American Spirit: A Story of Virginia’s Liquor Laws
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American Spirit: A Story of Virginia’s Liquor Laws


It pains me to say that I’d have to leave
our home state, but if things don’t change, I’d like to keep our business, and if we want
to keep our business, it won’t survive here if the laws don’t change. It’s hard to articulate how divisive the alcohol
debate was in our country. It is a system that is deliberately designed
to limit the sale and distribution of alcohol in order to prevent the, uh, feared social
problems. The people that are most hurt by the current
system are two people, two entities, the consumers and then also the people that are producing
and actually making the alcohol products. They face a lot of times really burdensome
paperwork regulations, really high markups from state taxes that make their products
more expensive for people, limit their ability to sell directly to people. Most every law or regulation that looks archaic
that if you say, “They do what?” is there because somebody wants it there for their
economic interests. I can’t underscore how much laws have changed. The laws on alcohol today are totally different
than they were 40 years ago, and I predict 40 years from now, they’re going to be different
than they are today. Alcohol has got a history. You have two Constitutional amendments on
it. The first was the 18th Amendment banning alcohol. That was a one size fits all and it says,
“No alcohol.” That was a failure, and as a result, after,
uh, several years of, uh, lots of controversy, they, uh, passed the 21st Amendment. An important part to remember about the 21st
Amendment is Section 2. Section 2 grants the right to the states to
regulate alcohol, and as a result, we have 50 different state markets for alcohol, not
a national market for alcohol. And as a result, you’re going to have different
laws in each state, but that’s by constitutional design. It’s the only product in the Constitution
that has its own Constitutional amendment govern the regulation of it. In 1933, when they repealed prohibition, John
D. Rockefeller commissioned a study to come up with some recommendations as to how the
states and the federal government should regulate alcohol going forward to try to avoid reversion
to the wild west saloon days that had preceded, uh, the prohibition era. Rockefeller was one of the leading proponents
of, you know, prohibition. He was a big funder of the groups that were
pushing, uh, to get rid of alcohol, but he, uh, in a very public letter in the New York
Times said, you know, “I pushed for prohibition and the 18th Amendment and I was wrong. We need to legalize it, but regulate it.” And he didn’t stop there. He funded this study. A book called Toward Liquor Control that was,
uh, published in 1933 at the behest of, uh, John Rockefeller, and that book kind of set
up a lot of the model of that system that states then took and implemented, and, uh,
ran with. And actually all the states eventually adopted
a version of that model. So they created a three tier system, which
basically, uh, says you can’t be both a manufacturer or wholesaler and a retailer, so that, uh,
is still in place virtually everywhere in the country. The first tier is us. We make it. The second tier is, you know, the wholesalers. They transport it. The third tier, the retailers. It was designed to do two things, prevent
the return of the saloon and encourage temperance. The idea was we want to tamp down this industry
to keep people from, you know, getting drunk and raising hell, so it has done that fairly
well. One of the difficulties with that is whether
that middle tier should be legally mandated, or whether it should be something that, uh,
is more voluntary. In a voluntary open market, the three tier
systems are just a natural part of the market. It … The distributors are very helpful in
getting products to market. In a mandated three tier system, it locks
opportunity, it locks entrepreneurship out, it inconveniences consumers. I believe in the three tier system if we were
to use it on a, uh, on a market level. I don’t think it should be mandated. If distributors are that needed, well, I’ll
go hire one. I don’t want to buy a bunch of trucks, right? I don’t want to go out and do the distribution
myself and set up a distribution center. I don’t want to do that. I like making it, and I like getting it out
so we can sell it in retail. I would use a distributor if I thought that
I was getting a fair price for my FOB and they weren’t trying to screw me. Wholesalers help, you know, alleviate problems
for a variety of issues. For example, taxation. Many states make the wholesaler pay for it
as a point of entry when they come into the state before it could be sold at retail. Making sure the products are approved. Making sure it’s not, uh, some product that’s,
you know, illegal or forbidden or illegally made. They can tax anybody in the business. It doesn’t have to be through a wholesaler
