Is it constitutional for Tennessee to require liquor-by-the-drink bars and restaurants to pay wholesalers on delivery while letting package stores keep their 10-day credit?

Subject

Opinion No. 14-61, Constitutionality of Payment Requirement for Liquor-by-the-Drink Licensees, June 17, 2014

Plain-English summary

Senator Douglas Henry asked whether SB2415 (108th General Assembly, 2014, as passed) violated equal protection. The bill required liquor-by-the-drink licensees (bars, restaurants) and retail food store wine licensees to pay wholesalers on delivery, by electronic funds transfer or similar method, while keeping the existing 10-day credit allowance for package retail licensees in place. The AG concluded the differential treatment was constitutional under rational-basis review.

The framework is standard. Equal protection (Fourteenth Amendment; Tenn. Const. art. I, § 8 and XI, § 8) applies strict scrutiny only when a fundamental right or suspect classification is involved. Otherwise, rational-basis review controls (State v. Tester; Tenn. Small Sch. Sys. v. McWherter). Selling alcohol is a privilege, not a fundamental right (Medley v. Maryville City Beer Bd.; Martin v. Beer Bd. for City of Dickson). The classification (which licensees must pay on delivery, which may use credit) is not suspect.

Rational basis is deferential. A statute carries a strong presumption of validity. Challengers must "negate every conceivable basis that might support" the classification (Beach Commc'ns; Nordlinger). The legislature need not articulate its purpose; any conceivable rational basis suffices (Harrison v. Schrader; City of Cleburne). The judiciary will not second-guess legislative policy in the economic sphere absent invidious discrimination (City of New Orleans v. Dukes).

The Twenty-first Amendment gives states broad power to regulate alcoholic beverages (Granholm v. Heald; 37712, Inc. v. Ohio Dept. of Liquor Control). Tennessee uses a three-tier system: manufacturers (§ 57-3-202), wholesalers (§ 57-3-203), retailers (§ 57-3-204). § 57-3-404(g) generally prohibits credit but allows wholesalers to sell on 10 days' credit; SB2415 carved liquor-by-the-drink and retail food store wine licensees out of that allowance.

The stated purposes were articulated in the legislation itself. The amendment to § 57-4-203 was "to facilitate the prompt payment of state taxes imposed upon wholesalers." Wholesalers owe a per-gallon tax on wine and spirits monthly, computed on adjusted gross sales (§§ 57-3-302, -303), so prompt payment from licensees to wholesalers facilitates prompt payment of state taxes. The amendment to § 57-3-813 was "to facilitate the implementation of this section." Both are reasonable government objectives.

The opinion knocked down the underinclusiveness objection. The legislature may attack one phase of a problem at a time (Beach Commc'ns; Williamson v. Lee Optical). It need not apply the same payment rule to all classes of licensees. The Sixth Circuit's 37712, Inc. decision recognized that differences between various types of alcohol-permit holders can justify drawing statutory distinctions among them. And § 57-6-108 already required payment on delivery for wholesale beer sales generally, showing the General Assembly's familiar use of this tool.

Currency note

This opinion was issued in 2014. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

What is the three-tier system?

Tennessee licenses alcohol manufacturers separately from wholesalers, and wholesalers separately from retailers. § 57-3-404(b) requires retailers to buy only from licensed wholesalers and prohibits wholesalers from selling to anyone other than licensed retailers or licensed wholesalers. The structure is meant to prevent vertical integration and keep tax-collection points clean.

Why does the legislature care about prompt payment from licensees to wholesalers?

Because wholesalers pay the per-gallon state tax on adjusted gross sales monthly (§ 57-3-303). Tax collection depends on wholesalers' financial health. Late-paying retailers create cash-flow issues that ripple into late tax payments. Requiring payment on delivery moves money up the chain faster, supporting tax collection.

Why are package stores treated differently?

The opinion does not explore the policy rationale beyond noting the differential treatment and the bill's stated purpose of facilitating prompt payment of state taxes. Under rational-basis review, the court does not need to know the legislature's actual reason; the opinion holds that any conceivable rational basis suffices, and the legislature is never required to articulate one.

What is the standard for equal-protection challenges to economic legislation?

Rational-basis review: the law is presumed valid; the challenger must show that no conceivable rational basis supports the classification. The court will not strike down economic regulation just because it is imperfect or under-inclusive. Only "invidious discrimination, the wholly arbitrary act" is invalid (City of New Orleans v. Dukes).

What is the Twenty-first Amendment's role?

The Twenty-first Amendment (1933) repealed Prohibition and gave states broad power to regulate alcoholic-beverage sales. Granholm v. Heald (2005) carved out some commerce-clause limits (states cannot discriminate against out-of-state wineries while allowing in-state direct shipping), but the basic regulatory authority remains broad. State alcohol regulation gets more deference than other regulatory regimes.

