16 March 1992

New Hampshire

The New Hampshire State Liquor Commission has the monopoly on the importation and wholesale of wine which may be sold at retail by Commission stores and private retailers.

Listing criteria for premium wines in State stores include, but are not limited to: vintage; consumer demand; sales performance in the national markets; and potential profitability. De-listing criteria include annual gross profits of less $6,500; unavailability of the product; delisting request from the vendor or manufacturer; non-payment of the wine listing fees; excessive cost increases passed on to the consumer.

Table wines not listed in any other listing may be sold by a manufacturer through the Commission or its licensees. Placement of available wines is automatic upon submission of a request for listing and payment of the registration fee. Renewals are also automatic with the payment of the annual maintenance fee.

New Hampshire law includes statutory requirements that in-state wine be granted preferred treatment in listing procedures where feasible. The delisting review procedure includes preferred treatment for in-state wine.

North Carolina

The state Alcoholic Beverage Control Commission does not import or sell any wines. Local Alcoholic Beverage Control Boards, which are not agencies of the State Board, may sell fortified wines at retail. Local boards have no authority to import fortified wines but must purchase such wines from private, licensed importers. There are no listing or delisting criteria applicable to the sale of fortified wines by the local boards. "Fortified wine" is defined as any wine made by fermentation from grapes,

fruits, berries, rice or honey, to which nothing has been added other than pure brandy made from the same type of grape, fruit, berry, rice or honey that is contained in the base wine, and which has an alcoholic content of not more than twenty-four per cent (24%) alcohol by volume.

Table wine is imported and sold exclusively by private businesses. There are no listing or delisting criteria applicable to the importation or sale of table wine.

The Oregon Liquor Control Commission has the monopoly on the importation and wholesaling of wines of 21 per cent or greater alcohol content. Listing criteria are:

Pennsylvania

There is a Board monopoly on retail off-sales except for licensed Pennsylvania farm wineries which may sell directly to retailers or through the 750 Liquor Control Board stores. With respect to listing, all of the information in the presentation is analyzed to ascertain which items will best fit the Board's needs with regard to selection, price and quality. Items chosen must expand and fit a growing market segment, be supported by marketing plans and promotional efforts and provide the Board with a reasonable return.

Only two applications for a listing are permitted per listing review meeting.

With respect to retaining a listing, class performance indicators based on case sales are used as a guide; other factors considered include uniqueness of a product, price range, competition within category and special appeal.

Store distribution is determined by the Board based on sales of comparable items in the target market.

Vermont

There is a state monopoly on importation and off-sale for dessert wine. Vermont's 16 state operated liquor stores and 55 agency stores do not carry table wines, but only "fortified" or "dessert" wines containing at least 16 per cent alcohol. As an exemption to that rule, the Department of Liquor Control is mandated to list Vermont wines which are "light" or "table" wines (containing 6 to 12 per cent alcohol).

The criteria for listing are:

No rationale is given for negative responses on listing, and there is no appeal process. The procedures are not published. There are no formal written standards for annual listing/delisting decisions. Private stores are not subject to listing criteria. There are 1,500 private stores.

Virginia

The Virginia Department of Alcoholic Beverages Control lists only vermouth and wine produced in the state by "farm wineries" for sale in its the 240 state store outlets. Out-of-state and imported wines may be sold only through private outlets, which are not subject to listing criteria. There are approximately 6,800 licensed private stores that are authorized to sell wine for off-premises consumption.

Alabama

Ale and/or malt or brewed beverages with an alcoholic content in excess of 5 per cent by volume are classified as liquors and all such beverages must be sold to the state liquor board or as authorized by the board. A liquor wholesale licensee may not sell liquor to retail licensees. A beer wholesaler (5 per cent alcohol by volume or less) may sell or distribute to all licensees authorized to sell beer and wine.

