Why the Supreme Court Was Asked To Hear Retailer Wine Shipping Case


Notwithstanding Granholm v. Heald, does the Twenty-first Amendment to the U.S. Constitution overrides its Commerce Clause and allows States to discriminate against out-of-state businesses in the sale of alcoholic beverages?

This is the question that the Specialty Wine Retailers Association (for which I serve as Executive Director) is asking the Supreme Court of the United States to decide. A Writ of Certiorari ( filed last week and downloadable here) asks the court to review a decision by the Fifth Circuit Court of Appeals that overturned a Texas Federal Court's decision that prohibiting out-of-state wine stores from shipping to Texans while allowing Texas-based stores to ship to Texans violated the Commerce Clause of the Constitution.

Today only 13 states allow out-of-state wine stores to ship wine to their residents, while 38 states allow out-of-state wineries to ship wine to their residents. This is the case despite the fact that there is no difference between the transaction or logistics involved in a winery selling to consumers and shipping wine to consumers on the one hand and a wine store selling wine to consumers and shipping wine to consumers on the other hand. More importantly, the arbitrary state bans on wine stores-to-consumer shipping means that consumers have far less access to wines than they could other wise. It means that many wine shops don't have access to the commercial revolution that other industries have experienced due to the Internet and highly efficient shipping methods.

From a Constitutional perspective, it means that if the Supreme Court does not overturn the decision of the Fifth Circuit Court of Appeals allowing Texas to discriminate against out-of-state wine stores, wine shops across the country will effectively have their rights under the Commerce Clause to be free of discrimination in interstate commerce stripped from them. This will be only the second time in the history of our country when a particular sector of the economy has seen this critical protection stripped from them.

Finally, from a consumer perspective, for too long consumers have seen their basic interests ignored for the sake of protecting the parochial, financial interests of a small band of extraodinarily powerful, well-connected and subsidized industry players. Simple and absurd arguments have been floated and embraced to protect the laws that protect these industry players. The archaic system of wine distribution that was designed to accommodate a 1930s world now exists to protect special interests that have erected cynical and self serving platitudes that take no account of history, free trade or any interests beyond their own. These special interests make outlandish and false claims against anyone who even suggests this archaic system governing the American wine industry be reformed. Laws and lawmakers are bought and sold by special interests to assure no measure of fairness invade the special regulatory cocoon that protects certain industry players. This lawsuit takes a tiny step in balancing what has become a truly unbalanced system that no longer even attempts to serve the needs of of American wine consumers.

The State of Texas, the Fifth Circuit Court of Appeals and wine wholesalers argue that when the Supreme Court wrote that the "three tier system is unquestionably legitimate" the High Court meant that any manifestation of the three tier system in any state was protected from having to comply with the Commerce Clause of the U.S. Constitution, which gives the federal government, not the states, the power to regulate interstate commerce among the various states. Only if there is an exception in the law to a state's general regulatory organization of the distribution of alcohol, such as letting wineries sell their wine at retail, is the state then required to comply with the Commerce Clause. Hence, when states allow their own wineries to sell direct to consumers and ship direct to consumers (something not historically allowed under three tier systems of alcohol distribution) they must comply with the commerce clause, meaning they may not get in the way of allowing out-of-state wineries to ship to their consumers. The 2005 Granholm v. Heald Supreme Court ruling made this clear.

However, the Supreme Court in that 2005 ruling never said that wine retailers were exempt from the protections against discrimination provided by the Commerce Clause of the Constitution. In fact, no Supreme Court ruling and no congressional law has ever suggested such a thing. In order for the federal government to give up its right to regulate interstate commerce in any industry and give that power to the state, the Congress must say so directly. That has never happened. In essence, the Fifth Circuit Court of Appeals has elevated the three tier system to quasi-Constitutional stats that outranks the Commerce Clause.

What's interesting is that in two cases concerning this issue that appeared in Federal appeals courts, justices have bemoaned the fact that they need Supreme Court to give guidance on this issue. The hope of specialty wine retailers and consumers across the country is that the Court will give that guidance.

