Costco Sues over State Liquor Laws

Retail giant Costco is suing to overturn Washington state’s laws which keep the price of wine and beer artificially high.

Costco Sues for Right to Buy Wine, Beer (AP)

Costco Wholesale Corp. is known for selling stuff cheaply, and a lot of it. But the company says it can’t sell beer and wine cheaply enough under state rules for distributing alcohol. Lawyers for the big-box retailer on Thursday asked U.S. District Judge Marsha Pechman to let it and other stores buy directly from out-of-state wineries and breweries. State lawyers representing the state Liquor Control Board warned the judge that doing so would dramatically increase alcohol consumption in Washington.

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Costco’s lawsuit, filed early last year, challenges Washington’s scheme for distributing alcohol from other states. Under it, out-of-state vintners and brewers must sell to one of about 200 licensed distributors in Washington state, at a markup of at least 10 percent above cost. The distributors then sell to retailers, such as Costco, at another 10 percent markup. Washington’s 450 wineries and breweries can sell directly to retailers, at just a 10 percent minimum markup.

Costco, based in Issaquah, says that by buying in bulk, striking deals directly with out-of-state wineries and using its own distribution system, it could offer beer and wine at better prices. Company lawyer David Burman said the state cannot justify forcing retailers to use a middleman at an automatic 20 percent markup — especially when state liquor stores aren’t subject to the same restrictions or markups.

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Last year, the U.S. Supreme Court ruled that states that allow their citizens to buy directly, such as by mail, from in-state wineries must also allow them to buy directly from wineries in other states. Several states are wrangling with their alcohol distribution systems in light of the ruling. Costco says that under the court’s ruling, it too should be allowed to buy directly. The state argues that the Supreme Court’s ruling isn’t applicable because it didn’t deal with the enormous quantities at issue in the Washington case.

I would like to see Costco win this case and, ideally, state monopolies on the sale of “hard liquor” invalidated. Legally, though, I’m not sure what the grounds would be. The 21st Amendment, which ended prohibition, seems to give the states wide latitude:

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.

Still, it is difficult to find a legitimate public policy rationale for a state forcing retailers to sell beer and wine at a large markup. Washington’s stated aim, discouraging excessive drinking, would seem vitiated by the fact that it sells these beverages at a lower price in state-run stores.

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James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Bithead says:

    I’ll point up that there’s precident for this case, here in the People’s Republic of NY, vs Century Liquor and Wine…

  2. dw says:

    Actually, what Washington is doing is actually some good old fashioned protectionism — it’s trying to keep state distributors and by extension smaller state wineries in business.

    There is some question as to whether removing the 10% markup would help or hurt the state’s wine business. The markup helps small wineries better position themselves with the in-state distributors, so they sell more bottles. Out-of-state distributors would only deal with the big wineries like Columbia and Chateau St. Michelle, since they’re going to want an economy of scale and a name brand. OTOH, the one thing that Costco prides themselves on is their wine sales and their ability to get some great wines from the small wineries, so it’s possible that by using a combination of out-of-state distributors for the big wineries and in-state ones for the small wineries there could be more space for the small production wines.

    I tend to be with Costco on this one (and not just because of my membership card). Breaking down our arcane liquor laws, busting the state monopolies on alcohol, and opening distribution would do a ton for small businesses, from craft brewers to small distributors. Right now you can’t ship a bottle of wine to half the states in this country. That doesn’t make any sense at all.