An exchange with Representative Kevin McCarthy on HR 5034 and direct shipping

On April 15th, H.R. 5034 was introduced into the US House of Representatives.  This bill, written by the Beer Wholesalers of America and titled the "Comprehensive Alcohol Regulatory Effectiveness Act of 2010" [Get it? The "CARE Act"] would write into law the primacy of the 21st Amendment, which repealed prohibition, over the Commerce Clause of the US Constitution, which gives the federal government exclusive power to regulate interstate commerce.  The net impact would be to allow states to write laws which allow their own in-state wineries (and breweries) to ship direct to consumers but prohibit out-of-state wineries (and breweries) from doing the same.  Read the full text here.

Of course, local wineries, and the in-state jobs that they represent, have been one rallying point for the advocates of direct shipping.  And direct shipping has been largely victorious in the nearly five years since Supreme Court ruled in Granholm v. Heald that states were not allowed to discriminate in favor of in-state interests in their alcohol regulations.  At that time, we could ship to 13 states.  Later this month, we will add Maine as our 31st legal shipping state.  The end result of the deregulation has been more choices for and lower prices to consumers, and more tax revenue to states, who have nearly all written shipping laws that require out-of-state wineries to remit state and local taxes on the wines they ship into the state.

Of course, one tier has been left out of the celebration: the wholesale tier, who in the era before direct sales collected a state-mandated markup on every bottle of beer, wine and liquor sold in every state.  These wholesalers are licensed by each state, and are often the single largest contributors to state political campaigns.  And although direct shipping of beer and wine is a tiny proportion of all sales and largely covers products that are not available through distribution, wholesalers have mobilized in force against direct shipping.  It's really amazing that so many direct shipping laws have been written in the last five years given the money and political muscle that have been lined up against each one.

With state ploys for legal discrimination being eliminated one by one in the courts (the most recent, a Massachusetts capacity cap under which all in-state wineries fell, was reaffirmed as unconstitutional by the First Circuit Court of Appeals in January) wholesalers have evidently turned to the federal government for help.  Hence H.R. 5034.

Although the bill has yet to be brought to the floor of the House for a vote, I did not want to be complacent about its prospects.  So, I wrote our local congressman, Representative Kevin McCarthy of California's 22nd District, to urge him to oppose the bill.  I assumed, given that his territory includes both Paso Robles and Bakersfield (wine producing regions) that he would be opposed to the bill.  His response suggested to me that he had not yet considered the bill's impacts on his district, and that he was taking the legislation's sponsors at their word when they said that this was an issue of states' rights.

I thought it would be interesting to post our exchange.  I have a few concluding thoughts (as well as how to contact your own representative) below the emails.  First, from last Thursday:

Dear Representative McCarthy,

We met a few years ago at an event organized by the Paso Robles Wine Country Alliance about immigration issues.  This is much more pressing to us, and to every small wine producer in the Paso Robles region.  I hope you will oppose HR 5034, a bill sponsored by beer wholesalers that would overturn winery-to-consumer shipping around the United States.

The legislation is couched as addressing public safety and states' rights, but is better described as an effort by wholesalers to protect their monopoly and choke off a potential source of competition.  If it passes, it will eliminate consumer access to thousands of small wineries and tens of thousands of wines, nearly all of them with such small productions as to be irrelevant to distributors.

HR 5034 has been condemned by winery associations including the Paso Robles Wine Country Alliance.  It would choke off the lifeblood of most small wineries in our area and around the country.

Please let me know how you intend to vote on this important issue.

Sincerely,
Jason Haas

I received a response this morning:

Dear Jason:

Thank you for contacting me in opposition to H.R. 5034. 

According to the bill's sponsors, H.R. 5034 is intended to reiterate the three-tier system of alcohol regulation in the U.S., and to ensure that states retain their traditional regulatory authority over alcohol distribution, which are areas that I support. However, I appreciate your concerns that the legislation could negatively impact wineries, especially small ones, in California. Given these concerns, I will closely monitor this legislation before making a final decision on this bill should it come to the House floor for a vote.

Thanks again for contacting me on issues of importance to you. If you would like additional information on services my office can provide you, my votes and positions on issues facing our nation, and to subscribe to receive periodic "e-newsletters," please visit my website at http://kevinmccarthy.house.gov/.

