Michigan's regulation of liquor business is sobering

(Originally published June 22, 2011)

By Susan J. Demas

No, it's not your imagination. That bottle of Jack Daniels really does cost more in New Buffalo than in Michigan City, Ind.

"There is a mark-up," said Andrea Miller, spokeswoman for the Liquor Control Commission, the state agency that regulates alcohol.

Why is that? The answer goes back to 1933, when Michigan established the LCC "for the control of the alcoholic beverage traffic within the state of Michigan." Following Prohibition's repeal, states had a choice whether to get involved in the sale of alcohol or just license establishments that do. Michigan chose the former.

"There's a belief that alcohol is a product that needs to be regulated at a higher standard than other products," said Mike Lashbrook, president of the Michigan Beer and Wine Wholesalers (MBWW). "It's a product that can be subject to abuse."

Consumers might not know that the LCC holds the monopoly over spirits distribution in the state. There's a 65 percent  mark-up on hard liquor in Michigan, which helps cover the LCC's costs and generates a lot of revenue for the state. In 2010, that generated $139.77 million. Then retailers are given a 17 percent discount so they can turn a profit.

Today, Michigan is one of 18 alcohol control states, according to the Alexandria, Va.-based National Alcohol Beverage Control Association. Other Midwest states like Indiana, Wisconsin and Illinois are not -- which iswhy hard liquor prices are lower there.

The process for regulating and selling alcohol in the Great Lakes State is extremely complex -- and something consumers know little about. The state's liquor control code -- Public Act 58 of 1998 -- is 74,029 words and its rules are another 37,000 words, notes Michael LaFaive, the Mackinac Center's fiscal policy director. That makes us second only to Indiana in wordiness in Midwest states.

The end result is higher prices for consumers and a lot of red tape for businesses trying to obtain liquor licenses from the state. (Click HERE for a recent LCC financial report.)

"This takes millions of dollars out of the alcohol market," said Jack McHugh, legislative analyst for the free-market Mackinac Center for Public Policy.

However, Lashbrook makes the case that Michigan's system is a "good balance of business interest vs. social interest" compared to what other states do. He notes that Michigan tends toward the higher side among states on consumption of beer and wine.

But there are signs that change could be underfoot. Gov. Rick Snyder has established an Office of Regulatory Reinvention, which has a task force on the state's Liquor Control Code.

And the governor last week named Andy Deloney as his new LCC chair. Deloney, vice president of government relations for the Michigan Restaurant Association, said he wants to take a more business-friendly approach and look at what other states are doing. His first focus is on liquor license reform, but he notes there's been recent discussion on the state's involvement in distribution, as well.

"Licensing in Michigan is in deep need of reform," he said. "We need to treat businesses as customers. Too often we treat them like they're trying to get away with something. … There are vast trips and traps in Michigan's Liquor Control Code and there's been a 'gotcha' attitude about enforcement."

Regulation in Michigan

So how does the state of Michigan get involved in alcohol sales?

It starts with the five-member Liquor Control Commission, which is housed in the Department of Licensing and Regulatory Affairs, formerly known as the Department of Energy, Labor and Economic Growth.

The governor appoints members. The salary for the four members is $78,030 and the chair is paid $106,030, according to the Office of State Employer. Members are eligible for the health and retirement benefit package available to non-classified state employees.

"There are only five of them and there's a certain amount of prestige to the position," LaFaive said.

The LCC's total revenue to the state was $333.96 million last year. That comes from the mark-up on spirits; taxes on beer, wine, spirits and mixed drinks; licensing fees; and fines. This revenue is used to operate the commission, which was allotted 152 full-time slots and a $17.6 million personnel budget for fiscal 2012.

Unlike other control states, Michigan does not operate its own liquor stores. But the LCC is involved in what it terms the "merchandising cycle" of spirits. Another way of putting it is that the state has a monopoly over wholesaling hard liquor. The LCC is responsible for ordering and buying spirits from suppliers and selling these products to its retail licensees.

There are only three approved distributors of spirits in Michigan: General Wine and Liquor, NWS Michigan and Chinese Import and Export.

Beer and wine distribution functions differently with a three-tiered system. Here's how it works: The first tier is composed of those who produce beer and wine. The second tier is the wholesale distributors. And the third tier is the restaurants and stores that sell alcohol.

