Are Tennessee's residency requirements for alcohol wholesalers and retailers unconstitutional?

Subject

Opinion No. 12-59, Tennessee Residency Requirements for Alcoholic Beverages Wholesalers and Retailers, June 6, 2012

Plain-English summary

Representative Jon Lundberg asked the Tennessee AG whether Tennessee's residency requirements for getting a license to sell alcohol at wholesale or package-retail violate the dormant Commerce Clause of the U.S. Constitution. The statutes require individual wholesale-license applicants to have been Tennessee citizens for at least two years (or fifteen years at any time prior). Retail-package-license applicants need two years' Tennessee residency (or ten years at any time). Corporate applicants face even tighter rules: capital stock must be owned by long-term Tennessee residents and, for some wholesale licenses, the majority of the corporation's assets must be located in Tennessee with all active officers as residents.

The AG concluded these requirements are unconstitutional. The Sixth Circuit had already struck down a similar Tennessee winery-licensing residency requirement in Jelovsek v. Bredesen (2008). Under the dormant Commerce Clause, regulations that discriminate against interstate commerce are "virtually per se invalid" unless they advance "a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives." The U.S. Supreme Court has held that the Twenty-first Amendment does not authorize states to use alcohol regulation to favor in-state industries (Granholm v. Heald; Bacchus v. Dias). The legislative history of Tennessee's residency rules revealed only protectionist motives, with one 1984 House floor exchange explicitly characterizing the bill as designed to "kill interstate whiskey."

Currency note

This opinion was issued in 2012. 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.

Historical background and statutory framework

The statutory regime

Tenn. Code Ann. §§ 57-3-201 to -219 govern alcohol-licensing in Tennessee (excluding on-premise retail licensing, which sits in Title 57, Chapter 4). For wholesalers, individual applicants must satisfy two-year/fifteen-year citizenship requirements (§ 57-3-203(b)). Corporate wholesalers face complex stockholder, asset-location, and officer-residency requirements (§ 57-3-203(f), (g), (h)). For package retailers, individual applicants face two-year/ten-year residency rules (§ 57-3-204(b)(2)), and corporate applicants face similar stockholder-residency rules with stock-transfer restrictions (§ 57-3-204(b)(3)).

The Jelovsek decision

In Jelovsek v. Bredesen, 545 F.3d 431 (6th Cir. 2008), cert. denied, 130 S. Ct. 199 (2009), the Sixth Circuit struck down residency requirements in Tennessee's Wine and Grape Law (then codified at Tenn. Code Ann. § 57-3-207(d) (2002)). The law required winery-license applicants to be Tennessee residents for at least two years; if the applicant was a corporation, its capital stock had to be owned by two-year Tennessee residents.

The court applied standard dormant Commerce Clause analysis. The Commerce Clause grants Congress the power to regulate interstate commerce (U.S. Const. art. I, § 8, cl. 3). The "dormant" or negative-implication aspect prohibits states from engaging in economic protectionism. A discriminatory law is "virtually per se invalid" (Oregon Waste Systems; Philadelphia v. New Jersey) and survives only if it "advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives" (Dep't of Revenue v. Davis; Maine v. Taylor).

The Twenty-first Amendment

The Twenty-first Amendment, § 2, prohibits the transportation of intoxicating liquors into a state in violation of that state's laws. But in Granholm v. Heald, 544 U.S. 460 (2005), the U.S. Supreme Court held that the Amendment does not "give States the authority to pass nonuniform laws in order to discriminate against out-of-state goods." Bacchus v. Dias had earlier said the Amendment's central purpose "was not to empower States to favor local liquor industries by erecting barriers to competition."

Legislative history reveals protectionist intent

The AG examined the legislative history of the wholesale and retail residency statutes. The wholesale residency provision in Tenn. Code Ann. § 57-3-203 was enacted in 1947 to "regulate the issuance of wholesaler's licenses to corporations" (1947 Tenn. Pub. Acts 73). Subsequent amendments offered no additional justification.

The retail provision was amended in 1984 (1984 Tenn. Pub. Acts 746). A floor exchange on April 4, 1984, illustrated the protectionist purpose: Speaker Naifeh noted that under the bill, "Walgreens . . . would only be able to have one store with whiskey in it in the state of Tennessee." Rep. Bragg said he saw "nothing wrong with this bill. This chamber just voted for interstate bank, I mean, to kill interstate banking. I think all this does is kill interstate whiskey." Rep. Covington asked the sponsor whether the bill would reduce alcohol sales by deterring out-of-state retailers, and the sponsor agreed: "I'm trying to restrict the sale of it [liquor], yes sir."