or whatever. If people are going to abuse alcohol, they’re
going to do it in either system, but what this system does is it prevents people who
want to appreciate, who want the specialty products, people who want to innovate, and
it just undermines the marketplace for that. Uh, I don’t see any reason, safety reason,
for the government to be involved. Tier two in Virginia is broken. We need to have the freedom of choice to use
whatever distributor that we want and do our negotiations directly with them. Wholesale and retail of distilled spirits
in Virginia is conducted by the Department of Alcoholic Beverage Control, so we only
have basically two tiers. You’ve got the manufacturer and you’ve got
ABC. They limit our staging, they limit our commission,
and they can arbitrarily pick what stores we’re in and how much we can sell out of those
stores. So it’s not the three tier system that’s the
problem for us. The problem for us is the fact that due to
the control system, our guys are unable to make sales directly, uh, themselves to retail. A control state is where the government controls,
uh, how it’s sold, right? And a license state is where they license
private parties to sell. So, like, New York licenses liquor stores
to sell liquor only, but in Virginia, the government sells liquor, and then in other
states, the supermarket can sell liquor, everybody can sell liquor. As to, um, the issues of the control states,
um, they provide a lot of revenue for the state, and they provide a lot of access. I think there’s, uh, there’s a lot of folks
that you could talk to that are small producers that love the control states, and the larger
producers may not like the control states, because they lose shelf space to these unproven
smaller guys versus the larger guys. The segment of the industry that has the most
negative, uh, impact from the, uh, design of the system is the distillery industry. The distillers are still suffering from the
1933 idea that we should make it harder to get, uh, distilled spirits and easier to get
beer and wine, so their taxes are higher, they have fewer privileges. The number of outlets for their products are
smaller than beer and wine, so everything is stacked against them. We knew how much we were going to have to
pay when we distributed to the headquarters, but we were not aware of the cut that they
take, um, out of the distillery tasting room. Wineries, breweries, cideries, they don’t
have to pay anything. We have to pay 54 percent of every bottle,
and so that is very costly and is very burdensome to us. There’s not really a rational reason for things
to be treated differently. The presumption is that spirits are more dangerous,
um, but you can abuse any type of alcohol, and if somebody is going to abuse it, they’re
going to abuse it, right? The reason we have all these laws, it started
with the temperance movement. The reason really is to protect certain interests,
so once these laws got into place, um, for instance, spirits are sold in some places
in government stores. Well, the reason is because the government
wants to make the money. It’s not because it’s a more dangerous product. A control state makes it harder, but if control
states like Pennsylvania have been able to figure it out, you would think Virginia could
figure it out. So within Pennsylvania, we’re allowed to have
five remote tasting rooms, and so we don’t have to have full production facilities with
those remote tasting rooms. We can just have a tasting room to provide
an experience for our customers. We can sell bottles, do cocktails, and educate
them about our products, and spread the word on Silverback. They also were allowed to sell bottles at
festivals. Um, we’re allowed to give tastings at festivals. We’re allowed to sell at farmers markets. Yes, we need some laws, but, yes, let’s make
it profitable for the distilleries to come here. You know, agri-tourism is very big right now. People want to go on road trips and try the
local beer or try the local, you know, distilled spirit, um, and a lot of states have, uh,
really severe limits on that. You know, you might only be able to try three
ounces of a spirit while you’re there. Uh, you might only be able to buy one bottle
of, uh, of booze while you’re there. You can’t buy any more than that. You know, the fact is alcohol is unique. Alcohol is an intoxicant. Alcohol, uh, can be abused. According to the Centers for Disease Control,
not me, the Centers of Disease Control say 88,000 people a year die from alcohol. That’s twice, uh, what the amount of deaths
from opiates that everyone is talking about, so we can’t lose sight of that. If you were a consumer and your main interest
was this is, uh, what I buy and this is how much it costs me and this is how many outlets
I have to purchase it, then the alcohol regulations probably don’t, uh, do much good for you,
because they’re designed to make alcohol more expensive, uh, so that to discourage people