Michigan wants a strict legal separation between beer and wine producers and sellers, hence the state-approved distributors, who function as middlemen. There are a little more than 100 licensed distributors, but some of those are in niche fields, providing wine for Sunday sacrament at churches. The Michigan Beer and Wine Wholesalers has 63 members.

With only minor exceptions, the LCC doesn't permit any business involved in one tier to have its hands in other tiers. Lashbrook said the system was designed with the public good in mind to correct abuses during the pre-Prohibition era.

"Before, those manufacturing products were the retailers -- they operated saloons," Lashbrook said. "That had a very negative societal impact, with (businesses) encouraging overconsumption -- which let to Prohibition."

But the current regulatory framework has a big impact on small businesses. A Michigan brewery or vineyard can't directly sell its wares to Wal-Mart, Applebee's or the party store down the street, although there are small exceptions. They have to go through one of the state's licensed distributors. 

A 2009 state law prohibits Michiganders from purchasing beer and wine from out-of-state retailers (like wine clubs) and having them shipped directly to their home. They still have to go through a state-licensed wholesaler. One exception to this is that wineries can ship to in-state stores, like St. Julian, LaFaive notes.

Some craft breweries and wineries are clamoring to self-distribute, LaFaive said. They argue it makes more business sense to deal with stores and restaurants in their communities directly -- and they would save money.

But Lashbrook said the three-tier regulatory system isn't hurting those businesses, which have expanded and grown in recent years.

"Those industries are flourishing with the system and the support of beer and wine wholesalers across Michigan," the MBWW president said. "That couldn't have been achieved without independent wholesalers across the state. It's really a great partnership."

Lashbrook said the system encourages "vibrant competition" in the beer and wine marketplace.

"It levels the playing field amongst retailers, from large grocery and big-box stores to smaller party stores," he said.

Of course, the three-tier system is the MBWW's bread and butter. If it were reformed or scrapped, that would likely mean less money for its 63 members.

Liquor licenses

The liquor license process is as complex as the distribution side.

There are 27 types of liquor licenses and annual fees vary widely, including $250 for hotels with more than 20 rooms, $1,000 for golf courses and $600 for airlines. A standard C-class license that many restaurants and bars apply for is $600. There's a non-refundable fee of $70 for any license.

Revenue from licenses is almost $14.8 million annually, the LCC reports. The LCC sends 55 percent of its retail licensing fees to local units of government -- primarily for enforcement of the state's liquor laws.

The LCC estimates that 17,200 retail businesses, including bars, grocery stores, restaurants, hotels, convenience stores and pharmacies have one or more active licenses, totaling more than 27,000. Almost 27,000 retail licenses and about 6,200 special (24-hour) licenses are renewed annually.

Here is the LCC's description of the liquor license process:

"The application file is authorized for investigation with one of the Commission's four (4) Enforcement district offices (Escanaba, Farmington, Grand Rapids, Lansing), and a recommendation is requested from the local legislative body (if required) and the local law enforcement agency who has jurisdiction of the proposed location (applicants must submit fingerprints if not previously on file). When all investigations are complete and the required recommendations are received back in the Lansing office of the Commission, the file is submitted to the Licensing Administration Docket Preparation Unit where an analyst reviews the file and it is scheduled for a (weekly) Licensing docket to be considered by the Commission. Subsequent to a decision being rendered by the Commission (approval, denial, etc.) notification is sent to the applicant. The notification may be a letter indicating approval along with the "Contract for Licensing" package containing the documents necessary to consummate the licensing transaction (including the request for statutory fees); or it could be a letter indicating approval, subject to final inspection, and the Contract for Licensing package (where applicable) - with instructions regarding obtaining the final inspection; or it could be a letter indicating denial and instructions regarding the appeal process.

WARNING: The Commission wishes to warn all applicants for licenses not to invest any money or to commit themselves by any binding agreements in the expectation of being issued a license for sale of alcoholic beverages until officially notified by the Commission that their application has been approved."

Miller, spokeswoman for the LCC, acknowledges the process is "complex."

"The commission, however, perceives its licensing function as much more than a revenue source," Miller said. "It strongly believes that adherence to rigid standards for licensure to sell beverage alcohol products in this state is the first line of defense in protecting the public from illegal and injurious business practices and conduct."

Licenses can be sold between businesses. Linda Gobler, president of the Michigan Grocers Association, notes that licenses are a valuable asset, but some businesses are keeping them in escrow for five years. In some cases, that can prevent any business in the area from selling alcohol.

