Fruit Snacks, Organic Wine, and the Dilemma of "Made With"

This Welch's Fruit Snacks box is a great example of why I find the US National Organic Program (NOP) wine standard problematic. Seem like a leap? Bear with me.

These fruit gummies say “Made With Real Fruit”. And they are! But also a lot of other stuff, like corn syrup, artificial flavors, and Red 40. The phrasing "made with" is pretty clear in this case. This product contains real fruit. It's (in this case) the first ingredient, though it doesn't need to be. But the clear implication is that there are other ingredients. And there are, 17 in all, in these fruit snacks. 

So, why, if you look on a shelf in the "organic" section of your local wine shop or supermarket, do most of the wines there say “Made With Organic Grapes” on the label? After all, based on American labeling laws, the implication is that there’s other stuff in there, maybe even things that aren’t grapes. But it's one of the only options for wines, as dictated by the NOP standard.

This disconnect comes down to a long-standing (and in my opinion overblown¹) fear of sulfites. Sulfur has been used for centuries in winemaking because adding it in small amounts slows the process of oxidation and inhibits the action of vinegar-causing bacteria. But as I wrote early this year, how this got added to and then maintained in the organic regulations is a quirk of history and marketing from an unusual coalition of anti-alcohol interests, natural wine purists, and sulfite-free wineries: all parties with a vested interest in making organic wine hard to achieve.

Most other countries set a limit for sulfites for organic wines around 100ppm. That seems reasonable to me. But not the NOP. If you add any sulfites at all you can’t call your wine organic. You can't use the NOP organic seal. Instead there is a specific line in the NOP standards that says "Any use of added sulfites makes the wine only eligible for the “made with” labeling category; may not use the USDA organic seal." There is a specific meaning to the "Made With" claim in the NOP organic regulations. It's for products that are at least 70% but less than 95% organic. Think pasta sauce "Made With Organic Tomatoes" but including non-organic onions, spices, etc. By contrast, the "Organic" standards require that 95% or more of the finished product be from organic sources. Those products can use the organic seal. A wine from an organic vineyard with 100ppm sulfites is 99.99% organic. But it's not eligible for the organic seal. 

This may seem an esoteric worry. But the fact that American organic wine is forced to be sulfite-free makes many of them short lived and unstable. That implies to consumers that organic farming makes unreliable wine and reduces incentives for wineries to farm organically. It's probably not a coincidence that the percentage of wine grapes in California has lagged that in France, Spain, and Italy. It also makes American organic wine  less competitive with international organic wines. That's at least three clear negative outcomes.

Supporters of the NOP standards (and wineries who have built a market with sulfite-free wines) say that wineries should embrace the “Made With Organic Grapes” phrasing. But one look at that fruit snacks box should make it clear why that option comes with its own baggage.

Footnote:

1. Why overblown? Many people attribute to sulfites the "red wine headache" that is more likely a sensitivity to histamines, found naturally in grapes. Sulfite allergies can be serious, but such sensitivities are very rare, and usually manifest in respiratory symptoms. It is (purportedly) for people with these sensitivities that wines that add it carry a “Contains Sulfites” warning. But given that there are many other products including including dried fruit, frozen potatoes, frozen shrimp and many condiments that contain much higher sulfite levels and don't have to carry a warning label, I don't find that particularly convincing.

Prohibition's legacy and the marginalization of organic wine

Introduction
Prohibition may have ended nearly 90 years ago, but its legacies remain, often hidden, in the way that wine and other alcoholic beverages are marketed and sold in America. I've written about the unintended consequences of the 21st Amendment which repealed Prohibition and as a side effect carved out an exception to the Commerce Clause that has made every step forward in the fight for direct shipping a battle between actors in the winery, wholesale, and retail spheres. Another effect is that because there is an express prohibition in the federal standards from any statement that might "suggest a relationship between the consumption of alcohol, wine, or any substance found within the wine, and health benefits or effects on health" a winery can't talk in advertising or on their website about the studies that show links between red wine and heart health.

Understanding the NOP Standards
One consequence of Prohibition's legacy is in how wine is treated by the National Organic Program (NOP) standards. The organic labeling standards, as written for most products, contain four levels of organic purity. In descending order:

• 100% Organic
  • All ingredients, processing aids, and facility must be certified organic
  • Can use the organic seal 
• Organic
  • All agricultural ingredients must be certified organic, but up to 5% of non-organic, non-agricultural ingredients are allowed
  • Can use the organic seal
• Made with Organic
  • At least 70% of ingredients must be certified organic
  • Must state the ingredients that are organic ("made with organic apples")
  • Cannot include USDA organic seal anywhere or represent finished product as organic
• Specific Organic Ingredients
  • For use of organic ingredients in a non-organic product. Does not need to be certified.
  • Organic can only be used in ingredients list and not on front panel
  • Cannot use the organic seal or state organic anywhere other than the ingredients list.

