Editor’s Note: This article was updated March 11 to include additional comments from the ABC Commission, sent to The Assembly after publication.

When Sean Hamilton pulled into Mystic Farm & Distillery’s dirt parking lot on the eastern edge of Durham on the morning of November 14, 2019, he knew what he was looking for.

During an inspection a week earlier, the North Carolina Alcohol Law Enforcement special agent had spotted the 17 liquor bottles—various whiskeys, mostly—in Mystic’s kitchen. He’d asked about them: You don’t serve those? Assured they didn’t—with its distillery permit, Mystic can only serve what it makes—he’d left.

So after Mystic co-owner Jonathan Blitz showed Hamilton and his intern around—the converted barn filled with metal tanks, the cozy front room with its wooden bar, the front porch looking out over 20 acres of corn and wheat fields—Hamilton asked to speak with Blitz alone.

“I’m going to have to seize those bottles in your kitchen,” he said. Blitz asked why. “Because you can’t sell them,” he answered.

Blitz acquiesced, but he still didn’t understand what he’d done wrong. He sent an email to an Alcoholic Beverage Control (ABC) Commission attorney, but didn’t hear back. (He was later told he’d sent it to an old address.) Months passed. By May, he’d almost forgotten about it.

Then a “Notice of Alleged Violation” arrived in Blitz’s mailbox. The ABC accused him of “[possessing] spirituous liquor upon premises where such possession is not authorized by law.” It proposed a settlement: pay a $1,000 fine, or have Mystic’s permits suspended for 10 days.

Most distilleries would consider the fine the price of doing business. A lawyer would cost more than a grand, after all. But Blitz was a lawyer—and he was frustrated. To his mind, ALE agents and ABC officials were contorting the rules, while his industry kept quiet for fear of antagonizing the regulators. Someone needed to fight back, he decided. And if he didn’t do it, no one would.

To outsiders, the stakes were small: a hair-splitting interpretation of a pedantic regulation. But to Blitz, it was about much more than that.

“There is no way somebody’s gonna pay their lawyer $40,000 to litigate some shit like this,” he told me last week. “We all have businesses to run. You pay the fine and you walk away. The thing is, I don’t want to be bullied.”

Eighty-four years after the General Assembly established the ABC Commission, North Carolina remains one of 17 states where the government controls the supply of liquor, and the only one where local boards operate retail sales. The New Deal-era artifact has persevered, despite polls showing that voters want to privatize the system and campaigns seeking to do just that.

For lawmakers, the twin allures of revenue and rectitude have proven too strong to ignore.

In the 2019 fiscal year, ABC retail stores raked in more than $1.2 billion, of which almost $350 million went to the state’s general fund and $85 million went to city and county governments. North Carolina also has one of the lowest rates of excess drinking, and the fewest liquor stores per capita, in the U.S.

The ABC was born in the aftermath of Prohibition and bathed in the state’s long history of teetotalism. North Carolina was the first state to outlaw “intoxicating spirits,” and one of two that refused to ratify the 21st Amendment. It banned liquor by the drink until 1978. It banned beer stronger than Budweiser until 2005. It still forbids happy hours.

And unlike agencies that are accused of being too close to the industries they regulate, the ABC has a certain hostility toward alcohol producers encoded in its DNA.

So as the state’s distilleries grew from a dozen eight years ago to 80 today, according to Distillers Association of North Carolina president Pete Barger, it was inevitable that some elements within the ABC would fiercely resist.

“[For] some of the individuals in the system, it was all about control,” says Barger, who launched Southern Distilling in Statesville in 2013. “It was all about their ability to exert control, rather than, ‘What does it take to build a fruitful business environment where we can look after public safety?’”

That relationship began to change in 2017, Barger says, when Governor Cooper appointed Zander Guy chairman of the ABC Commission. The ABC and the Distillers Association started cooperating, which laid the groundwork for Senate Bill 290, the 2019 law that allowed distilleries to sell mixed drinks and obtain beer and wine permits, and lifted the five-per-person annual cap on onsite bottle sales.

