Association of Washington Spirits and Wine Distributors, Appellant ,
The Washington State Liquor Control Board et al., Respondents
Argued October 28, 2014
Appeal from Thurston County Superior Court 13-2-00049-8 Honorable Christine Schaller.
John C. Guadnola and Reuben Schutz (of Gordon Thomas Honeywell LLP ), for appellant.
Robert W. Ferguson, Attorney General, and Mary M. Tennyson and Leah E. Harris, Assistants, for respondent Washington State Liquor Control Board.
David J. Burman and Ulrike B. Connelly (of Perkins Coie LLP ), for respondents Washington Restaurant Association, Northwest Grocery Association, and Costco Wholesale Corporation.
WE CONCUR: Chief Justice Barbara A. Madsen, Justice Charles W. Johnson, Justice Susan Owens, Justice Mary E. Fairhurst, Justice Debra L. Stephens, Justice Steven C. González, Justice Sheryl Gordon McCloud, Justice Mary I. Yu.
[182 Wn.2d 345] ¶ 1 We granted direct review of this challenge to the Washington State Liquor Control Board's (Board) spirits distribution licensing fee structure brought by the Association of Washington Spirits and Wine Distributors [182 Wn.2d 346] (Association). The Association, a trade group composed of distributors licensed under RCW 66.24.055, challenges the Board's decision to exempt distillers who distribute their own manufactured spirits and others acting as distributors pursuant to certificates of approval from contributing to a shortfall of $ 104.7 million in licensing fees imposed on persons holding spirits distributor licenses. The Association asks us to hold that the distillers must contribute proportionately to eliminating the shortfall.
[¶2] We reject the Association's arguments. The plain language of Initiative Measure No. 1183 (Initiative), supported by the context in which the language appears and the overall scheme for licensing participants in the spirits industry, enables the Board to impose the entire shortfall on the spirits distributors without contribution from the distillers. We therefore hold that the Board acted within its authority and did not act arbitrarily or capriciously. Additionally, the Board did not violate the privileges and immunities clause of article I, section 12 of the Washington State Constitution. The decision of the Thurston County Superior Court is affirmed.
I. History and Overview of Washington's Liquor Control Laws
[¶3] Washington adopted the Washington State Liquor Act (Liquor Act) to regulate intoxicating liquors following the repeal of federal law prohibiting the manufacture, sale, or transportation of alcoholic beverages. Laws of 1933, Ex. Sess., ch. 62; Title 66 RCW. The Liquor Act created the Washington State Liquor Control Board, RCW 66.08.012, and established distinct regulatory systems to control the distribution and sale of different types of liquor. Wash. Ass'n for Substance Abuse & Violence Prevention v. State, 174 Wn.2d 642, 647, 278 P.3d 632 (2012). The legislature enacted a three-tier system to govern the distribution and [182 Wn.2d 347] sale of beer and wine, which provided different regulations and licensing requirements for manufacturers, distributors, and retailers. Id. This three-tier system allowed the State to control the prices at which manufacturers and distributors sold beer and wine. Id. at 648. However, unlike the system that applied to beer and wine, only the State could distribute and sell spirits.  Id. (citing former RCW 66.16.010 (2005); Wash. State Liquor Control Bd., FY 2010 Annual Report 9-10, available at http://www.liq.wa.gov/publications/2010-annual-report-final-web.pdf).
[¶4] In 2011, Washington voters passed the Initiative, which dramatically changed the State's approach to regulating the distribution and sale of liquor in Washington. Id. at 649. The Initiative ended the
State's exclusive rights to distribution and retail sales, allowing private distributors to become licensed to distribute spirits and permitting a limited number of retail stores to sell spirits. The Initiative imposes licensing fees in exchange for the ability to sell and distribute spirits. There are currently four different licenses in Washington that allow the distribution of spirits.
[¶5] Petitioner Association is a trade group of distributors operating pursuant to " [s]pirits distributor license[s]." RCW 66.24.055(1) (boldface omitted). A " spirits distributor license" is the broadest grant of authority to distribute under the Initiative, authorizing the licensee to purchase spirits from manufacturers, distillers, or other suppliers and resell the spirits to a variety of establishments. Id. This license places very few limits on the sources from which a licensee may purchase or distribute spirits.
[¶6] In addition to the distribution rights granted to licensees through a " spirits distributor license," RCW 66.24.055, licensed in-state distillers may distribute their own products directly to retailers. RCW 66.24.640. Distillers who choose to distribute their own spirits enjoy limited [182 Wn.2d 348] distribution rights. See RCW 66.24.140, .640; WAC 314-28-030(1). Importers and out-of-state spirits distillers may also act as distributors by obtaining one of three " certificates of approval." RCW 66.24.640; WAC 314-23-030(2). These certificates provide specific, limited distribution authority to manufacturers, importers, or bottlers. RCW 66.24.640; WAC 314-23-030(2). We refer to the certificate holders and the distiller distributors collectively as " distillers" because they are treated similarly as to the fees at issue here.
[¶7] In addition to the basic licensing fees imposed on spirits distributors, distillers distributing their own products, and other certificate holders, RCW 66.24.055(3) created two fees designed to replace the revenue that the State lost when spirits distribution was privatized. See generally Wash. Ass'n for Substance Abuse & Violence Prevention, 174 Wn.2d at 671 (Wiggins, J., dissenting) (citing Laws of 2012, ch. 2, § 101(2)(k) (codified at RCW 66.24.055(3))). Subsection (3)(a)(i) imposes a 10 percent  fee of all spirits sales by " spirits distributor licensee[s]" (subsection (3)(a) percentage fee). Subsection (3)(c) provides that if the subsection (3)(a) percentage fee did not generate $ 150 million in the first year under the new statute, the shortfall between the collected fees and $ 150 million was to be equitably assessed against " all persons holding spirits distributor licenses," according to rules to be promulgated by the Board (subsection (3)(c) shortfall fee).
[¶8] The entire dispute in this case comes down to who must contribute to payment of the subsection (3)(c) shortfall fee. The Association argues the distillers must contribute, and the Board argues the opposite.
[¶9] Acting under its rule-making authority under the Washington Administrative Procedure Act, chapter 34.05 RCW, the Board determined that distillers distributing their own spirits are subject to the subsection (3)(a) percentage [182 Wn.2d 349] fee. WAC 314-23-030. The Board later adopted WAC 314-23-025 to enforce the subsection (3)(c) shortfall fee. Although the Board had imposed the subsection (3)(a) percentage fee on distillers, the Board did not require the distillers to contribute to the subsection (3)(c) shortfall fee. Rather, the Board determined that the shortfall fee would be imposed only on " persons holding a spirits distribution license." WAC 314-23-025. Thus, while the Board requires that both distributors and distillers pay the subsection (3)(a) percentage fee, only distributors paid the subsection (3)(c) shortfall fee.
[¶10] In 2012, businesses holding spirits distributor licenses generated nearly $ 450 million in sales. The distillers generated approximately $ 15 million in sales arising from their distribution rights; the $ 1.5 million fees collected from these sales did not contribute to the $ 150 million statutory requirement. The combined fees assessed on persons holding a spirits distributor license totaled just over $ 45.3 million, leaving a $ 104.7 million shortfall. Pursuant to WAC 314-23-025,
spirits distributor license holders paid this entire amount. The overwhelming majority of sales in Washington were from spirits distributors; had the distillers been required to pay the subsection (3)(c) shortfall fee, the distillers would have been responsible for ...