Regulatory Catch 22

Thursday, March 15th, 2012

Great article in the Nashville City Paper about the proliferation of distilleries in Tennessee. Until just a few years ago, there were only two, Jack Daniels and George Dickel. Now there are about a dozen. Here’s why:

From the repeal of Prohibition in 1933 until the most recent law change, it was exceptionally difficult to get legal approval to distill spirits in the state of Tennessee. Only a few counties allowed the practice, and for a distillery to be approved it had to get a referendum on the ballot and then win a countywide vote. This made it nearly impossible for new producers to start up.

In 2009 all that changed. A bill was drafted that would permit distilleries in any county in Tennessee where there are both operating liquor stores and liquor by the drink, which opens up much of the state. But there was a moment where things didn’t look good for the bill.

“A state senator said to us at one point: ‘Wine is good because Jesus drank wine. But beer and whiskey are bad, because Jesus did not drink those,’ ” Darek Bell of Nashville-based Corsair Distillery recalled. “It felt like we had traveled back in time to Prohibition.”

“At one point it looked like the bill would fail,” Bell said. “An older representative got up and spoke. He said ‘I don’t know anything about this stuff. But if it will help the farmers in my community sell more corn, then I am all for it.’ And just like that, the opinion turned, and the bill seemed to sail through after that.”

But that doesn’t mean there still aren’t some daunting regulatory hurdles. The most asinine is probably the wholesaler/distributor laws, variations of which are common to many states. The only real purpose of these laws is to drive up the cost of booze in order to enrich people who run alcohol wholesaling businesses. Wholesalers are also licensed by the state, and usually given state-granted monopolies over large chunks of territories.

 [T]o make it to the shelves, a distillery must sign on with a distributor, which is a very delicate aspect of the process. Tennessee liquor distribution, which also includes wine and higher-alcohol beer, is subject to what is known as a franchise law. This law was put in place to protect the franchisee, in this case, the wholesaler. According to local attorney Will Cheek, once a distiller enters into a contract with
a wholesaler, it is very, very difficult to terminate that contract. In fact, he couldn’t recall a single case of  such a relationship being terminated.

So, hypothetically, were a distiller to ever get crossways with the distributor for whatever reason, leaving that relationship would be nearly impossible.

“It’s a harder choice than choosing your spouse. Getting divorced is far easier than breaking up with your distributor,” Cheek said.

This could prove especially difficult for microdistilleries, which might not get as much notice on a wholesaler’s radar. Cheek said the law is structured to protect the wholesalers from big, out-of-state competitors.

“From a distiller’s standpoint, the law is ridiculous. It offers every protection to the wholesaler and almost none for the distiller,” he said.

If you sat down and consciously tried to design a system prone to corruption and highly favorable to large, incumbent alcohol companies at the expense of upstarts, I don’t think you could do much better than this.

But the most beautiful example of regulatory nonsense can’t be blamed on Bible Belt temperance. It comes courtesyof the federal government. In order to get a federal permit for whiskey-makin’ . . .

 . . . you have to be able to prove you know how to make whiskey but are not allowed to have actually made it . . .

Wonderful, isn’t it? It’s illegal to distill booze for any reason, even solely for personal consumption. So to get a federal permit, you really do have to swear to the feds that you know how to distill, but it’s illegal for you to ever have tried.*

Related: This Tennessee-distilled wonderfulness is the best bourbon I’ve ever had. Don’t be deterred by the chocolate. It’s delightfully subtle.

*A commenter points out that someone could conceivably have learned the art of distilling in another country. Good point! That also means that when it comes to whiskey-making, the feds are giving a huge advantage to .  .  . foreigners!

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25 Responses to “Regulatory Catch 22”

  1. #1 |  Bob | 

    Wonderful, isn’t it? It’s illegal to distill booze for any reason, even solely for personal consumption. So to get a federal permit, you really do swear to the feds that you know how to distill, but it’s illegal for you to ever have tried.

    That’s brilliant! You’re either lying to a Federal Agent, or confessing to making Moonshine. They have you on felony charges either way. They can probably Lacey Act your ass, too. You know… because it’s illegal to turn corn into hooch in some countries.

