Does giving craft distillers a lower New Mexico liquor excise tax violate the dormant Commerce Clause?

Plain-English summary

State Representative Joanne Ferrary asked the New Mexico AG two questions about the state's liquor excise tax. First: does the existing rule that gives craft distillers a lower tax rate violate the dormant Commerce Clause? Second: would House Bill 230 (2023), which proposed unifying the rates, run into the same problem?

The AG said no to both. Assistant Attorney General Kristin E. Hovie's analysis turns on a single point: the craft-distiller benefit is structured around who holds a New Mexico craft-distiller license, not where the distiller is located. Because NMSA 1978, § 60-6A-6.1, the licensing statute, is open to both in-state and out-of-state distillers on equal terms, the lower excise rate is not doing the work that the dormant Commerce Clause forbids: it is not protecting in-state producers from out-of-state competition.

The opinion contrasts this with Bacchus Imports, Ltd. v. Dias, 468 U.S. 263 (1984), where Hawaii exempted only locally-produced okolehao and pineapple wine from its liquor tax. That was facial discrimination against out-of-state producers and the Supreme Court struck it down. New Mexico's structure is different because the favored class (craft distillers) is defined by license type, not by geography.

For HB 230, which would have unified rates rather than created a new in-state preference, the analysis is even simpler. A rule that treats everyone the same does not implicate the dormant Commerce Clause.

What this means for you

If you are a New Mexico state legislator

You have a green light to keep the craft-distiller rate or to unify rates as HB 230 proposed. Either policy choice is defensible against a dormant Commerce Clause challenge as the statute is currently structured. The risk surface would change if a future bill restricted the favorable rate to distillers physically located in New Mexico, or to spirits produced from New Mexico ingredients, or to license types that out-of-state producers cannot in practice obtain. Those moves would push the structure toward the Bacchus problem.

If you are a craft distiller (in-state or out-of-state)

The favorable wholesale rate keys off your craft-distiller license, not your address. If you are an out-of-state producer, the practical question is whether you can in fact qualify for a New Mexico craft-distiller license under § 60-6A-6.1 and what compliance costs that imposes (production volume caps, reporting, in-state distribution arrangements). The legal door is open.

If you are a liquor wholesaler

Your excise rate continues to depend on what you sell, not on whether you bought it from an in-state or out-of-state distiller. Selling spirits that came from a licensed craft distiller, regardless of that distiller's location, qualifies for the lower rate.

If you are a constitutional law attorney evaluating a similar tax

The opinion is a useful template for the dormant-commerce-clause analysis when a state offers a tax preference tied to a regulatory category (license type, production method, business size). The category itself can survive scrutiny if eligibility is geographically neutral. The trap is when the category is defined in a way that, in practice, only in-state producers can satisfy. That is when the analysis tips toward Bacchus.

Common questions

Q: What is the dormant Commerce Clause?
A: The Commerce Clause grants Congress power to regulate interstate commerce. The "dormant" version is a court-created doctrine that says even when Congress hasn't spoken, states cannot pass laws that discriminate against or unduly burden interstate commerce. Its main target is economic protectionism, where a state shields its own businesses from out-of-state competition.

Q: How is New Mexico's craft-distiller break different from Hawaii's okolehao exemption?
A: Hawaii's exemption was tied to the type of product (okolehao and pineapple wine) that, as a practical matter, only Hawaiian producers made. New Mexico's break is tied to the license type (craft distiller). Any distiller, in-state or out-of-state, can apply for that license. The distinction is geographic neutrality on the face and in operation.

Q: Could a future bill cross the line?
A: Yes. Examples that would raise dormant Commerce Clause concerns: a tax preference for distillers "headquartered in New Mexico," or for spirits "produced from New Mexico-grown agricultural products," or a craft-distiller license that imposed in-state operating requirements no out-of-state producer could realistically meet.

Q: What was House Bill 230 (2023)?
A: A proposed bill that would have raised and unified the basic alcohol excise tax rates in § 7-17-5. The opinion concluded the bill posed no dormant Commerce Clause issue because uniform rates do not discriminate between in-state and out-of-state interests.

Q: Does this opinion settle the question if challenged in court?
A: No. AG opinions are persuasive but not binding. A federal court reviewing § 7-17-5 would do its own dormant Commerce Clause analysis. The opinion is most useful as a roadmap for legislators and as a defensive resource if the statute is challenged.

Background and statutory framework

The dormant Commerce Clause emerged from a long line of Supreme Court decisions reading the affirmative grant of commerce power in Article I, § 8, cl. 3 to imply a corresponding restraint on state power. The core concern is economic balkanization: 50 states each protecting their own producers against the others would fragment the national market and re-create the trade barriers that the Commerce Clause was designed to dismantle.

The doctrine has two main rules. A state law that discriminates against interstate commerce on its face or in effect is "virtually per se invalid" and survives only on a strong showing that no nondiscriminatory alternative exists. A nondiscriminatory state law that has only incidental effects on interstate commerce is upheld unless its burden on commerce is "clearly excessive in relation to the putative local benefits" (the Pike v. Bruce Church test, applied implicitly in the analysis).