A 1990 amendment (1990 Tenn. Pub. Acts 794) extended the rule to allow longer-term former residents to qualify. The floor debate suggested practical motivations (allowing retiring owners to keep their businesses if they had been in-state for ten years and giving the TBI and Alcoholic Beverage Commission a longer background-investigation window). Neither rationale spoke to a Commerce Clause-defensible local purpose.

Conclusion: failed Commerce Clause review

The AG could "[not] conceive of a legitimate local purpose, such as promoting the health and safety of Tennesseans, that could be served solely by enforcement of these residency requirements." Other circuits had struck down analogous rules: Cherry Hill Vineyards (Kentucky in-person purchase requirement); Cooper v. McBeath (Texas alcoholic beverage permit residency requirements); Anheuser-Busch v. Schnorf (Illinois out-of-state brewer license bar).

Common questions

I want to invest in a Tennessee liquor distribution business but I'm not a Tennessee resident. Does the residency rule block me?

According to this opinion, the rules in Tenn. Code Ann. §§ 57-3-203 and -204 should be unenforceable as violations of the Commerce Clause. Whether and when the Tennessee Alcoholic Beverage Commission has formally stopped enforcing them is a separate question. Confirm current practice with the ABC and current case law.

Does the Twenty-first Amendment save Tennessee's residency rules?

The AG opinion concluded that under Granholm v. Heald and Bacchus v. Dias, the Twenty-first Amendment does not authorize state laws that discriminate against out-of-state economic interests in alcohol. Pure economic protectionism through state alcohol-licensing residency rules fails Commerce Clause review even under the Twenty-first Amendment's framework.

Has Tennessee changed the statutes since this opinion?

The opinion analyzed the 2012 version of the statutes. Anyone planning to operate in Tennessee's alcohol industry should verify the current text of §§ 57-3-203 and -204 and look for later AG opinions or court decisions, including any U.S. Supreme Court precedent following Granholm.

Does this also apply to bars and restaurants (on-premise consumption)?

No. The opinion's scope is limited to wholesale licenses and package-retail licenses under Title 57, Chapter 3. On-premise consumption (bars and restaurants) is licensed under a separate part of the alcohol law, and the AG opinion did not analyze on-premise licensing rules.

What about Tennessee Wineries?

The AG flagged Jelovsek as the controlling case for the wine and grape law residency requirement, which had already been struck down. The 12-59 opinion extends that reasoning to the wholesale and retail license provisions.

Could the legislature fix the residency requirements?

Yes. The legislature could repeal the residency provisions or replace them with neutral rules that target legitimate concerns (background investigations, financial responsibility, fitness to hold a license) without geographic discrimination. The opinion notes that "reasonable nondiscriminatory alternatives" would be necessary to survive review.

Citations

• Tenn. Code Ann. §§ 57-3-201 to -219 (alcohol licensing)
• Tenn. Code Ann. § 57-3-203 (wholesaler residency and corporate requirements)
• Tenn. Code Ann. § 57-3-204 (retail package residency and corporate requirements)
• Tenn. Code Ann. § 57-3-207(d) (Wine and Grape Law, struck down in Jelovsek)
• U.S. Const. art. I, § 8, cl. 3 (Commerce Clause)
• U.S. Const. amend. XXI, § 2 (Twenty-first Amendment)
• Jelovsek v. Bredesen, 545 F.3d 431 (6th Cir. 2008)
• Granholm v. Heald, 544 U.S. 460 (2005)
• Bacchus v. Dias, 468 U.S. 263 (1984)
• Dep't of Revenue v. Davis, 553 U.S. 328 (2008)
• New Energy Co. of Ind. v. Limbach, 486 U.S. 269 (1988)
• Oregon Waste Systems, Inc. v. Department of Environmental Quality of Ore., 511 U.S. 93 (1994)
• Philadelphia v. New Jersey, 437 U.S. 617 (1978)
• Maine v. Taylor, 477 U.S. 131 (1986)
• Cherry Hill Vineyards, LLC v. Lilly, 553 F.3d 423 (6th Cir. 2008)
• Cooper v. McBeath, 11 F.3d 547 (5th Cir. 1993)
• Anheuser-Busch, Inc. v. Schnorf, 738 F. Supp. 2d 793 (N.D. Ill. 2010)
• 1947 Tenn. Pub. Acts 73
• 1984 Tenn. Pub. Acts 746
• 1990 Tenn. Pub. Acts 794

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2012/op12-059.pdf

Original opinion text

June 6, 2012
Opinion No. 12-59
Tennessee Residency Requirements for Alcoholic Beverages Wholesalers and Retailers

QUESTION

Do the residency and corporate asset location requirements of Tenn. Code Ann. §§ 57-3-203 and 57-3-204 violate the Commerce Clause of the United States Constitution?

