What is the ‘Three Tier System’?
California’s anti-monopoly framework and how it affects your alcohol business growth options
The California Dept. of ABC offers over 80 license types to legally do business with alcohol in the state. There are licenses for brewing beer, importing wine from outside of California borders, selling wine bottles to go or serving margaritas to patrons on site.
What makes each of these distinct is that you’re allowed to do some things with them and NOT allowed to do others. Some of these dos and don’ts are explicit, along with the fines and penalties if violated. Some are more gray areas, with no clear guidance from ABC.
All licenses fall within a ‘Three Tier System’ that an operator is restricted by in terms of business growth.
Essentially, each license type gives you certain options within the ‘Three Tier System’, requirements for operating the license, and restrictions that, if violated, will lead you to a suspension or revocation.
Tier 1: MAKING ALCOHOL aka manufacturing
winery, brewery, distillery, rectifier, blender
Tier 2: WHOLESALE & IMPORT
wholesaler, importer
Tier 3: SERVING & SELLING TO THE GENERAL PUBLIC aka retail
bar, restaurant, liquor store, hotel, convenience store, boat, special event
Initially when these were signed into law, the intent was that only the Tier 3 retailer could sell to the public. But they are required to buy from a Tier 2 wholesaler. Wholesalers buy from the Tier 1 manufacturers, so that no one company (or individual) can monopolize the entire market. [GG1]
A hundred years of experience with the Three Tier System has shown there needs to be a bit more flexibility for operators. The ABC has made some hybrid license types available (Type 74 craft distiller, or Type 75 brewpub, for example), as well as a host of complex exceptions so that a person can own (limited) licenses in different tiers.
But ABC still takes tied house laws very seriously and can see on their database what licenses an individual applicant is on, sometimes even if that person is simply a non-managing investor, so this is an important consideration going into a new project.
If your money is coming from an entity or person with ownership in a different tier (particularly wholesaling spirits), your license could be denied. Because of this, it’s important to have clarity on these before you submit an application to avoid raising a lot of red flags and causing a delay with your license application.
Another important note is that all of the Tier 1 manufacturing and Tier 2 wholesale/import license types require Federal approval as well from the Tax & Trade Bureau (TTB). These applications are done all online and can be done concurrently with your state (ABC) applications.
There are no application fees for TTB, but there are substantial reporting requirements with the federal alcohol regulators. If you want to avoid hearing from them, you will need to be diligent about reporting your production for tax purposes. ABC doesn’t ask about your formulas or require you get labels approved for your product, but TTB does. (As an aside, working with the TTB website has made me appreciate ABC being analog & paper based. In 2023, you would not believe how glitchy and frustrating a website made by the government can be… well maybe you would).
These are just the basics of the Three Tier System and some considerations for starting and operating alcohol businesses in California. If you want help, please do reach out. Once I know your business goals, I can help direct you to the best license(s) for the most privileges and handle your ABC and TTB permit applications so you can focus on making the best gin or importing that silky Rioja.
Cin-cin until next time!
