Washington brewers challenge Oregon’s distribution laws

It’s a bit of a quid-pro-quo situation. If you’re a brewer located outside of Oregon, you can ship malt beverages direct to consumers (DTC) in Oregon only if you're licensed in a state that permits Oregon licensees to make DTC malt beverage shipments to its residents. If your license was issued by a state with no such reciprocal agreement, like Oregon’s northern neighbor Washington, Oregon will not issue you a direct shipper permit. Because of this, three Washington brewers are suing Oregon.

The civil suit, filed July 26, 2022, actually challenges the constitutionality of two separate Oregon policies:

1. Oregon allows in-state beer producers to sell, deliver, and ship beer directly to consumers but prohibits out-of-state beer producers located in Washington from doing the same

2. Oregon allows in-state beer producers to self-distribute directly to Oregon retailers but prohibits out-of-state breweries from doing the same

Hat tip to the Washington Beer Blog for the link to the complaint, Case 3:22-cv-01086-SI.

In Granholm v. Heald (May 2005), the Supreme Court of the United States ruled that Michigan and New York were discriminating against interstate commerce by allowing in-state wineries to make DTC shipments to consumers in their home states but prohibiting out-of-state wineries from doing the same. This case didn’t deal with reciprocity directly, but the principles could perhaps be applied to Oregon’s DTC beer policy.

The Granholm decision didn’t require Michigan and New York to allow DTC shipments from out-of-state wineries — it merely said they couldn’t discriminate against interstate commerce by treating in-state and out-of-state businesses differently. The states could offer direct shipping licenses either to both in-state and out-of-state producers (level up), or to neither (level down).

Granholm was a catalyst for change. Following the decision, the wine industry worked with state legislatures to eliminate reciprocal requirements for DTC wine shipping. Yet the beer industry didn’t do the same, perhaps because direct shipping for beer was less widespread at the time. It still is: Just 10 states and the District of Columbia permit DTC beer shipments today, so breweries have access to less than 17% of the population aged 21 or above. By contrast, wineries can ship directly to consumers in most states and have access to about 97% of Americans old enough to consume alcohol. 

Whether by intent or oversight, when Oregon lawmakers removed the reciprocal requirement for wine and established a direct shipper permit for wine (effective January 1, 2008), they left the reciprocal requirement for malt beverages on the books. (Oregon doesn’t permit DTC shipments of spirits.) 

Washington doesn’t allow either in-state or out-of-state producers to ship beer directly to consumers in the state.

The principles of the Granholm decision could possibly be applied to Oregon’s beer distribution policy as well, though this issue could prove more complicated.  

Oregon beer producers can self-distribute the beer they produce directly to Oregon on-premises (full and limited) and off-premises sales licensees and other retail establishments licensed by the OLCC upon receiving a wholesale license. See ORS § 471.200 and § 471.221. 

However, as the Washington brewers explain in the suit, breweries located outside of Oregon “cannot directly distribute beer to Oregon on-premises sales licensees and other retail establishments.” See ORS § 471.404. 

This used to be the case with out-of-state wineries, as well, but just as they won the right to ship DTC in Oregon, out-of-state wineries earned the right to apply for an Oregon self-distribution permit. And just as breweries did not pursue DTC privileges in Oregon, they did not add the right to self-distribute in the Beaver State.

The plaintiffs want to be able to self-distribute to Oregon establishments so they can avoid going through a wholesaler. According to the suit, “Self-distribution, if allowed, would be at great cost savings to Brewery Plaintiffs, all such similarly situated Washington breweries, and the retail establishments which purchase their products.”

Just so it’s clear, the suit says the plaintiffs “intend to pay all taxes that may be due on such interstate and self-distribution shipments and to comply with all other non-discriminatory state laws and regulations, including obtaining licenses if one were available.”

The Washington brewers believe they’ll win their case — both the DTC issue and the self-distribution issue — but they don’t think it will happen quickly. “This lawsuit may take 3–5 years to litigate, but we are going to win,” says Justin Leigh, co-owner of one of the plaintiffs and a practicing attorney. “There’s really no question. The State of Oregon can’t overcome what’s called ‘strict scrutiny’ … because Oregon’s laws are, on their face, discriminatory.” That kind of conviction should help carry him through what promises to be a lengthy process. 

Yet there’s another option: They could win on the DTC issue but lose on the self-distribution issue. And of course, they could lose on both.

We’ll keep an eye on the case and report any interesting developments at the Avalara Tax Desk. In the meantime, check out this post: Is Idaho a reciprocal state for DTC wine shipping?