Poured Out

With archaic and self-serving laws, reforms don't come easy for the Texas booze industry

A veteran owner of a Houston bar and restaurant thought he had a good grasp of the state laws and the lengthy interpretations of them by the Texas Alcoholic Beverage Commission.

And yet during one inspection, a TABC agent came growling to him about a flagrant violation: On his outdoor tables, he had put up those common umbrellas sporting wine names and the Italian tricolors. In Texas bars, that's forbidden advertising.

For water carafes, the establishment had carefully removed all the labels from used tequila bottles of a particularly classic design. The agent looked all over the seemingly clear, clean containers, until he spotted a tiny etching of the maker's logo in the base of the carafe -- and ordered all of them banished.

Spec's John Rydman doesn't want to see big 
corporations in the Texas package store business.
Daniel Kramer
Spec's John Rydman doesn't want to see big corporations in the Texas package store business.

"He carried on like we'd committed a felony," the restaurant operator says. "You never know what they're going to come up with."

Another bar owner tells of having to call the Texas Parks and Wildlife Department to convince a TABC agent that the fish in his aquarium were just pacus -- not the man-eating piranhas that the agent insisted they were.

And the operator of a Houston drinking establishment displayed a banner proclaiming him winner of the Houston Press Best of Houston category for serving a particular premium beer. That display lasted only until a TABC officer ordered it removed immediately. The apparent violation: The sign mentioned the name of the bar and the beer it served.

"I thought, 'Why don't they just take away my menus, too?' " says the owner, who asked to remain anonymous. "There are bars around here that serve underage drinkers, but they're more worried about my sign."

Allen Shivers, who headed the TABC for six years, hears the stories and shakes his head at Texas's code: "No one understands it. It's at least as complicated as the IRS code.

"Take three experienced TABC agents and give them the same fact situation," Shivers says about TABC's marketing rules. "You'd have at least five different interpretations of the Alcoholic Beverage Code."


The TABC and its onerous operating code seem overdue for reform, and the timing couldn't be better. In 12-year cycles, every state operation gets intense scrutiny under the Texas Sunset Advisory Commission, which can even call for disbanding agencies that can no longer justify their existence.

And 2005 is the year that the TABC is up for review by the state legislature. The agency, with a $25 million budget and about 500 employees, is saddled with enforcing nearly incomprehensible laws that date back to its post-Prohibition beginning in 1935.

Most everyone agrees that the code's mission statement reflects an era long gone: This code is an exercise of the police power of the state for the protection of the welfare, health, peace, temperance and safety of the people of the state.

The beverage code also explains that various provisions are in place to block unfair competition and "unlawful trade practices." In fact, many of those same laws are doing just the opposite: ensuring near-total monopolies, higher prices and taxes for consumers, and even the use of public agencies to enforce the private preferences of the industry.

Other industries might have exclusive wholesaler distribution zones, and their businesses may prefer to get paid on demand; with the TABC code, it's the law of the land for beer retailers, enforced by a state agency.

As an example, a Sunset Commission report cited the impacts of the Texas law that requires that beer be sold in only certain-sized containers. A 12-ounce can is fine; a 345-milliliter can -- common in much of the world -- holds 11.67 ounces, so it is banned by the TABC.

"As a result, [Texas] consumers lack access to a range of products bottled in metric sizes from countries such as Canada, Holland, Belgium, New Zealand and Japan, which can be purchased in almost all other states," the Sunset Commission report said.

So one domestic brewer has to pay $600,000 more to produce a container that conforms to Texas law. And a malt beverage producer estimated additional costs of $200,000 for that, the Sunset report stated.

Why the need for such a law? Because distributors prefer working with standardized containers. Sunset staffers wryly noted that "This does not seem to be a matter of state concern."

When it comes to regulating booze in Texas, however, the state concerns can get even stranger. The foundation for the state code, known as the three-tier system, virtually ensures that.


The TABC mandates absolute separation of the three levels of the booze business in Texas: manufacturers, wholesalers and retailers. The concept's roots go back to efforts to keep organized crime and undue influence from affecting the industry when alcohol was legalized in the '30s.

