The Map of the Battleground for Wine Retailer Shipping

If you considered the state-by-state effort to legalize retailer interstate shipment of wine as a war (which I often do), you could say that at this moment the opposing forces are in course of carrying out maneuvers. Jockeying for advantage. There is a good deal of behind-the-scenes moves being made at the moment. This update on the state of retailer interstate shipment will attempt to illuminate the various efforts.

THE COMBATANTS
Those working to open up states’ borders to shipments from out-of-state retailers include the National Association of Wine Retailers (for whom I act as executive director) and consumers. Those opposing retailer interstate shipments are middlemen wholesalers, 90% of all retailers in the United States, and alcohol regulators.

What should immediately strike you as odd is that 90% of retailers are opposed to being given the right to sell and ship wine to consumers in other states. But it’s true. Most wine retailers are satisfied buying wines from the relatively small selection offered by wholesalers and selling it to local consumers. They may dabble in Drizly but this isn’t really e-commerce and it certainly doesn’t amount to serving up their customers with alternative choices. These retailers oppose interstate shipments for the same reason wholesalers do: it’s an effort to curtail competition from better, more competent retailers.

Alcohol regulators, particularly those in “control states” where the state controls some portion of the marketplace, are generally unimaginative bureaucrats who side with wholesalers who tell them their jobs are on the line if the three-tier system is broken with interstate shipment from retailers.

When it comes down to this collection of interests making their case in from of lawmakers, they don’t skirt the issue: they claim they will go out of business if out-of-state retailers are allowed to ship into their state. Yes they are straight up that crazy.

The National Association of Wine Retailers is a group of progressive wine retailers located across the country that understand the national marketplace, offer consumers in other states a selection of wines unavailable locally and who want the right to serve this growing marketplace. Consumers side with NAWR because…well, because they believe the idea that wine should not be sent across state lines is ludicrous.

THE LEGISLATIVE BATTLEGROUND
Currently, there are bills in two states that would legalize shipments from out-of-state retailers: Maine and New York. Lobbyists are deployed by NAWR while the wholesalers and retailers located in the states have the advantage of residing in the state and no politicians are happy to side with job losses, whether they would materialize or not. However, there exist a number of lawmakers who actually listen to the arguments made by local wholesalers and retailers and immediately see the charade. It is in the course of these legislative battles that consumers become key and their outreac to lawmakers is crucial

THE REGULATORY BATTLEGROUND
Over the past two years, state attorneys general have been working at the behest of wholesalers to crack down on so-called “illegal shipments” into their states by using the 21st Amendment Enforcement Act. This law passed in Washington, D.C. in 2,000 and gives state attorney generals the ability to sue alcohol producers, retailers and wholesalers in Federal Court. It had never been used until two years ago when Michigan then Ohio sued out-of-state retailers they claimed were shipping illegally. The wholesalers, through the influence they have with local lawmakers purchased with millions of dollars in campaign contributions, have convinced these state attorneys general to prosecute out-of-state retailers rather than consider formally legalizing wine shipments. They have usually won these battles and left millions of dollars in sales tax revenue on the table in the process. The irony is that these attorneys general claim that their states are losing tax revenue due to their consumers seeking out and receiving shipments from out-of-state retailers.

THE LEGAL BATTLEGROUNDS
After the 2005 Granholm v Heald Supreme Court decision, the high court set down a formula for evaluating claims that states discriminate against out-of-state alcohol shippers. The Court held that a state law allowing in-state businesses to ship wine to in-state consumers while prohibiting out-of-state businesses from doing the same was discrimination that would not ordinarily stand due to its violation of the Dormant Commerce Clause. However, the Court said, because the 21st Amendment gives states considerable power to regulate alcohol in their borders, the question of obvious discrimination and obvious violations of the Dormant Commerce Clause, is not so simple. The state, the Court said, could see their discriminatory laws upheld if they could show the laws further a legitimate state purpose authorized under the 21st Amendment and if the state could show that there were no other less discriminatory means of achieving that purpose without discrimination.

In the Granholm case, the Court brushed aside claims of minors getting their hands on alcohol, evasion of taxes, preservation of the three-tier system and maintaining an orderly market as easily achieved without discrimination and ruled such laws unconstitutional. However, after that decision, many courts, wholesalers and many regulators argued that the decision and its reasoning only applied to producers of alcohol, not to retailers. In other words, it was said by many that states could still blatantly discriminate against out-of-state retailers. That was a mistake that retarded the retailer wine shipping marketplace for nearly 15 years.

In 2019 the court noted that mistake in reasoning when Justice Alito, writing the decision in Tennessee Wine Retailers v Thomas, noted the formula for evaluating discriminatory laws laid out in Granholm does indeed apply to all economic actors, not just producers.