Colorado

Beer with an alcohol content of over 3.2 per cent by weight is classified as a "malt liquor", and may only be sold at retail in liquor stores or drugstores. A retail licensee under the Fermented Malt Beverages Act may sell beer (up to 3.2 per cent alcohol by weight). This license is separate and distinct from licenses issued in the Alcoholic Beverages Act for the sale of liquor in retail stores and drugstores. A retail liquor store licensee may sell only malt, vinous and spiritous liquors. The same licensed premise may not hold a licence for the sale of alcoholic beverages (over 3.2 per cent by weight) and a license for the sale of beer (3.2 per cent or less) at the same time.

Florida

Beer or malt beverages containing 3.2 per cent or less alcohol by weight may disclose on the label the accurate information about such alcoholic content.

Kansas

Beer with an alcohol content of over 3.2 per cent by weight is classified as an "alcoholic liquor" and must be sold at separate retail premises than beer under 3.2 per cent. Retail licenses for the sale of "alcoholic liquors" may be issued only for retail premises in incorporated cities, or in unincorporated cities in townships whose population exceeds 11,000. "Kansas strong" marking is required for beer over 3.2 per cent alcohol by weight. Beer of 3.2 per cent alcohol or less by weight must be labelled with a statement that the contents contain no more than 3.2 per cent alcohol by weight.

Minnesota

The regulation indicates that brewery and wholesalers' invoices of sale for malt beverages above 3.2 per cent alcohol must have the signature of the purchasing retail dealer, and the number of the retailer's identification card. [NOTE: The United States provided a letter from the Minnesota Department of Public Safety which states that this regulation is not enforced.] Any product that contains not more than 3.2 per cent alcohol by weight must be labelled as such. There is no alcohol content labelling requirement for beer containing more than 3.2 per cent alcohol by weight.

Missouri

Any holder of a Missouri license to sell intoxicating liquor may sell nonintoxicating beer (not more than 3.2 per cent alcohol by weight). A retail licensee holding a nonintoxicating beer license cannot hold another retail license on that same premise. A wholesaler holding a nonintoxicating beer license may also hold licenses to sell intoxicating beer.

Beer is sold at retail in three different establishments. Beer over 3.2 per cent alcohol by weight is classified as intoxicating liquor and is sold for off-premises consumption only in packages under a package store license. Beer containing not more than 3.2% alcohol is classified as a nonintoxicating beverage and is sold for off-premises consumption only in packages at licensed retail stores. Both types of beer may be sold by the drink on draught or in bottles or cans for on-premise consumption at licensed establishments.

Oklahoma statutes indicates that no person shall attach to any container any label which in any manner indicates the alcoholic contents of said beverage or which carries any reference to the alcoholic strength of such beverage in excess of 3.2 per cent.

Oregon breweries and wholesalers may sell malt beverages containing not more than 4 per cent alcohol by weight, in quantities of not less than 5 gallons to any unlicensed organization, lodge, picnic, party or private gathering.

Brewers may sell light beer (0.5-3.2 per cent alcohol by weight) to wholesalers or retailers but must sell heavy beer (over 3.2 per cent alcohol by weight) to the Utah authorities for sale in state stores and other state-authorized outlets. They are specifically excluded from selling heavy beer to any person within the state other than the State liquor authority.

3.1 The United States stated that Canada had asked the Panel to examine the GATT consistency of 27 measures which had not been the subject of consultations with the United States before the Canadian request for a panel in this matter. It was a fundamental tenet of the GATT dispute settlement system that only those matters on which parties to a dispute had consulted, and on which consultations had not proven successful, were properly subject to examination by a GATT panel. This concept was also implicit in the 1989 Improvements to the GATT Dispute Settlement Rules and Procedures.

3.2 In the United States view, consultations provide the parties an opportunity to reach a satisfactory solution to the dispute before proceeding to a panel. The party complained against might modify its practice or, alternatively, convince the complaining party of the GATT consistency of its measure, in either case avoiding the need for a panel. Furthermore, in those situations where resolution is not possible without recourse to a panel, consultations provide the defending party notice of the measure(s) complained of and the consequent opportunity to prepare adequately for the issue. Such basic due process is a fundamental element of all equitable adjudicatory systems, and is especially important to a federal nation like the United States, where the state authorities have substantial law-making authority, particularly in the area of in-state regulation of the sale of alcoholic beverages. It is thus essential that adequate notice be received of any state measures complained of to permit notification of and consultations with the states involved. The United States requested that the Panel examine only those practices on which consultations under Article XXIII:1 had been held.

