Border battle over beer sales

For years, Delaware liquor stores have held a competitive advantage over their neighbors to the north.

Cheaper prices and the convenience of one-stop shopping for beer, wine and liquor have kept local drinkers from crossing the state line while pulling Pennsylvania shoppers into the First State, a phenomenon known as "border bleed."

But some store owners here say they are concerned that ongoing efforts to reform Pennsylvania's arcane alcohol laws could challenge those long-held habits.

"It's time for Delaware to wake up and smell the coffee," said Palash Gupta, owner of Brandywine Liquors and president of the Delaware Asian American Business Association, which represents about 350 package stores. "We're already losing business to Maryland and if Pennsylvania were to privatize its state stores or cut their taxes on alcohol, we would be losing another big chunk of revenue."

Maryland package stores are able to undercut their Delaware competitors because of smaller excise tax rates and greater competition among distributors. It is enough to overcome that state's 9-percent sales tax on alcoholic beverages.

At the moment, the lack of sales tax in Delaware and its comparatively low excise taxes on all forms of alcohol are keeping package stores here more than competitive with Pennsylvania.

But there are signs that could be changing.

Last month, Pennsylvania's beer distributors received a boost in their efforts to compete with Delaware. The Pennsylvania Liquor Control Board announced on March 8 that beer distributors for the first time would be allowed to sell 12-packs instead of the minimum purchase of one case – 24 beers – that had been in effect since the end of Prohibition.

"It started slow, but sales are getting better as more people find out about it," said Mike Spaziani, owner of Wayward Beverage in Kennett Square. "I think it definitely will help because, especially with the emergence of microbrews, people drive up for beers they can't get in Delaware. Now they can try different kinds of beer without having to buy a whole case and be stuck with something they don't like."

That's good news for Delawareans who love good beer, said Hockessin resident Rick Kokoszca, a self-described beer snob who often travels over the state line in search microbrews he can't find closer to home.

"You can't get a good West Coast IPA around here, so it's worth the drive, even when you could only buy a case," he said.

The new 12-pack rule alone won't level the playing field between the two states. But it does represent the first major change to the laws that have long put Pennsylvania beer distributors at a disadvantage.

For instance, customers in the Keystone State must travel to two stores if they want purchase beer along with wine and spirits. Wine and liquor are only available at about 600 state-owned stores, while up to two six-packs of beer can be purchased at bars, delis and some grocery stores. Larger quantities of beer are only available at 1,200 state-licensed distributors.

In recent years, Pennsylvania has made small changes to become more competitive.

In 2011, its Legislature allowed beer distributors to extend Sunday hours from 9 a.m. to 9 p.m., compared to Delaware package stores' Sunday hours of noon to 8 p.m.

Pennsylvania's Liquor Control Board reports 240 grocery stores and convenience stores now hold restaurant licenses that allow them sell beer. Nearly half of those licenses are held by grocery store chains.

Acme Markets is taking direct aim at Delaware customers. Its billboard, visible from Interstate 95 in Wilmington, advertises that its Granite Run and Concordville locations, about 20 to 30 minutes away, now sell beer.

Republicans in the Pennsylvania House of Representatives have been pushing to privatize state-run stores and allow existing beer distributors sell any amount of spirits and wine. The House has twice passed bills to do just that, but the measure has yet to be approved by the Senate.

Gov. Tom Wolf, a Democrat who praised the recent 12-pack ruling, is reportedly opposed to privatization, preferring instead to "modernize" the current system, possibly through more competitive pricing, expanded Sunday sales, extended hours and direct sales.

Brian Mutschler, manager at Brewers Outlet, a beer distributor about a mile over the state line in Chadds Ford, said even incremental reforms would go a long way to help to stem border bleed.

"It would be great if we could turn into Delaware and sell wine, liquor and beer at the same time," he said. "I'd be rich if I had a nickel for every time an out-of-state customer asked me where our wine selection is. The current system is confusing even for Pennsylvanians. But that's the way it has been since Prohibition. You can see we don't want to rush into anything here."

While change might not be coming fast enough for Mutschler, Delaware package store owners say they're concerned that it's coming at all.

"There is absolutely a strong movement in Pennsylvania to be better at what they're doing now or to sell off the state stores to private companies," said Dave Trone, owner of 85 Total Wine & More stores in 15 states, including Delaware and Maryland. "That's why package stores in Delaware have to start looking at ways to better compete now, because if they don't take care of their customers, they will shop in other states."

