I’m a lawyer who happens to drink craft beer. I fell into craft beer accidentally (as many people do) and have since become an ardent supporter of Texas craft and other craft beer brands from out of state. I’ll be the first to admit that I’ve still got a lot to learn when it comes to many areas of craft beer. And, personally, there will likely be a lot that I will never bother to learn. While I love my craft beer, I’m not very happy with how my state treats breweries. And because of that, this is the longest blog post that I’ve ever written or ever hope I will write again.
See, there has been a lot of discussion about two house bills pending in the Texas State legislature that hope to change a tiny sliver of the laws that apply to craft breweries. They are HB 602 and HB 660. Frankly, I hope they both pass and are quickly instituted, but unfortunately these bills don’t begin to take care of the variety of problems that litter our state’s law statutes in regards to beer. I may not have everything right about these two bills nor probably all there is to know about the complex TABC laws, codes and regulations — but neither does anyone else as far as I can find.
What’s the problem?
Texas’ alcohol laws are rife with outdated rules that date from the 1930’s. These laws apply to a market that no longer bears any resemblance to the market that they were created to govern. Beer is one of those markets. Sometime in the 1970’s the wine industry began to make a concerted effort to change Texas laws that affected them. And they largely succeeded. However, that has left a patchwork of laws that favor one subsection of the alcohol industry while hampering another.
As a result, Texas treats two subsections of alcohol manufacturers (wineries and breweries) completely differently. This applies more to HB 602’s ultimate purpose. Read the excerpts from the two statutes below and tell me how this is fair:
CHAPTER 16. WINERY PERMIT
Sec. 16.01. AUTHORIZED ACTIVITIES. (a) Except as provided by Section 16.011, the holder of a winery permit may:
(5) [(4)] sell wine to ultimate consumers:
(A) for consumption on the winery premises; or
(B) in unbroken packages for off-premises consumption in an amount not to exceed 35,000 gallons annually; (FYI, that number amounts to just about 7,466 cases of wine)
CHAPTER 12. BREWER’S PERMIT
Sec. 12.01. AUTHORIZED ACTIVITIES. (a) The holder of a brewer’s permit may:
(3) sell the ale and malt liquor only to wholesale permit holders in this state or to qualified persons outside the state;
Did you see what I see? I see wineries allowed to sell wine directly to consumers (i.e. you and me when we walk in off the street) and I see breweries only allowed to sell ale and malt liquor (and beer for that matter) to wholesalers and distributors (more on that lunacy later). I, personally, believe this amounts to an unconstitutional restraint on trade and commerce, and unfair favoritism to one subsection of an industry while others in that industry are treated less fairly. Why the State Legislators in Texas do not is a mystery to me.
HB 602 attempts to allow breweries a “wink and a nod” exemption from this unfair statute. Essentially, the idea would be that you could take a tour of a local brewery, and you could walk away with beer from that brewery in an amount not to exceed 48 bottles of beer (limited to 12 oz bottles) as long as you paid a higher tour price. So, you don’t want to take beer away with you? No problem, the tour will cost you $5.00. Wait, you do want to walk out with two cases of beer? Well, that tour will cost you $50.00. To me, that sounds an awful lot like selling beer to the ultimate consumer but just not calling it that.
Now, I don’t know the history behind this house bill other than this is the third time it has been presented (at least in some format). Perhaps the other bills presented in previous legislative sessions met with such resistance that this watered down version looks to stand the best chance of passage. I can understand the burning desire to start somewhere, but I have to believe that if Texas consumers were educated about the disparity presented to breweries by our state’s laws, especially when compared with wineries who are allowed to sell wine on site, they would not be too keen to allow this to continue. Texans believe in fairness and they won’t like it that our laws allow institutionalized favoritism. Texas laws need and should be updated to treat all “manufacturers” equally under the law — no exceptions. (for the distillers out there reading this, I imagine this would also include you, but, frankly, this post won’t cover you today)
I know in the past beer distributors haven’t supported such updates, but I wonder how these changes would differ from what wine distributors are already dealing with? If wine distributors can make it economically just fine with in-state and out-of-state wineries selling wine at the winery and/or delivering wine to my door, then I would have to believe that beer/ale distributors would not be put in jeopardy of losing their businesses just because breweries sell a small number of six packs on site. To say otherwise just doesn’t make any sense. People will continue to buy beer at the grocery store and the local package stores even if allowed to buy beer at the brewery, just as they do wine (myself included). Per the Three Tiered System, beer at your grocery and package stores must be purchased via licensed Texas distributors/wholesalers – voilà, distributors remain making money and employing Texans.