3.3 Canada argued that in the bilateral consultations which it had held with the United States under Article XXIII, it had identified all of the types of issues now before the Panel, and had also identified particular examples of such issues in specific states. The types of issues and some examples were clearly identified in the charts and other written materials provided to the United States during the bilateral consultations. Other specific examples were raised orally during the consultations under Article XXIII:1.

3.4 With respect to the specific issues which the United States contended had not been the subject of consultations, Canada stated that the matter of a tax credit in Wisconsin was raised and discussed with the United States during both consultations held under Article XXIII:1. The Nebraska tax issue was raised orally during the second Article XXIII:1 consultation with the United States and the generic issue was explained both orally and in written material. A chart given to the United States at the consultations on 7 March 1991 indicated distribution problems with respect to Montana (beer and wine), Oregon (beer), Kansas (beer and wine) and New York (wine). The subject of local option was raised orally in consultations, and Mississippi was cited in written material as a state with discriminatory measures related to market access. Canada stated that the listing/delisting issue was raised in consultations. In the written material provided to the United States, there was a specific reference to the New Hampshire regulation in this respect. Furthermore, listing/delisting was in the Agreed Terms of Reference (DS 23/4).

3.5 The Panel carefully considered the parties' arguments with respect to the matters rightfully before it, and the evidence they provided of the issues included in their bilateral consultations under Article XXIII:1. The Panel subsequently made the following ruling and so informed the parties:

RULING OF THE PANEL ON THE SCOPE OF ITS TERMS OF REFERENCE

3.6 Canada indicated that its request for a GATT Panel arose from complaints received from the Canadian beer and wine industries that resulted from United States federal excise tax measures introduced in 1991 in section 11201 of the Omnibus Budget Reconciliation Act of 1990, as well as a wide range of state tax measures, distribution barriers, licensing fees, transportation requirements, alcohol content regulations, and listing/delisting policies. These measures operated to create significant discrimination against Canadian beer, wine and cider in the United States market.

3.7 Canada considered the United States measures to be inconsistent with its GATT obligations, particularly Articles III:1, III:2, III:4 and possibly Article XI. Canada also indicated that the effect of these measures was to nullify or impair benefits accruing to Canada under the General Agreement.

3.8 In particular, Canada asked the Panel to find that:

3.9 Canada noted that the United States market for beer, wine and cider was an important one for its products and that the less favourable treatment offered to imported products as compared to United States domestic products had a significant effect on Canada's export performance and prospects. In spite of various barriers to trade, Canadian beer sales into the United States totalled approximately $200,000,000 annually which accounted for 90 per cent of Canadian exports of beer. Canada also noted that the United States market for imported wine had declined by 50 per cent since 1984, but the Canadian industry considered the United States to be an important growth market for its products. However, Canada had received strong expressions of concern from the Canadian beer industry that the competitive position of their products had been placed at a disadvantage. Canada cited the Panel on United States - Taxes on Petroleum and Certain Imported Substances (BISD 34S/136) (the "Superfund Panel") to the effect that, "a change in the competitive relationship ... must consequently be regarded ipso facto as a nullification or impairment of benefits accruing under the General Agreement" (paragraph 5.1.9).

3.10 The United States stated that with respect to the Panel's examination of state practices, it was important to bear in mind that each state had independent legislative and regulatory authority. Although categories of practices might be similar across states, each state's legislative and regulatory structure represented a specific response to the unique situation within that state. Thus, despite some general similarities, each state practice had unique aspects and had to be examined individually.

3.11 The United States noted that in addition to regulating the sale and distribution of alcoholic beverages within their border for social welfare purposes, states imposed excise taxes on alcoholic beverages. In order to prevent circumvention of these regulations and taxes, and to ensure the orderly assessment and collection of tax liabilities, states had to assert jurisdiction over those who sold alcoholic beverages within their borders.