The arguments the wholesalers give for the notion that retailers somehow have no protections under the Commerce Clause are weak. For example, At Alcohol Law Review, a website administered by wholesalers, the following was recently suggested:

"Once again they (specialty retailers) try to blur the lines and claim that retailers and wineries are the same entity.  They forgot to mention that the federal government doesn’t agree with that.  For example, the wineries need to be licensed at the federal level. Retailers do not."

At best, this is a non-sequitur. Neither Congress nor the Supreme Court has ever suggested that for a business to be granted protection from discrimination under the Commerce Clause it must receive a license from the federal government.

One of the reasons this issue of wine store-to-consumer shipping is so important is that it goes to the issue of the blatant protectionism that exists in the wine industry. I've yet to hear a reasonable argument as to why a winery ought to be able to ship into a state, but a wine store should not be allowed. When a reason is given, it often revolves around the notion that in-state wine stores are put at a disadvantage because out of state stores don't have the same taxes and fees to pay as in-state stores. But of course this argument is ludicrous. Taxes could be paid to the shipping state. Plus, the cost to ship the wine far outweighs any in-state fees a local store may have.

No, the reason that this kind of discrimination continues to occur is because it can and because neither lawmakers nor the wholesalers that control state legislatures have any desire to protect the interest of consumers in their states.

It will be a few months before the Supreme Court makes a decision as to whether or not to take up this case. In the mean time, the state of Texas and Texas wholesalers and many others will send briefs to the Supreme Court weighing in on whether or not the high court should take up this issue.

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28 Responses

  1. James McCann - November 30, 2010

    Nice piece Tom. It should be noted that one of the reasons that other industries are not excluded from commerce clause protection is that there is no other industry that has their own constitutional amendment. (Unless of course, you count the media, and their protections in the First Amendment.)
    If the court hears the case, this would be very high stakes, as one possible outcome is that they re-assert Granholm by saying that in state and out of state retailers must also be treated the same, and thus allowing states to simply ban ALL wine shipping.

  2. Tom Wark - November 30, 2010

    Currently, states may ban both in-state and out-of-state retailer shipping. Further, Plaintiffs argue that under a proper reading of the constitution that does not allow for discrimination against retailers, a state may indeed ban both in-state and out-of-state retailer shipping.

  3. James McCann - November 30, 2010

    Right, so if the court holds that Texas cannot discriminate, don’t they change their law to ban all shipping? I suppose if you at least have that clarified, then you take the battle to the individual states?
    Where does Ken Starr get good wine in Waco?

  4. Tom Wark - November 30, 2010

    I’ll ask about the better wine shops in Waco.
    As far as Texas and the rest of the country is concerned, I think it’s clear a state COULD prohibit ALL shipping, from in-state or out of state. One wonders how Texas wine retailers would feel about wholesalers making the argument that they should not be able to ship. How would the legislature respond to hearing wholesalers make the case that a sector the industry that they are not involved in (retailing) should be hampered, while the sector being targeted says..”hey, slow down”. On top of that, how would consumers respond to this blatant show of power by wholesalers that does nothing but harm consumers.
    The answer to your questions is, Yes, it does go back to the states, just as it did after Granholm.

  5. Thomas Pellechia - November 30, 2010

    I think what James is pointing out is that, until the issue is resolved from a constitutional standpoint (be that repeal, a new amendment, whatever), this back and forth nonsense will prevail and we will retain the 50-state solution hodgepodge that remains a boon for the lawyers.
    If James isn’t pointing that out, I am–again.

  6. Tom Wark - November 30, 2010

    There will be no constitutional amendment. Wine regulations will remain a state-based issue, save requirements that other parts of the constitution are taken into account along with the 21st Amendment.
    That said, social, commercial and cultural changes force us to address issues that in previous decades simply did not come up. That’s what’s happening here.