And for those of you who challenge these sales on the basis that it will promote underage drinking- please, this “argument” is a nonstarter. Wineries don’t serve underage kids any more than bars or restaurants, probably less. Every package delivered from a winery has as a requirementthat it not be delivered to anyone under 21 years of age nor be delivered to an intoxicated person. If no one is home to sign for the wine, then it doesn’t get delivered. I think 16 year olds who want wine (or beer) are much more likely to try to find an older sibling to buy the wine (or beer) for them rather than try to purchase wine (or beer) via the Internet. Underage drinking laws already exist and should be enforced, but not at the expense of fairness between manufacturers in this state. Free the breweries from unfair restrictions, I say.
Well, HB 660 addresses a completely different set of laws, though many of you reading this would probably be really surprised and confused as to why this is so different. HB 660 addresses brewpubs alone. The reason HB 660 addresses brewpubs alone is because our state separates brewpubs out as somehow different from breweries. Yes, I know – breweries brew beer and brewpubs brew beer, but Texas sees apples and oranges when it looks at the two entities. (It’s a long, prohibition-laden story and not part of this dialog, but it is worth investigating if you have the time.)
Here is an excerpt from Texas’s statutes for brewpubs:
CHAPTER 74. BREWPUB LICENSE
Sec. 74.01. AUTHORIZED ACTIVITIES. (a) A holder of a brewpub license for a brewpub located in a wet area, as that term is described by Section 251.71 of this code, may:
(1) manufacture, brew, bottle, can, package, and label malt liquor, ale, and beer;
(2) sell or offer without charge, on the premises of the brewpub, to ultimate consumers for consumption on or off those premises, malt liquor, ale, or beer produced by the holder, in or from a lawful container, to the extent the sales or offers are allowed under the holder’s other permits or licenses; and (i.e. you can buy beer on site and either drink it there or take it home)
(3) sell food on the premises of the holder’s breweries.
(d) The holder of a brewpub license may not hold or have an interest either directly or indirectly, or through a subsidiary, affiliate, agent, employee, officer, director, or other person, in a manufacturer’s or distributor’s license or any other license or permit in the manufacturing or wholesaling levels of the alcoholic beverage industry regardless of the specific names given to permits or licenses in Title 3 of this code. The holder shall be considered a “retailer” for purposes of Section 102.01 of this code. (meaning that brewpubs owners cannot have any ownership interest in any brewery or wholesaler/distributor)
(f) A holder of a brewpub license may not sell an alcoholic beverage for resale. (meaning that brewpubs can’t sell their beers to licensed wholesalers/distributors for resale to you and me at grocery stores or other retail establishments such as other bars/restaurants)
Why does this matter? Well, it means that even though brewpubs brew beer just like breweries, because Texas refuses to accept that both of these “manufacturers” end up producing beer and ale, brewpubs are restricted to selling their beers only from their premises. (Keep in mind that breweries are prohibited from selling their beers on their premises.) Back in the day, there was some thought that such division would help maintain free and open alcohol markets. I would argue that these goals are woefully outdated given the drastic changes seen in transportation, marketing advances, government oversight improvements, capitalization requirements and other reasons, and should be brought up-to-date with current needs and goals of the market.
HB 660 attempts to change the brewpub laws by allowing brewpubs to sell a limited amount of their beers into the distribution chain so that consumers can purchase them somewhere else other than the brewpub. The bill further allows smaller brewpubs (those producing up to 10,000 barrels a year) to self-distribute their brews. This is similar to laws currently in existence that allow small breweries to self-distribute until they reach a set production level. Once the brewpub exceeds that capacity, they must enter the three-tiered system and distribute via wholesalers and distributors — same as for breweries. It does, however, limit the ultimate size of the brewing capacity to 75,000 barrels per year to retain the ability to distribute outside the brewpub. Some say this is an unnecessary restriction, and, there are certainly arguments to be made in this regard. However, Texas has traditionally held smaller “manufacturers” to lesser standards as a methodology of evening the playing field among the giant producers such as InBev and the much, much smaller producers like Independence, (512), and Saint Arnold.
Does that make sense? It does if you want to eliminate prohibition-era laws currently on the books and promote the growth of Texas craft beers.
