The Distribution System
After Prohibition ended, state and federal laws went into effect that separated the activities of the producers of wine (and all alcoholic beverages) and the activities of the sellers, namely the retailers. Enter the distributor or wholesaler — the middleman. This arrangement for conducting business is known as the three-tier system.
How It's Supposed to Work
Say a California winery (tier one) wants to sell its wine in Tennessee. It shops around for a wholesaler (tier two), chooses the one that provides the best deal, and starts shipping wine. The wholesaler sells the wine to retailers and restaurants (tier three) and pays the state the appropriate excise taxes. The retailer then sells the wine to the consumer.
In the process, the wholesaler:
Ships the wine to its warehouse from the winery.
Stores the wine in its warehouse.
Sells the wine to stores and restaurants.
Delivers the wine to purchasers.
A wholesale operation requires people, buildings, and equipment. While markups will vary, a wholesaler will add about 30 to 40 percent to the cost of your wine.
Every state has a different way of implementing the three-tier system. Some states have state-controlled liquor boards that act as wholesalers. States such as Pennsylvania also assume the retailer role with their state-run stores. State laws may mandate price posting and specify markups, or prohibit quantity discounts and deliveries to retailers' distribution centers.
States impose taxes on wine, and they go into the price you pay. The average state excise tax is 67 cents a gallon — the highest being Alaska at $2.50 a gallon and the lowest being Louisiana at 11 cents a gallon. State and local sales taxes also apply. With state budget deficits, many states are considering increasing taxes and fees on alcohol to supplement their income.
Some state laws regulate in-state and out-of-state wineries differently. Many states allow in-state wineries to sell directly to consumers but won't allow out-of-state wineries to do the same. Some states allow their own wineries to sell directly to retailers but, again, prohibit out-of-staters from taking part in the same activity.
These practices have been the basis in the last several years of litigation to open up free trade for wine between the states. A coalition of smaller, family owned wineries has argued that the system prevents them from engaging in interstate commerce.