Only Three Liquor Stores? A Tale of Regulation

HOW A SIMPLE, WELL-INTENDED REGULATION TURNED INTO A TANGLED MESS

Earlier this year, a report at The Nerve detailed an attempt by a few lawmakers to insert a budget proviso into the state budget. This proviso – a one-year budget law – would effectively limit the number of brick-and-mortar liquor stores a person or company can own to three. The proviso would have accomplished this aim by levying a fee on the fourth license held by the liquor store owner “equal to the average gross sales” of the other three stores.

Such a “fee” likely strikes many readers as draconian. What’s going on here?

The context begins with a state law limiting the number of liquor store licenses a single licensee could hold to three. The law had been written to protect mom-and-pop liquor stores from big box vendors that would – so the argument went – drive the mom-and-pops out of business. Every small business would no doubt appreciate being protected by the law in this way, but the small liquor stores had the clout to get their regulation into the law code.

The law read as follows:

No more than three retail dealer licenses may be issued to one licensee, and the licensee must be eligible for a license for each store pursuant to Section 61-6-110.

Unfortunately for the mom-and-pops, one of those big box vendors, Total Wine & More, challenged the law as unconstitutional, and in a March 2017 decision, the court agreed. With the law struck, lawmakers scrambled to replace it with its functional equivalent. Initially they tried the aforementioned budget proviso. Instead of an outright ban on a fourth storefront, the proviso placed an overwhelmingly prohibitive tax on it: You could have a fourth license, but the fee for having it would be so large that you’d be a fool to try.

Somewhere in the deliberative process, however, the proviso was taken out of the budget. So the regulation’s proponents simply put the old law into a larger bill regulating the alcohol industry. That bill passed and was signed into law on May 19.

The new language is virtually identical to law said to be unconstitutional by the court.

The department [of revenue] shall not issue more than three retail dealer licenses to one licensee, and the licensee must be eligible for a license for each store pursuant to Section 61-6-110.

The only difference between the old law and the new one is a provision accompanying the latter: “The provisions of this section are therefore repealed on April 5, 2018.” In other words, lawmakers will revisit this provision, which they know to be unconstitutional, next year.

To recap: A law limiting liquor store licensees to three licenses was struck by the Supreme Court. Lawmakers tried to reframe the law as a fee and insert it into the budget as a one-year proviso. That didn’t work, so they simply put the old law back into the law code, with a little provision saying they’d take up the matter in a year’s time.

Can lawmakers do that? The answer would seem to be “No” in the legal sense but “Yes” in the practical sense. As a Statehouse source explained to SCPC, “They figured they could drop it back into the code and there’d be no court challenge in the next year. They’ll figure out what to do between now and then.”

The regulation is a tiny one, but it raises three important points:

First and most obviously, use of the law code to protect specific constituencies is intrinsically unfair. Why do small liquor stores afford this protection but not, say, small grocery stories?

Second, well-meaning regulations intended to protect businesses and industry sectors often create a complicated web of dependency that is extremely difficult to remedy. Granted, there are rational reasons for the original law – large retail chains can sometimes drive smaller stores out of business by manipulating the supply chain – but in the long run it does the smaller firms no favors. Regulatory protections insulate smaller firms from the need to do what they can do best: innovate and adapt.

Third, South Carolina state lawmakers take a cavalier, almost lawless, approach to lawmaking. After the Supreme Court declared a provision unconstitutional, they in effect put it back into the law code, albeit on a one-year basis. This is not the sort of behavior one expects in public officials of a constitutional republic.

The new law is but one small provision in a much larger bill with a great number of similar micro-regulations. Only this one, though, was intended – as the legislation itself explains – “to curb relationships and practices calculated to stimulate sales and impair the state’s policy favoring trade stability and the promotion of temperance.”

When bills talk about “curb[ing] relationships and practices” and “favoring trade stability,” you can be sure someone has hired an excellent lobbyist.

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