Does SB2415 still allow electronic transfers?

Yes. The statute lists "electronic funds transfer, credit card, debit card, or such other method as approved by the commission that will facilitate full payment at or near the time of delivery." Cash is not the only acceptable form; the requirement is timing (on delivery), not method.

What about restaurants that pour liquor and also have a package side?

Different licensees, different rules. A licensee holding a § 57-4-201 liquor-by-the-drink license is subject to the on-delivery requirement. A separate § 57-3-204 package retail license is not. A holding entity with both types of licenses would have to apply each rule to its respective licensed activity.

Background and statutory framework

Tennessee's alcoholic-beverage regulatory regime is in Title 57. Chapter 3 covers liquor; Chapter 4 covers liquor-by-the-drink (on-premises consumption); Chapter 6 covers beer. § 57-3-404 is the core wholesale-credit provision: subsection (b) requires retailers to buy from licensed wholesalers; subsection (g) limits credit to 10 days. SB2415 added subsection (n) to § 57-4-203 (liquor-by-the-drink licensees pay on delivery) and new § 57-3-813 (retail food store wine licensees pay on delivery, tied to 2014 Tenn. Pub. Acts ch. 554, the wine-in-grocery-stores legislation).

The equal-protection framework Tennessee uses tracks federal doctrine. Tester confirmed that Tennessee's Article I, § 8 and Article XI, § 8 confer "essentially the same protection" as the federal Equal Protection Clause (Tenn. Small Sch. Sys.). Rational basis is deferential precisely because legislative line-drawing in economic regulation is constitutional unless invidious. SB2415 is run-of-the-mill economic regulation in a heavily regulated industry; it survives rational-basis review.

Citations

• Tenn. Const. art. I, § 8 (law of the land; equal protection)
• Tenn. Const. art. XI, § 8 (no suspension of general law for individuals)
• Tenn. Code Ann. §§ 57-3-202, -203, -204 (manufacturer, wholesaler, retailer licensing)
• Tenn. Code Ann. § 57-3-302 (wholesaler tax)
• Tenn. Code Ann. § 57-3-303(a), (b)(1) (wholesaler tax due monthly)
• Tenn. Code Ann. § 57-3-404(b) (retailer must buy from licensed wholesaler)
• Tenn. Code Ann. § 57-3-404(g) (10-day credit allowance)
• Tenn. Code Ann. § 57-3-813 (retail food store wine licensee payment on delivery)
• Tenn. Code Ann. § 57-4-201 (liquor-by-the-drink licensing)
• Tenn. Code Ann. § 57-4-203 (liquor-by-the-drink regulation; subsection (n) payment on delivery)
• Tenn. Code Ann. § 57-6-108 (Wholesale Beer Tax Act payment on delivery)
• State v. Tester, 879 S.W.2d 823 (Tenn. 1994) (Tennessee Supreme Court; state equal protection)
• Tenn. Small Sch. Sys. v. McWherter, 851 S.W.2d 139 (Tenn. 1993) (Tennessee Supreme Court; state and federal equal protection parallel)
• Romer v. Evans, 517 U.S. 620 (1996) (U.S. Supreme Court; rational-basis test)
• F.C.C. v. Beach Commc'ns, Inc., 508 U.S. 307 (1993) (U.S. Supreme Court; rational-basis presumption of validity)
• Nordlinger v. Hahn, 505 U.S. 1 (1992) (U.S. Supreme Court; legislature need not articulate purpose)
• Harrison v. Schrader, 569 S.W.2d 822 (Tenn. 1978) (Tennessee Supreme Court; rational-basis test in Tennessee)
• City of Cleburne, Tex. v. Cleburne Living Ctr., 473 U.S. 432 (1985) (U.S. Supreme Court; states have wide latitude in economic regulation)
• City of New Orleans v. Dukes, 427 U.S. 297 (1976) (U.S. Supreme Court; rational distinctions without mathematical exactitude)
• Granholm v. Heald, 544 U.S. 460 (2005) (U.S. Supreme Court; Twenty-first Amendment scope)
• 37712, Inc. v. Ohio Dept. of Liquor Control, 113 F.3d 614 (6th Cir. 1997) (Sixth Circuit; differences between alcohol-permit classes can justify statutory distinctions)
• Medley v. Maryville City Beer Bd., 726 S.W.2d 891 (Tenn. 1987) (Tennessee Supreme Court; alcohol sales are a privilege)
• Martin v. Beer Bd. for City of Dickson, 908 S.W.2d 941 (Tenn. Ct. App. 1995) (Tennessee Court of Appeals; alcohol sales are a privilege)
• Nixon v. Adm'r of Gen. Serv., 433 U.S. 425 (1977) (U.S. Supreme Court; underinclusiveness not fatal)
• Roschen v. Ward, 279 U.S. 337 (1929) (U.S. Supreme Court; statute not invalid for not going further)
• Williamson v. Lee Optical of Okla., Inc., 348 U.S. 483 (1955) (U.S. Supreme Court; one-step-at-a-time principle)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2014/op14-061.pdf