Sincerely,

Kevin McCarthy
Member of Congress

I responded to him just a few minutes ago:

Dear Representative McCarthy,

Thank you for your response to my earlier note regarding HR 5034.  In your response, you write:

"According to the bill's sponsors, H.R. 5034 is intended to reiterate the three-tier system of alcohol regulation in the U.S., and to ensure that states retain their traditional regulatory authority over alcohol distribution, which are areas that I support."

Please, in your deliberations, recognize that nothing currently prevents states from regulating alcohol in any way they choose.  Some states force all wine to go through the three-tier system and prohibit wine shipments entirely.  Others only allow it only for wineries of a certain size.  Others allow shipment into some areas and not others.  Others allow wineries and retailers to ship.  The only prohibition is that states not discriminate in favor of in-state wineries.  The major beneficiaries of the free trade that has resulted from the Supreme Court prohibition of discrimination have been the small wineries of California, over 200 of which are in your district.

While the sponsors of the bill would have you believe that this issue is one of states' rights, it is instead an issue of legislated monopolies (the liquor distributors) trying to eliminate their competition (your small wineries).  If you support free trade, you should oppose this bill. 

The passage of HR 5034 would likely result in dozens of local wineries having to close, the elimination of hundreds of good local jobs, and blunt the most powerful engine of the vibrant Paso Robles economy.

I hope that you will oppose this dangerous bill.

All the best,
-Jason

I find it hard to believe that a California representative, and a member of the Congressional Wine Caucus, would take a bill like this at face value.  If a representative who has a territory with such a vested interest in expanded access to direct shipping can be so willing to accept the justifications of the wholesalers' lobby, what can the prospects be in the rest of the country?

If we expect the members of Congress to see this bill for what it is -- an anticompetitive money grab by big businesses with legislated monopoly power -- we need to make our voices heard.  Please speak up!  As usual, the Web site Free the Grapes is a great resource.  Or, you can also go straight to a page where you can customize and have notes sent to your senators and representatives.  And please continue to spread the word.  There is a Facebook group dedicated to stopping HR 5034, and a quick blog search on HR 5034 turns up nearly 4000 articles, led, appropriately, by Tom Wark's full-throated repudiation of the wholesalers' claims.


Wine markups at the wholesale, restaurant and retail level

I try not to rant about the wholesale market for wine in the United States.  Really I do.  I know that distributors and retailers play an important role both in marketing and in delivering wine to the millions of American wine consumers, and I am grateful for the work of the dedicated wholesalers, restaurateurs and retailers who support Tablas Creek wines every year.

But there are times when the entire wholesale channel can be discouraging, when I eye jealously the producers around here who sell most or all their production direct.

The economic challenges of a recession hit both ends of the distribution chain.  Restaurants have so far taken the largest hit, with several notable top spots already closed and others, particularly those who rely on businesspeople with expense accounts or tourists, down as much as 30%.  Retailers as well have seen the effects of consumers tightening their belts, and though they continue to sell plenty of wine, most of what is selling now is on the less-expensive (and less profitable) end of the price spectrum.  Similarly, smaller, higher-end wineries are impacted by having to convince several people along the distribution path that they should have enough confidence to sell their wines.  As I wrote a few weeks back in my post Succeeding in a poor economy:

"for a wine to sell in the wholesale market, the distributor manager has to believe in the product enough to maintain a healthy inventory, the distributor rep has to believe he or she can sell the wine enough to pull a sample and show it to his or her accounts, and the buyers at the accounts have to have enough confidence to buy the wine in a crowded marketplace full of people offering them hitherto-unimaginable deals.  That's a lot of people whose confidence you have to win or keep before the consumer even gets the opportunity to buy your wine."

While both restaurant/retailers and wineries struggle, the system is set up such that wholesalers are guaranteed to make healthy money off of wine.  For example: a typical wine that retails for $25/bottle ($300/case) a retailer would expect to buy for $200/case.  The distributor who sells it for $200/case would expect to buy it for $150/case.  An agent who sells to distributors for $150/case would expect to buy it for somewhere around $120/case.  So, a winery starts off with $10 of the eventual price of $25, and bears most the real costs of the wine (including, but not limited to, land, winery building, farming, harvest labor, winery labor, barrels, bottles, corks, and marketing).  Nearly every wholesaler and many retailers pay their sales force on commission, so if they sell less, they're paid less.  It's a great way to make sure that whatever sales are, the business ends up in the black.

