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Three-Tier System History
FROM PROHIBITION TO THE 21ST CENTURY
The 21st Amendment, ratified in 1933 empowered states with the ability to regulate who can make, transport, sell, and consume alcohol.
Consequently, this gave broad discretion to the States to formulate laws that worked best for their constituencies and to address issues of safety, access to market, and an orderly process to ensure proper tax collection and recordkeeping.
In Texas, the development of a regulatory structure to separate the manufacturing, distribution and retail tiers of the industries was adopted known as the Three-Tier System. This permits the State to track alcoholic beverages (during production, transport and consumption) while making it easier to collect and manage taxes and ensure the quality and safety of the product.
The Three-Tier structure was formed to create a safe, fair, and transparent regulatory model that encourages responsible consumption. It has continued to evolve to keep up with technology and safety innovations as well as market expansions.
As recently as 2021 the Three-Tier System saw several legislative actions that have added to the recent boom in the Craft Beer market. These and other changes over time have created a regulatory structure that is often cited as a model across the country.
Distribution Tier
In Texas, the Independent Distribution Tier was created by the legislature as a result of concerns regarding the regulation and monitoring of alcoholic beverages in the marketplace. Prior to Prohibition, lax regulatory oversight created an environment that limited the ability to monitor supply and quality control of alcoholic beverages. Additionally, the unregulated system made it difficult for new market participants.
In the Three-Tier Model, manufacturers contract with distributors in defined territories to pick-up, warehouse, market, and distribute their products. Distributors in turn are responsible for delivering the product to retail outlets (bars, restaurants, package stores, convenience stores and grocery stores) for sale to consumers. This system allows the State to monitor the movement of all alcoholic beverages which aides in tax collection and quality and safety control. In addition to tax collection, safety and quality control, and because of its independence, the Distribution Tier fosters consumer choice by ensuring equal access to products reaching the marketplace.
In the Three-Tier Model, manufacturers contract with distributors in defined territories to pick-up, warehouse, market, and distribute their products. Distributors in turn are responsible for delivering the product to retail outlets (bars, restaurants, package stores, convenience stores and grocery stores) for sale to consumers. This system allows the State to monitor the movement of all alcoholic beverages which aides in tax collection and quality and safety control. In addition to tax collection, safety and quality control, and because of its independence, the Distribution Tier fosters consumer choice by ensuring equal access to products reaching the marketplace.
As we have seen with the recent boom in craft beers, access to the marketplace has been a key component to the success of this segment. Recent amendments to the Alcoholic Beverage Code, which were passed by the Legislature during the 83rd Session, allow limited exemptions for startup newcomers into the marketplace. These limited exemptions were identified as a compelling State interest for their potentially positive impact on the industry. In fact, there has been a direct correlation between the astronomical growth in the craft segment in Texas and the passage of exemption legislation, which parties of all three Tiers supported during the 2013 Legislative Session.
The Distribution Tier continues to serve a vital role in the alcoholic beverage market in Texas. Texas beer distributors employ more than 65,000 Texans and pay approximately $1 billion in state, local, and federal taxes. By ensuring products get to market safely and in a timely manner, distributors help maintain a safe, orderly, and vibrant alcoholic beverage industry in Texas. Beer Alliance members strictly adhere to today's state-based regulatory model, including maintaining the Three-Tier System, while exploring new technologies and marketing tools to better serve the interests of Texas retailers and consumers in the malt beverage industry.
