16 March 1992

1.1 On 7 March and on 16 April 1991, Canada held consultations with the United States under Article XXIII:1 concerning measures relating to imported beer, wine and cider. The consultations did not result in a mutually satisfactory solution of these matters, and Canada requested the establishment of a GATT panel under Article XXIII:2 to examine the matter (DS23/2 of 12 April 1991).

1.2 At its meeting of 29-30 May 1991, the Council agreed to establish a panel and authorized the Council Chairman to designate the Chairman and members of the Panel in consultation with the parties concerned (C/M/250, page 35).

1.3 The terms of reference of the Panel are as follows:

The parties subsequently agreed that the above terms of reference should include reference to documents DS23/1, DS23/2 and DS23/3 (DS23/4).

1.4 Pursuant to the authorization by the Council, and after securing the agreement of the parties concerned, the Chairman of the Council notified the following composition of the Panel on 8 July 1991 (DS23/4):

1.5 The Panel met with the Parties on 1-2 October and 2 December 1991. The delegations of Australia, EEC and New Zealand were heard by the Panel on 2 October 1991. The Panel submitted its report to the Parties to the dispute on 7 February 1992.

2.1 The current regulatory structure in the United States alcoholic beverages market arose from the repeal of the Eighteenth Amendment to the United States Constitution, which had established Prohibition. The Twenty-first Amendment to the United States Constitution, adopted in 1933, repeals the Eighteenth Amendment and furthermore provides that:

Shortly thereafter, Congress enacted the Federal Alcohol Administration Act which requires, among other things, that all wholesalers obtain basic federal permits, and prohibits suppliers from having an interest in retail outlets and from engaging in many of the commercial practices that were associated with the "tied house" prior to Prohibition. In addition, the Federal government imposes excise taxes on alcoholic beverages.

2.2 Each state has independent legislative and regulatory authority, and, in response to the Twenty-first Amendment, each of the states has enacted laws governing the basis on which alcoholic beverages can be sold. In addition to regulating the sale and distribution of alcoholic beverages within their border for social welfare purposes, states impose excise taxes on alcoholic beverages. All states adopted a three tier system under which the production, wholesale distribution and retail sale of alcohol are kept separate. Some states provide an exception to certain in-state breweries and wineries.

2.3 The measures before the Panel apply to beer, wine and cider. Beer is defined under the 1991 United States Internal Revenue Code (Subpart D, s 5052, Subtitle E) as "beer, ale, porter, stout and other similar fermented beverages (including saké similar product) of any name or description containing one-half of one per cent or more of alcohol by volume, brewed or produced from malt, wholly or in part, or from any substitute thereof." Beer is classified under tariff item 2203.00.00 in the United States Tariff Schedule XX as "Beer made from malt" and the rate is bound at 1.6 cents a litre.

2.4 Natural wine is defined under Subtitle E of the Internal Revenue Code (section 5381) as "... the product of the juice or must of sound ripe grapes or other sound ripe fruit made with such cellar treatment as may be authorized and containing more than 21 per cent of weight by total solids." Wine is classified under tariff item 2204 with various subitems depending on type, alcohol content and type of container. The rates are bound on all the listed items.

2.5 Cider is considered as wine under the Internal Revenue Code. The tax measures on wine under the Code apply also to "All cider except for cider produced with apples in a place other than a bonded wine cellar and without the use of preservatives" (Section 5042). Cider is described in the United States Tariff Schedule XX (tariff item 2206.00.15) as "cider whether still or sparkling", and the rate is bound at 0.4 cents a litre. Canada has initial negotiating rights with respect to this concession.

2.6 The matters before the Panel concern the following federal and state practices with respect to beer, wine and cider:

2.7 The Omnibus Budget Reconciliation Act of 1990 ("the Act") increased the excise tax on beer from $9 to $18 per barrel. The Act leaves unchanged the existing lower rate of $7 per barrel, however, for the first 60,000 barrels produced by United States breweries with annual production not exceeding 2 million barrels. This lower rate is not available for imported beers.