The world of restaurants has even more dramatic markups on wine (which go to subsidize food and labor costs).  That same wine which the retailer sold for $25/bottle would normally sell on a restaurant list for triple the restaurant's cost, or $50.  If the restaurant were to pour it by the glass, the typical markup is to charge bottle cost for each glass of wine.  So, a glass of the wine would be $16.  I wonder if most people realize what a small percentage of the price that they are paying for wine at the retail shop or restaurant goes back to the producer. 

It's worth mentioning that I am not particularly complaining about restaurant markups, at least not wine list markups.  Restaurants typically use the margins they make on wine to help subsidize the rest of the astronomical costs of building out and running their operations, and given that 60% of restaurants close or change ownership in the first three years, most restaurateurs are not in the business getting rich.  I do think, though, that the standard 400% by-the-glass markup and the resulting $12 bottle cost limit for by-the-glass wines, is often self-defeating for restaurants, as most restaurants therefore can't offer great wines for their by-the-glass selections.

Why did this system evolve in a way that protects the profitability of wholesalers at the expense of restaurants and producers?  In my opinion, it's a combination of legislation that protects the distribution tier (the famous three-tier system) and natural economies of scale.  For a distributor to be effective, they must be relatively large, and sell many dozens (probably many hundreds) of wineries' wines.  This means that the success of any individual small winery or any individual restaurant or retailer means relatively little to them financially.

In addition to these natural economies of scale, wholesalers are protected by the laws that license them to make deliveries of alcohol to restaurant and retail customers. (A few states do permit wineries to do this, but it's usually only practical in the winery's own home region.)  Many states give even more explicit protection from competition to the wholesalers, including roughly 20 states with franchise laws that expressly prohibit wineries who are dissatisfied from choosing to move their custom elsewhere.  This has always seemed to me a clear violation of antitrust laws, and on a more pragmatic level allows distributors in franchise states to routinely work on higher markups.  With distributors' large size comes political clout and efforts to protect their privileges through favorable state legislation, as advocacy groups like the Specialty Wine Retailers Association point out.

It's worth noting that there are exceptions to every generalization.  We have several wholesalers in key states around the country who are terrific, who share the costs of offering better deals to our customers, and who are out on the streets regularly advocating for our wines.  But those distributors who provide advocacy and education in addition to their warehousing and delivery tend to be our smaller, wine-focused distributors rather than larger we-sell-everything-from-Jack Daniels-to-boutique-wine wholesalers, and mostly (though not entirely) come from states without franchise laws.  It doesn't take a rocket scientist to guess in which sort of wholesaler Tablas Creek does best.

How does a small to medium-sized winery who makes their livelihood in the wholesale market survive?  I have no idea (thank goodness for our tasting room and our mailing list, through which channels we can offer customers good discounts on wines and still make a much better margin than on what we sell wholesale).  My dad and I have come to the conclusion that for a winery to be successful focusing solely on the wholesale market they need to make somewhere above 50,000 cases.  I wouldn't know about that.  But I do know that at Tablas Creek, we've been forced to think of our money-losing efforts in the wholesale market as a portion of our marketing budget.  It's about the only way that we can avoid throwing the mouse at the computer when we get a request from a wholesaler that we lower our price on a bottle of wine that we sell for $9 (out of which come all the concrete costs of making the wine) so that the distributor can make their $4 for delivering a bottle of wine from their warehouse to a restaurant and the restaurant can make $58 on that bottle when pouring it by the glass.

So, where does this leave us?  Get involved in your state legislatures' discussions on wine-related matters.  Oppose franchise laws, exclusivity for wholesalers and other laws that protect the middle tier from competition.  Support direct shipping legislation.  Free market capitalism stops working when the markets aren't free, and the wholesale wine market, at least outside California, isn't very free.  And both producers and consumers suffer the consequences.