But critics contend that it has evolved into a rigged game. The big-money players are beer and liquor wholesalers and retail package stores that also double as wholesalers. Texas law says that bars and restaurants can buy wine and liquor from only package stores. And no one on the retail end of the liquor business can deal directly with a manufacturer.

The groups most responsible for those laws -- the Texas Package Store Association, the Wholesale Beer Distributors of Texas and the Licensed Beverage Distributors of Texas -- declined to be interviewed for this story.

For decades, wholesalers have been allowed to basically write the rules by making generous campaign contributions to state legislators. The result is a near-monopoly on the sale of alcohol at the wholesale level, leaving bars and restaurants with little choice of who they buy from -- or even when and how they pay.

"The current regulatory scheme is not set up to protect the public," says Howard Wolf, a retired Austin lawyer appointed to the Sunset Commission by Lieutenant Governor David Dewhurst. "It's set up to protect monopolies."

Three companies -- Glazer's Wholesale Distributors, Block Distributing and Republic Beverage Company -- distribute more than 90 percent of the wine and distilled spirits in Texas. Buy a Budweiser, Tecate or Miller Light in Houston, and it could have come from only one place after it left the brewery.

"Brewers and distillers are forced to take their product and drive right by the retailer," says Wolf. "Instead, it's taken to a warehouse and brought right back. Who pays? You do."

And when retailers get their shipments, the beer has to be paid for upon delivery. (Liquor and wine distributors can extend a few weeks' credit.)

Rick Donley of The Beer Alliance of Texas, a lobbying group for Houston-area beer wholesalers, explains that beer wholesalers are collecting state taxes in an industry where the average length of a liquor permit in the bar and restaurant business is just two years.

But Shivers argues that wholesalers in any industry take risks when they extend credit, and that decision is best ruled by market forces. He says the state law requiring payment for beer on demand has put the state in the role of a collection agency for private interests.

But beer wholesalers are fighting hard to keep the demand-payment rule on the books, despite criticism in the Sunset report. Not only does the law ensure beer wholesalers get paid, it also provides another revenue source: If the money were allowed to sit a few extra weeks in Wal-Mart's coffers, for example, Wal-Mart would be pocketing the interest.

Should the demand-payment rule be rescinded, millions of dollars each year effectively would be transferred from beer wholesalers to retailers. John Rydman, owner of Spec's liquor stores, says, "Would I like to have beer on credit? Sure. Cash flow is cash flow, and my profits would go up immediately."

Wolf calls the demand-payment requirement "a classic case of the industry writing the rules."


Buy a beer at Brian O'Neill's Restaurant and Irish Pub in Rice Village, and it might cost more than it would at The Ginger Man next door. Profiteering isn't part of it -- the Alcoholic Beverage Code is.

The Ginger Man sells only beer and wine, so it pays the same 8.25 percent tax rate as for most other goods sold in Texas. Places like Brian O'Neill's, which serves up liquor as well, are saddled with a 14 percent tax on all alcoholic drinks. And that tax is on gross receipts, effectively making it about 16 percent.

"If you're going to tax liquor, then tax it," says Alex Brennan, owner of Brennan's of Houston. "It doesn't make sense that just because I serve hard liquor, I pay a higher tax rate on beer and wine. I can get just as drunk either way."

The concerns of small entrepreneurs and establishments don't appear to have had much impact on the TABC and its rules. But the arrival into the debates of corporations such as H-E-B and Wal-Mart could bring significant change, legislative observers say.

Both corporate giants have enormous warehouse and distribution systems. Both would prefer to deal directly with manufacturers. Wal-Mart especially owes its success to buying larger quantities of goods at lower prices than its competitors pay.

Many grocery stores would like to open package stores next to their stores but can't, thanks to a TABC rule from the '40s that bans publicly traded corporations from owning liquor stores. Another archaic rule says that an existing liquor store can "absorb" a liquor-store permit obtained by a spouse, parent or sibling, effectively invalidating a separate rule limiting companies to owning five stores.