NMSA 1978, § 7-17-5 imposes the liquor excise tax at the wholesale level. Subsection (A)(5) creates a lower rate for spirits made by craft distillers. The opinion's central move is to read § 7-17-5 together with § 60-6A-6.1, the craft-distiller licensing statute, and conclude that because licensing is geographically neutral, the tax preference is too. The same neutrality analysis would apply to microbrewers and other licensed-producer categories that follow the same template.

Bacchus and Brohl mark the doctrinal poles the opinion is steering between. Bacchus is the discrimination case (Hawaii exempted only locally-produced okolehao and pineapple wine and lost). Brohl is the nondiscrimination case (Colorado required out-of-state retailers to send tax-notice paperwork, which placed an asymmetric burden but did not give in-state retailers a competitive advantage). The opinion places New Mexico's craft-distiller rule on the Brohl side of the line.

Citations and references

Statutes:
- NMSA 1978, § 7-17-5 (liquor excise tax)
- NMSA 1978, § 7-17-5(A)(5) (microbrewer/craft-producer rate provision)
- NMSA 1978, § 60-6A-6.1 (craft distiller license)
- U.S. Const., Art. I, § 8, cl. 3 (Commerce Clause)

Cases:
- Direct Mktg. Ass'n v. Brohl, 814 F.3d 1129 (10th Cir. 2016) (asymmetric notice burden did not violate dormant Commerce Clause where it gave no in-state competitive advantage)
- Bacchus Imports, Ltd. v. Dias, 468 U.S. 263 (1984) (Hawaii's exemption of locally-produced okolehao and pineapple wine from liquor tax violated the dormant Commerce Clause)

Source

• Landing page: https://nmdoj.gov/publication/opinion/2024-02-opinion-dormant-commerce-clause-theorys-application-to-proposed-house-bill-230/
• Original PDF: https://nmdoj.gov/wp-content/uploads/AG_Opinion_2024-02_-_Dormant_Commerce_Clause_Th.pdf

Original opinion text

January 30, 2024

The Honorable Joanne J. Ferrary
New Mexico State Representative
6000 Moonrise Avenue
Las Cruces, NM 87012

Re: Opinion Request – Dormant Commerce Clause Theory's application to proposed House Bill 230

Dear Representative, Ferrary:

You requested our advice concerning the constitutionality of NMSA 1978, Section 7-17-5 (2019) and possible legal consequences of enacting House Bill 230 (2023). Section 7-17-5 imposes a liquor excise tax on wholesalers that sell alcoholic beverages, and the Bill seeks to unify liquor excise tax rates on alcoholic beverages sold. In particular, you ask:

1. Does imposing a lower alcohol tax rate on wholesale distribution of alcoholic beverages produced by "craft distillers" violate the dormant Commerce Clause of the United States Constitution?

2. What are the legal consequences of enacting proposed House Bill 230 (2023), which seeks to raise the basic alcohol tax rates imposed by NMSA 1978 Section 7-17-5?

As discussed in more detail below, based on our review of the applicable law and information provided and available to us at this time, we conclude:

1. No, the lower tax rate imposed on wholesale distribution of alcoholic beverages produced by "craft distillers" does not implicate or violate the dormant Commerce Clause of the United States Constitution.

2. There are no anticipated constitutional concerns presented by House Bill 230 (2023) because the proposed bill does not distinguish between in- and out-of-state economic interests on its face and does not discriminate against interstate commerce in its effects.

The Dormant Commerce Clause's History and Application

Article I, Section 8, Clause 3 of the U.S. Constitution provides:

Congress shall have Power . . . [t]o regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.

This "Commerce Clause," as it is commonly known, is, in pertinent part, a positive grant of power to Congress to regulate interstate commerce without explicitly limiting the authority of a state to also regulate commerce. Nevertheless, the U.S. Supreme Court has interpreted the Commerce Clause to preclude state laws that unduly restrict interstate commerce, even where Congress has not purported to regulate, or has been "dormant" on an issue. See Direct Mktg. Ass'n v. Brohl, 814 F.3d 1129, 1135-36 (10th Cir. 2016).

This inverse view of Congressional authority over commerce addresses concern about economic protectionism and prevents states from protecting in-state interests while burdening out-of-state interests. See id.; Bacchus Imports, Ltd. v. Dias, 468 U.S. 263, 268, 271 (1984). A court will generally invalidate state legislation that constitutes economic protectionism if the law has discriminatory purpose or discriminatory effect on interstate commerce. See Brohl, 814 F.3d at 1135-36.

The analysis and decision in Dias illustrate application of dormant Commerce Clause principles in a related context. That case considered the constitutionality of a Hawaiian law that exempted locally produced okolehao and pineapple wine from its liquor tax for a specified and limited number of years, to encourage and promote the establishment of these new industries. 468 U.S. at 265. The United States Supreme Court held that the tax exemptions violated the dormant Commerce Clause because the law clearly discriminated against interstate commerce by bestowing a commercial advantage to local products. Id. at 272-73. Despite the legitimate goal of stimulating local economic development, the Court noted that "the Commerce Clause . . . limit[s] . . . the means by which a state can constitutionally seek to achieve that goal." Id. at 271.

