Craft Beer Fight Continues in Texas

Craft Beer Fight Continues in Texas.

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In December, we told you about a victory for those who love craft beer.  A Texas district court overturned a law that prohibited craft breweries from profiting off the sale of their territorial beer distribution rights. This decision, along with the easing of restrictions in 2013, has been a boon for beer-loving Texans as the craft beer industry has expanded in recent years.  And while the nationwide growth of the craft beer industry has leveled off, Texas was a late entrant into the industry and was seen as one of the markets that could help keep the growth going.

Three-Tier System

Some in the alcohol industry argue that Texas needs new regulations to ensure that the burgeoning craft beer industry complies with the state’s three-tier system for alcohol distribution.  The three-tier system was created long ago in response to the repeal of Prohibition.  It divides the alcohol industry into production, distribution, and retail sectors.  This division was intended to prevent vertical integration (in which one company owns the resources, manufacturing, distribution, and sales of a product) and to create avenues for revenue generation (that is, taxes).

Craft beer breweries, which are usually very small, break with this model and often sell directly to consumers.  When the craft beer industry itself was small, this was not an issue, but as new breweries enter the market, the amount of beer being sold directly to the consumer—and not through a distributor, as in the traditional three-tier system—has increased.

H.B. 3287

H.B. 3287 was written in response to this increase in direct-to-consumer sales.  It requires breweries that produce 225,000 barrels of beer or more a year to pay a distributor to deliver that beer.  This holds true even if the beer is being sold in-house, in a taproom of the brewery that created it.  Essentially, successful breweries that sell beer at in-house taprooms will have to pay for deliveries that are never made.

Proponents of the bill, which had bipartisan support, argue that the law will help prevent the vertical integration of the beer industry, which is consistent with the policy goals of the three-tier system.  They argue it will help prevent large beer manufacturers from buying up small craft beer operations and then bypassing the three-tier system altogether.  Rick Donley, president of the Beer Alliance of Texas, points out that the largest production of an independent brewery in the state is only 60,000 barrels, well under the 225,000 threshold.

Opponents of the bill call it anti-competitive. They point out that the law will lower the value of their businesses and make them less profitable, which will also make expansion less likely.  Some go further, calling it an “extortion fee” and pointing to the politically powerful beer distribution lobby as the real reason for the bill’s passing.

Whatever the motivation behind H.B. 3287, Governor Abbott did not veto the bill, and it is now the law in Texas.