from excess consumption. On the other hand, if you’re a taxpayer who
is either a non-consumer or a, uh, moderate, uh, occasional consumer, it’s probably been
pretty good for you, because, uh, the system makes a lot of money. Uh, ABC transfers hundreds of millions of
dollars to the general fund every year. If you didn’t have those hundreds of millions
of dollars coming from ABC, then they’d be looking for that money in income taxes
or some other sort of revenue streams. One third of Americans don’t drink. Two thirds do, but even at that two thirds,
there’s only a few that drink regularly. Some just have a few. Often the alcohol debate is pushed by folks
that are in the industry or are, you know, drink more than the vast majority of voters. There’s certainly a role for government to
play. I don’t think a lot of people are anxious
to go back to the, you know, black market of moonshine, for example, where people could
actually get hurt with, uh, certain kinds of alcohol. Um, and it’s just, kind of, what is the best,
most rational system for the government to get involved? I love what we’ve created here. We have 14 international awards. For a craft distillery, that’s unheard of. We work really hard. We work 12, 16, 18 hour days sometimes to
produce a great product for customers and to keep up with the demand. I don’t mind doing that. I love what I’m doing. I am passionate about it, and I talk to everyone,
but the fact that you have to give so much of your profits away, it just … It’s regulated. It doesn’t move as fast, maybe, as other industries,
but coming in with a bull in a china shop approach isn’t, uh, isn’t good for a consumer. It’s not good for public health. It isn’t good for the regulatory goals of
the state. We created a system and people made economic
assumptions and investments based upon the system that was created, and as those investments
have grown and, you know, they become a part of the system, there are people who, uh, don’t
want to see, uh, pieces of it change. So everything goes back to money. It’s not quality of product. It’s not whether we’re protecting the public
welfare and health of the great state of Virginia. What it comes down to is beer, wine and cider
have a much easier getting their product to Virginians than I do, and their taxes are
much less. That means that I am always swimming uphill
in this state. And, you know, limiting people’s ability to
be able to directly sell products to consumers is a huge handicap on those businesses. That’s how these craft distilleries actually
market their products. They don’t buy, you know, TV spots. You know, they’re not, you know, in the Super
Bowl like Budweiser is. They’re actually trying to get people to come
and actually taste their products and want to buy more of their product, and the fact
that we actually prevent them from doing that is just an incredible barrier to them expanding
in the marketplace that I don’t think you really see in almost any other industry. A lot of critics say that somehow the system
keeps out new entrants to marketplace and, uh, the facts just don’t support that at all. The number of permits for distilleries, wineries,
and breweries continues to skyrocket up. Specifically in the case of distilleries,
in 2010 there was roughly 500, and now in 2017, there’s over 2,000. That’s a fourfold increase in just seven years. Uh, there are new breweries and distilleries
opening up every day, and, uh, bringing a lot of excitement to the category. There is a lot more exciting things happening,
and I think that’s just, really, the American spirit. It’s not any thanks to the regulations. The climate is incredible. The water that we have here off of our property,
the grains that Virginia farmers provide for us, the fact that I think we’ve got the best
distiller in the world, right, with my wife and with my daughter. That’s fantastic. I think, however, the business climate in
Virginia is abysmal. You know, especially for distilleries, the
regulatory burden is pretty onerous.

5 Comments

  • Robert Marshall

    Politicians who are in favor of a welfare state need their hands in as many cookie jars as possible in order to pay for all the entitlements created and to keep control over society. These overbearing liquor laws are made to control one of those cookie jars

  • True north 30

    Keep on voting democratic Virgina!! Way to go…you tell the rest of the country how much you care about businesses..as they walk out the door!

  • mark abrams

    Any regulations that are based upon the concept that the people are idiots who are unable to control themselves while the government is wise and angelic are going to be not only economically but morally reprehensible.

  • James Henderson

    Mr Coleburn was the chairman of the ABC board when I worked there. It was a great system then, now he says it's broken. He was "retired" by the Gov. Now he works for the other side. Follow the money.

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