Not an Easy Life...
Wholesale wine sales in an uncertain economy

An Independence Day look at progress in direct shipping since Granholm v Heald

On the day that Granholm v. Heald was announced in 2005, there were impromptu celebrations around the country, stories in the national media about how the Supreme Court had sided with wine lovers and struck down restrictions on interstate wine shipment, and general euphoria among small and medium-sized wineries who rely on direct shipping.  A closer reading of the decision in the ensuing days produced a more nuanced view, that the Supreme Court overturned a certain type of state protectionism and that the real-world consequences of this decision were likely to be on balance positive to wineries and consumers wishing to order wine from these wineries.  Readers might be interested in a detailed analysis of the Granholm v Heald decision I wrote for a newsletter back in 2005, which I later expanded on this blog.

Slightly more than three years later, the results are complex.  The net effects have been to allow more people in more places to receive wines direct from wineries, but the impacts have been far from uniformly positive for wineries and their customers.

When the Granholm decision was announced, we could ship to the thirteen states with reciprocal shipping laws.  These states (Alaska, California, Colorado, Idaho, Illinois, Iowa, Minnesota, Missouri, New Mexico, Oregon, Washington, West Virginia and Wisconsin) allowed wines from the other twelve reciprocal states, with the stipulation that those states also allowed their wines.  Geographically, they were clustered around the West Coast and the upper Midwest.  None (with the exception of West Virginia) was near the East Coast or the South.  The total population of the reciprocal states comprised just under 30% of the US population.  The benefits of this system were that, as long as you were shipping to someone in one of these states, you needed to do very little compliance work and (outside of California) did not need to charge for or remit taxes.

Now, three years post-Granholm, we can ship to 26 states (Alaska, California, Colorado, Florida, Idaho, Illinois, Iowa, Michigan, Minnesota, Missouri, Nebraska, Nevada, New Hampshire, New Mexico, New York, North Carolina, Ohio, Oregon, South Carolina, Texas, Vermont, Virginia, Washington, West Virginia, Wisconsin and Wyoming).  We expect to receive approval to ship to Georgia within the next month. These 27 states comprise nearly 70% of the US population, and most of the rest border on at least one state to which we can ship wine.  Our only "landlocked" states (where no bordering state allows direct shipment) are Mississippi and Rhode Island -- two of the smallest wine markets in the country. 

Note that if you look at a shipping map such as the one published by the Wine Institute (in conjunction with ShipCompliant, which we'll hear more about later), you'll see 36 states listed as legal shipping states.  The discrepancy between their number and ours comes because of the varying levels of restriction and cost that states impose on wineries wishing to ship.  Some (like Arizona and Massachusetts) restrict us from shipping because we're too large.  Some (like Louisiana and Indiana) prohibit wineries from shipping if they also have a relationship with a distributor in the state.  Some (like Kansas and Rhode Island) allow you to ship orders placed while the customer was on-site only.  Others (like Hawaii and Connecticut) have such onerous reporting requirements that the business we could do does not justify the expense.  Finally, the District of Columbia has such a low monthly limit (one quart per month) that shipping there is not practical.

This variability by state is a large part of the downside of the proliferation of state direct shipping laws post-Granholm.  By and large, states have taken advantage of the portion of the Supreme Court decision that allows them to recoup the taxes they would otherwise have collected from an in-state sale of the same wine.  Some states (like Texas) have made this relatively simple by applying a uniform state-wide tax rate and then distributing the revenue internally.  Others (like New York) require that we collect the precise tax that would be charged at the point of delivery.  So, in addition to any state taxes, we need also collect county and city taxes, and remit these to the appropriate agencies at the schedule they dictate. As you'd expect, this can be a nightmare.  Different jurisdictions require reporting -- which can range in complexity from relatively simple to exceptionally detailed -- monthly, others quarterly, others annually.  At Tablas Creek, we have one person in our office who specializes in compliance.  She spends about one third of her time on this, and we receive additional contributions from our Controller.  The overall cost of the time they spent (in salaries and benefits) probably approached $20,000 last year. 