2.8 The provisions of the Act also increased excise taxes on wine by $0.90 per wine gallon, but introduced for the first time a credit for wine of small United States producers. The Act provides a credit of up to $0.90 per wine gallon for wine produced at qualified facilities in the United States by United States producers of not more than 250,000 wine gallons per year. The credit is provided on a sliding scale basis, depending on actual levels of production. The maximum credit of 90 cents per wine gallon is allowed on the first 100,000 wine gallons of wine for consumption or sale. The credit is reduced by 1 per cent for each 1,000 wine gallons of wine produced in excess of 150,000 wine gallons of wine during the calendar year. This credit is not available for imported wines. The Act provides that the credit is allowable at the time the tax is payable as if the credit constituted a reduction in the rate of the tax.

2.9 The Act increased the excise tax on wine held in stock for sale by $9 per wine gallon. The Act provides, however, for wine produced by small United States producers that the tax increase shall be reduced by the credit provided for small United States producers as described above. No reduction is available for imported wine.

2.10 Several states provide an excise tax differential based on annual production. The states of New York and Rhode Island, and the Commonwealth of Puerto Rico, provide an excise tax exemption or lower rate of tax for a specified quantity of beer brewed by in-state breweries. In the state of Oregon, an excise tax exemption is applied for a limited quantity of wine sold by United States producers manufacturing less than 100,000 gallons per year of alcoholic beverages.

2.11 In the states of Kentucky, Minnesota, Ohio and Wisconsin, an excise tax credit based on annual production is available for specified quantities of beer sold by brewers whose annual production does not exceed an indicated level. In Kentucky and Ohio, the credit is available only to in-state breweries.

2.12 In Alabama, Georgia, Nebraska and New Mexico, the excise tax rate is based on the origin of the product. These states provide for a lower rate of taxation, or a tax exemption, for wine produced by in-state or domestic wineries. Iowa applies an excise tax at the wholesale level; only "native wines" may be sold directly at retail, where no excise tax is applied.

2.13 Michigan, Ohio and Rhode Island determine the excise tax treatment based on the use of local ingredients. A lower tax rate is applied in the state of Mississippi to wines in which a certain variety of grape has been used.

2.14 The state of Pennsylvania provides a tax credit on the purchase of equipment for the production of beer to domestic breweries not exceeding a specified size.

2.15 Table 1 summarizes the differential excise tax measures applied by various states.

2.16 Many states regulate the distribution of alcoholic beverages, including beer and wine, to points of sale. Such regulations may limit the right to import beer and wine to alcoholic beverage boards, manufacturers, licensed importers, or to wholesalers. Further restrictions are usually applied with respect to which entities can qualify to receive importer, wholesaler or retailer licenses. In-state manufacturers of beer and wine may, in some states, sell directly to retailers. Table 2 presents the distribution requirements of thirty states.

2.17 Several states impose restrictions on the transportation system that can be used for the delivery of beer and wine. In particular, certain states require that alcoholic beverages be shipped into the state by common carriers. A common carrier is defined as one that undertakes to carry the goods of all persons indifferently or of all who choose to employ it.

2.18 The state of Arizona requires that out-of-state or foreign-produced alcoholic beverages be shipped to their destination by common carriers. In-state produced alcoholic beverages may be shipped in the in-state wholesaler's own vehicle.

2.19 In California, alcoholic beverages imported into the state are required to be transported by common carriers. There is no such requirement for in-state producers, and beer manufacturers and wholesalers are specifically permitted to sell to licensees from their own trucks.

2.20 Maine requires that liquor imported into the state be transported by common carriers but permits in-state producers to transport their own product in their own vehicles.

2.21 The state of Mississippi requires that imported alcoholic beverages be transported into the state by common carriers. In-state producers and wholesalers may be licensed to transport their own product in their own vehicles.

2.22 In South Carolina, alcoholic liquors must be shipped into the state by common carriers. In-state producers and wholesalers are permitted to transport their own product in their own vehicles.

2.23 A number of states charge fees for licenses for the sale of beer and wine. In the states of Alaska and Vermont, different fees are charged for in-state produced and imported products.

