Retailer Wine Shipping Has NO RELATIONSHIP TO the Three-Tier System
Tomorrow the United States Supreme Court is scheduled to meet in conference and consider a petition that the Court hear a retailer wine shipping case out of Missouri and the 8th Circuit Court of Appeals. The case is a familiar one. Missouri allows its own wine retailers to ship to Missouri residents but bans out-of-state retailers from doing the same.
While not impossible, it is unlikely the Court will take the case. Yet because the implications of the Court agreeing to take this case are so great for the wine industry and wine consumers there has been a good deal written about it of late. Because of the interest generated by the possibility of the Court taking another alcohol case is so great, this is an opportune time to explain what many don’t seem to understand but really should: This retailer wine shipping case has no implications or impact on the so-called “three-tier system”.
Commonly interstate wine shipping has been set up as being in opposition to this “three-tier system” that so many claim governs wine sales and distribution in most states. It shouldn’t be understood like this. But one of the problems is that the term “three-tier system” is too often incorrectly used as a euphemism for the entirely of a state’s alcohol regulatory system. In fact, the proper understanding of a “three-tier system” must focus on a very narrow set of provisions sometimes found in states’ alcohol regulatory codes.
The term “three-tier system” is properly used to describe the following set of provisions: 1) That suppliers, wholesalers and retailers hold separate licenses or permits, 2) that cross-ownership between these tiers is prohibited (a licensed. retailer may not also be licensed as a wholesaler, for example) and 3) that a state’s retailers are required by law to procure their inventory from an in-state wholesaler, which in turn is the only licensed entity in the state able to obtain wine from suppliers and wholesale it to retailers and restaurants.
It happens that these three provisions also make up the Supreme Court’s understanding of the “three-tier system”. In a variety of decisions, the court has noted that this system is one that “funnels” alcohol through a wholesaler and that each tier is separately licensed.
The most obvious purpose of these three laws that make up the three-tier system is that together they theoretically prevent vertical integration of the three separate elements of the distribution system. The system was also designed to prevent members of one tier (usually thought of as the producer tier) from controlling or exerting undue influence over members of the retail tier. These goals could be achieved without a state’s laws incorporating these three provisions that makeup what we know of the three-tier system. But this is less important for this discussion. I want to point out something else important about this system.
First, the system governs how a bottle of wine must make its way to a retail setting within the state where the laws are enshrined (supplier to wholesaler to retailer). Second, It is important to note that these provisions that make up the famed three-tier system do not govern where a consumer may purchase wine.
A resident of Missouri may, of course, purchase wine at a Missouri wine retail store, which offers wine that went through the funnel of the state’s three tiers. But there is nothing in Missouri law (nor could there be any such law) that prohibits the same consumer from purchasing wine from Florida, California, Illinois or retailers in any other state. The Missouri wine lover can legally purchase wine from a Florida retailer online at the retailer’s website. The consumer could also travel to Florida and buy that wine from the Florida retailer in person. Neither of these transactions has any association with or relationship to, let alone are governed by, Missouri law or its three-tier system. The Internet or in-person purchase of the wine by a Missouri wine lover from the Florida retailer is considered to have occurred in Florida and is governed by Florida law. Moreover, because the transaction takes place in Florida, the Sunshine state gets to charge and collect sales tax on the transaction, while Missouri, despite being the home of the consumer, does not have a right to that sale tax. Missouri has no right to any sales tax when one of its wine-loving citizens travels to Florida, buys a bottle of wine at retail, and drinks it at the home of their friend in Portland.
Missouri law is only implicated when the wine purchased in Florida, either in person or over the internet, arrives back in Missouri. And no matter how it arrives, either by the retail store shipping it to Missouri or the consumer arranging shipment on their own, the Missouri three-tier system remains untouched and unimplicated because, as we know, the provisions of the three-tier system governs how wine comes to retail inside Missouri.
This brings us back the Supreme Court and the retailer wine shipping case. If we understand that the question of the purchase of wine is not in question, then it’s easy to see that the only issue is the movement of the wine across state lines. However, the state of Missouri as well as most other states don’t see it this way.
Missouri, along with other states, sees the arrival of a bottle of wine into their state and into the hands of a consumer as a wine that did not travel through their three-tier system and, more importantly, a bottle of wine that was not purchased by a Missouri licensed retailer from a Missouri licensed wholesaler. If out-of-state retailers are allowed to ship into Missouri, they say, it will unravel their three-tier system, which they like to remind everyone has been blessed by the Supreme Court as “unquestionably legitimate”. This view represents a fundamental misunderstanding of what the three-tier system is, who it governs and how it operates. Out-of-state wine retailers do not want a Missouri retail license. They simply want to be able to ship to Missouri residents. What’s key is understanding that neither the Missouri retailer shipping to a Missouri address nor a Florida retailer shipping to a Missouri address in any way touches upon or implicates what actually is, or what the Supreme Court understands to be, the “three-tier system”.
While all this seems somewhat arcane, it likely won’t surprise anyone with a passing understanding of alcohol law that what is actually in question in the case being appealed to the Supreme Court is even more arcane. Yes, questions of discriminating against out-of-state interests and the dormant Commerce Clause and the 21st Amendment are in play. However, this case actually has more to do with the process by which a federal court must analyze these issues in deciding the case. I don’t want to explore that, however.
