Will lawmakers alter monopolistic system of liquor control?

By: John Trump - Carolina Journal

RALEIGH — Head distiller Chris Jude steps through a door at the High Wire Distilling Co. in Charleston, South Carolina. Jude, who’s from Boone, enters the tasting room and bar, making the short trip from the place spirits are made to the place spirits are served.

Customers sitting at the long bar can distract themselves by peering through large glass windows, revealing the distillery. At the still and mash tuns, the grain and the barrels, filled with aging bourbon, sorghum, rye, and single malt whiskies. A series of shelves to the left of the bar are filled with the distillery’s products, including amaro — a compilation of macerated herbs, botanicals, fruits — including Charleston Black Tea — and sweetened with sugar cane.

So, what do you want to try, Jude, every bit the proud father, asks from behind the bar?

A listing of the spirits has been laid in front of each bar stool, along with a small card — a cocktail recipe made with High Wire products.

Ruby Slippers to Old Fashioneds. Specials like a Strawberry Gin Fiz or a Hat Trick Daisy, made with gin, lemon, and habanero bitters. Whiskey flights and Irish coffee.

A law passed in South Carolina in summer 2017 allows the state’s distilleries to sell cocktails and mixed drinks, and it doubles tasting limits — from 1.5 ounces to three.

At Westport Whiskey & Wine in Louisville, Kentucky, customers can cut a path through the well-stocked store straight to a tasting room, stocked with hundreds of bottles of bourbon and other whiskey. The store often hosts special events focusing on bourbon, including, over the Thanksgiving holiday, a chance to grab a bag. The buyer won’t know the contents of the brown paper sack until he opens it, although the bag will include a mystery bottle of bourbon.

There’s no such fun in North Carolina, which prohibits distillers from mixing drinks and limits tastings to 1.5 ounces per customer.

Liquor in N.C. distilleries is served warm and straight. Take it or leave it. A move to allow tastings at N.C. liquor stores was summarily dismissed from a bill last year.

North Carolina roots

Before becoming head distiller at High Wire, Jude was the inventive leader of Fair Game Beverage Co. in Pittsboro, where he oversaw and created spirits such as Flying Pepper tobago-pepper infused vodka and a rhum agricole, a rum that originated in the French Caribbean and made using juice from the sugar cane.

“Not everyone drinks straight liquor,” Jude says. “We don’t make a lot of money off [mixed drinks] because we can serve you three ounces per day of liquor.”

But, he concedes, the new law brings people in and introduces them to a product they would probably never sample.

The rules governing liquor in South Carolina not only serve as a salient contrast to N.C. laws but also as an example of how far one state — situated firmly in the so-called Bible Belt — can transcend antiquated ideas and embrace free markets and entrepreneurial ideals.

Kentucky, Virginia, and Tennessee now allow distilleries to serve mixed drinks, as well championing other market-friendly initiatives. In North Carolina, customers can buy five bottles of liquor from the distiller every 365 days. Neighboring states have limits, but they aren’t nearly as draconian and are generally based on “daily” purchases. Virginia, like North Carolina, is also one of 17 alcohol “control” states. But with some big differences. For one, Virginia alcohol sales are governed by a statewide authority, and distilleries are licensed to operate their own quasi ABC stores, without limits on sales.

The N.C. Alcoholic Beverage Control Commission sets statewide policy and rules, but most of the decision-making is left to 168 county-based ABC boards, which have great autonomy and, as the argument goes in some circles, immense political sway. That, say critics, can very well lead to favoritism, cronyism, and, ultimately, corruption.

“They’re all individual businesses,” one distiller told Carolina Journal. “They operate in different ways. That’s one of the problems, right?”

No North Carolina law exists requiring local boards to favor one product over another, says Kat Haney, ABC public affairs director.

“Local ABC boards buy the inventory for their stores based on what they believe will be good sellers in their markets,” she told Carolina Journal. “State law requires ABC stores to promote, in a special North Carolina area in their store, any North Carolina products that they choose to sell. But the law does not require the ABC boards to buy any specific products.

“In the past, the commission has encouraged distillers who are concerned about local boards’ interest in their products to reach out directly to local restaurants to get a commitment in writing so that they can show to the local boards that ordering a case of the local product will result in quick sales.”

The N.C. ABC, in general, operates with little oversight, as N.C. state Auditor Beth Wood pointed out after a recent audit found the ABC erred in its responsibility to follow state policies and practices. Wood on Aug. 9 released the report saying the ABC has over past years cost the state about $13.5 million. It found that poor contract administration cost North Carolina taxpayers at least $11.3 million over 13 years, exceeding a contract cap for 13 consecutive years, Wood told CJ.