2.24 In Alaska, in-state brewers must obtain a brewery license at a cost of $500.00 which entitles them to sell to retail licensees. Out-of-state brewers must obtain a General Wholesale License, which costs $1,000.00 plus additional fees up to $10,000.00 based on volume, or a Wholesale Malt Beverage & Wine License, which costs $200.00 plus additional fees up to $10,000.00 based on volume. A General Wholesale License must be obtained for each wholesale distributing point in the state.

2.25 In-state producers of wine in Alaska may obtain a Winery License, the annual fee for which is $250. Out-of-state producers must obtain either a General Wholesale License or a Wholesale Malt Beverage & Wine License, the fees for which are described above.

2.26 In Vermont, an in-state manufacturer's license to sell beer (between 1 to 6 per cent alcohol by volume) to wholesale dealers costs $150 per year. Out-of-state brewers require a "Certificate of Approval", at a cost of $1,500 per year, entitling a manufacturer or distributor of malt beverages not licensed under the provisions of the Vermont statute to sell to wholesale dealers.

2.27 In the state of Mississippi, the legalizing provisions of the alcoholic beverage laws are not applicable in any county within that state unless and until a local option election is held. Notwithstanding an election reinstating the prohibition laws in a political subdivision, the holder of a native wine retailer's permit is allowed to continue to operate under such permits and to renew such permits.

2.28 Certain states maintain provisions which limit the price at which sales can be made to wholesalers. These require that out-of-state alcoholic beverages may not be sold at a price above the lowest price available elsewhere either in the United States or in adjoining states. Prices of in-state products are not thus restricted.

2.29 In Massachusetts, the Massachusetts General Laws Annotated, (Chapter 138) establishes the general price affirmation rule, applicable to both beer and wine, as follows: "there shall be filed...for a brand of alcoholic beverages [beverages containing 0.5 per cent or more of alcohol by volume]...an affirmation duly verified by the owner of such brand of alcoholic beverage, or by the wholesaler designated as an agent...that the bottle and case price of alcoholic beverages to wholesalers...is not higher than the lowest price at which such item of alcoholic beverage will be sold by such brand owner or such wholesaler designated as agent or any related person to any wholesaler anywhere in any other state in the United States or in the District of Columbia, or to any state or state agency which owns and operates retail alcoholic beverage stores." In-state producers can sell directly to retailers.

2.30 The Rhode Island price affirmation requirements apply to wine: "no holder of a certificate of compliance for ... vinous beverages shall ship, transport or deliver within this state, or sell or offer for sale to a wholesaler any brand of ... vinous beverages at a bottle or case price higher than the lowest price at which such item is then being sold or offered for sale or shipped, transported, or delivered... to any wholesaler in any state of the United States or in the District of Columbia or to any state, including an agency or [sic] such state, which owns and operates retail liquor outlets". Certificates of compliance are required in order to transport malt beverages and vinous beverages into the state. The price affirmation requirement applies to sales to any wholesaler and only wholesalers may import alcoholic beverages; in-state wineries may sell their products directly to retailers. (General Laws of Rhode Island 1956, 1987 Re-Enactment)

2.31 Eighteen states in the United States maintain Alcoholic Control Boards or Commissions which import, distribute and sell alcoholic beverages at the retail level. In a number of these "control" states, wine must be "listed" with these state marketing agencies in order to gain access either to the state market or to the state stores. The criteria for accepting a new listing for wines varies substantially among control jurisdictions. The specific listing and delisting policies of the nine states which Canada has challenged as GATT inconsistent are detailed in Table 3.

2.32 Certain states distinguish between beers with an alcohol content of 3.2 per cent by weight (4 per cent by volume) or lower and those with a higher alcohol content. A number of states restrict the location at which beer with over 3.2 per cent alcohol content may be sold, while not imposing the same restrictions on sales of beer at 3.2 per cent alcohol content or lower. In some states, labelling requirements are imposed on beer containing more than 3.2 per cent alcohol content which differentiate it from the lower alcohol content beer. Table 4 indicates the treatment of beer on the basis of its alcohol content in several states.