There’s still tension, Barger says. But the same is true everywhere.

“We are a highly regulated industry,” he says. “That’s frustrating for entrepreneurs. And this industry breeds freethinking people. People do not go into this business because they like being told what to do.”

Not everyone is as sanguine about the industry’s relationship with the ABC.

“These are people who are anti-alcohol,” says Scott Maitland, who opened TOPO Distillery in Chapel Hill in 1995. “They think if you are drinking alcohol, you are doing the devil’s business. And anyone in the industry is a craven son of a bitch who’s willing to sell out their soul.”

Last month, the ABC sent the Distillers Association a 21-page draft of potential rules for distilleries for informal comments, which the association immediately rejected as “onerous and unreasonable.” Among other things, they would force distilleries to pay for renovations and additional staff, all to achieve a goal of questionable merit: physically separating sales of liquor bottles from sales of mixed drinks.

“If these rules went into effect, everybody in the industry would suffer $20,000 to $100,000 in costs in the first year,” Blitz says. “What you have right now is a situation where the industry is galvanized against the rulemaking they’re trying to do and is refusing to negotiate. It’s just ludicrous.”

Being in a control state provides distillers with certain advantages. The ABC requires shelf space for local spirits. All distillers receive equal access to sales data. The government, not Walmart or another big chain, is the gatekeeper.

But those benefits come with a cost: a sprawling bureaucracy with byzantine regulations.

According to a 2019 report from the pro-privatization John Locke Foundation, the ABC has promulgated 1,009 restrictions in the North Carolina Administrative Code.

But knowing what’s in the NCAC isn’t always enough. Because sometimes, the code can appear to contradict the law, or the ABC might interpret a rule in a way that puts conditions on a law.

That’s what Blitz says happened in his case. The ABC says that’s not so—and that there’s nothing ambiguous about any of this.

State law says distillery permit holders can “transport into or out of the distillery the maximum amount of liquor allowed under federal law, if the transportation is related to the distilling process.” Blitz argues that this includes the bottles distillers use to compare flavors or get packaging ideas. These activities, he says, are clearly “related to the distilling process.”

The ABC says that part of the law doesn’t apply. Another one does.

“The standard is not ‘related to the distilling process,’ but ‘ingredients and equipment used in the distillation of spirituous liquor,’” ABC spokesman Jeff Strickland told me in an email.

Specifically, the law allows distillery permit holders to “manufacture, purchase, import, possess, and transport ingredients and equipment used in the distillation of spirituous liquor.” Both the “transport” and the “ingredients and equipment” provisions appear in the same statute—and are given equal weight—under the header, “The holder of a distillery permit may do any of the following.”

The ABC says neither applies to Mystic. The “transport” provision “relates specifically to the transportation of bulk liquor to and from the distillery,” Strickland says. And “the liquor seized was not being added to, and thus was not an ingredient for, products [Blitz] was distilling.”

The ABC also argues that distilleries should be divided into two parts: the commercial side, where booze is made, and the retail side, where it’s sold.

“Any spirits used in the production process must be stored on the commercial side of your establishment,” ABC attorney Rachel Spears told Blitz in a June email. Citing three statutes and one administrative rule, she added, “only liquor distilled at Mystic Farm & Distillery can be stored on the retail side.”

Because the liquor was stored in Mystic’s kitchen, which is behind the bar on the retail side, it was unauthorized.

Nothing in the laws or rule that the ABC cites mentions anything about delineating commercial from retail space. In fact, the rule itself reads as a blanket ban of foreign bottles. Before SB 290, that’s how the ABC interpreted it. But SB 290 complicated things, Barger says.

Understanding why requires going even deeper into the weeds.

A federal statute bars distilleries from locating where “liquors of any description are retailed, or on premises where any other business is carried on.” A federal regulation, meanwhile, forbids distilleries from being located where “liquors are sold at retail.”

To sell mixed drinks and bottles, distilleries have to separate their production spaces from retail operations, even if the separation is only a thin wall between the two. But nothing in federal regulations addresses the issue of storing bottles on the retail side. Indeed, federal jurisdiction doesn’t include the retail component.