3.12 The United States further observed that the United States market accounted for over 90 per cent of Canadian exports of beer, an industry in which Canada was the fourth largest exporter in the world. Canada had not alleged that the federal and state practices about which it complained were targeted specifically against Canadian imports into the United States, so the effects of the allegedly discriminatory practices could be expected to be applicable to imports into the United States market from all countries. However, examination of the recent import performance of Canadian beer into the United States market revealed that whereas Canadian beer shipments to the United States had declined, imports from other countries had increased, not only in quantity, but also in value. Because other imports had not been adversely affected, the United States argued that Canada's import problem must be related to something other than the purported United States market access barriers.

3.13 The United States requested the Panel to determine that the practices which Canada raised were in conformity with United States obligations under the General Agreement.

3.14 Canada considered that imported and domestic beer were "like products" within the meaning of Article III:2, first sentence. Canada argued that the application of a lower rate of excise tax on a specified quantity of domestic beer products from small producers, which was not also available to imported products, was contrary to the United States obligations under Article III:2 of the General Agreement and acted to afford protection to domestic products contrary to Article III:1. As such, this measure nullified or impaired benefits accruing to Canada under the General Agreement.

3.15 Canada also maintained that the excise tax applied in the United States at the federal level was an internal tax within the meaning of Article III:2. As an excise tax, this tax was applied on a product-specific basis. In the Superfund Panel, the panel found in paragraph 5.1.1 that the United States excise tax applied to like petroleum products which was higher on imported product than on the like domestic product was inconsistent with United States obligations under Article III:2, first sentence. That panel went on to conclude in paragraph 5.1.12 that this violation constituted a prima facie case of nullification and impairment and that an evaluation of the trade impact of the tax was not relevant for this finding. Canada argued that these conclusions applied equally to the exemptions and reduced tax rates granted to United States domestic product which were not available to like imported products.

3.16 Canada stated that approximately 250 brewers in the United States were eligible for the reduced federal tax rate since their annual production did not exceed two million barrels per year. Canadian exports competed directly with the product of United States brewers or vintners in the United States market, regardless of their size. Canada's two major brewers produced in excess of two million barrels of beer annually, and thus faced discriminatory treatment in the United States market against their direct competitors. The Superfund Panel stated in its paragraph 5.1.9 that "Article III:2, first sentence, obliges contracting parties to establish certain competitive conditions for imported products in relation to domestic products." It went on to note that while Article III:2, first sentence, could not be interpreted to protect expectations on export volumes, "it protects expectations on the competitive relationship between imported and domestic products." The conclusions of this panel were reaffirmed in the Panel on Japan - Customs Duties, Taxes and Labelling Practices on Imported Wines and Alcoholic Beverages" (BISD/34S/83) (the "Japan Alcoholic Beverages Panel"). Canada considered that a denial of a reduced tax rate to imported products which was granted to like domestic products constituted a difference or change in the competitive relationship between imported and domestic product contrary to Article III:2.

3.17 The United States indicated that the total number of breweries which could qualify for the lower excise tax rate represented approximately only 1.5 per cent of United States beer production. Moreover, because the lower tax rate was available on only the first 60,000 barrels of production, and because many eligible breweries produced far fewer than 60,000 barrels per year, the estimated total number of barrels subject to the lower excise tax rate represented less than 1 per cent of total United States beer production. In other words, over 99 per cent of United States beer products were subject to exactly the same excise tax as that imposed on Canadian beer imports. It seemed apparent on its face that the domestic law did not discriminate against the imported products or provide protection to domestic production.

3.18 The United States recalled that the Japan Alcoholic Beverages Panel had succinctly summarized the two principal obligations of Article III:2 in its report at paragraph 5.9(c):

The United States argued that the lower beer excise tax was neither discriminatory nor protective. Furthermore there was nothing in either the letter or spirit of Article III:2 that obligated GATT contracting parties to treat imported products more favourably than they treated virtually their entire domestic industries, or that prohibited contracting parties from aiding very small segments of their domestic industries, provided that imports were not the target of discrimination, either in intent or effect. The panel in the Japan Alcoholic Beverages case interpreted Article III:2 in this way when ruling on the tax treatment Japan accorded to whiskeys and brandies from the European Community (paragraph 5.9(a)):