There are currently lawsuits challenging discriminatory wine retailer shipping laws ongoing in eight states: Indiana, Illinois, Missouri, Kentucky, Ohio, New Jersey, Rhode Island and North Carolina. There should not be. Currently, states and some courts are interpreting the Tennessee Wine decision in a way that explains states need not show there are less discriminatory ways to achieve their goals when it comes to retailer discrimination, but rather must only show that a state’s legitimate interests under the 21st Amendment are being protected. What’s notable about this interpretation of the Tennessee Wine decision is not just that it is currently preventing retailers from shipping into upwards of 20 states that currently discriminate in their retailer shipping laws, but also that nowhere in the Tennessee Wine decision did the Court say this was a new legal interpretative framework, nor that there was a new interpretive framework for retailers at all. In fact, this reasoning now being deployed by the Sixth Circuit Court of Appeals as well as by states defending their laws is one that appears to overturn the Granholm decision as applied to winery shipping.

The goal of the eight lawsuits is to bring a straight wine retailer shipping case before the Supreme Court (the Tennessee Wine case was not explicitly about retailer shipping, but about retailer residency in states). By my estimation, it will be two to three years before we know if the Court will take such a case.

THE ENDGAME
Down the road, consumers in the majority of states will have the right to receive shipments from out-of-state retailers. To begin with, the pro-shipping forces have the law on their side. Second, eventually, the tax revenue states will gain from retailer shipments will prove too desirable. Third, the arguments deployed by the opposition are horrendously bad. Finally, more and more retailers that currently oppose retailer shipments will see that interstate shipment is critical to their survival and will change sides.

And so, the battles continue…

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6 Responses

  1. Mendiharat+Nicolas - March 22, 2021

    Great summary of a crazy situation. Thanks Tom

  2. VVP - March 23, 2021

    Just another very strange article. Reading the 21st Amendment Enforcement Act we can understand that SHIPMENT OF INTOXICATING LIQUOR IN VIOLATION OF STATE LAW is not prohibited in general, but prohibited in certain cases only. The law implemented into the 21st Amendment is commonly known as the ‘‘Webb-Kenyon Act”. The Act itself does not prohibit SHIPMENT OF INTOXICATING LIQUOR for personal use and consumption by a consumer, so shipping followed the sale at retail unlikely is a case. In addition, the Act requires that violated STATE LAW must be a valid exercise of power vested in the States. The Act itself isn’t construed to grant to States any additional power, so States must relay only on the Act itself, and in every case must prove the validity of their laws. Also, the Act requires that a State proves by a preponderance of the evidence that a violation of State law has taken place or is taking place in the case of shipping followed the sale at retail. So far none was given in the Courts. Definitely, all cases in the States where all or partial interest in alcohol sales belong to the States are politically arranged to be totally protectionist.

    “Small selection offered by wholesalers” is a joke. Even a large retail store can’t physically fit on its shelves what is available from wholesalers in private enterprise markets.

  3. DTH - March 23, 2021

    “Small selection offered by wholesalers” has nothing to do with shelf space. It is referring to the % of wines offered in a state vs. all the wines available in the country. For instance CT retailers only offer a fraction of the wines that are available for sale in NY. Why should CT residents not have access to those wines as well?

  4. VVP - March 23, 2021

    DTH,
    Connecticut controls sales utilizing a minimum price law. This leads to higher alcohol prices than in neighboring states. It is possible that CT retailers can’t compete with NY retailers and offer only fraction of wines available in NY. You must consider that from the furthest point in CT it is only two hours of driving to NY. Nothing prohibits CT residents to drive and shop in NY.

    On the other end CT offers draconian out-of-state retailer wine shipping permit. This permit costs $700.00 a year and requires an out-of-state retailer to register for business in the state of Connecticut, collect and remit CT Sales and Use Tax, obtain CT Alcoholic Beverages Distributor License (why?), not ship more than five (5) gallons of wine in any two-month period, and not sell below minimum bottle price for all products that are already registered in Connecticut and have appointed wholesaler. We don’t believe that anyone can see a business with such discriminating permit.

  5. Jonathan - March 23, 2021

    Curious the logic behind the incremental sales tax to the state. If wine purchases remain static but prices decline (due to competition), sales tax revenue would be neutral to negative. The remittance may be spread across more retailers but it seems you would need an overall net increase in the value of wine purchases to realize more sales tax revenue.

  6. Bill St. Croix - March 26, 2021

    @Jonathan – I believe the general logic is that I would by wine from out of state retailers that I would not have the opportunity to buy in state, hence lost tax revenue opportunity. Remember that most people buying wine, out of state, are buying wines they can’t get in state (think specific, old vintages), therefore there is no competition. Market price rules and the state in which you live gains revenue they would not likely have gotten, otherwise.

    One could presume that I would merely go to the local store and buy a bottle of wine so it’s a zero sum gain, but if the local store had what I wanted, I wouldn’t mail order it in the first place.


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