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Sell here, live here: SCOTUS reviews liquor retailer residency requirements

January 9, 2019
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Indiana statutes require liquor store owners to have been state residents for five years. A case at the U.S. Supreme Court challenges such laws. (Photo courtesy of mandritoiu / Shutterstock.com)

The requirement that alcohol permit holders live in the state where they do business is based on the simple notion that neighbors care more about the well-being of their communities than out-of-towners do.

But a challenge to that notion has stirred a feud between Tennessee liquor store owners and the Volunteer State itself. That spat has spilled into the Supreme Court of the United States with alcohol proprietors arguing the 21st Amendment gives states the right to regulate booze as they see fit, and Tennessee officials countering the Dormant Commerce Clause does not allow states to discriminate by granting permits to in-state residents and denying them to out-of-state residents.

Oral arguments in Tennessee Wine and Spirits Retailers Association v. Zackary W. Blair, interim director of the Tennessee Alcoholic Beverage Commission, et al., 18-96, are scheduled for Jan. 16, and liquor lawyers in Indiana and elsewhere are paying attention. While they’re hesitant to publicly speculate what the justices will ultimately decide, they say there is the possibility that residency requirements could get poured down the drain.

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“For us alcohol lawyers and industry members, we are all keeping an eye on this case,” said Alex Intermill, partner in the hospitality and alcoholic beverage law group at Bose McKinney & Evans LLP.

Indiana has been chipping away at its own residency requirements over the years. Previously, the Hoosier state demanded that holders of almost every kind of alcohol permit live within its borders. However, the Legislature has created exceptions so that now only two classes of permits — liquor stores and restaurants selling less than $100,000 in food per year — come with residency provisions.

Even so, Indiana, represented by Attorney General Curtis Hill, Jr., has gotten involved in the Tennessee fight, siding with the retailers. It has joined the District of Columbia and 34 other states in an amicus brief filed by the state of Illinois. The brief argues the regulation of alcohol is not driven by economic protectionism but by the desire to ensure an orderly liquor market that avoids the evils created during Pre-Prohibition and Prohibition-era practices.

In addition, the brief nodded to the value of having liquor store owners be neighbors.

“It is owners who make the important managerial decisions that have the potential to affect the public health, and it is owners who must be eventually held liable if those decisions go wrong,” the brief asserted. “An absentee owner without a relationship to the local community is less likely to be invested in the community’s well-being.”

The spirit of Granholm

Interestingly, Indiana’s stance in the Tennessee case is contrary to an advisory opinion issued in 2009 by the Indiana Attorney General’s office under Greg Zoeller. Then the top lawyer examined the state’s five-year residency requirement for holders of an alcoholic beverage retailer’s or liquor wholesaler’s permit and determined it was unconstitutional.

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Indiana Code section 7.1-3-21-5 requires at least 60 percent common stock of a corporate applicant for a retailer’s or wholesaler’s permit be owned by residents who have lived in the state for at least five years. The Attorney General’s office concluded the statute violated the Commerce Clause because it discriminated between in-state and out-of-state economic interests.

Jeff McKean of McKean Law Firm P.C. in Indianapolis remembered for a “significant period of time” the Indiana Alcohol and Tobacco Commission followed the Attorney General’s opinion. Clients were counseled that the law, although still on the books, was not considered constitutional, so they did not need to be concerned about it.

Similarly, Tennessee reached the same conclusion about its own residency laws.

When Tennessee Fine Wines and Spirits LLC d/b/a/ Total Wine Spirits Beer & More and Affluere Investments, Inc., d/b/a/ Kimbrough Fine Wine & Spirits filed applications for retail liquor licenses even though they did not meet the residency requirements, the Tennessee Attorney General sought a declaratory judgment on the constitutionality of the durational-residency provisions. The U.S. District Court for the Middle District of Tennessee in Nashville ruled the requirements violated the Dormant Commerce Clause and eventually the retailers’ association sued the state for not enforcing the law.

Zoeller’s opinion was based on the decision in Granholm v. Heald, 544 U.S. 460 (2005), which held New York and Michigan regulations that prohibited out-of-state wineries from shipping directly to in-state consumers ran afoul of the Commerce Clause. The majority was unpersuaded by the 21st Amendment argument, finding states were not permitted to discriminate against alcohol producers who resided in other states.

Since Granholm, there has been some confusion over how far the decision extends. Some contend it only covers producers, but others believe the ruling carries across the three-tier system to include distributors and retailers.

The 6th Circuit Court of Appeals’ decision in the Tennessee Wine & Spirits case, which overturned Tennessee’s residency requirements, cited Granholm. In particular, the split appellate panel found the 21st Amendment does not give states the power to enact alcoholic beverage law that “deprive citizens of their right to have access to the markets of other States on equal terms.”

McKean noted the U.S. Supreme Court typically takes an alcohol-related case once every 10 years. So picking up the Tennessee case now will give the justices an opportunity to take a much-needed return to the issues in Granholm.

“For us in the industry, I think we are glad (the Supreme Court) is looking at it,” McKean said of the question raised by the Tennessee dispute as to whether the Dormant Commerce Clause trumps the 21st Amendment. “We welcome the clarity.”

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Haze and loopholes

David Rothenberg, former executive secretary and chief counsel to the Indiana Alcohol and Tobacco Commission, noted the Supreme Court could issue a broad decision or pinpoint to a particular provision. But even just defining the word “resident” would help clear some confusion.

Indiana alcohol statutes are vague, Rothenberg said, and, in fact, do not contain the definition of “resident” or “residency.” Finding the meaning of those terms requires flipping to other sections such as the tax code.

As an example of the haziness, he pointed to Ricker’s convenience stores’ brief turn selling cold beer in 2017. Indiana only allows liquor stores to offer beer cold, but Ricker’s found a loophole and used its food service to obtain a restaurant alcohol permit, which enabled it to sell chilled brew.

The Indiana General Assembly has sometimes stepped in to either remove a residency hurdle or reinforce one.

In 2014, Monarch Beverage Co., Inc., filed a lawsuit asserting the Indiana Alcohol and Tobacco Commission has violated state statute by issuing permits to three wholesalers who did not meet the residency requirements. The Legislature upended the case by removing the residency provision.

Two years later in 2016, Binny’s Beverage Depot, the largest liquor store chain in Chicago, was preparing to start selling alcohol in Indiana. Its plans were spoiled when then-Gov. Mike Pence signed a law bolstering the residency language for liquor retailers. Specifically, the revamped statute required owners with a controlling interest to have lived in the Hoosier state for at least five years.

Speaking to the Chicago Tribune, former Rep. Tom Dermody, R-LaPorte, said, “I don’t think it’s protecting (Indiana liquor store owners) as much as it is, hey, these guys live in our communities and they do it well.”

If the U.S. Supreme Court upholds the 6th Circuit’s decision in Tennessee, Intermill said that could throw Indiana’s remaining residency requirements out the window and lay out the welcome mat for alcohol mega-retailer Total Wine & More, which is trying to muscle into Tennessee.

Indirectly, it also could foster changes to other Indiana alcohol laws. Intermill explained overturning residency requirements would not likely be the “legal domino” that topples the restrictions on cold beer sales, but “it certainly could be the social domino.” It would be another piece of evidence for Hoosiers to say, “enough is enough.”•

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