Residency restriction for liquor distributors should go

February 16, 2009

Indiana liquor distributors are small and some of their counterparts outside the state are huge, so it's understandable why the locals are desperate to preserve an old statute banning out-of-state competitors.

But let's be real. Protectionist measures like this one should have been axed decades ago. They make about as much sense as township government.

IBJ reported last week that one of those big out-of-state players is suing the Indiana Alcohol and Tobacco Commission and the commission's recent chairman, Dave Health, to gain access to the market.

The plaintiff, Southern Wine & Spirits of Indiana Inc., is part of a Miami company that distributes liquor in 30 states and accounts for 20 percent of the booze consumed in the nation.

Southern Wine looked to the courts after state regulators rebuffed its request in October due to Indiana's requirement that liquor distributors be owned by Indiana residents. Southern was granted a request to distribute wine, because the residency restrictions on wine and beer were dropped several years ago.

The statute was adopted after the Depression in order to better track liquor providers. Back then, it was harder to conduct background checks ensuring the owners of such firms were above board.

It's easy to forget the benefits of open markets in an era when government has failed in its oversight of Wall Street firms, financial markets and food safety. But those advantages are significant: Competition results in consumers' paying less and receiving more choices and better quality.

Competition also forces suppliers to cut costs, which reduces waste. Not to mention the inherent fairness of offering all comers a fair shot at the American Dream.

These benefits were so apparent that beer distributors saw the writing on the wall and asked several years ago that the statute governing their corner of the industry be changed.

Beer distributors took the position after an out-of-state person bought a local beer distributorship but had to remain a minority owner for five years to establish residency and meet the requirements of the law.

The legal obstacle was "silly," Marc Carmichael, president of the Indiana Beverage Alliance, told IBJ.

However, the stakes are higher for liquor distributors than for beer distributors. Liquor brands seldom lock themselves into distribution agreements, meaning they would be free to shift to Southern Wine or other competitors and cut ties to such local distributors as National Wine & Spirits Inc. Beer brands, on the other hand, tend to sign exclusive contracts.

We doubt the state will be able to come up with compelling reasons to justify keeping the status quo. Protecting Hoosier-owned firms from the potential pitfalls of competition isn't enough.

Indiana University law professor J. Alexander Tanford thinks the statute will fall. Federal courts almost never support residency requirements for doing business: "This seems open and shut to me," he said.

Let's hope the U.S. District Court for the Southern District of Indiana agrees.

To comment on this editorial, write to ibjedit@ibj.com.

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