3.19 Canada observed that paragraph 5.9(c) of the Japan Alcoholic Beverages Panel report related to the consideration of the different methods of calculating ad valorem taxes on imported and domestic product, but not to the application of a specific tax at different rates to imported and domestic product. Canada further argued that there was no de minimis standard in Article III of the General Agreement. The consequences of the discriminatory United States tax measures were considerable. The federal tax measures alone could result in annual potential tax reductions of approximately $140,000,000. Canada also noted that United States trade publications indicated that these measures aided small United States producers at the expense of imported products. Furthermore, although Canada did not accept the United States' estimate that the tax exemption applied to only 1 per cent of United States production, Canada noted that this figure equalled total Canadian exports of beer to the United States.

3.20 The United States indicated that it was not arguing de minimis trade effect but rather the meaning of discriminatory and protective in the context of Article III:2.

3.21 The United States further maintained that the lower excise tax rate was allowable as a subsidy under Article III:8(b). Article III:8(b) states:

The intent of the lower beer excise tax rate was to subsidize small United States beer producers. The United States maintained that a tax exemption or reduction was a GATT-consistent way in which a subsidy to small producers could be made available as it did not affect the competitive conditions any differently than measures allowed by the plain language of Article III:8(b). It differed from the direct payment of a subsidy after taxes had been collected only in that it avoided the actual transfer of funds.

3.22 Canada disagreed that the lower beer excise tax was allowable as a subsidy under Article III:8 (b). Article III:8(b) existed within the framework of the national treatment provisions of Article III. As an exemption from those provisions, it had to be narrowly construed in order to give effect to the national treatment obligations of Article III. This provision was drawn from the Havana Charter, changed to insert the notion that payments to domestic producers from the proceeds of internal taxes required that these taxes must be applied consistent with the provisions of Article III. The Havana Reports explained the purpose of the change as follows:

Article III:8 (b) thus did not permit the exemption or remission of internal taxes to domestic products. The Article referred to two types of measures: payments made exclusively to domestic producers and to government procurement programs. All other types of subsidy programs were excluded from the operation of Article III:8(b). This was confirmed by the rejection of a proposal by Cuba at the Havana Conference to amend the article to read:

The application of a lower tax rate to United States beer constituted an exemption or remission of an internal tax, directly contrary to the intent of the Article.

3.23 The United States noted that Canada's quotation of the Havana Reports above was incomplete, giving the false impression that Article III overrode Article XVI, dealing with subsidies. The sentence following the Canadian reference read: "At the same time the Sub-Committee recorded its view that nothing in this sub-paragraph or elsewhere in Article [III] would override the provisions [of Article XVI on subsidies.]" GATT drafting history indicated that the GATT contemplated a broad definition of "subsidy":

The United States maintained that the federal and state tax measures at issue were thus justifiable under Article III:8(b).

3.24 Canada argued that only direct payments of monies exclusively to the domestic producer could constitute a subsidy for the purposes of Article III:8(b). These monies could not be derived from measures applied inconsistently with Article III. Interpreted in its ordinary grammatical sense, "proceeds" as used in Article III:8(b) meant the revenue generated by the application of internal taxes and charges. Fiscal programs which operated to exempt or reduce the tax payable did not result in "proceeds". In the case of a subsidy permitted under Article III:8(b), the domestic producer had to pay the taxes due and owing before it received the subsidy payment. The domestic producer was thus faced with the same expenses and limitations on business decisions faced by foreign producers. In contrast, in the case of a tax exemption or reduction, the domestic producer neither had to set aside capital nor arrange financing to meet its tax burden, thus giving domestic products an advantage in the market not available to imports. Canada maintained that the exception to national treatment for subsidies to domestic producers did not permit the exemption of such producers from an internal tax nor allowed for a credit against such taxes. Were this not the case, the effect would be to allow an exemption or credit to destroy a general obligation. This was not supported by the language of the exception or the drafting history. Article III:8(b) first referred to "the payment of subsidies." This did not mean all subsidies, but those involving a payment. Secondly, the specific reference to "payments ... derived from the proceeds of internal taxes or charges applied consistently with the provisions of this Article..." made clear that an after-tax-collection payment was foreseen, but not an exemption from the tax. This was reinforced by the further reference to "applied consistently with the provisions of this Article." An exemption could not be construed as being consistent with Article III:2. To interpret the Article as the United States suggested would undermine the national treatment provisions of Article III, particularly Article III:2, because inconsistent programs could then be considered permissible subsidies. Canada further argued that if the tax rebates and credits qualified as subsidies under Article XVI, as argued by the United States, the United States had failed to notify them as such as required by Article XVI of the General Agreement.