Original opinion text

STATE OF TENNESSEE
OFFICE OF THE ATTORNEY GENERAL
June 17, 2014
Opinion No. 14-61
Constitutionality of Payment Requirement for Liquor-by-the-Drink Licensees

QUESTION

Does Senate Bill 2415/House Bill 2027 of the 108th General Assembly (2014), as passed (hereinafter "SB2415"), which requires liquor-by-the-drink licensees to make payment to wholesalers upon delivery of the product, violate equal protection under the United States or Tennessee Constitutions?

OPINION

No. SB2415 does not run afoul of equal-protection principles.

ANALYSIS

The Fourteenth Amendment to the United States Constitution provides that no state shall "deny to any person within its jurisdiction the equal protection of the laws." Two provisions of the Tennessee Constitution, art. I, § 8, and art. XI, § 8, encompass the equal-protection guarantee. State v. Tester, 879 S.W.2d 823, 828 (Tenn. 1994). These two provisions of the Tennessee Constitution confer "essentially the same protection" as the Equal Protection Clause of the Fourteenth Amendment. Tenn. Small Sch. Sys. v. McWherter, 851 S.W.2d 139, 152 (Tenn. 1993).

The Tennessee Supreme Court has followed the framework developed by the United States Supreme Court for analyzing equal-protection claims. Id. at 153. Under this framework, an equal-protection analysis requires strict scrutiny of a legislative classification only when the classification interferes with the exercise of a "fundamental right," such as the right to vote or right to privacy, or makes distinctions based on suspect classifications, such as race or national origin. See Tester, 879 S.W.2d at 828. On the other hand, if a law neither burdens a fundamental right nor targets a suspect class, the law will be upheld so long as it bears a rational relation to some legitimate end. Romer v. Evans, 517 U.S. 620, 631 (1996).

On rational-basis review, a statute creating a classification bears a strong presumption of validity, and those attacking the rationality of the legislative classification have the burden to negate every conceivable basis that might support it. F.C.C. v. Beach Commc'ns, Inc., 508 U.S. 307, 314-15 (1993). A legislature is never required to articulate at any time the purpose or rationale supporting its classification. Id. at 315 (citing Nordlinger v. Hahn, 505 U.S. 1, 15 (1992)). Under the rational-basis test, "if some reasonable basis can be found for the classification, or if any state of facts may reasonably be conceived to justify it, the classification will be upheld." Tenn. Small Sch. Sys., 851 S.W.2d at 153 (quoting Harrison v. Schrader, 569 S.W.2d 822, 825-26 (Tenn. 1978)). Where social or economic legislation is at issue, the Equal Protection Clause affords States wide latitude, City of Cleburne, Tex. v. Cleburne Living Ctr., 473 U.S. 432, 440 (1985); the States legislate in these areas pursuant to "their police powers, and rational distinctions may be made with substantially less than mathematical exactitude," City of New Orleans v. Dukes, 427 U.S. 297, 303 (1976). "In short, the judiciary may not sit as a superlegislature to judge the wisdom or desirability of legislative policy determinations made in areas that neither affect fundamental rights nor proceed along suspect lines; in the local economic sphere, it is only the invidious discrimination, the wholly arbitrary act, which cannot stand consistently with the Fourteenth Amendment." Id. at 303-04 (internal citations omitted).

States also possess broad powers under the Twenty-first Amendment to the United States Constitution to regulate, restrict, or ban the sale of alcoholic beverages within their borders. Granholm v. Heald, 544 U.S. 460, 488 (2005); 37712, Inc. v. Ohio Dept. of Liquor Control, 113 F.3d 614, 618 (6th Cir. 1997). To regulate the alcoholic-beverage trade in Tennessee, the General Assembly has adopted a three-tier regulatory system consisting generally of licensed manufacturers, wholesalers, and retailers. See Tenn. Code Ann. §§ 57-3-202, -203, -204; see also id. §§ 57-3-401 to -413 (regulating liquor traffic generally). Under Tenn. Code Ann. § 57-3-404(b), "[n]o retailer shall purchase any alcoholic beverages from anyone other than a licensed wholesaler, nor shall any wholesaler sell any alcoholic beverages to anyone other than a licensed retailer, or a licensed wholesaler."

