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Tuesday, April 19, 2016

A Modest Bourbon Proposal for the Secondary Market.

Before I jump in, some people have articulated that selling or trading whiskey for collectability is perfectly legal.  I don’t agree, but I’m not giving anyone legal advice, and if any reader has questions about it, I encourage consultation with counsel. 


With that out of the way, I was asked recently, by someone who had already heard that selling Bourbon on the secondary market is illegal, whether trading bottles could avoid those problems, and it got me thinking about how to fix the secondary whisk(e)y market in the United States.  Then yesterday and today, the secondary market was rocked when Facebook shut down popular Bourbon trading and sale groups, emphasizing for me that there needs to be a legal outlet for selling and trading rare bottles.

Spirits are highly regulated, of course, and can only be sold in accordance with state regulations, which most often involve the “three tier” system of producers, wholesalers, and retailers.  Those regulations have driven whiskey sales into an unregulated secondary market.  While secondary market sales occur everywhere that Bourbon enthusiasts outweigh supply, sellers are taking a risk that somewhere, some day, local authorities will decide to enforce laws that make these types of sales illegal.  In Kentucky, for example, KRS 243.020(1) requires a license to sell alcohol under any circumstance whatsoever:  “A person shall not do any act authorized by any kind of license with respect to the manufacture, storage, sale, purchase, transporting, or other traffic in alcoholic beverages unless he or she holds the kind of license that authorizes the act.”

The Kentucky statute does not expressly use the words “trade” or “barter,” so some consumers might stop there, without checking the definition section applicable to Chapter 243.  The definitions provide that the word “sale” “means any transfer, exchange, or barter for consideration, and includes all sales made by any person, whether principal, proprietor, agent, servant, or employee, of any alcoholic beverage.”  KRS 241.010 (49).  In other words, at least in Kentucky, trading Bourbon is just like selling it.  The real questions are whether the authorities will ever care about small-scale consumer-to-consumer selling and trading, and whether the risks – like being the test-case or getting a fake – are worth it.

Minor reforms in existing laws could provide a relatively simple solution.  Yesterday I suggested to a Kentucky State Senator that Kentucky could leap to the forefront of a new white market by creating a legal, taxable, verifiable clearinghouse for the sale of rare whiskey.  A new category of license could be created to permit sales from non-licensed people to a clearinghouse licensee, which could verify and authenticate the bottle, and then sell or trade it in an online market (we might have to change shipping laws, too, but let’s take this one step at a time).  Authenticity and purchase prices could be determined by trained examiners, and other proof of authenticity (like an original retail receipt) would help consumers demand the best price for their Pappy Van Winkle, Willett Family Estate, and other hard-to-find limited edition whiskeys. 

This would allow consumers – and even the dreaded “flippers” – to sell without violating the law, and it would reduce every black market buyer’s very real concern of counterfeit whiskey.  Plus, clearinghouse licensees will be competing against each other on both paying top dollar to acquire the best selection of rarest Bourbon, and on the prices they charge for re-sale, along with competing on managing those margins and training employees to avoid fakes.  This combination of the free market and sensible regulation would bring the secondary market out of the shadows and Facebook wouldn’t have to aggravate its users by closing private groups.

What do you think?  Could this work?

12 comments:

  1. I like the idea but I'm just not sure it would work. If the clearinghouses are buying rare bourbons at prices that leave room for resale, that is like a car dealership offering you that "trade-in value" on your car. As the owner, you say, "no way, I can get more by selling it myself." And as a buyer, rather than go to the clearinghouse/dealership to pay "retail value" on said bourbon/automobile, you just go private party a la Craigslist. As long as the black market or private party value rests somewhere between the price you could buy or sell to a licensed member, I just don't think it would work. Progress, perhaps, but I doubt it would make a marked dent in the practice of private swaps.

    I could be missing the point, but that's how I interpreted it and see it. Thanks for the great, thoughtful post as always though. Definitely has me thinking!

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    1. Thanks for the comment. I think you raise a valid point, and that there will still an unregulated black market due to the necessary margin. Maybe a concern over fakes will draw more people to the clearinghouse? In the end I suppose it would be all about margins.

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  2. The robust legal secondary market for alcohol in Europe suggests that it's entirely possible to make one work. With that said, even the big auction houses sometimes sell fakes, so proving provenance is almost never a trivial matter.

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    1. The distilleries and bottlers could really provide some help on a go-forward basis with protection against counterfeits, but there's definitely a risk with every other bottle begin sold on a secondary mark, legal or illegal.

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    2. A numbered equivalent to a bygone-era tax strip seems to be pretty easy for a distillery to introduce--and likely cheaper than wax-dip. Would cut down on fakes immensely.

      As it stands, some of the most prized bottles from one of the biggest distilleries (ahem) essentially use off-the-shelf foil wraps. Hrm.

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    3. I've read that there are many relatively simple ways bottlers could eliminate counterfeits. Despite public statements against the secondary market, the distillery you're mentioning could sure stand to take some action instead.

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  3. I'd say the shipping is a bigger concern. If beer and liquor were regulated like wine, where retailers and producers can ship direct to consumer in most states, it would alleviate the flipping of new rare releases. Basically flipping is a result of supply and demand imbalance. Too much on the shelves in one area, not enough in others. I guess sometimes it is still flipped from areas with limited supply, but not much you can do about it. I envision that if fans could sign up for/pre purchase special releases, distilleries and breweries would be able to accurately forecast production levels and geographic distribution allocations while making a better margin by cutting out the middle man. Also, seems like an easier (albeit still difficult) thing to lobby congress for.

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    1. That is an EXCELLENT point. The flippers would stop racing to Bardstown on rumors of new releases. The wholesalers and retailers would fight this, but it should be part of the solution.

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    2. They definitely would but I doubt it would hurt them. Not like people would order their yearly supply of Jim beam this way, would actually remove the headache of dealing with limited releases for stores...not really a money maker for them as far as I'm aware.

      Also, good post, I really enjoy this site. Thanks.

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    3. Thanks for reading and the kind words! I think you're right about regular Bourbon shoppers. The majority of Bourbon shoppers wouldn't have any interest in the limited releases and dusties.

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  4. Why not let people sale their perfectly legal private property if they wish to do so? If a person has the original receipt to prove the tax has been paid and the purchase was legal, do we need to be taxed twice?

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    1. Good point, but that gets much deeper into liquor law theory and the remnants of Prohibition. I don't see private sales ever being allowed.

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