“Essentially what they’re doing [is], they’re trying to find a fig leaf to justify all these draconian rules,” Blitz says.

Nevertheless, state regulators have enforced the ABC’s rule. Last February, an ALE agent seized bottles stored upstairs from the commercial side of a Wilmington distillery. The ABC also cited this rule to send out three other notices of violation after SB 290 took effect in September 2019: one to Mystic, and others to Mother Earth Brewing and Call Family Distillers. In the years before SB 290, it had cited five other distilleries for possessing unauthorized bottles.

Of these nine cases, four ended in warnings, three in fines. Fair Game Beverage Company in Pittsboro settled for $1,000, Three Stacks Distillery in Raleigh settled for $800, and Sutler’s Spirit Co. in Winston-Salem—which had seven bottles in its warehouse—settled for $500. (The case against Call Family, in Wilkesboro, for an alleged violation on January 11, hasn’t been resolved.)

That left Mystic, the distillery determined to put the rule on trial.

This summer, the ABC tried to clarify and codify its commercial/retail distinction. On July 30—the same day it filed a petition in the Office of Administrative Hearings, charging Mystic with possessing unauthorized liquor—it announced “Policies Regarding Distillery Retail Sales Pending Rulemaking” in an attempt to “help guide distilleries that sell spirituous liquor distilled at the distillery.”

According to these policies, which would take effect September 1, 2020, distilleries could “possess spirituous liquor used exclusively for liquor production purposes, including comparison, flavoring, sensory analysis, quality control, and education,” in commercial but not retail spaces. However, they had to submit diagrams detailing the boundaries of each side.

Here, Blitz saw an opportunity. The ABC was overstepping its authority, he believed. A statute forbids state agencies from “[seeking] to implement or enforce” a rule-like policy that “has not been adopted as a rule.” And if the policies went into effect, he’d not only have to spend money creating a new diagram for the ABC, but would also be required to seek ABC approval to sell mixed drinks—a right he already had.

He filed for an injunction. On August 31, Administrative Judge J. Randolph Ward granted it.

On October 28, with the case against Mystic still lingering, Blitz filed another petition against the ABC, accusing the agency of failing to respond to his request for rule changes within the legally required timeframe. In December, the case moved from the OAH to the Durham County Superior Court, which forced the state Attorney General’s Office to get involved on the ABC’s behalf.

Assistant attorney general Ameshia Cooper asked him what he wanted, Blitz recalls.

“You have exactly one thing I want,” he replied, “which is to get rid of this bogus fucking violation case. And if you do that, I’ll dismiss everything else.”

On February 1, the ABC agreed to his terms. Neither side would admit they were wrong, but the ABC said it would “authorize” ALE to return the 17 bottles, and they inked the agreement a week later. But ALE refused to turn over the bottles. On February 26, Blitz says, Cooper told him that the ALE said the bottles might be “evidence of a crime.” (The Attorney General’s Office and ALE referred questions for this story to the ABC.)

“The crazy thing about this is, it shows you how screwed up alcohol law is in a state where you can’t even negotiate in good faith with who you think is the regulator,” Blitz says. “Because the guys with the guns and badges who are going to come in and turn your place upside down and disrupt your business are answerable to nobody.”

Blitz told me last week that if he didn’t get the bottles back by Monday, he’d sue. Last Wednesday, I sent questions to ALE, the ABC, and the Attorney General’s Office.

On Thursday, ALE gave the bottles back.

In February, the ABC asked the Distillers Association to review its second attempt at distillery-retail rules. It went over worse than the first try had.

The rules haven’t yet been published. The ABC is still in the “informal comments” part of the rulemaking process; the staff aims to have the Commission review and formally propose the rules in May. But what distillers saw set off alarms.

“The rulemaking process is long,” Barger told me. “What was sent was a first draft. Totally unacceptable to us. So the process begins.”

