California testimony in support of allowing direct-to-consumer sales by craft distillers
Testimony from Steven Greenhut, Western Region Director, the R Street Institute
In SUPPORT of AB 3203, “An act to amend Section 23504.5 of the Business and Professions Code, relating to alcoholic beverages.”
March 18, 2024
California Assembly Governmental Organization Committee
Dear Chair and members of the committee:
My name is Steven Greenhut and I am the Western Region director for the R Street Institute, a nonprofit, nonpartisan public policy research organization that promotes freer markets and limited, effective government. I’m writing to express R Street’s support for Assembly Bill 3203. The bill aligns with our principles of promoting enhanced commercial freedom by reducing regulations that encourage small-business development – in this case craft distilleries.
Under California’s three-tiered alcohol regulatory system, craft distillers are statutorily allowed only to sell their beverages directly to consumers at their licensed facilities, per a 2015 law. During the COVID-19 emergency, however, the governor signed legislation, Assembly Bill 920, which provided a lifeline to those companies that struggled during the lockdowns by allowing a temporary exemption to the in-person requirement. The Legislature subsequently extended those provisions, which are now set to expire in January 2025.
According to the craft-distilling industry, 30 percent of those distillers’ revenue comes from online sales and direct-to-consumer shipping, so another year extension is obviously of great importance to these small, mostly family businesses. Even though pandemic restrictions have ended, this business model has become highly dependent on direct-to-consumer shipping. California has more than 200 craft distillers. That pales in comparison to the size of the state’s wine industry, which has for decades enjoyed direct-to-consumer shipping privileges. It’s nevertheless a growing and exciting business model. The alcohol industry is a large producer of manufacturing jobs in California.
By extending the exemption for another year until January 2026, AB 3203 would allow this industry to continue as it has done for several years. That’s important, but it would be best if the Legislature can develop rules that make permanent this direct-to-consumer model, rather than continuously spend time on short-term extensions. The lack of a permanent solution also provides uncertainty for craft distilleries as they plan to expand and invest in their businesses.
The current process has been successful. Although the California Department of Alcoholic Beverage Control found some initial issues involving ID checks by drivers upon delivery, that concern appears mainly to have involved restaurants and not distillers. Compliance rates have vastly improved.
A spokesperson for California ABC confirmed via email to R Street that the department has conducted more recent operations around underage drinking and alcohol delivery. This spokesperson also confirmed that the current violation rate for sales to minors from alcohol deliveries has dropped to 14 percent in the state, rather than the prior 80 percent. Importantly, a 14 percent violation rate is well in line with average expectations for undercover decoy operations for alcohol sales. California ABC stated that it was “satisfied” with the updated results.
As others have noted, it’s far safer to encourage alcohol consumption at home rather than at a bar or restaurant, where many patrons have to drive home. The COVID emergency orders have shown that many commercial rules can indeed be relaxed without ill consequence. R Street has published empirical research showing that direct-to-consumer wine sales do not increase underage drinking.
Such legislative efforts have drawn some pushback, mainly from the wholesale distributors and anti-alcohol groups. It’s a typical scenario, one that during Prohibition inspired the term, “the Baptists and the bootleggers.” Those were the odd bedfellows that joined forces to oppose the end to Prohibition – one for moral reasons and the other for anti-competitive purposes. Nevertheless, the Legislature should not maintain unreasonable commercial restrictions based on such rationales. Indeed, previous efforts to expand the exemption received overwhelming support in the Capitol.
R Street thanks the committee for its continued attention to this issue and reiterates our support for AB 3203.
Best regards,
Steven Greenhut
Steven Greenhut
Western Region Director
R Street Institute
(909) 260-9836