3.25 The United States indicated that the lower excise tax rate applied to floor stocks of beer was a one-time tax which was no longer in force. Canada indicated that it withdrew its complaint with respect to this measure on the basis that by this time the stocks of beer eligible for the lower tax rate had most likely already been dispersed.

3.26 Canada argued that the provision of a credit towards the excise tax for wine of small United States producers which was not similarly available to the like imported product was contrary to the United States obligations under Article III:2 of the General Agreement and afforded protection to domestic production contrary to Article III:1. In addition, Canada considered these measures to nullify or impair benefits accruing to Canada under the General Agreement. This tax credit was applied in a manner equal in terms and effect to the application of the lower rate of excise tax on beer. Like beer, Canada considered that imported and domestic wines and ciders were like products within the meaning of Article III:2, first sentence. The tax credit for domestic wines and cider applied to the prevailing excise tax levied on both the imported and domestic product. Canada noted that Article III:2 referred to internal taxes of any kind and that the Japan Alcoholic Beverages Panel considered this language to have wide meaning to include the rules for tax collection (paragraph 5.8).

3.27 Canada further argued that the credit on wine was designed to provide domestic products with a lower rate of tax. It was described in the legislation as allowable at the time the tax was payable as if the credit constituted a reduction in the rate of such tax. As a practical matter, this meant that eligible United States producers simply continued to pay the pre-existing lower rate of tax on up to 150,000 wine gallons. This discriminated against imported products as Canadian exports of wine and cider competed directly in the United States market with like products of United States origin, regardless of the annual volume of production by the respective producers.

3.28 The United States argued that the federal wine excise tax credit was neither discriminatory nor protective. The credit was fully available only to small domestic wineries that produced less than 150,000 gallons of wine per year. The credit was gradually reduced as production increased, and was unavailable to any winery producing more than 250,000 gallons of wine per year. Although a number of United States wineries qualified for this credit, they represented in total less than 4 per cent of United States wine production. In other words, over 96 per cent of United States wine products were denied the excise tax credit that was also denied to imported Canadian products. It was thus apparent that the domestic law did not have a discriminatory or protective effect against the imported products nor provided protection to domestic production. The United States also recalled its arguments in paragraph 3.18 with respect to the applicability of the Japan Alcoholic Beverages case.

3.29 Canada observed that the United States Bureau of Alcohol, Tobacco and Firearms (BATF) had estimated that there were approximately 1400 small wineries in the United States. The aggregate production of these wineries was substantial and the total annual potential tax reductions could reach $125,000,000. There was no time limit on this legislation. Canada noted that its arguments with respect to the standards required under Article III which it had cited with respect to beer (paragraphs 3.22 and 3.24 above) equally applied here.

3.30 The United States maintained that the credit to limited quantities of wine from small wineries was allowable as a subsidy under Article III:8(b). It recalled its arguments in paragraphs 3.21 and 3.23 above with respect to the beer excise tax. The clear intent of the federal excise tax credit was to subsidize small United States wine producers. The subsidy was given "exclusively to domestic producers," and was derived "from the proceeds of internal taxes or charges applied" equally to all wine producers, both domestic and foreign.

3.31 The United States stated that the excise tax credit on wine floor stocks was a one-time credit which was no longer in force. Canada recalled that the United States had not provided any evidence that the floor stocks had been disposed of with respect to wine, and its position remained that these measures were contrary to Article III in this regard.

TO CONTINUE WITH MEASURES AFFECTING ALCOHOLIC AND MALT BEVERAGES

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