  7. James McCann - November 30, 2010

    Correct. Under the category of be “careful what you wish for”, my fear is that once the Supreme Court clarifies the situation, and puts the retailers in the same camp as wineries, what is the next move for wholesalers? If I was advising them, I would tell them to shore up their individual states, which could lead to fewer states being open for shipping, not more.
    While they would certainly see resistance from their in-state retailers, the wholesalers would play their trump card, which is tax revenue. (both sales and excise)
    To clarify, I think that this lawsuit is a step in the right direction in terms of gaining clarity as an industry, but possibly a short term step backwards in terms of open shipping if it succeeds.

  8. Tom Wark - November 30, 2010

    I hear you. However, Im pretty confident that I can demonstrate that by shutting down direct shipment for retailers, rather than opening it, the State loses tax revenue…in significant amounts.

  9. Tom Wark - November 30, 2010

    I hear you. However, Im pretty confident that I can demonstrate that by shutting down direct shipment for retailers, rather than opening it, the State loses tax revenue…in significant amounts.

  10. Thomas Pellechia - November 30, 2010

    Why would the Supreme Court care about state tax revenue?

  11. James McCann - November 30, 2010

    That’s the post I’ve been looking forward to for at least two years. I would love to see your tax argument, as states are growing weary of losing sales tax revenue to internet retailers, and it makes for the most compelling wholesaler argument.

  12. Tom Wark - November 30, 2010

    James was suggesting that wholesalers might try to shut down all shipping in a state using the “Tax Revenue Loss” argument.
    However, the SCOTUS does care about state taxes insofar as they have identified it as a consideration that must be taken into account when determining if a state’s discriminatory law is necessary.

  13. Thomas Pellechia - November 30, 2010

    Aha! I see that angle.

  14. Tom Wark - November 30, 2010

    The only way a state ever loses tax revenue to Internet wine retailers is when the retailers are 1) banned from shipping into the state legally and 2) when they ship into the state illegally.
    Retailers have demonstrated over and over again that when given the chance to ship legally and to remit taxes to a state, they will do so.
    However, in order for that to happen, they must be allowed to legally ship into a state.
    First, it is the general consensus of states, their attorneys general, the Supreme Court, retailers, wineries and state legislatures that a state has the right to sales tax paid to them on wines that the purchaser takes possession of in their state.
    This means when a Texan walks into Specs in Dallas, buys a wine and takes possession of it there, the store collects sales tax and remits to the state of Texas. It also means that when a Dallas based consumers used the Internet to buy a wine from a New York retailer and the retailer ships it to Texas, the New York retailer will collect Texas sales tax and remit to the state of Texas.
    However, Texas doesn’t automatically have the right to it’s sales tax from the New York store. They have to pass a law that requires it be paid to them. In other words, their legislature has to ask for it.
    The only way to do this is to legally allow the direct shipment of wine to their citizens. And of course this is easily accomplished through legislation that requires a retailer or winery to purchase a wine shipping permit from the state, agree to submit reports to the state, agree to submit to the states legal and regulatory jurisdiction and to remit taxes. Many states have done this and done so successfully. Furthermore, no state has seen their alcohol-derived tax receipts go down after they’ve passed these laws.
    Now, there will be illegal shipping. Wineries and retailers do it by shipping without getting a permit to do so or by shipping into states where it is illegal to do so. However, those instances are hugely reduced when they legalize direct shipment.
    Direct shipping is boon for states as far as taxes are concerned.
    When wholesalers argue that states lose revenue from direct shipping, they are saying the states lose revenue when it’s illegal to ship and it happens anyway. And in that respect they are correct. The solution is to allow direct shipping, issue permits and tax it.

  15. Mark's Wine Clubs - November 30, 2010

    I always tell people, it’s easier as far as permits go for me to export wine to Latin America than it is to ship wine to Texas.
    How exactly does that make sense?

  16. Chris - November 30, 2010

    Which one of the 256 Texas counties would an out of state wine store claim it is operating in. Texas Retail stores have a limited shipping area (the county they are in, and possibly a small area of an adjacent county if they are close enough). They also have to honor the local alcohol option of where they are shipping to.
    Do the out of state retailers rally want to front the State label registration for each wine they ship in?

