As has been reported, the only thing preventing Surly from moving ahead with their brewery plan are the Minnesota statutes regarding licensure for liquor manufacturers, wholesalers, and retailers. The real significance of this story lies in the proposals to change those laws. Reading the articles and the attached comment threads reveals a good bit of misinformation and misunderstanding about what the laws actually say and where they originate, so let’s take a look at that.

The Three Tier System

What is it and why do we have it?

The laws in question stem from the state’s interpretation of the three-tier system of alcohol manufacture, distribution, and sale. The three-tier system is a set of federal statutes put in place after prohibition that are intended to separate the manufacturers of alcoholic beverages from those that sell them to consumers. The statutes basically require that manufacturers and importers sell to wholesalers, who in turn sell to retailers. The system was devised to correct coercive and anti-competitive practices that existed prior to prohibition.

In those days, breweries owned saloons, which of course sold only their products. They also entered into exclusivity agreements with saloon owners, often through coercion or bribery with loans and equipment, creating so-called “tied houses.” The brewery that held the most saloons could essentially prevent competing breweries from entering certain markets, creating an anti-competitive situation. Breweries also exerted a good deal of pressure on tied-house owners to increase sales, leading to public drunkenness and ultimately aiding the cause of the prohibitionists.

Arguments in favor of the three-tier system

Proponents of the system say that it simplifies revenue collection, provides retailers with easier access to a greater range of products, and creates a more level playing field for small brewers to enter markets.

Distributors maintain centralized warehouses through which product is moved. They are better able to track the comings and goings of those products for payment of taxes and can efficiently generate a paper-trail for reporting of those taxes. This centralization also means that retailers can go to a single location to access several breweries’ products rather than having to manage contacts and transactions with a multitude of different producers. It also saves brewers the difficult task of selling to many individual retailers.

Requiring manufacturers to go through distributors theoretically prevents larger breweries from flooding markets with underpriced goods or bribing/coercing retailer to carry only their products. Because wholesalers make money from many producers, they have an incentive to promote the large and the small brands, thus creating a level playing field.

Arguments against the three-tier system

Critics argue that the three-tier system has simply shifted the corruption and coercion. They say that large manufacturers now incentivize distributors to drop competing brand, in essence creating tied-house relationships with wholesalers rather than retailers. Distributors then offer perks to retailers, such as installing draft lines at bars that agree to carry their products. Although such practices are for the most part illegal, critics say they are often overlooked. In this way, both small producers and small distributors can be denied access to markets. According to critics the same anti-competitive situation still exists that existed before prohibition.

The Laws in Minnesota

States interpret the statutes

While federal law mandates the manufacturer/ distributor/ retailer model, it gives the states a great deal of leeway in how to interpret and implement it. The model varies significantly in structure and strictness from state to state. In some cases, state government takes on the role of wholesaler and/or retailer, operating state liquor stores or buying from manufacturers and selling to retailers. Some states allow breweries to self-distribute product, some do not. Some allow manufacturers to participate in retail sales at the brewery, others prohibit this practice. I have read instances where state officials come to inspect a brewpub’s tax determination tanks, buy the beer in the tank from the brewery, and then immediately sell it back to them.

What does Minnesota law say?

Here’s where we get technical.

Minnesota statute allows four types of brewer’s licenses:

1.       Brewers who manufacture less than 2000 barrels in a year

2.       Brewers who manufacture between 2000 and 3500 barrels in a year

3.       Brewers who manufacture over 3500 barrels in a year

4.       Brewers who also hold one or more retail on-sale licenses and who manufacture fewer than 3,500 barrels of malt liquor in a year, at any one licensed premises, the entire production of which is solely for consumption on tap on any licensed premises owned by the brewer, or for off-sale in growlers as permitted in another section of the statute.

Brewers in the first and second category may not hold a retail “off-sale” license, but are permitted to sell beer from the brewery for off-premise consumption in 64-ounce growlers or 750 ml bottles. Brewers in the category three may not hold a retail license or sell beer for off-premise consumption from the brewery. None of these three license categories allow the sale of beer for on-premise consumption. In other words, breweries cannot sell beer directly to consumers in their tasting rooms, nor can they sell beer directly to consumers in an attached restaurant. No brewery in any of these three categories is allowed to have any ownership stake in any business holding a retail license. Brewers with these licenses are allowed to self-distribute their product if they obtain a separate wholesalers license and produce no more than 25,000 barrels of beer annually. Surly along with a number of the state’s other small breweries self-distribute their beer to retailers.

Category four is the so-called “brewpub” license. It allows a brewery to hold a retail license for on-premise consumption at a restaurant located in the place of manufacture. Brewpubs are allowed to sell growlers and 750 ml bottles for off-premise consumption, but are prohibited from distributing their product to the off-sale retail market. They can also sell their product at other separately-licensed locations for on-site consumption if those locations are owned by the same entity. For instance, Town Hall is able to sell its beer at the Town Hall Tap because both are owned by the same entity. Town Hall would not be allowed sell its beer across the street at Preston’s.

Confused yet?

So what does this all mean?

In order to move forward with the brewery project, Surly needs to change the law to allow breweries that manufacture over 3500 barrels annually to also hold a retail license for on-site consumption at a restaurant located in the place of manufacture. In other words, they need the rules that apply to brewpubs to also apply to large breweries. As I understand it, however, beyond raising the barrel limit for brewpubs, they would also need to change the brewpub license to allow for distribution into the retail market. Otherwise the change in classification would allow Surly to sell beer in their proposed restaurant, but would prohibit them from selling beer in stores. The change to the law requires more than has been suggested in the current discussion.

This change to the law has broader implications than just allowing Surly to build its brewery. If successful, the change would presumably allow brewpubs like Town Hall and Fitger’s to package and sell their beer in bars and liquor stores, something they have long wanted to do. It could also be interpreted to allow breweries to sell beer in their tasting rooms, essentially operating them as bars, as they do in Colorado.

A lot of competing interests have already begun building their cases both for and against the change. I’ll address that tomorrow.

Read part one.
Read part three