Gobler said it can take six months for one business just to transfer a liquor license to another. And it can take a year to obtain a new license from the LCC. She said the process is often "subjective."

"It's a very complex process and there's a lot of red tape," she said. "… It sends a message to the business community overall. If it's this difficult to do business here, why would they want to?"

However, Miller said many licenses can be processed in 90 days. For 2010, 8,939 applications were received that were subject to the 90-day clock. Of those, three applications were not processed within 90 days and $22,199 was returned for license fees, as businesses receive a 15-percent discount. 

A 2006 law allows the LCC to issue redevelopment liquor licenses to businesses located in designated areas such as principal shopping districts or downtown development authorities.

There's a hefty $20,000 fee and licenses can't be transferred under this law. There are several requirements for entertainment establishments, such as having a capacity of at least 25 people and pouring at least $75,000 into rehabilitating the building.

Gobler said the LCC has been focused on the regulatory aspects and hasn't taken a business perspective. But she added that she's hopeful that will change with Deloney's appointment.

Lashbrook notes that the process is in place to ensure that "good actors" and businesses with financial stability are the ones allowed to sell alcohol. But the MBWW is on board with streamlining the liquor license process.

"I'm familiar with the perception and the reality that some of the licensing regulation and process for getting a license can get to be a bit burdensome and take too much time," Lashbrook said.

Beer tax debate

Almost every year, groups like the Center for Michigan and the Michigan League for Human Services make the case to raise beer and wine taxes to help balance the state budget.

And every year, the idea goes nowhere.

Michigan hasn't touched the beer tax since 1966 -- and that was to lower it. The same goes for the wine tax, which hasn't been raised in decades. A Center for Michigan report notes that if Michigan had adjusted the 1966 beer tax to inflation over the years, it would result in an additional $250 million a year in tax revenue.

But given Michigan's high prices for hard alcohol and a complex regulatory system, it's little wonder that raising the beer and wine tax is the third rail of Michigan politics.

It also doesn't help that the powerful Michigan Beer and Wine Wholesalers lobby has throatily opposed it. The MBWW has argued this would have a "chilling effect" sales in Michigan, noting that the beer tax here of 2 cents a bottle is still higher than what it is in other Midwest states.

The MBWW is one of the most powerful lobbies in Lansing as the 11th highest-spending political action committee in the 2010 election cycle, spending $1.05 million, according to the nonpartisan Michigan Campaign Finance Network. The group also sponsors conferences at destinations such as the Cayman Islands and Cabo San Lucas, Mexico, which the MIRS newsletter has reported lawmakers attend. In the past, LCC members have gone to junkets, the Detroit Free Press reported in 2005.

And according to this database from the Michigan Campaign Finance Network, MBWW nearly doubled its lobbying expenditures from 2009 to 2010.

However, Lashbrook said he hasn't heard much criticism about the group's influence.

"We are an active participant in the policy-making process," he said. "Distributors are significant employers and participants in communities and are known to local officials and legislators. They have a rapport with elected officials. We are an active player, yes, and proud of it."

Reforms ahead

The new LCC chair has made it clear that revamping the liquor license process is a top priority. But will Michigan take regulatory reform to a whole new level and get out of the alcohol distribution business?

"It's been time for decades for Michigan to join 32 other states," LaFaive said. "I hope the Legislature and governor take it on, but I don't know how far they want to take it."

There's a lot of revenue generated from the current system, he notes. But the state could solve that problem by dropping its monopoly on hard liquor wholesaling and enacting a comparable tax. LaFaive also notes that there's a tough political reality, as lobbyists will line up against such an overhaul.

The MBWW supports a "mend it, don't end it" approach to regulation. Lashbrook said the system should become more "consumer-friendly" but the overall framework needs to remain.

He cites a March survey commissioned by the Alexandria, Va.-based Center for Alcohol Policy, which was founded by the National Beer and Wine Wholesalers. The poll found that 77 percent of Americans support "the rights of individual states to set their own laws and regulations" regarding the sale of alcohol. And 87 percent believe that all alcohol sold in their state should "come through a licensed system which effectively tracks the steps it takes from producer to the consumer."

"The public believes alcohol should be regulated," he said. "It shouldn't be treated like corn flakes or popcorn."