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 Amazon.com 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.


An update on corks, screwcaps and consumer preferences

In the late-March post Consumers choose... cork? I reported on the the results of the first six weeks since we'd offered on our online order form the option of choosing between cork-finished and screwcap-finished versions of our 2005 Cotes de Tablas.  I was surprised that of the first 21 orders we'd received, 15 had chosen to order the cork-finished version.  I speculated that the reports of widespread consumer acceptance for screwcap-finished wines, at least for red wines, had been exaggerated.

In a very thoughtful comment, a reader named Russ suggested that I might have influenced customers' choices simply by putting the cork-finished version first on the order form.  I agreed to switch the order of the two wines on our online order form, and have been meaning to report back on the results in the three-plus months since.

Russ may have had a point.  Since early March, we've received 135 orders that have included the 2005 Cotes de Tablas.  Of these orders, 56 (42%) have selected the cork-finished version.  62 (46%) have opted for the screwcapped version.  And, perhaps most promisingly, 17 orders (13%) have included both cork and screwcap versions of the wine.  This is a much more promising outcome than what we'd seen in the initial 21 orders, and it's great to see a significant percentage wanting to recreate the experiment for themselves.

It also strikes me that the initial sample size of 21 orders was too small to conclude much with any degree of assurance.

On a related note, the more that we taste the screwcap-finished version of the Cotes de Tablas, the more we appreciate the vibrancy and freshness that it gives the wine. It does seem that, at least for Grenache-based reds, screwcap offers an appealing option, and barring any unexpected developments in the next 8 months, our plan is to put the entire production of the 2007 Cotes de Tablas in Stelvin screwcap.

Our conclusion is probably not too surprising; in our experiments (which I wrote about in the summer 2007 post Corks and Screwcaps: Not an open and shut case) we've  consistently preferred the vibrancy and freshness of the screwcap finish for our aromatic whites and our Rosé, while preferring the softer, sweeter mouthfeel of the cork finish for our Roussanne-based whites and our Mourvedre- and Syrah-based reds.  The Grenache-based Cotes de Tablas, always a lighter, fruitier red, falls somewhere in the middle, and seemed to be the right red wine on which to experiment with screwcaps.  And, we are enjoying the evolution of the wine under cork as well.  But, when we're equally happy with cork and screwcap, the argument of avoiding a thousand or more TCA-tainted bottles (about 3% of a wine with 3000-case production) becomes overwhelming.


Wine shipping cost comments from a cancelled Wine Club member survey

Early this year, we made a point to reach out to our canceled VINsider Wine Club members and ask them for some feedback on what we could be doing better.  I'm not worried overall about our club members; our median tenure of a club member is about 3.5 years, more than double the industry average.  Still, I was sure that we could learn something from the former members who have moved on.

We're still receiving dozens of survey responses each day, and we're holding off on rigorous analysis of the data until we have received most of the surveys we expect to get.  I'm sure that these will lead to several additional posts here on the blog.  Still, I've been reading through many of the responses and was surprised to see one item pop up with some frequency.  Several ex-club members have commented that they don't like paying shipping for wine, or that they think that what we're charging for shipping is too much for them.

I was surprised, since we subsidize shipping costs considerably, particularly to the East Coast (where most of the survey respondents who mentioned shipping costs live).  I wonder how often these people have tried sending 40-pound packages second-day air across the country.  We receive good shipping rates from FedEx thanks to our membership in the Wine Institute (about half off FedEx's published rates) but we still pay between $70 and $79 to ship a case of wine to the East Coast, and between $40 and $46 to ship a half-case of wine.  We charge our customers $45 (full case) and $30 (half-case).  In the mountain states (where we charge $25/$35 for half case/full case) we pay $29/$55.  In California, where we use UPS Ground (they guarantee next-day delivery to nearly the entire state, and second-day on a few outlying fringes) we pay $19/$29 (we charge $15/$25).

Yes, we're receiving a higher margin on this wine, since we're selling direct to customers, but we're also providing most of these customers (our wine club members) either a 20% or a 25% discount, and absorbing packaging costs and labor expenses. 