Maryland-based LB&B, which, its website says, specializes in facilities management, logistics, and training operations, since 2004 has contracted with the state to provide warehouse and distribution services.

Unused warehouse space potentially cost the state $2.1 million over seven years, and a lack of monitoring left the state underpaid by at least $297,537 over two years.

Oversight effectively falls to the General Assembly.

The N.C. House has a standing committee, chaired by Rep. Chuck McGrady, R-Henderson, and Rep. James Boles, R-Moore, to oversee the ABC. The Senate has no committee specific to ABC oversight, although that would probably fall to the Commerce Committee. For his part, McGrady, a proponent of loosening the state’s alcohol rules, calls the current system antiquated and prefers a licensure model allowing the private sector to sell and distribute liquor, as it already does for wine, beer, and hard cider.

The lack of contractual oversight is a problem, Wood said.

“The point here is poor oversight,” she said. “Poor monitoring. Doesn’t matter if it’s done by state agency or if it’s privatized.”

On its face, the ABC board system makes little sense.

The ABC commission staff, the ABC told CJ, operates under the direct oversight of the chairman and the two commissioners, who are appointed by the governor.

The commission, says the ABC, “is the chief regulatory agency for the state related to alcohol matters.

“Alcohol laws are the purview of the General Assembly. … ”

ABC referred CJ to Chapter 18B of the N.C. General Statutes — Regulation of Alcoholic Beverages.

The state’s two largest ABC boards in terms of stores and population served — Wake and Mecklenburg counties — each have five members plus staffs. The much smaller Rockingham County system has three separate boards, governing the towns of Madison, Eden, and Reidsville.

The counties and towns are accustomed to the revenue generated by alcohol sales, somewhere around $1 billion annually, the state ABC website says. Of that, $406,044,410 was distributed across North Carolina, including $306,238,795 to the General Fund and $74,503,732 to towns, cities, and counties, including, for the year ending June 30, 2016, more than $7 million in Wake.

Efforts to modernize, reform, or even abolish the N.C. ABC system aren’t new, and the system has made some small steps toward progress and consumerism. But efforts to privatize the antiquated system have fallen flat, due in part to strong religious interests and even stronger lobbying efforts by the ABC itself, including from the politically connected local boards.

“It is across the state,” one distillery representative told CJ about the discretionary power prevalent throughout the ABC system. ABC board members have told the rep, “’If an N.C. distiller has said he or she wants privatization, then I’m not carrying their products.’ Many ABC boards just aren’t interested in N.C. products,” the rep told CJ.

Selling versus controlling

The disparities between how the ABC boards in Virginia and North Carolina are stark and telling.

The Virginia ABC is an authority, an independent political subdivision not unlike the Virginia Lottery, Virginia Tourism Corporation, Virginia Port Authority, and MCV Authority. “The intent behind turning Virginia ABC into an authority is to allow it to operate more like a business, outside of the requirements of the Virginia Public Procurement Act, the Personnel Act, and the Virginia Information Technology Act,” the Virginia ABC website says.

Virginia ABC stores are open Sundays; North Carolina’s stores aren’t.

The N.C. ABC falls under the Department of Public Safety, with, as stated on its website, an “overall objective to provide uniform control over the sale, purchase, transportation, manufacture, consumption, and possession of alcoholic beverages in the state.”

The word “control” is key, often popping up in legislative committee hearings and church pulpits.

North Carolina has more than 50 distilleries with products in stores, more than double the number from just a few years ago. To be fair, some North Carolina distillers are happy with the ABC system. Others tolerate it. Still others loathe it.

Some say the respective ABC boards delist their products — remove them from further circulation — without telling them. Others say they refuse to carry their products, without reason or reference. They say boards delay placement of some products yet show favoritism toward others. Some distillers say promises made aren’t always kept. Some distillers say they’re treated as an enemy and not as a partner.

Several distillers in North Carolina didn’t hesitate to discuss with CJ their problems and concerns regarding the ABC. But because state and local ABC boards approve, list, distribute, place, and sell their products, the distillers who talked with us asked that we allow them to remain anonymous.

The fear of retribution was a common thread among distillers and their representatives. We will use some of their quotes but won’t name them here.

Making liquor in North Carolina isn’t a trend or a fad. This has been going on awhile. Before Prohibition, North Carolina had more distilleries than just about any state in the country. But that changed quickly, and lawmakers, beginning in the mid-to-late 1800s, began railing against the intoxicating beverage.