In contrast, a Tenth Circuit Court of Appeals decision illustrates when a law that potentially impacts interstate commerce does not offend the dormant Commerce Clause. The law at issue in Brohl imposed reporting and notice obligations on retailers. 814 F.3d at 1132-33. Specifically, the law required retailers that did not collect sales taxes to send notice to purchasers, advising that they may be subject to Colorado use taxes. Id. Effectively, this meant only out-of-state retailers had reporting and notice requirements. See id. at 1133. The court acknowledged the differential treatment of in-state and out-of-state retailers but concluded that the reporting obligations did not give in-state retailers a competitive advantage and therefore did not run afoul of the dormant Commerce Clause. See id. at 1141, 1143.

Section 7-17-5 Does Not Implicate or Violate the Dormant Commerce Clause

The current New Mexico statute imposing liquor excise taxes on wholesalers does not violate the dormant Commerce Clause because it does not differentiate between in- and out-of-state craft distillers or give in-state craft distillers a competitive advantage. Section 7-17-5 imposes a liquor excise tax on wholesalers that sell alcoholic beverages. The excise tax rates vary based upon the type of alcohol sold. Wholesalers that sell spiritous liquors are taxed at a rate of $1.60 per liter, whereas spiritous liquors manufactured or produced by a craft distiller are taxed at more favorable rates.

NMSA 1978, Section 60-6A-6.1 (2021) outlines the requirements to apply for and receive a craft distiller's license in New Mexico. That statute allows both in-state and out-of-state distillers to obtain such a license and does so on equal terms.

Unlike the unconstitutional Hawaii statute in Dias, the New Mexico excise tax imposed on wholesalers incentivizes them to sell all spiritous liquors, whether manufactured or produced in- or out-of-state by craft distillers. Compare § 7-17-5(A)(5) (providing for the liquor excise tax on "beer manufactured or produced by a microbrewer and sold in this state," but not limiting such tax to beer manufactured or produced in this state (emphasis added)), with Dias, 468 U.S. at 265 (noting that the Hawaiian tax exempted only in-state producers of okolehao and pineapple wine). Section 7-17-5(A)(5)'s purpose and effect are not discriminatory or protectionist and do not implicate the dormant Commerce Clause.

In other words, because the dormant Commerce Clause is only concerned with burdens on interstate commerce, this limitation on state regulatory authority would not be implicated to in-state craft distillers marketing or selling out-of-state. Section 7-17-5(A)(5) does not subject out-of-state craft distillers to higher excise tax rates. Both in-state craft distillers and out-of-state craft distillers may apply for a New Mexico license to receive the favorable tax rate. Moreover, the fact that the tax only applies to craft distillers selling beer in the state provides no basis for concluding otherwise: New Mexico has no authority to tax beer sold in other states. Again, the dormant Commerce Clause is simply not implicated. Section 7-17-5(A)(5) does not discriminate against out-of-state craft distillers and as a result, does not offend the dormant Commerce Clause.

Proposed Legislation – House Bill 230

The proposed bill seeking, in part, to unify liquor excise tax rates on alcoholic beverages sold would similarly not implicate or violate the dormant Commerce Clause. As discussed above, the dormant Commerce Clause limits state regulation of interstate commerce and is primarily concerned with preventing economic protectionism by states. State regulation that discriminates against interstate commerce will survive constitutional challenge if the state can show that the law advances a legitimate local purpose that could not be advanced by reasonable nondiscriminatory alternatives. A statute may be invalidated only where the burden imposed on interstate commerce is clearly excessive in relation to the putative local benefits.

As with Section 7-17-5(A)(5), the proposed bill does not distinguish between in- and out-of-state economic interests on its face and does not discriminate against interstate commerce in its effects. House Bill 230 seeks to unify excise tax rates for all spiritous liquors, whether the wholesaler selling the alcoholic beverage sells products produced in- or out-of-state. Similarly, in the same manner as analyzed above, the proposed bill does not place a burden on interstate commerce. Because House Bill 230 does not treat in- and out-of-state economic interests differently, distinguish between the two, or place a burden on interstate commerce, it does not implicate the dormant Commerce Clause.

Conclusion

In accordance with our analysis and interpretation of the statutes identified, the taxation of craft distillers under Section 7-17-5 and proposed changes to liquor excise taxes in House Bill 230 do not violate or implicate the dormant Commerce Clause. Where there is no discriminatory purpose or impact and no undue burden on interstate commerce, there is no way to run afoul of the dormant Commerce Clause.

You have requested a formal opinion on the matters discussed above. Please note that such an opinion is a public document available to the general public. Therefore, we may provide copies of this letter to the general public. If we may be of further assistance, or if you have any questions regarding this opinion, please let us know.

Respectfully,

Kristin E. Hovie
Assistant Attorney General