I wonder how other wineries do this.  Many of the customers who mentioned that they felt our shipping prices were high said that other wineries who they ordered from provided very inexpensive shipping (on the order of a $15-$25 per case) or even free shipping.  I can only assume that these wineries must be eating this cost to do more business on the East Coast.

Shipping costs have gone up enormously over the past few years, reflecting the higher costs of gasoline. On of my first conclusions from this survey is that I'm not sure public perceptions have changed along with them.


A Supreme Court tobacco ruling that may have implications on wine direct shipping: Rowe v. New Hampshire Motor Transport Association

I was intrigued by a story in the New York Times today on a unanimous ruling by the Supreme Court on a tobacco case.  This case, Rowe v. New Hampshire Motor Transport Association, was brought by the New Hampshire Motor Transport Association in challenge of a Maine law requiring shippers of tobacco products to identify and intercept packages from sellers unlicensed to ship tobacco, and to conduct age verification on delivery.  The law seems unexceptional, except that the federal government is given exclusive authority over common carriers under the 1994 Federal Aviation Administration Authorization Act.  The First US Circuit Court of Appeals overruled Maine's law, and the Supreme Court agreed that the 1994 act (which established the deregulation of trucking to put it on a level playing field with the newly-deregulated airline industry) superseded a state's desire to achieve specific public policy goals through regulating the distribution and delivery of a controlled substance.

Particularly interesting as the ruling might apply to wine is the Court's dismissal of a public health argument by states as a means of overriding the federal legislation.  From Justice Breyer's opinion:

"Despite the importance of the public health objective, we cannot agree with Maine that the federal law creates an exception on that basis, exempting state laws that it would otherwise pre-empt."

As the regulatory patchwork allowing direct shipping of wine has coalesced, it has become clear that the compliance costs for wineries will be enormous.  Each state has different regulations, requires different remittances and reports, and exacts different fees.  An industry has developed around knowing these regulations, with companies like Ship Compliant arriving to fill the growing needs of wineries to handle the regulations created by filling the orders of their customers.

It will be interesting to see whether the statutory authority of states to regulate the sale and distribution of alcohol within their borders (granted by the 21st amendment repealing prohibition) takes precedence over the Federal Aviation Administration Authorization Act.  All state regulations (and the model direct shipping bill drafted by the Wine Institute) include portions requiring shippers to verify age upon delivery.  This specific clause was singled out by the Supreme Court as:

"the very effect that the federal law sought to avoid, namely, a State’s direct substitution of its own governmental commands for 'competitive market forces'"

Certainly, the phrasing in the recent ruling suggests that the Supreme Court is not likely to look favorably on many of the "risk to public health" arguments put forth by the states and their distributor financiers.  Again, from Justice Breyer's ruling:

"Many products create “public health” risks of differing kind and degree. To accept Maine’s justification in respect to a rule regulating services would legitimate rules regulating routes or rates for similar public health reasons. And to allow Maine directly to regulate carrier services would permit other States to do the same. Given the number of States through which carriers travel, the number of products, the variety of potential adverse public health effects, the many different kinds of regulatory rules potentially available, and the difficulty of finding a legal criterion for separating permissible from impermissible public-health-oriented regulations, Congress is unlikely to have intended an implicit general “public health” exception broad enough to cover even the shipments at issue here."

Of course, there are constitutional debates involved in the debate on wine shipping, as the Granholm v. Heald ruling demonstrated. The Commerce Clause has its own contradictions with the 21st Amendment.  I don't know whether the Federal Aviation Administration Authorization Act would be viewed as bowing to the 21st Amendment as it impacts the common carriers who deliver wine shipments.  But, I am cheered by the Court's understanding of the difficult burden that various state regulations put on a business trying to deliver a product within the fifty different United States.  This recent ruling gives me additional hope that when the next direct shipping case reached the Supreme Court, wineries are likely to receive a sympathetic hearing.


Direct Shipping to Florida - A New Challenge

Wineries' privileges to ship to Florida are under attack.  As is happening in many states, the distributors' lobby has been working to reduce or eliminate the abilities of out-of-state wineries to ship directly to consumers, and there have been recent developments consumers in Florida - or wineries who ship to Florida - should be aware of.