One proposal mandates that distilleries collect their customers’ personal information—name, driver’s license, and the date and time each customer took a tour of the distillery—before selling them a bottle of liquor. As the Distillers Association pointed out in its response, distilleries had to do this before SB 290 to ensure that customers didn’t exceed the annual cap.

“Those written records were burdensome and not very useful when they were reviewed by law enforcement,” the Distillers Association said. “In some cases, consumers decided not to purchase bottles because they did not want a written record of their purchase.”

Strickland says the ABC needs this information to ensure that consumers are taking the tours, which are required by state law, before purchasing a bottle of liquor.

Another proposal requires distilleries to create a space “separated by a solid or glass wall from any other part of the premises”—including where beer, wine, or mixed drinks are sold—in which to sell bottles of their liquor.

“Federal and state law requires commercial and retail operations related to alcohol to be separate,” Strickland explains. “This is not a new distinction the ABC is creating.”

Bottle sales, Strickland says, are regulated by the distillery permit, so they are considered commercial, not retail, operations.

“Many distilleries will be forced to undergo costly renovations to build a separate room to sell bottles,” the Distillers Association responded. “In some cases, a distillery may have to choose whether to sell bottles or serve alcoholic beverages for on-premise consumption because their retail space is limited, and they cannot build a separate room for bottle sales. In addition, maintaining separate areas for bottle sales and on-premise consumption means that distilleries will have to hire more staff to support separate sales areas.”

The ABC also wants to settle the bottle question with a new official mandate—OK in the distillery, not in the retail space.

“What are you people doing?” Blitz asks rhetorically. “After the pandemic, you’ve got 60 businesses on death’s door in this state, and you people are making up rules to make our lives harder for no good reason.”

That’s the question at the heart of this imbroglio: Is there a good reason for these regulations? What’s the point of forcing distilleries to spend thousands of dollars to separate mixed drinks from bottle sales? For that matter, why punish them for storing a bottle of Jack Daniel’s in their kitchen? What was this rule designed to accomplish?

“It isn’t a rule, but rather a lack of authorization by statute,” Strickland replied when I posed that question.

In the ABC’s view, everything related to alcohol is illegal unless state law says otherwise. In other words, a rule doesn’t need a reason to exist—it exists if nothing says it doesn’t.

That position isn’t baseless, though it is anachronistic. In creating the Commission in 1937, the General Assembly wrote that laws should be “liberally construed to the end that the sale, purchase, transportation, manufacture, consumption, and possession of alcoholic beverages shall be prohibited except as authorized” elsewhere in state statutes.

Insofar as the bottle rule serves a purpose today, it’s about money. Bottles sold to distilleries that have mixed-beverage permits have a $3.75 tax slapped on them. The ABC doesn’t want anyone circumventing that tax by bringing a bottle from home, nor does it want distilleries selling anything not on the ABC’s approved list—bottles purchased out of state, gifts from other distilleries—on which it hasn’t collected any tax at all. To make sure there’s no cheating, the argument goes, it’s safer just to keep the bottles out of reach.

But others argue that for those with distillery permits, it wouldn’t make financial sense to pour someone else’s booze when they’re surrounded by vats of their own. For those with mixed-beverage permits, saving a few pennies a pour probably isn’t worth risking their license.

“The idea that this is some kind of clown-car industry—what are we talking about here?” TOPO’s Maitland asks. “We’re talking about bottles that Blitz had and every other distillery would have. And they act like we’re gonna run around bootlegging 11 bottles of booze.”

Blitz got his bottles back, but he never put the ABC’s rule on trial. In fact, nothing tangible changed after his 10-month campaign. But with the ABC’s new proposal looming, it may be just the first round of a growing fight.

“We are facing an existential threat,” he says. “Until I went and punched the bear, [distillers] were all like, ‘We don’t want to take on ABC.’ But now everybody’s like, ‘Holy shit.’”

Jeffrey Billman reports on politics and the law for The Assembly. He is the former editor-in-chief of INDY Week in Durham. Email him at jeffrey@theassemblync.com.

More by this author