How Wine Is Treated Differently: Cue Strom Thurmond
Wine is a pretty easy product to measure, as it's typically more than 99% grapes and winemaking additions (yeasts, nutrients for that yeast, acid, and an amount of sulfur measured in parts per million) are minor in volume. More natural-leaning wineries like us don't add yeast or nutrients at all. And yet, the organic regulations put a unique hurdle in front of wine: "Any use of added sulfites means that the wine is only eligible for the 'made with' labeling category and may not use the USDA organic seal." Because we add sulfites in the winemaking process, the highest tier that we can qualify for is the "Made with Organic" tier.

Pause for record scratch here. What?

Before I go further, I want to acknowledge that there are people with serious sulfite allergies and sensitivities. I have found various government estimates that between 0.2% and 1% of Americans have sulfite sensitivities to one degree or another. That's not an insignificant number, although most sensitivities are mild. The most serious sulfite allergies can cause asthma or even in rare cases anaphylaxis, although these reactions are extremely rare. It is in theory for those people that wines have to carry a "contains sulfites" declaration on their label. Whether this declaration (which has led a lot of people to attribute to sulfites unrelated symptoms such as the "red wine headache") is wise is the topic for another blog. In any case the presence of sulfites already has to be declared. But sulfites, in and of themselves, are not inorganic... except according to the NOP standards, when they're used in wine. 

Why turns out to be a legacy of prohibition. In an article for the Tribune Newspapers, Bill St. John recounts the influence of then-Senator Strom Thurmond, segregationist, teetotaler and avowed opponent of alcohol, whose "crowning achievement" was a warning label on alcohol whose purpose was "not to inform but to frighten". That is how the "contains sulfites" labeling requirement ended up in the regulations of the BATF (now TTB) rather than the FDA. There are many common food products that contain higher concentrations of sulfites than wine (including dried fruit, frozen potatoes, frozen shrimp and many condiments) but none of them are required to declare a warning like this. Only alcohol.

Why the Standards Haven't Evolved
According to Geoffrey Jones and Emily Grandjean's working paper for Harvard Business Review Creating the Market for Organic Wine: Sulfites, Certification, and Green Values, the standard we have today is a result of two things: the stigmatization of sulfites in alcohol, and economic protectionism. When a coalition of wineries and organic farming advocates got together in 2012 to propose adopting the same standards used in Europe and most of the rest of the world (a 100ppm cap on sulfites for organic wines, as opposed to the 350ppm cap for "conventional" wines) a handful of wineries making sulfite-free wines, most notably Frey Vineyards, pushed back. The NOP board sided with that group.

In the conclusion to his article Reds, Whites, and Sulfites: Examining Different Organic Wine Regulation Practices in the United States and the European Union in the Northwestern Journal of International Law & Business, author Ryan Puszka points out that the health difference between the American and world standards is negligible:

"For all ecologically and nearly all health concerned purposes, the penalized winemakers produce an identical product to certified wine producers from completely organic grapes. The logical foundation of the current NOP scheme and resulting disenfranchisement, then, is substantiated by flimsy health claims about extremely marginal cases that thinly veil an economic desire to narrow competition in the market."

So, there's a coalition of anti-alcohol interests, natural wine purists, and sulfite-free wineries who have banded together to make the "Organic Wine" status hard to achieve in the United States. Why should we care? Because having the standards written as they are means that organic wine is unlikely to ever be more than a niche product. And having organic wine no more than a niche product means that grapes -- which are one of the easiest crops to farm organically -- are going to be farmed organically a lot less widely than they should be. And that should concern us all.

To understand why, it's helpful to know what sulfites are doing in winemaking. After all, sulfur is a mineral, and a perfectly legal thing to put on an organic vineyard, used for its antimicrobial and antifungal properties. On vines, it's a common tool to keep mildew from spreading. In winemaking, it discourages the action of yeasts and other bacteria. Put in too much and your wine won't ferment. But in small amounts, it allows fermentation yeasts to proceed while inhibiting the action of vinegar-causing bacteria and other spoilage processes. It also absorbs oxygen, protecting a wine from oxidation as it ages in barrel or bottle.

Implications on the Reputation of Organic Wine
As you might expect from my list of sulfur's properties, many of the early organic-labeled sulfite-free wines were unstable and short-lived. The ones that were shelf-stable tended to have been highly fined and filtered and otherwise processed in a way that tended to make them unexciting. And those early impressions of organic wines have lingered in the marketplace. To this day, wineries like us dread being put on the "organic wine" shelf, because fine wine drinkers tend to avoid it, assuming it's aimed at people for whom the organic seal is more important than the wine quality.

The "made with organic grapes" option might seem like an equally good substitute, but it hasn't gotten much traction either. I'd speculate that this is for three reasons. First, there's that lingering doubt because of the many flawed or mediocre organic wines about whether organic grapes is actually a good thing. Second, the NOP clearly intends that the classification be a lesser one that implies that there are things in there that are not organic, and maybe not even grapes. Think "Pasta Sauce, made with Organic Tomatoes". The implication is clear that there are things in there that aren't organic, and aren't tomatoes. Third, you can't use the organic seal. As it was intended to be, the seal is the shorthand for certified organic. You can put extra words on your label, but there are always lots of words. The seal stands out.