  2. #2 |  Brandon | 

    “If you sat down and consciously tried to design a system prone to corruption and highly favorable to large, incumbent alcohol companies at the expense of upstarts, I don’t think you could do much better than this.”

    What makes you think that wasn’t the goal?

  3. #3 |  Onlooker | 

    And yet people still don’t understand what’s meant by “regulations are harming the business environment in this country.” Of course they’re misled by propaganda on both sides of the aisle on the issue, as with so many other things.

    I tell ya, we’re on the road to Greece with this nonsense.

  4. #4 |  supercat | 

    If one has traveled outside the country, could not one claim to have obtained experience legally brewing spirits there?

  5. #5 |  billb | 

    Could also one have worked in a licensed distillery and learned the trade before striking out on one’s own?

  6. #6 |  Radley Balko | 

    Could also one have worked in a licensed distillery and learned the trade before striking out on one’s own?

    Yes, that seems likely.

    Stop harshing my outrage buzz!

  7. #7 |  JThompson | 

    If you sat down and consciously tried to design a system prone to corruption and highly favorable to large, incumbent alcohol companies at the expense of upstarts, I don’t think you could do much better than this.

    Well yeah, that’s because we’d be amateurs at designing a system prone to corruption and highly favorable to large, incumbent alcohol companies. This system was designed by professionals.

    @billb: That would depend on how many non-competition agreements you’re forced to sign to work at one.

    Another (maybe) way around that is to get a fuel ethanol permit. I’m not sure they’d take that experience. Cars don’t care what you ferment or how much foreshots or heads you leave.

  8. #8 |  MattF | 

    Or you could have learned at an existing distillery. Seems like most of the breweries around here (San Diego) get started when someone’s built up enough experience to head out on their own and start up their own operation.

  9. #9 |  JimP | 

    Georgia’s system is similar and basically just as bad…

    http://clatl.com/atlanta/beer-bust/Content?oid=1250475

  10. #10 |  Brendan | 

    You guys have absolutely no idea of the regulatory nightmare that the TTB is (alcohol & tobacco tax & trade bureau – the arm of the ATF that handles brewery/winery/distillery licensing & taxation). I’m in the middle of TTB licensing to open a brewery, the distilleries have it 10x as worse. Then move onto state licensing in the 3-tier system of Pennsylvania. I’m keeping track of everything & taking notes, when I’m all done with the process, I’m going to send Radley a summary. It’s insane.

  11. #11 |  Barry D | 

    God, not the Feds, gave the advantage to foreigners in making whisky, by making some of them Scottish.

    That said, this stuff is utterly ridiculous. What justification is there for making it illegal to distill alcohol for personal consumption?

    I don’t support licensing or other restrictions on personal activities, but in this case, one can’t even get a LICENSE to do it. That is ridiculous; one can get a license to build machine guns for experimental purposes. Granted, this is not a trivial license, but it is available.

  12. #12 |  contrarian | 

    Note that John McCain’s personal fortune comes from the fact that his wife Cindy inherited a liquor distributorship. A champion of free enterprise.

  13. #13 |  TC | 

    “…the feds are giving a huge advantage to . . . foreigners!”

    Just like the 4% money they could get to buy up all the POS motels and put in place what amounted to slave labor, imported from their “red Dot” country of origin.

    But someone that had demonstrated over decades their desire to grown the economy was prohibited from such favorable loans!

    Do you really wonder why you now stay at a Red Dot inn, shop at a red dot c-store?

    Oh and don’t ever forget none of these places have any declarable CASH sales either! That element is reserved for personal expenses and putting the kiddlets through Harvard!

    I may have wandered a bit, sorry.

  14. #14 |  a_random_guy | 

    Yeah, the alcohol licensing system is all mucked up. My honest understanding is that it was designed to make alcohol more difficult to get – kind of a last burp out of the prohibition days.

    I know a guy who wants to nationally retail Scotch whiskies that are not otherwise available in the US. He can be (a) an importer or (b) a wholesaler in a single region or (c) a local retailer. He cannot be any two of the above. Since he knows the sources in Scotland, this means that he has elected to be the importer. He corresponds with his customers (over the Internet, I think), but cannot actually sell them anything. They order, but the actual bottles must pass through a regional wholesaler and then a local retailer – both of whom demand a hefty markup on a product that they are just passing on. Insane.