The effect has been that liquor stores are basically mom-and-pop operations, with one family-owned company typically dominating a region. In West Texas, Pinkie's liquor stores rule. In Dallas, it's Centennial, and in Houston, Spec's.

With 30 stores in the area, Spec's sells more liquor than any package store chain in Texas. Owner Rydman says there's a good reason for keeping big corporations out of the package store business.

Rydman says that California did away with the three-tier system, and then "a few big stores gobbled up the little ones by lowering prices and squeezing out the competition. Then prices went back up.

"The responsibility of selling alcohol works best when the owner is in the community. Big corporations don't feel a responsibility to the community," says Rydman. "Thousand-dollar fines are nothing to them. To us it's a big deal."

More burdensome laws have tied down the state's long-suffering wine industry. (See "Getting Stomped," by Robb Walsh, August 30, 2001.)

"The Texas wine industry is the little kid on the block," says Gabe Parker, who owns the Homestead Winery near Grapevine. "We get slapped around by almost everybody." Like other Texas wineries, Homestead has a Web page, but it's against the law for him to list stores that sell his wine. Even giving directions to his winery over the phone is an offense under the TABC laws.

Vintners complain that another law -- the ban on any night or weekend deliveries to wineries -- can ruin truckloads of grapes forced to sit outside over the weekend because they arrived after 5 p.m. on Friday.

But the main concern is overturning the cumbersome laws that virtually restrict wineries from shipping their products to customers (for now, they must go through a liquor store).

Consider the trade deficit that creates: In fiscal 2003, there were 197,000 wine "partials" (typically three or four bottles from wine clubs) shipped into the state. During that same period, Texas wineries shipped a total of 139 bottles.


The Sunset Commission set the stage for revamping the TABC with its report, which peppered the agency with harsh words: "overregulated," "outdated," "inefficient," "poorly guided," "inconsistent." That review criticized everything from the way the agency conducts inspections and levies fines to marketing enforcement practices it described as out of touch.

"I would amend the entire Alcoholic Beverage Code and rewrite it in its entirety, so it's clear, understandable and simple," former TABC director Shivers testified at a hearing late last year. "It has been patched on since 1935. It was great for then, but it has outlived its usefulness."

Nobody at the hearing, including legislators and representatives from every facet of the liquor industry, argued with Shivers. Carolyne Beck, spokesperson for the TABC, says the agency itself agreed with the Sunset recommendations.

No major shakeups are emerging in the session, though. Proposed laws advocate such measures as keg registration, server training and forfeiture of driver's licenses for adults who buy alcohol for minors.

Beck says improvements are expected. The TABC is likely to be freed from analyzing new products -- a role duplicated by federal agencies; liquor permits will go from annual to two-year renewals; and the law on beer container sizes may be overturned. A bill to allow winery shipments direct to consumers also is likely to pass.

The agency anticipates funding for hiring about 100 civilian inspectors, to free more agents to conduct sting operations on underage drinking. "That's probably the biggest change that consumers will notice," Beck says.

However, the three-tier system remains intact. An interim committee will be set up to study that issue and the marketing rules that have long befuddled retailers. The legislature does appear to be set to authorize the TABC's existence for just six more years, rather than the customary 12.

As for the onerous provisions, the TABC itself notes that it is saddled with enforcing laws created by legislators. "They may ask us for input, but we don't have a lot of influence over those decisions," notes Beck.

Shivers predicted the business-as-usual outcome that is shaping up. "I expect it's going to look a lot like it does now," he said as the legislative session began. "The beverage industry likes it the way it is."

Wolf stated outright that the industry uses the legislature to control the TABC. "They're one of the biggest political contributors in the state, and elected officials don't like to go off on Don Quixote chases."

The entry of big retail corporations is likely to chip away at the current laws and the lobbyists behind them, Wolf says. Also, liquor retailers are "terrified that hard liquor will get onto supermarket shelves and prices will drop."

But for now, wholesalers -- especially beer wholesalers -- remain dominant.

"Beer distributors make large political contributions, a lot of charitable contributions, and they've got friends that vote," says Shivers. "They're not bad people, they're just protecting their interests. It's the American way."

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