Last week, in what sounds like a strange and contentious legislative session, Florida House Jobs & Entrepreneurship Council voted 7-6 against a direct shipping bill modeled after the legislation used in states around the country.  The Department of Business & Professional Regulation, which has allowed wine shipments by executive ruling since early 2006, has said that without approved legislation, it will revoke its ruling on May 5th.  The failure of the committee to forward a bill to the state Senate leaves this permission in limbo.

An good article describing the recent developments appeared in the Orlando Sentinel.

It appears to me that the distributors' lobby, in responding to state legislators' unwillingness to vote publicly against a consumer-friendly (and pro-business) measure like regulated direct shipments of wine, have offered legislators an out: by declaring that the amendment with a production cap had failed, they delivered a bill to the committee that a bare majority could vote against... uniting those legislators who believe that no direct shipping should be allowed with those who believe that it should be allowed only for smaller wineries.  In effect, they offered a "poison pill" provision into the direct shipping bill, allowing legislators to appear to vote against a part of the bill while actually voting against the entire bill.

It is too early to know what impact this will have.  The legislature has until May 5th to pass a workable bill before the state deadline passes.  Interested consumers should write to your state representatives, urging them to pass a workable wine shipping bill.  A sample letter, which can be modified to suit your desires, is available on the "Free the Grapes" Web site.

At Tablas Creek, we have always worked to open legal avenues of shipping, and we hope that Florida will not become the first state to remove shipping privileges granted after the Supreme Court ruling two years ago.


Direct Shipping of Wine: The Supreme Court's Granholm v. Heald Case Explained

[Ed note, July 2008:  I recently wrote an update analyzing the ongoing impacts of the Granholm v Heald decision on wineries that readers of this post might find interesting.]

With the issues surrounding wine direct shipping becoming more complicated (check out Free the Grapes or ShipCompliant's excellent blog) I have had lots of conversations with people around the industry concerning the implications of the Supreme Court's landmark Granholm v. Heald decision from 2005. 

I speak each week with a surprising number of consumers who believe that after the Supreme Court ruling, we should be able to ship wine anywhere, and take it personally when I explain that we can't.

I thought it would be timely and interesting to republish the article I wrote for our Summer 2005 newsletter.  The article is reprinted below.  I'll be revisiting this issue over my next few posts, with an eye toward what has changed in the last 24 months:

Introduction

We were thrilled that on Monday, May 16, 2005, the U.S. Supreme Court struck down laws that prohibit out-of-state wineries from shipping to consumers while allowing in-state wineries to do so. However, some of the hype surrounding the case gave consumers the mistaken impression that wineries can now ship wine to anyone, anywhere. Rather, this decision is a positive step in the direction of giving consumers access to more wines, but will have only limited immediate impact.

Case Details

In order to know what impact the decision will have, it is important to understand the two cases under review. Michigan and in New York both have enacted laws or regulatory systems that in effect permit their in-state wineries to ship wine directly to consumers, but prohibit out of state wineries from doing so. The mechanisms were slightly different, but the effects were the same. In Michigan, wine writers Ray and Eleanor Heald, joined by San Luis Obispo winery Domaine Alfred, challenged the state’s laws on the grounds that they represented an unconstitutional favoritism of in-state producers over out-of-state producers. The Michigan Association of Wholesalers, fearing that direct shipping could erode their share of the wine market, intervened in favor of the state’s argument claiming that the 21st Amendment to the Constitution immunized states from prosecution for discrimination over alcohol. The district court upheld the state’s regulations, but the 6th Circuit Court of Appeals reversed it.

In New York, small winery owners Juanita Swedenburg (Swedenburg Estate Vineyard in Virginia) and David Lucas (Lucas Winery in California) brought suit against New York claiming that the state’s restrictions violated the Commerce Clause, and again New York wholesalers intervened in the state’s defense. A district court found for the plaintiffs, but the 2nd Circuit Court of Appeals reversed the decision, ruling in favor of the state. This led to the Supreme Court combining the two cases to review the question of whether the 21st Amendment permits states to enact regulatory schemes that discriminate in favor of in-state wine producers.

