what a licensee can and cannot do. For example, a distillery license typically permits the license holder to produce and bottle distilled spirits, and to sell the finished product to wholesalers, but it might prohibit direct sales to retailers or consumers, or limit those privileges in a variety of ways. By contrast, a restaurant license allows the retail sale of some or all types of alcoholic beverages to consumers for on-premises consumption, but typically would not allow the license holder to manufacture alcoholic beverages or to sell alcoholic beverages to other license holders.

Each state’s licensing regime gives alcohol regulatory agencies the tools to define how different license holders can operate, and gives the agency jurisdiction to enforce against license holders for noncompliance. When license holders exceed their license privileges or otherwise operate outside the bounds of the state’s alcoholic beverage laws and regulations, the state’s alcohol regulatory agency can enforce against the license holder, typically with a variety of penalty options, ranging from fines to license suspensions, to license revocation, depending on the nature of the violation. The Alliance members each operate within each state’s licensure system and their associated privileges by delivering for licensed alcohol retailers that hold the privilege to deliver alcohol to consumers using a third party.

The Adult Beverage Alliance member companies operate as third party service providers for various types of alcoholic beverage retailers. As explained in our What is Alcohol Delivery page, and on maps here and here, some state alcohol regulatory agencies issue delivery permits to third party delivery companies, while others treat delivery companies as agents of the retailers for which they provide delivery services.

The Adult Beverage Alliance is committed to the expansion of safe and responsible alcohol beverage delivery. The Alliance is committed to doing so within each state’s existing three-tier framework. That means that the Alliance advocates for delivery from licensed retailers to consumers, which serves to promote each state’s existing three-tier structure. Ultimately, by working to expand the options for alcoholic beverage delivery, the Adult Beverage Alliance promotes the growth of a fulfillment channel that benefits not only retailers, but wholesalers and suppliers too. At the end of the day, consumers and the industry benefit from the increased options that delivery provides.