The main cost to consumers is that (with the exception of the three remaining reciprocal states) we are now required to collect and remit taxes on the wines that we sell.  The 21st Amendment that repealed prohibition gives special authority to states to treat alcohol differently from other products.  However, the Supreme Court has held that the Commerce Clause prohibits states from collecting taxes on most out-of-state sales.  For example, you don't pay taxes on a book you order from unless you live in Amazon's home state of Washington.  The Supreme Court last weighed in on the collection of taxes in interstate commerce in the 1992 decision Quill Corp. v. North Dakota, and affirmed the earlier rule that required a company to remit state taxes only if it has a "nexus" in that state.  The decision looked specifically at a mail-order business, but it has been held to apply equally to Internet commerce.

Yet, the new direct shipping laws nearly all require that wineries collect and remit taxes on their sales.  I think it's interesting that I can't distinguish how this conflict between the 21st Amendment and the Commerce Clause differs materially from the one ruled on in Granholm.  Yet, when the states' Attorneys General argued in Granholm that they had a "legitimate local purpose" in collecting taxes on the sales of wine within their borders (as a justification for prohibiting untaxed out-of-state sales) Justice Kennedy specifically rebuts their concerns by suggesting that wineries remit taxes.  From the court's opinion:

Licensees could be required to submit regular sales reports and to remit taxes. Indeed, various States use this approach for taxing direct interstate wine shipments, e.g., N. H. Rev. Stat. Ann. §178.27 (Lexis Supp. 2004), and report no problems with tax collection.

This imposition of formerly-uncollected taxes amounts to a surcharge of between 6% and 10%, depending on the location where the wine is delivered.  On the volume of sales even of a relatively small winery like us, this adds up.

You might well ask how a really small winery, with little or no staff, can hope to navigate this labyrinth.  It is a real challenge.  Some small wineries have simply abandoned shipping to the non-reciprocal states, and therefore seen their market shrink rather than grow in the last three years.  However, a handful of companies specializing in compliance have moved in to fill the void. We use what is probably the market leader, ShipCompliant, and it has made the process much easier.  For a fee of a few hundred dollars per month, we filter our sales through their software and have state and local compliance documents generated automatically.  Of course, there have been other costs in setting up and integrating this system with both our Web front-end and our accounting back-end systems.

Another hidden cost to consumers has been the erosion of rights to receive out-of-state shipments from wine retailers.  The Granholm decision specifically addresses wineries, and many states have taken the (in my mind, constitutionally indefensible) position that it was not intended to apply to other sellers of wine.  The Wine & Spirits Wholesalers of America has been tireless in the face of public ridicule and judicial rebuke in opposing any expansions of direct shipping privileges, and the newly formed Specialty Wine Retailers Association has only recently begun mobilizing to protect retailers' shipping rights.  Meanwhile, several states, most notably Illinois, have stripped their consumers of the rights to order wine from out-of-state retailers.

Finally, as a conclusion, it's worth noting that my initial idea in writing this article was to find relevant sections of the Declaration of Independence, and its spirit of rule by and for the people governed, as a way of exploring the various impacts. Looking at the Declaration's text, I decided that idea was overblown. Yes, I'd love to be able to ship a bottle of Mourvedre to Maryland, but I don't think that the fact that we cannot should encourage us to dissolve our system of government.  The US Constitution (which, after all, specified the mechanism of government rather than the justification for it) seems a better guide.  The most relevant?  The wisdom of the founding fathers, who in the Commerce Clause (Article I, § 8, cl. 3) reserved for Congress the power to "regulate Commerce with foreign Nations, and among the several States".  It's clear that states, given a sliver of opportunity, find justifications for imposing and collecting taxes and for favoring businesses licensed by and in that state.  One can only imagine how fragile the federation of states would be, and how discouraging it would be for business in general, if every product had to navigate the same patchwork of regulatory challenges that producers of wine face.