What I want instead, and what I hope I’ve done, is bring a little clarity to what the “three-tier system” is and means and make the case that retailer interstate shipping does not implicate a state’s three-tier system. Because, in the end, a discriminatory law like Missouri’s that is at issue in the appeal to the Supreme Court does not prevent the “sale and shipment” of wine to Missouri consumers. It only prevents the shipment of the wine. This not a nit being picked. This point is fundamental to the various laws surrounding interstate shipping.
The Twenty-First Amendment Enforcement Act expressly prohibits any State from enforcing a law regulating the importation or transportation of intoxicating liquor that unconstitutionally discriminates against interstate commerce by out-of-State sellers by favoring local industries, erecting barriers to competition, and constituting mere economic protectionism. (H.R.2031 — 106th Congress (1999-2000))
The Dormant Commerce Clause does the very same. So, what is a fight for?
We are happy to see that after many years attacking our comments you finally understand that three-tier systems and unconstitutional state laws have nothing to do with interstate retail transactions. A retail liquor store operating strictly inside the unquestionably legitimate three-tier system has nothing in relation with DtC. However, we want to remind you that California ABC license type 17/20 is exactly that prohibited cross-ownership between tiers, and license type 85 is a Direct Shipper license.
Much of the purpose of the three tier system is to ensure that the states collect their excise taxes as well as sales tax. In Ohio if I buy any consumer good from out of state through ebay or Amazon I will be paying sales tax. Also any wine shipped directly to a person or a retailer in Ohio will be registered with Ohio liquor control and pay excise and sales tax. It is as much about tax collection in the state the wine ends up rather than the tax going to another state in an imported purchase. Ohio actually discriminates against my winery in that a retailer can get wine shipped to them directly from an out of state winery with only one B2A permit, the same as a winery in Ohio has, while the Ohio winery is subject to a food processing license which is duplicate of the liquor control permits in effect and the out of state is not. California, Washington and Oregon states all exempt wineries and breweries from being licensed and regulated as food processors. While not pertinent to a retailer shipping directly to a person of final use, it in effect will cut out the state that should be getting the excise and sales taxes. The system was set up as much for taxation purposes as it was for preventing vertical ownership.
@Keith – On the taxation side, if that is such a big problem, why is it that so many states already allow retail shipments into their states, without collecting tax directly/at all? I guess they assume that people will self report purchases when doing their income taxes?
So, if they don’t self report, then they still don’t collect tax and I doubt many do self report, so again, what are the ‘real’ reasons that there is such resistance to DtC retail shipping in certain states?
It’s not the red herrings of ‘protecting kids,’ alcoholism and drunk driving reduction…so what else is there? Religion (UT) is the other ‘big one’ so what else is there?
@William- Wineries have to buy a license in the state they ship to and submit excise and sales tax to the state they are shipping. Whether it be excise tax to a retailer or both excise and sales tax to the final customer. Most all large companies like ebay, amazon, Wal-Mart, etc do charge sales tax on any thing sold to customers in Ohio and many other states. It is about taxation as much as anything, Wholesale distributors in the middle tier are the primary collectors of excise taxes on alcoholic beverages. Retailers are the primary collector of sales tax. States have a reluctance to lose tax money. Also most states are very serious about not having wine or other shipped to minors. Age has to be verified by shipper or have the adult signature confirmation by the carrier. Having retailers ship then the receiving state where the wine is shipped loses their excise taxes, which go to the retailers state as the distributor there paid them.
If out-of-state retailers shipped 120,000 cases of wine to Ohioans in a year (approximately what wineries sent in 2020) and only paid sales tax and not excise taxes, the state would not get approximately $384,000 in excise taxes. However, if those 120,000 cases sold at an average bottle price of $25.00 per bottle (considerably less than the average price per bottle of wine shipped to Ohio by wineries), the state would make $2,070,000.
….. Where wine shipping is concerned, the state is decidedly NOT concerned with taxes. Otherwise, they’d jump on the opportunity to let retailers ship.
Keith wrote: “Also most states are very serious about not having wine or other shipped to minors. Age has to be verified by shipper or have the adult signature confirmation by the carrier. ”
So how does that differ from an in state shipper? It doesn’t as they have to verify at delivery as well. That is a red herring.
To Tom’s point I would think if taxation is such a concern, they would embrace retailers shipping and capturing that revenue.
Ohio is a control state and has separate agencies collecting taxes. No one wants to give up their cut. Also, they would likely need to be licensed and I would think the state would require them to pay excise tax in Ohio. a retailer in Ohio has excise tax paid by the distributor, I suspect they would expect an out of state retailer to submit excise taxes. Everyone wants their cut. While I have no issue with retailer shipping myself at all, it doesn’t mean others don’t have issues with less control of a regulated product. Many do not want the three tier system busted. I don ‘t really care as I can’t even sell wholesale in Ohio at this time and can only ship to end customers in Ohio. I am not set up to sell out of state to end customers. Usually it is the small guy that cannot comply with much of anything, I suspect when it gets going that will include small retailers. They will also be the ones to suffer most from the competition. Discrimination is in effect either way, maybe against the small in state business. Kind of reverse of the Commerce clause discrimination so far litigated. Ohio promotes big business and gives lip service to supporting small businesses in most cases. Wine.com and other large retailers will be the primary beneficiary. They will be pit against the wholesale distributors lobby in Ohio who have a huge amount of clout. As usual, the end legislation will not be pretty with all kinds of hoops to jump through. Ohio already has more regulations than at least 46 other states.