  15. #15 |  Eric Oden | 

    Has anyone tried Angel’s Envy by the guy who brought us Woodford Reserve (my favorite)? it’s aged again in port wine barrels. Also.. if bourbon is flavored after aging in new white charred oak barrels still technically bourbon? Or.. once it’s aged.. everything is cool.

  16. #16 |  Discord | 

    I have a friend here in NYC who is a mixologist and a booze sommelier (I know this is the wine type, but I don’t know the name for the booze type). His favorites are bourbon. He says hands down, the best is http://www.fourroses.us/home His home selection of booze has FAR more bottles than most bars, it’s astounding. Whenever I’m there we do tastings and he mixes unbelievable old school cocktails – often with the help of a digital thermometer, it’s that serious. We always end off the night with bourbon though.

  17. #17 |  Discord | 

    ^ I should say, my personal favorite Four Roses is the Small Batch.

    http://www.fourroses.us/products/small_batch

  18. #18 |  C. S. P. Schofield | 

    The core problem, of course, is that regulators do not get rewarded for NOT putting up roadblocks to wealth generation, but they do catch holy hell every time something goes wrong that – in the minds of the public – could have been prevented. And I’m by no means sure that there is any way to amend the situation, though I’d love to try.

    Anybody got any ideas?

  19. #19 |  Boyd Durkin | 

    “…have to know how to do it really well, but have never done it before.”

    Feds are now applying porn plots to law making. Don’t know if this is good or bad.

  20. #20 |  ChicagoSucks | 

    “he says hands down, the best is http://www.fourroses.us/home

    Four Roses barrel strength small batch is in my top 3 (depending on the barrel), and I have a few bottles of this in my collection, but even FR can’t hold a candle to Pappy’s 23 year, or anything else from the Old Rip Van Winkle Distillery IMO.

  21. #21 |  Astra | 

    In the cheaper category, Eagle Rare ftw.

  22. #22 |  smurfy | 

    It’s a bit late but my university, right here in California, offered degrees in distillation theory. Given what can go wrong if you are one carbon off in the finished product, requiring some expertise may have some wisdom. This is the intersection of art and science and science for public consumption is necessarily regulated, over regulated to be sure, but, still.

  23. #23 |  StrangeOne | 

    C.S.P.

    I would humbly suggest destroying all state and federal regulatory agencies of alcohol as they currently exist. Most are hold over organizations made in the collapse of prohibition, as their mentality on enforcement shows.

    Secondly get rid of all laws that make arbitrary legal distinctions between importers, brewers, wholesalers, retailers, bars, etc. All such laws are established industry rent seeking and do nothing but prohibit innovation and the free market.

    Reform, at the state level, basic regulatory agencies that take random samples of alcohol products sold to the public. The regulatory impetus is entirely on the state, businesses will not be required to pay for the tests nor do they have to meet arbitrary deadlines. They are only tested when the state purchases their product and preforms the test. Ideally it would function like the BBB, where the agency only responds to complaints instead of proactively testing everyone. If its found that someone is selling methanol, or some other dangerous concoction, the agency can get a court order to stop distribution, but only after confirming the initial results with a second immediate test. If someone is not selling their alcohol to the general public, then problems caused by those spirits will be dealt with at the civil level.

    Fourth, if you or anyone else manages to unweave the decades of bullshit laws regarding alcohol production, distribution, and regulation then I would really like to know how this herculean feat was accomplished.

  24. #24 |  Cornellian | 

    “A state senator said to us at one point: ‘Wine is good because Jesus drank wine. But beer and whiskey are bad, because Jesus did not drink those.”

    Just another reminder of why I’m glad I don’t live in the South.

  25. #25 |  bigjohn756 | 

    “Related: This Tennessee-distilled wonderfulness is the best bourbon I’ve ever had. Don’t be deterred by the chocolate. It’s delightfully subtle.”

    Tennessee-distilled and bourbon don’t belong in the same sentence. Bourbon can be made only in Kentucky. The difference is great. I cannot swallow Tennessee sour mash because it tastes so bad, but, I love bourbon.

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