OPINION

Yes, these residency and corporate asset location requirements for applicants seeking a license as an alcoholic beverage wholesaler or package retailer violate the Commerce Clause of the United States Constitution.

ANALYSIS

In Tennessee, no person may lawfully engage in the business of selling alcoholic beverages as a wholesaler or as a retailer selling sealed packages without a license. See Tenn. Code Ann. § 57-3-201 to -219. Tenn. Code Ann. §§ 57-3-203 and § 57-3-204 set forth the requirements for obtaining licenses to sell alcohol as a wholesaler or package retailer. Both require applicants to satisfy certain defined Tennessee residency requirements.

Individual applicants for a wholesaler's license must be "citizens of the state of Tennessee and either have been for at least the two (2) years next preceding citizens of the state of Tennessee or have been citizens of the state of Tennessee at any time for at least fifteen (15) consecutive years." Tenn. Code Ann. § 57-3-203(b). Individual applicants for a retail package license must be "residents of the state of Tennessee and either have been bona fide residents of the state for at least two (2) years next preceding or who have at any time been residents of the state of Tennessee for at least ten (10) consecutive years." Tenn. Code Ann. § 57-3-204(b)(2).

To qualify for a corporate wholesaler's license, the corporation's officers and stockholders must meet defined Tennessee residency requirements and the corporation's assets must meet certain in-state requirements, which are as follows:

(f) . . . no license shall be issued to any corporation unless such corporation meets the following requirements:

(1) All of its capital stock must be owned by individuals who have been residents of Tennessee for not less than five (5) years next preceding or who at any time have been residents of the state of Tennessee for at least fifteen (15) consecutive years . . .

. . . .

(3) No stock of any corporation licensed under this subsection shall be transferred to any person who has not been a resident of Tennessee for at least five (5) years next preceding or who at any time has not been a resident of Tennessee for at least fifteen (15) consecutive years.

. . . .

(g) Notwithstanding any language contained in subsection (f), the commission, in its discretion, may issue a wholesale license to any corporation which has been domiciled in the state of Tennessee for twenty-five (25) years, and the majority of whose assets are located in the state of Tennessee and all of whose active officers shall be residents of Tennessee . . .

(h) If at any time subsequent to the granting of a wholesale liquor license to any such corporation, the majority of its assets shall cease to remain and be located in the state of Tennessee, and if any of its active officers shall cease to be residents of Tennessee, then the commission, within its discretion, shall have the right to revoke such license. . . .

Tenn. Code Ann. § 57-3-203(f), (g) & (h).

Similarly, the ABC may issue a retail package license to a corporation, provided that a corporation satisfies the following defined Tennessee residency requirements:

(3) The commission may, in its discretion, issue such a retail license to a corporation; provided, that no such license shall be issued to any corporation unless such corporation meets the following requirements:

(A) All of its capital stock must be owned by individuals who are residents of the state of Tennessee and either have been residents of the state for at least two (2) years next preceding or who have at any time been residents of the state of Tennessee for at least ten (10) consecutive years;

. . . .

(C) No stock of any corporation licensed under this section shall be transferred to any person who is not a resident of the state of Tennessee and either has not been a resident of the state for at least two (2) years next preceding or who at any time has not been a resident of Tennessee for at least ten (10) consecutive years.

Tenn. Code Ann. § 57-3-204(b)(3).

