Regulation of alcohol in the United States uses a three-tiered system that perpetuates big business’s control on the alcohol industry and has helped maintain a cartel-like hold on the marketplace ever since the end of alcohol prohibition in 1933. The power the distributor has on the market cannot be underestimated. In order for alcoholic products to be sold, the law requires you to go through a distributor who has been licensed by the state to sell to the retailer. This means if you decide to import or start up a brewery, you’ll have to acquire a distributor license yourself and deal with the subsequent overhead cost associated with it. The other option is signing a contract with an existing distributor who will sell your beer while expanding their own distributing network. The cost here is perpetuating the control big business has on the alcohol industry.
Laws regarding alcohol vary depending on which US state you reside in but generally, it’s required by law to ONLY sell beer to properly licensed distributors (some states have the government itself act as a distributor i.e. Utah, Pennsylvania). The three tiered system might as well be called the three taxed, benefit system because that’s essentially what it does: guarantee the state to collect taxes at every level while protecting big business advantage on distributing.
If you decide to enter the beer market, you better be prepared for the complex web of restrictions. First, you will need a Limited Liability Corporation (LLC). You must file the proper paperwork with the Alcohol Tobacco Trade and Tax Bureau (TTB) for the benefit of paying excise taxes and get the labeling permits. All the requirements to protect consumers begin with the level of production and end at the beginning of distribution. The distributor takes a profit from the sales but is really nothing more than a fancy way of saying “I’ll sell that for you at a higher cost because the government says so.”
The three-tiered system ends up generating a virtual cartel of big business distributors in the marketplace for beer. These large distributors often produce their own beer (they own licenses for 2 of the 3 tiers) and garner most of their profit off their own main-line beers. This arrangement makes it so the incentive to help out small time brewers looking to tap into the marketplace is nonexistent. They will only “help” out on the chance of a win-win scenario. If the beer doesn’t sell, then the distributor still makes money since their own line of beers is the bread and butter of the profit margins. In the case that the beer does take off and becomes fairly popular, the distributor sees increased profits. Either way, the distributor faces little risk if the product doesn’t become successful.
This three tiered system requires taxation at every level, from the brewery all the way down to the grocery store or restaurant. The production level includes various types of taxes such as federal excise taxes, custom duties, permit and license fees, corporate income, and property taxes. The exact same taxes are applied at the wholesale level as well. As if that isn’t enough, the retailer (restaurant, pub, grocery store) has to pay sales taxes, license fees, corporate or personal income and property taxes on top of everything else.
Regulation restricts the direct sale of alcohol from the producer to the retailer. They do nothing to foster commerce and everything to take a dagger to the side of the free market. By the time all the taxes have been collected and accounted for, the consumer pays the brunt of the cost. In fact, taxes are the most expensive ingredient in beer. If all the taxes levied on the production, distribution, and retailing of beer are added up, they amount to more than 40% of the retail price
The way to completely free the market is to eliminate the three-tiered system. Otherwise we will be left with conglomerate distributors who control a great deal of the beer supply and seek to eliminate competition through buy outs via government regulation. If it wasn’t for the three-tiered system, the price of beer would be significantly cheaper and you’d see an increase in the amount of variety of beers available. A proverbial beer paradise if you will.