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Tweaking the Twenty-First Amendment

Tweaking the Twenty-First Amendment: An Argument Against Durational-Residency Requirements for Alcohol Beverage Wholesalers and Retailers

Keegan J. Shea*

The full text of this comment can be found in PDF form here.

INTRODUCTION

Say you lived in Washington, D.C. and owned a successful restaurant, the profitability of which depended in part on its wine, beer, and liquor sales. The restaurant was successful enough to begin looking for a second location. You determine that Bethesda, Maryland is an ideal location because it is only seven miles from your D.C. residence, but there is one problem: the Maryland Code of Alcoholic Beverages imposes a two-year durational-residency requirement on restaurant owners seeking a restaurant liquor license. In order to sell alcohol at the new restaurant, you have to establish a second residence in Bethesda, live there for two years, and face the associated costs.

The Commerce Clause gives the U.S. Congress power to “regulate Commerce . . . among the several States.” This affirmative grant of power implies a negative converse known as the dormant Commerce Clause, which prohibits the States from passing legislation that improperly burdens or discriminates against interstate commerce. Normally, when a state statute discriminates on its face, in its purpose, or in its effect against interstate commerce, a strict scrutiny test is applied, and the State must advance “a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives” in order to validate the statute. At a minimum, imposing a durational-residency requirement on alcohol beverage wholesalers and retailers discriminates in its effect against interstate commerce because it denies out-of-state residents access to the alcohol market on equal terms as instate residents. However, Section 2 of the Twenty-first Amendment can save state alcohol regulations, such as durational-residency requirements, from Commerce Clause scrutiny. Section 2 of the Amendment provides: “The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.”

Early Supreme Court cases interpreting Section 2 held that it gave the States authorization to discriminate against alcohol. This view slowly changed, and the Supreme Court has more recently held that the Twenty-first Amendment does not entirely remove state alcohol regulations from Commerce Clause scrutiny.

To draw a conclusion . . . that the Twenty-first Amendment has somehow operated to “repeal” the Commerce Clause wherever regulation of intoxicating liquors is concerned would, however, be an absurd oversimplification. If the Commerce Clause had been pro tanto “repealed,” then Congress would be left with no regulatory power over interstate or foreign commerce in intoxicating liquor. Such a conclusion would be patently bizarre and is demonstrably incorrect.

Although the Twenty-first Amendment does not save all state alcohol regulations from Commerce Clause scrutiny, it has and continues to give the States significant power in how they design their alcohol distribution systems. Once the Amendment passed, many States developed a three-tier system of alcohol distribution, and now virtually every State has adopted it. The three tiers are: (1) the producer or supplier, (2) the distributor or wholesaler, and (3) the retailer. Typically, producers sell to in-state wholesalers, and the wholesalers pay excise taxes. In-state wholesalers sell to in-state retailers, such as the local liquor store, bar, or restaurant that sells alcohol. The retailers then sell to consumers and collect state sales tax. The “main purpose” of the threetiered system was to eliminate “the existence of a ‘tied’ system between producers and retailers, a system generally believed to enable organized crime to dominate the industry.” Curbing alcohol consumption was another goal of the three-tier system. However, some States use their regulatory power under the three-tier system to impose durational-residency requirements on alcohol beverage wholesalers and retailers.

This Comment will argue that the Twenty-first Amendment does not save these durational-residency requirements from Commerce Clause scrutiny. Part I of this Comment examines the Supreme Court’s decision in Granholm v. Heald, which struck down state statutes that effectively required out-of-state wineries to operate in state before they could compete on equal terms with in-state wineries. Although the statutes did not impose durational-residency requirements, Granholm is the leading case on the interplay between the Twenty-first Amendment and the Commerce Clause. Part II examines a current circuit split between the Eight Circuit and Fifth Circuit. In 2013, the Eighth Circuit held that the Twenty-first Amendment saves durational-residency requirements for wholesalers from Commerce Clause scrutiny. In 2016, the Fifth Circuit held that the Amendment does not authorize durational-residency requirements for wholesalers and retailers, and thus the requirements are subject to Commerce Clause scrutiny. Part III argues that the Eighth Circuit’s holding should be reversed because durational-residency requirements directly regulate citizens, and the Twenty-first Amendment only gives States the power to directly regulate alcohol products.

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*J.D. candidate, May 2018, Saint Louis University School of Law. Thank you to Professor Joel Goldstein for reading many drafts and providing invaluable feedback. Also, thank you to Cathleen Church for willingly listening to me rant about the dormant Commerce Clause, the Twenty-first Amendment, and durational-residency requirements.