In Texas, as in much of the nation, alcohol is regulated under the so-called “three-tier system,” which requires alcohol manufacturers, distributors and retailers to be separate and independent from each other.
Texas, however, takes this requirement to the extreme. Not only may a company not operate in more than one of the three tiers, but state regulators have taken the position that a company that manufactures or distributes alcoholic beverages may not own even a single share of stock in any company that sells alcohol or vice versa.
The craziness of the “one share rule” is illustrated by a new lawsuit filed against the Texas Alcoholic Beverage Commission by the Texas Association of Business and, perhaps more notably, by the McLane Co., a drinks distributor owned by Warren Buffett’s Berkshire Hathaway Inc.. Because Berkshire also owns shares in Wal-Mart, which sells alcoholic beverages, McLane is ineligible for a Texas distributor license under the rule.
As the complaint notes, if the one share rule were applied strictly and consistently, alcohol distribution and sale would be effectively prohibited in the state. For example, if a drinks distributor had a pension fund for its employees, this could violate the rule if the fund invested in a diversified stock portfolio that included alcohol retailers. In fact, the suit alleges, officials at the TABC are themselves in violation of the rule, since their pension fund owns shares in both distributors and retailers.
Even sensible regulations can produce absurd results when taken to an extreme. But this case does raise the question of what purpose the three-tier system is supposed to serve in the first place.
The three-tier system is a creature of another century, creating artificial divisions that aren’t necessary in most markets, including markets for potentially more dangerous products like pharmaceuticals.
The recent lawsuit isn’t the only case where the internal contradictions of Texas’ three-tier system have led to legal challenge. While the state should rethink its application of the one share rule, it also needs to do a more fundamental rethink on the basis of the whole drinks system.