In 1903, the growing influence of the Anti-Saloon League led to the passage of the Watts Act, which banned the production and sale of liquor outside incorporated towns, effectively outlawing rural distilleries. In 1905, the Ward Law extended Prohibition to incorporated towns of fewer than a thousand inhabitants, meaning that liquor sales were banned in 68 counties.

Though the 18th Amendment, ratified in 1919, made producing, selling, transporting, and importing liquor a crime, North Carolina had jumped on the Prohibition wagon much sooner. A referendum vote on May 26, 1908, made it the first state in the South to ban alcohol. Even when nationwide Prohibition ended with the 21st Amendment’s passage in 1933, North Carolina didn’t ratify the amendment. It wasn’t until 1937, when the ABC system was set up to sell alcohol in North Carolina counties, that Prohibition officially ended in the state. The state allowed breweries and wineries to operate shortly after Prohibition, but North Carolina lawmakers didn’t lift the ban on making liquor until 1979, and the first legal liquor produced in the state didn’t hit the market until 2005.

“Why do we feel we are wedded to a system conceived 80 years ago?” asks a North Carolina distiller.

Gov. Roy Cooper last summer signed Senate Bill 155, which cleared the way for N.C. craft distillers to sell five bottles to customers each year, instead of the current one, and — with local approval — allows restaurants and retail outlets to begin selling alcohol on Sunday at 10 a.m., as opposed to noon.

An amendment by Rep. Pat Hurley, R-Randolph, effectively removed a provision allowing distilleries to sell directly to consumers, which means distillers contract with online merchants in other states to sell their products. The bill also allowed for the sale of antique or rare spirits in special auction, after auctioneers obtain a $750 permit. The bill provided distillers a means to obtain a special event permit, which would cost $200 and allow distillers to offer tastings of their products — 0.25 ounce per product, not to exceed an ounce — during events and gatherings such as trade shows and festivals, contingent on local approval, although this has been problematic. A provision from S.B. 155 allowing tastings at ABC stores — similar to Virginia and South Carolina — was removed early in the process.

But, despite changes to the laws, and the relative baby steps toward consumerism and open markers, many distillers are frustrated and discouraged.

“I’ve just given up,” said a distiller, who called out one county in particular.

“I thought it was incompetence. Now, I think it’s something else.”

A broken system

Distillers talked about their relationships with local ABC officials, and how certain ABC decisions lead to questions about favoritism and downright bias.

One ABC board declined to list a new product, even though it was approved for sale and available at the distillery and in several counties. “Not because it’s a low-quality product,” the distiller said … “because they feel like our other stuff’s not selling fast enough.”

Another distiller waited for three months after approval for his product — which has won national awards — to make it into stores, despite a large deal to sell it in a popular venue. The same distiller said as his product collected dust in the state warehouse, cases of a less expensive product — which received money through a state grant — were rushed into ABC stores.

Yet another distiller says several of its products were delisted over a perceived problem that was more cosmetic than anything, and that a sales clerk could easily explain to customers. But the local board wouldn’t budge, the distiller said, even after extensive market research and sales analysis.

“We did everything to prove his point wrong,” the distiller said of one ABC official. “He didn’t like [the products].”

The product was not only delisted, but the ABC failed to inform the affected distiller of the decision.

“No one had the balls to call us and tell us we were delisted,” the distiller said.

Distillers cite disagreements with officials from local ABC boards that are often nonsensical and many times based not on facts but on bias and opinion.

An ABC official, says one distiller, told a representative from a distiller, “I’m not carrying your product unless a restaurant orders it.’

“There shouldn’t be a man sitting behind the desk who has that authority,” the distiller said,

Someone who represents a group of distilleries told CJ about a festival in which several of the distillers were approved for booths. A week or so before the event the representative was told a distiller who makes vodka — another vodka producer was a festival sponsor — wouldn’t be allowed to pour that spirit.

“OK, I guess I can do that,” the rep remembers thinking.

“But it bothered me.”

Later that day the rep received an email saying none of the distillers could pour, though many had already traveled to the festival from throughout the state. The booth fee was refunded, but the travel expenses weren’t. The official response was the respective city failed to get the required permits.

“That should have never happened,” says another distillery rep. “[The N.C. ABC doesn’t] have the capacity to keep us all on the same playing field, and they’re not looking at all the factors.

“All things that are hindering our industry could be making them money. All the time we’re trying to be as creative as can be just to sell our products. It doesn’t make any sense. We can’t do any cocktails, we can’t go out and market. Not to be able to do a tasting in ABC stores so at least the managers can taste and understand … it’s almost debilitating.”

John Trump

Carolina Journal