Tenn. Code Ann. § 57-3-404(g) generally prohibits licensed retailers and wholesalers from selling alcoholic beverages on credit but creates an exception that allows wholesalers to sell "on not more than ten (10) days' credit." This 10-day credit allowance formerly applied to sales by wholesalers both to retailers who are licensed to sell packaged liquor for consumption off the premises, see id. § 57-3-204(a), and to retailers who are licensed to sell liquor by the drink for consumption on the premises, see id. § 57-4-201.

But SB2415 amended Tenn. Code Ann. § 57-4-203, which regulates liquor-by-the-drink licensees, by adding the following subsection:

(n) In order to facilitate the prompt payment of state taxes imposed upon wholesalers, payment for all sales to any licensee holding a license under this chapter by a wholesaler shall be made upon delivery of the product and shall be made by electronic funds transfer, credit card, debit card, or such other method as approved by the commission that will facilitate full payment at or near the time of delivery.

SB2415, § 10. It also added similar language to newly enacted Tenn. Code Ann. § 57-3-813, which prohibits wholesalers from selling any product to a retail food store wine licensee on credit. SB2415, § 7; see 2014 Tenn. Pub. Acts, ch. 554, § 1. Thus, Tennessee law now allows wholesalers to sell to package retail licensees on 10-days' credit, while liquor-by-the-drink licensees and retail food store wine licensees are required to provide payment upon delivery.

Nevertheless, SB2415 does not offend equal-protection principles. Because statutes that regulate payment requirements to liquor wholesalers do not involve the exercise of a fundamental right or make distinctions based upon race or national origin, a strict-scrutiny analysis is not required. See Tester, 879 S.W.2d at 828. Instead, an equal-protection challenge to the payment classification created by SB2415 would be governed by the more deferential rational-basis test. And it cannot be said that SB2415 lacks a conceivable rational basis.

The stated purpose of the amendment to § 57-4-203 is "to facilitate the prompt payment of state taxes imposed upon wholesalers," SB2415, §10, and the stated purpose of the amendment to § 57-3-813 is "to facilitate the implementation of this section," id. § 7. Although the bill requires payment on delivery by liquor-by-the-drink licensees and by retail food store wine licensees but not by package retail licensees, "mere underinclusiveness is not fatal to the validity of a law" for equal-protection purposes. Nixon v. Adm'r of Gen. Serv., 433 U.S. 425, 471 n.33 (1977) (referring to the equal-protection component of the Fifth Amendment); see Roschen v. Ward, 279 U.S. 337, 339 (1929) ("[a] statute is not invalid under the Constitution because it might have gone farther than it did"). If the General Assembly wishes to ensure immediate payment upon the sale of alcoholic beverages by wholesalers, in order to facilitate the prompt payment of taxes or for its own sake, it "may take one step at a time, addressing itself to the phase of the problem which seems most acute to the legislative mind." Beach Commc'ns, 508 U.S. at 316 (quoting Williamson v. Lee Optical of Okla., Inc., 348 U.S. 483, 489 (1955)); see id. (quoting Williamson) ("The legislature may select one phase of one field and apply a remedy there, neglecting the others."). Equal protection principles thus do not require the General Assembly to apply its payment-on-delivery measures equally to all classes of liquor license holders. See, e.g., 37712, Inc., 113 F.3d at 620-22 (the differences between various types of alcohol-permit holders justify drawing statutory distinctions between these permit holders).

Selling alcoholic beverages is a privilege, not a fundamental right. See Medley v. Maryville City Beer Bd., 726 S.W.2d 891, 892 (Tenn. 1987); Martin v. Beer Bd. for City of Dickson, 908 S.W.2d 941, 945 (Tenn. Ct. App. 1995).

Licensed wholesalers in Tennessee are required to pay a per-gallon tax on wine and spirits based upon the wholesalers' adjusted gross sales of alcoholic beverages for the purposes of retail sale or distribution. See Tenn. Code Ann. §§ 57-3-302, -303(a), (b)(1). This wholesalers' tax becomes due at the first of every month and applies to all taxable transactions from the previous month. Id. § 57-3-303(b)(1).

Tenn. Code Ann. § 57-6-108 similarly requires payment on delivery for wholesale beer sales "[i]n order to effectively collect the tax levied by [the Wholesale Beer Tax Act]." This provision, though, exempts sales within military installations but otherwise applies to sales to all retailers.

The legislature was certainly aware of the credit allowance in § 57-3-404(g) when it passed SB2415. In 2014 Tenn. Pub. Acts, ch. 554, § 14, which was enacted on March 20, 2014, the legislature amended -404(g) to add specific provisions regarding the 10-day credit allowance.

ROBERT E. COOPER, JR.
Attorney General and Reporter

JOSEPH F. WHALEN
Acting Solicitor General

KYLE HIXSON
Assistant Attorney General

Requested by:
The Honorable Douglas Henry
State Senator
321 War Memorial Building
Nashville, Tennessee 37243