The question posed is whether the foregoing in-state residency and corporate asset location requirements are vulnerable to constitutional challenge. In light of the recent decision by the United States Court of Appeals for the Sixth Circuit in Jelovsek v. Bredesen, 545 F.3d 431 (6th Cir. 2008), cert. denied, U.S., 130 S. Ct. 199 (2009), these requirements are constitutionally infirm. In that case, the plaintiffs challenged the constitutionality of residency requirements in Tennessee's Wine and Grape Law, codified at Tenn. Code Ann. § 57-3-207(d) (2002). Id. at 432, 438. The requirements for a Tennessee winery license at that time were that an applicant must be a two-year Tennessee resident. Id. at 438. If the applicant was a corporation, the capital stock of such corporation was required to be owned by two-year Tennessee residents. Id. The plaintiffs argued these requirements discriminated against out-of-state wine producers and therefore violated the Commerce Clause of the United States Constitution. In striking down the requirements, the Sixth Circuit first quoted the United States Supreme Court's summary of the scope of the Commerce Clause, which grants the exclusive power to Congress to regulate interstate commerce, stating:

The Commerce Clause empowers Congress "[t]o regulate Commerce . . . among the several States," Art. I, § 8, cl. 3, and although its terms do not expressly restrain "the several States" in any way, we have sensed a negative implication in the provision since the early days, see, e.g., Cooley v. Board of Wardens of Port of Philadelphia ex rel. Soc. for Relief of Distressed Pilots, 53 U.S. 299, 12 How. 299, 318-319, 13 L.Ed. 996 (1851); cf. Gibbons v. Ogden, 22 U.S. 1, 9 Wheat. 1, 209, 6 L.Ed. 23 (1824) (Marshall, C.J.) (dictum). The modern law of what has come to be called the dormant Commerce Clause is driven by concern about "economic protectionism—that is, regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors." New Energy Co. of Ind. v. Limbach, 486 U.S. 269, 273-274, 108 S.Ct. 1803, 100 L.Ed.2d 302 (1988).

. . . .

Under the resulting protocol for dormant Commerce Clause analysis, we ask whether a challenged law discriminates against interstate commerce. See Oregon Waste Systems, Inc. v. Department of Environmental Quality of Ore., 511 U.S. 93, 99, 114 S.Ct. 1345, 128 L.Ed.2d 13 (1994). A discriminatory law is "virtually per se invalid," ibid.; see also Philadelphia v. New Jersey, 437 U.S. 617, 624, 98 S.Ct. 2531, 57 L.Ed.2d 475 (1978), and will survive only if it "advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives," Oregon Waste Systems, supra, at 101, 511 U.S. 93, 114 S.Ct. 1345, 128 L.Ed.2d 13 (internal quotation marks omitted); see also Maine v. Taylor, 477 U.S. 131, 138, 106 S.Ct. 2440, 91 L.Ed.2d 110 (1986).

Jelovsek, 545 F.3d at 435 (quoting Dep't of Revenue v. Davis, 553 U.S. 328, 337-38 (2008)).

Jelovsek further confirmed that the Twenty-first Amendment to the United States Constitution does not allow states to erect trade barriers or engage in other forms of economic protectionism in contravention of the dormant Commerce Clause. Id. at 435. As the United States Supreme Court stated in Granholm v. Heald, 544 U.S. 460, 484 (2005), the Twenty-first Amendment does not "give States the authority to pass nonuniform laws in order to discriminate against out-of-state goods." In Bacchus v. Dias, 468 U.S. 263, 276 (1984), the Court reiterated that the "central purpose of [the Twenty-first Amendment] was not to empower States to favor local liquor industries by erecting barriers to competition."

In adopting the Wine and Grape Law, the Legislature's stated purpose, as set forth in the Act's preamble, was to benefit Tennessee's rural areas and general economy and to provide a market for mature grapes. In light of controlling Commerce Clause principles, the court in Jelovsek held that residency requirements imposed on applicants for a Tennessee winery license to promote local economic interests were trade barriers that impermissibly favored Tennessee interests at the expense of interstate commerce. Jelovsek, 545 F.3d at 438-39.

Accordingly, under the principles enunciated in Jelovsek we must review the legislative purpose for adopting the residency requirements for wholesale and package retail alcoholic beverage licenses to determine whether such purposes are sufficient to protect these requirements from Commerce Clause scrutiny. The legislative history of Tenn. Code Ann. §§ 57-3-203 and 57-3-204 does not provide any evidence of public policy concerns that could overcome a constitutional challenge. Nor can this Office conceive of a legitimate local purpose, such as promoting the health and safety of Tennesseans, that could be served solely by enforcement of these residency requirements.

The residency requirements for a wholesaler's license contained in Tenn. Code Ann. § 57-3-203 were added in 1947. 1947 Tenn. Pub. Acts 73. The introduction to Chapter 73 states that it was enacted to amend certain public acts "so as to regulate the issuance of wholesaler's licenses to corporations." Id. The remaining amendments to Tenn. Code Ann. § 57-3-203 did not offer any additional insight into any justifications for the residency requirements for those seeking wholesaler's licenses.