Here’s the point about HB 660: other states don’t care if brewpubs ultimately grow big enough to be able to fledge into a full brewery that sells their beers into the distribution chain nationwide, they actually want that to happen. Other states recognize that, like small businesses in other industries, it can be very difficult to amass the financing needed to start a full fledged brewery. If owners can start small, with a brewpub, they can potentially grow into a larger brewery that employs lots of people. By instituting laws that encourage more people to enter the market without the need for huge market capital, other states actively encourage small business growth. Why? Because it makes good economic sense, that’s why. States like California, Oregon, Washington, Colorado, Illinois, Pennsylvania, New York, New Jersey, Florida – even Oklahoma, see the wisdom in encouraging industries that are in double-digit growth mode, continue to hire more and more employees and add to their tax rolls from a corporate and an individual tax basis. Aren’t we in a budget crunch? Wouldn’t it make sense to encourage any industry that would help offset unemployment and tax shortfalls?
Doing away with the outdated distinction in Texas between brewpubs and breweries would do much to help foster continued growth in the craft beer industry, would open several new permanent employment positions to people in various areas of the state (including small counties; see: Real Ale and Jester King), and would very likely allow small breweries/brewpubs to grow into larger brewery operations that would add additional jobs and continue to pay more taxes to the local cities, counties and even the state. The fiction that Texas continues to perpetuate only serves to fragment the craft beer market at a time when other states have the advantage because they do not continue to hobble their craft beer industry.
Texas breweries have begun to export beer to neighboring states, but not to a great extent since we have such a small craft brewing industry. If our Texas breweries were given legal encouragement to grow, they, too, could begin to export our Texas beers to other states. It is a proven fact that such exportation of craft beers helps tourism to such states as beer nerds from around the country travel to seek out their favorite breweries. Anyone who doubts this need only attend huge beer festivals like the Great American Beer Festival in Denver (30,000 attendees), or smaller events like Dark Lord Day at the Three Floyds Brewery in the whooping metropolis of Munster, Indiana (5,000 attendees) or see the out-of-state travelers at the brewpubs of Russian River or Stone Brewing in California. Texas only hurts itself when it continues to turn a blind eye to our craft beer market.
Additionally, when out-of-state breweries bring their beers into Texas, Texas gains fees from such breweries to the tune of $1,500/year plus various taxes accessed (see Section 13: Non-resident Brewers’ Permit). For importers like Shelton Brothers, these fees can really add up if they were to apply for every brewery they represent to be able to enter the Texas market. I’m not prepared to tackle this issue here, but suffice it to say, that there are many who believe that our fee structure is a hindrance to market expansion as well.
And, while we’re at it: Beer isn’t Ale, didn’t you know?
I’m certainly not the first person to bring this to anyone’s attention, but it must bear repeating since our Texas legislature keeps this law around. In Texas, “beer” is defined as a malt beverage that contains at least ½% ABV but no more than 4% ABV. Any “beer” with an ABV above 4% is considered “ale.” (and there’s more, but this is getting long enough as it is) Anyway, why do we care? Well, other than making our craft brewers look foolish to the rest of the entire world for making a distinction without a difference that no one can remember why it was it was ever instituted in the first place is ludicrous. It also means that many craft beers are locked out of Texas because the label on the bottle refers to the liquid inside as a “beer” but contains a higher ABV than allowed for the word “beer” in Texas. Leave it to my brethren lawyers to find such an abominable use of the English language, jeez!
We don’t need this law anymore. It doesn’t serve any useful purpose. It doesn’t protect the public or produce any notable improvement in products. It’s just an outdated, antiquated law that confuses the public and keeps great beer from reaching our shelves (along with the revenue it would generate). I haven’t found anyone who supports the retention of this law, but no one in the state legislature is willing to re-write the bloody thing either.
So, you’re saying . . . what exactly?
I’m saying that without anything more expansive on the table, let’s see to it that HB 602 and HB 660 are both passed. However, it is really about time that the much larger issues present in the laws affecting the beer industry are overhauled and revamped to make Texas an inviting market for craft beer. It’s time for our Texas legislature to do away with laws that allow favoritism. And it’s time for our Texas legislature to encourage growth in a rapidly expanding industry. Good beer = good sense.
 For those who are very well versed in the definitions put forth in the TABC code, you will notice that I’m a little lax. I’m writing this for the regular folk out there who don’t know anything about the law and for whom distinctions without differences would serve no purpose but to further confuse the issues I’m trying to raise in this piece. Your forgiveness, I humbly request.