Costco Sues for Right to Buy Wine and Beer Directly from Out-of-State Suppliers

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Costco Sues for Right to Buy Wine and Beer Directly from Out-of-State Suppliers

SEATTLE-- Costco Wholesale Corp., known for selling products in bulk at a cheap price, says it can't sell beer and wine cheaply enough under Washington state rules for distributing alcohol, reported the Associated Press.

Lawyers for the wholesale retailer on Thursday asked U.S. District Judge Marsha Pechman to let it and other stores buy directly from out-of-state wineries and breweries. Lawyers representing the state Liquor Control Board warned the judge that doing so would dramatically increase alcohol consumption in Washington, according to the report.

The judge said she would rule in two weeks on whether to grant summary judgment or have the case proceed to trial in March.

Costco's lawsuit, filed early last year, challenges Washington's scheme for distributing alcohol from other states. Under it, out-of-state vintners and brewers must sell to one of about 200 licensed distributors in Washington state, at a markup of at least 10 percent above cost. The distributors then sell to retailers, such as Costco, at another 10-percent markup, AP reported.

Washington's 450 wineries and breweries can sell directly to retailers, at just a 10-percent minimum markup.

Costco, based in Issaquah, Wash., arguedthat by buying in bulk, striking deals directly with out-of-state wineries and using its own distribution system it could offer beer and wine at better prices. Company lawyer David Burman told AP the state cannot justify forcing retailers to use a middleman at an automatic 20-percent markup--especially when state liquor stores aren't subject to the same restrictions or markups.

State liquor stores are allowed to buy directly from out-of-state wineries and negotiate better deals--even though the state claims such activity on the part of retailers such as Costco would increase alcohol abuse, Burman said.

"That's particularly galling," he told AP.

But Assistant Attorney General David Hankins noted in the report that state liquor stores primarily sell hard alcohol and not much beer and wine. Profits, taxes and fees collected by the Liquor Control Board are returned to city and county governments across the state.

Last year, the U.S. Supreme Court ruled that states that allow their citizens to buy directly, such as by mail, from in-state wineries must also allow them to buy directly from wineries in other states. Several states are wrangling with their alcohol distribution systems in light of the ruling.

Costco says under the court's ruling, it too should be allowed to buy directly. The state argues that the Supreme Court's ruling isn't applicable because it didn't deal with the enormous quantities at issue in the Washington case.

If Costco and other retailers are allowed to buy wine and beer from out-of-state wineries and breweries, Hankins suggested, then convenience stores would be able to order deeply discounted fortified wines and beers from shady establishments in other states. The distribution system in Washington helps track what alcohol is coming into the state, he argued in the report.

Costco is challenging the system under the U.S. Constitution's Commerce Clause, which reserves for the federal government the right to regulate commerce among the states, as well as antitrust law.