The statute governing the issuance of a retailer's license to corporations was amended in 1984 to include the residency requirements. 1984 Tenn. Pub. Acts 746. The following exchange on the House Floor on April 4, 1984 reveals no valid public policy concerns to support those requirements:

Speaker Naifeh: What if, just say we did get whiskey in drug stores and say then – then with this bill Walgreens wouldn't only – they would only be able to have one store with whiskey in it in the state of Tennessee.

Rep. Rhinehart: Yes sir.

Rep. Bragg: Mr. Speaker, ladies and gentlemen of the house, I don't see anything wrong with this bill. This chamber just voted for interstate bank – I mean, to kill interstate banking. I think all this does is kill interstate whiskey. I don't see anything wrong with this bill.

. . . .

Rep. Covington: Actually this might cut down on the sale of liquor in the state of Tennessee and prevent more people from getting drunk, more drunks on the streets. Is that what you're trying to do in effect?

Rep. Rhinehart: I'm trying to restrict the sale of it [liquor], yes sir.

Rep. Covington: I think that's a fine approach.

Rep. Bragg: Mr. Speaker I think we ought to go on and pass this and give our local stores time to get ready for interstate whiskey.

Remarks in the Tennessee House of Representatives on House Bill 1576, 93rd General Assembly, 2nd Sess., Legislative Tape H-21 (April 4, 1984).

The statute's residency requirements were again amended in 1990. 1990 Tenn. Pub. Acts 794. The following discussion occurred on the House Floor, again evidencing no valid public policy concerns to support these residency requirements:

Rep. Stulce: Would you explain this bill? Does what this means now – does this say that someone who grew up here as a child for ten years and moved away and is now 60 years old living in Nevada could have a license in the state of Tennessee?

Rep. Tindell: In a technical sense yes, but from a practical stance the goal is to have an alternative for people who have lived here in the past, or someone who is a present owner that could keep their license, for instance, if they were going to retire and they wouldn't have to sell their business they could retire to another state if they had maintained residency for ten consecutive years.

Rep. Stulce: Why would we want to have people who are not residents have licenses in the state of Tennessee?

Rep. Tindell: Well someone who wanted to retire, for instance, that didn't want to have to sell and liquidate their assets into say Florida, or another state, they would be able to keep their business if they had a good record here for ten years. But also it's going to put stronger than the current law that says you have to be a resident for two years prior to applying for a license. This would let the TBI and Alcohol[ic] Beverage Commission and others have a really strong window of ten years to understand the background of someone in terms of their residency before giving them a license when they apply; and so in some ways it's actually stronger requirement for residency than the current law.

Remarks in the House of Representatives on House Bill 1836, 96th General Assembly, 2nd Sess., Legislative Tape H-90 (May 28, 1990).

In short, the aforementioned legislative history reveals no legitimate public policy to support these residency requirements and indeed provides some evidence that the legislative intent for the residency requirement for retailers was to deter the sale of alcoholic beverages from outside Tennessee, which intent would violate the federal Commerce Clause. Accordingly, based on the legal principles cited above and the analysis of the applicable law by the court in Jelovsek as it related to Tennessee law and residency requirements, the current residency and corporate asset location requirements of Tenn. Code Ann. §§ 57-3-203 and 57-3-204 would be invalid under the Commerce Clause. These requirements constitute trade restraints and barriers that impermissibly discriminate against interstate commerce, and cannot be sustained unless they advance "a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives." Jelovsek, 545 F.3d at 435 (quoting Dep't of Revenue v. Davis, 553 U.S. at 337-38). See also Cherry Hill Vineyards, LLC v. Lilly, 553 F.3d 423, 431-35 (6th Cir. 2008); Cooper v. McBeath, 11 F.3d 547, 552-56 (5th Cir.), cert. denied, 512 U.S. 1205 (1994); Anheuser-Busch, Inc. v. Schnorf, 738 F. Supp. 2d 793, 802-16 (N.D. Ill. 2010).

ROBERT E. COOPER, JR.
Attorney General and Reporter

WILLIAM E. YOUNG
Solicitor General

LYNDSAY F. SANDERS
Senior Counsel

Requested by:
The Honorable Jon Lundberg
State Representative
20 Legislative Plaza
Nashville, TN 37243