Constitutional Arguments

The commerce clause is actually a very short piece in Article 8 of the Constitution, giving congress “Power to regulate Commerce among the several States” . However, Supreme Court interpretation has concluded that there is a dormant commerce clause assumption implicit in the wording, best expressed in a ruling from 1949:

Our system, fostered by the Commerce Clause, is that every farmer and every craftsman shall be encouraged to produce by the certainty that he will have free access to every market in the Nation… Neither the power to tax nor the police power may be used by the state of destination with the aim and effect of establishing an economic barrier against competition with the products of another state or the labor of its residents. Restrictions so contrived are an unreasonable clog upon the mobility of commerce.

The 21st Amendment repealed Prohibition, while assuring that states or municipalities who wished to remain “dry” could do so:

The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.

The states argued that the ban on out-of-state shipping was necessary for two reasons. First, to ensure that minors did not receive access to alcohol. Second, to ensure that states were able to collect the appropriate tax revenues. They further argued that it was reasonable to permit in-state wineries rights denied to those from other states because the remedies they had against local wineries who broke state laws were more easily enforced.

The plaintiffs in the case countered that there were remedies in place that addressed the states’ legitimate concerns. 26 states have enacted some sort of direct wine shipping, requiring an adult signature at delivery, and requiring wineries that ship into the state to remit the appropriate taxes.

The Supreme Court’s Decision

After reviewing case history, the Supreme Court, in a 5-4 decision, agreed that the 21st Amendment gave states broad powers to regulate alcohol in many ways, including the rights to assume all control over liquor distribution, or to funnel sales exclusively through distributors. However, as the court pointed out in its decision:

State policies are protected under the Twenty-first Amendment when they treat liquor produced out of state the same as its domestic equivalent. The instant cases, in contrast, involve straightforward attempts to discriminate in favor of local producers.

In conclusion, the court ruled that although states may control the distribution in many ways, they must do it equitably:

States have broad power to regulate liquor under §2 of the Twenty-first Amendment. This power, however, does not allow States to ban, or severely limit, the direct shipment of out-of-state wine while simultaneously authorizing direct shipment by in-state producers. If a State chooses to allow direct shipment of wine, it must do so on evenhanded terms.

The court affirmed the Michigan Decision, and reversed the New York decision, remanding the case back to the state legislatures to enact constitutional legislation.

The Decision’s Impact

There are currently only eight states that permit in-state wineries to ship to consumers but prohibit out-of-state wineries from doing the same thing (and who are therefore in violation of this recent ruling).  These are New York, Michigan, Massachusetts, Connecticut, Ohio, Florida, Indiana, and Vermont.  The regulations in those states will have to be re-written, and it is possible that the states will choose to prohibit direct shipping from everyone (including their own wineries) rather than opening the states’ borders to all.  However, it appears unlikely that states with a significant winery presence (including New York, Michigan, and Connecticut) will take an action that would mean economic ruin for some of its small in-state wineries.  States with a strong wholesaler lobbying presence and very few wineries (including Florida and Massachusetts) seem more likely to prohibit all direct shipping of wine. 

[Ed note, April 2007: New York, Michigan, and Vermont passed legislative solutions permitting direct shipping to both in- and out-of-state wineries.  The Ohio and Florida executive branches enacted rules permitting in- and out-of-state shipping.  Massachusetts and Connecticut enacted legislation that theoretically permits wineries to ship to consumers, but with so many restrictions and such high compliance costs that few wineries actually are shipping, and the Indiana Attorney General clarified the state's laws to prohibit any wineries from shipping wine to consumers.]

But, you do have power to affect the decisions state legislatures make.  If you have an opinion, contact your legislator and let him or her know what you think.  Resources online that can help you contact your legislator include the Wine Institute (www.wineinstitute.org) and Free the Grapes (www.freethegrapes.org).

[Ed note, April 2007:  At Tablas Creek, we have since created and maintain a page of wine shipping news where we post any updates as they occur.]

We will be contacting our mailing list members who live in affected states as soon as we learn what any new regulations mean.  We are also working with our common carriers (FedEx and UPS) to ensure that our customers are protected from questionable or unscrupulous shipping practices. We only ship to the states to which we are allowed by state law, and we mark our shipments clearly as wine. If you live in a non-shipping state, we're happy to help you find local retailers or wholesalers who carry our wine.