  17. Chris - November 30, 2010

    Texas already requires remittance of sales tax for out of state vendors selling/shipping to Texas addresses. Vendors of alcohol products are required to collect and remit the taxes. for non-alcohol products it is mostly the responsibility of the receiver to comply.

  18. Chris - November 30, 2010

    How about Tehuacana Creek Vineyards & Winery http://www.wacowinery.com/
    More wineries are all around the area.

  19. Tom Wark - November 30, 2010

    Yes, Texas issues shipping permits to out of state wineries. However, they bar out of state wine stores from shipping into the state. However, were they to issue shipping permits to out of state retailers, then they would also receive tax revenue from shipments into the state from the retailers to whom they issue permits.

  20. Tom Wark - November 30, 2010

    Were Texas to create permits that out of state retailers could obtain allowing them to ship to all Texans, presumably they’d also change the law for in-state retailer to what it was prior to 2008: Texas retailers being able to ship wine across the state. The law was changed in 2008 to only allow retailers to ship within their county as a cynical way to address the lawsuit challenging the Texas law that prohibited out of state retailers from shipping in as unconstitutional discrimination.
    For a year and a half, under a preliminary injunction, out of state retailers were able to ship into texas and they remitted taxes to the state. The state found no problems occurring as a result.
    As for label registration, my recommendation would be for the State to not require that label registration be required. There is no rational reason for the Texas ABC to require this since the wines shipped in can easily be tracked both via reports sent to the state bou the out of state retailers and from the common carriers that deliver the wine into the state—just as they are now required from out of state wineries an the common carriers that deliver the wine.
    Requiring label registration for all wines shipped into the state would have one purpose and one purpose only: To continue to try to discriminate against out of state commerce. How does that help Texas coffers or its consumers?

  21. Thomas Pellechia - December 1, 2010

    Every time the subject of state sales taxes comes up I am left to wonder whether or not it was a good idea from the start to maintain separate states in a unified country…

  22. Scott - December 1, 2010

    Good idea, Thomas. Hey Tom, while you’re at it, could you ask the Supreme Court to abolish the individual states?

  23. Bill McIver - December 1, 2010

    Good work, Tom. No one knows this issue better than you. You should argue the case before the Supremes.

  24. Australian wine - December 3, 2010

    Hi… very good work.. its better that you know this issue very well and you can handle this better. You should discuss all the matter with your lawyer and all and try to get solution of this problem..

  25. JohnLopresti - December 3, 2010

    I think Scotus will grant cert. There are impressive names on the petition. Landau clerked for Thomas, and for Scalia. The docket is set for December 22, which should get the justices in a holiday mood. A wierd aspect is the adaptation aspect of the law to modern society norms, which sounds like a bull’s red flag about to wave before the “original constructionist” Scalia. Yet, for wine, the honorable associate justice might make an exception, and might ask someone else to write the eventual opinion. I can see Roberts and Alito being eager to pen a new ruling involving commerce. Yet, again, TX is a realm unto itself. Brave TX for standing alone in this case; likewise, the noteworthy Mr. Starr for opting in. It is a somewhat peculiar cast of attorneys on this case. Yet, it’s all in the spirit of wine trade.
    Here is a link to the Scotus docket on the cert issue:

  26. Tom Powers - December 11, 2010

    This banter is making my eyes bleed. Perhaps we can start from a reference where we ask what is in the best interests of the American people. That answer, it would seem, would be to allow our citizens to buy wine from a number of different places to create competition and provide value. The current system of importing, distributing, and shipping simply creates an absurd price escalation. We can intellectualize the process or we can reduce it to what it is-greed.

  27. ugg boots - December 13, 2010

    I know this is really boring and you are skipping to the next comment, but I just wanted to throw you a big thanks – you cleared up some things for me!

  28. Stephen George - December 14, 2010

    Thanks for the careful analysis. I’m wondering — how many states currently allow in-state retailers to ship direct while prohibiting out-of-state retailers from doing the same, as Texas does? In other words, if SCOTUS grants cert and decides this case the way you and I want it to, and if each state that currently discriminates against out-of-state retailers levels up in response, how many states will a California retailer be able to direct ship into?

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