Gupta said Delaware package store owners may seek to better position themselves as they monitor the privatization debate in Pennsylvania.

"If it were to happen, that could have a big, big impact on us, especially if it affects [Pennsylvania's] pricing," he said. "If that happens, we would really have to look at our strategy here in Delaware, possibly including seeking reduction in the excise taxes."

Last year, Delaware's excise taxes on beer, wine and liquor collected $19.6 million, up $1.2 million from 2013.

State Sen. Greg Lavelle (R-Sharpley) said it's too early to be talking about cutting a tax because of what Pennsylvania might do.

"I'm always looking to keep businesses competitive, but right now, I now I think it's just such a hypothetical question," he said. "Pennsylvania has been talking about this stuff for a long time now, I think it's better to wait and see what they actually do, which to date has been nothing."

For now, Pennsylvania's taxes are enough to keep Delaware competitive. The Keystone State currently charges an 8-cent per gallon excise tax and a 6-percent sales tax on beer sales. That pushes prices there higher than what customers would pay in Delaware, which charges a 16-cent excise tax but has no sales tax. Pennsylvania also charges a 30-percent markup on wine and spirits at state stores, as well as an 18 percent liquor tax and state and local sales taxes.

"The thing is, Pennsylvania has the potential to undercut everyone in price because they're the largest retailer of wine and spirits in the country," said William Latham, an economist at the University of Delaware who has authored several studies on the alcohol industry. "Fortunately for those Delaware stores, that hasn't happened because Pennsylvania enjoys getting those taxes."

While higher prices in their home state tend to drive Pennsylvanians into Delaware, the lack of wine and liquor has helped provide Pennsylvania beer distributors with one advantage over many Delaware package stores: a wider selection of microbrews.

"Right now, beer is like TVs or anything else. You can get it cheaper by going into Delaware," said Mutschler, who also serves as a board member of Pennsylvania's Malt Beverage Distributors Association. "But Delaware doesn't have the large microbrew selection most Pennsylvania distributors can offer simply because we don't have stock 50 types of wine and 50 types of alcohol."

That selection is attractive to beer aficionados like Jack Wick, co-founder of Twin Lakes Brewing Co. in Greenville.

"People will drive to where ever good beer is," Wick said. "The prices in Delaware are a tiny bit cheaper, especially if you go looking for beer you know they have. But I will drive an extra 10 minutes to get a case of Ranger IPA."

Gupta and Trone insisted Delaware stores offer selections equal to or better than their neighbors to the north.

New Belgium Ranger IPA, for instance, is available at Total Wines' Wilmington and Claymont stores.

To sell their beer in Delaware, breweries must obtain a suppliers license and find a wholesaler willing to purchase their product, a factor usually determined by what retailers are willing to buy for their stores, said Jack Cordrey, commissioner of Delaware's Office of Alcoholic Beverage Control.

"I'm not sure Delaware stores do sell fewer microbrews, but my guess would be there are more microbrews in Pennsylvania or Maryland than Delaware, because those are bigger states," he said. "They have more people, more microbreweries and more places sell their products."

While Delaware residents like Kokoszcan and Wick can travel over state lines to make their alcohol purchases with relative impunity, Pennsylvania technically bars its residents from doing the same.

But that law is rarely enforced. And when it is, it's generally applied only to large purchases.

"I've never heard of it being enforced and we get many, many, many Pennsylvania customers," said Pete Missimer, the manager at Hockessin Liquors on Lancaster Pike, just a few thousand feet inside Delaware state line. "On the other hand, I don't think people going from Delaware to another state is that common. I mean, unless you're OK with paying state tax. Otherwise, Delaware customers shop Delaware stores unless there's something they can't get here."

But beer fans like John Bessel, who runs the Wilmington home-brew club The Grateful Shed, say that's exactly why they cross the state line into Pennsylvania and Maryland.

"The majority of people I know go down to State Line Liquors in Maryland because they've got the biggest selection of craft brews around," Bessel said. "I'm not sure why Delaware stores don't offer more of the microbrews that people are into today, but they don't."

Contact Scott Goss at (302) 324-2281 or at sgoss@delawareonline.com. Contact him on Twitter @ScottGossDel