Why We Should Care: Less Organically Farmed Land
If there's not a great reason to put yourself into the organic classification you're eligible for, wineries would be excused for not bothering to go through the work and expense of certifying themselves organic. And that's what's happened: according to Jones and Grandjean, in 2017 organic acreage represented only 2% of vineyard land in California, and had actually declined 10% since 2013.

To be sure, some of the prime grape acres have let their organic certification lapse but have adopted Biodynamic certification, which requires the same elimination of chemicals in the vineyard but allows a limited (under 100ppm) addition of sulfites in the winery. Biodynamics, which also incorporates elements of biodiversity and soil microbial health, has garnered a reputation as a farming method adopted by some of the world's greatest vineyards. Of course it also comes with elements that speak of cosmic energies and cycles of the moon, which tends to limit its audience a bit.

Many other vineyards are being farmed organically but not certified. I talk to vintners all the time who have chosen that path. And of course sustainability certification have proliferated. But I don't think that either of these are ideal outcomes. Someone who does not have to be audited for a certification is more likely to hedge, and it's difficult to know how many of these vineyards would actually be able to pass an organic certification. Verification matters. And as for sustainability certifications, they do a good job on breadth, asking wineries to look at things that neither organics nor Biodynamics addresses, like renewable energy, water use reduction, or wildlife passthroughs. But, by and large, sustainability certifications fall short on rigor. Most allow the use of Roundup and many chemical pesticides. You can make a legitimate critique that many are little more than greenwashing.  

In any case, it is a failure of the national organic standards that they have left air in the room for these other approaches to proliferate. Ryan Puszka's conclusion on this is scathing:

"Furthermore, the no-added sulfite NOP standards disincentivizes U.S. and European winemakers from attaining organic certification, as they may not deem the “made with organic grape” certification worthwhile in light of the high costs associated with certification. Moreover, this confusing system renders wine labels even more indecipherable than they already are, requiring customers to know the different international standards of “organic” and “made with organic . . . “. The net result is consumer confusion and economic inefficiency. All of these issues undermine the legitimacy of national organics programs."

What Comes Next
For us, the failures of the existing certifications are another reason we're excited to embrace Regenerative Organic Certification. There is a carve-out in the TTB's application of the NOP standards that a wine that farms their grapes organically, produces the wine in an organic-certified facility, and uses less than the international standard (100ppm) of sulfites can't use the NOP seal but can use the seal of their certifier. The good folks at CCOF have a useful document explaining the rules, which contains the below image:

The Regenerative Organic Certification (ROC) logo will be treated similarly. Thankfully, ROC is following the international organic (and Biodynamic) standard and allowing ROC labeling on wines that are made from Regenerative Organic Certified grapes, produced in an organic certified facility, and use no more than 100ppm of sulfites.

So, while you won't see a USDA Organic seal on a bottle of Tablas Creek any time soon, we're hopeful that starting in 2021 you'll see the ROC logo on our bottles. And together we can help put one last legacy of Strom Thurmond to bed. 

Wine Shipping State of the Union, 2021 Edition

Six years ago, I wrote my own State of the Union, Wine Shipping Edition, breaking down the 50 states and one district into tiers based on how expensive and difficult it was for us to send wine into each. Casual wine lovers might be surprised to know that not only are there some states to which we are prohibited from shipping wine, but that each state to which we can ship has its own laws, permits, fees, and reporting requirements. Managing this morass takes specialized software and still a big chunk time for one of the members of our accounting team, so it's far from the uniform, frictionless open market that Section 8 of the US Constitution promises:

"The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States;"

I mentioned in my post from 2015 that diving into the arcane details of these state laws only highlights the wisdom of the founding fathers and generations of Supreme Court justices in prioritizing the Commerce Clause, which protects the federal government's exclusive role in regulating interstate commerce. The 21st Amendment, which repealed Prohibition in 1933, as a side-effect sheltered states from the Commerce Clause's requirement to maintain an open, fair market for all players. This means that the wine market provides a glimpse into what a world absent the Commerce Clause might look like. We should all be thankful that most products we might want to buy don't have to face a similar regulatory nightmare. Our current map:

Below you can find an updated summary of what the world of DTC (direct-to-consumer) wine shipping looks like, from a winery's perspective, as we enter 2021, with states broken down into tiers based on the cost and ease of doing business there.

One thing that has changed since 2015 is that the playing field has been made harder to summarize by the rise of "economic nexus" statutes, driven by the 2018 Supreme Court ruling South Dakota v. Wayfair, Inc. This ruling said that states could require out-of-state companies to collect and remit sales taxes, whereas previous rulings had held that states could only comply tax collection and remittance from companies with a physical location (a "nexus") in that state. In practice, this has meant that states have begun to implement transaction thresholds, above which wineries have had to remit state (and sometimes local) taxes, but below which they don't. That annual threshold has tended to be somewhere around 200 shipments or $100,000. For us, we're over that threshold in places like Colorado, Illinois, and of course California, but not in Iowa, DC, or Minnesota (though we're getting close). So, the numbers below reflect the conditions for a winery of our basic size and profile. I've noted the states with current or upcoming economic nexus laws with asterisks (*) below, with some explanatory notes.  

Tier I: The no-brainers (AK, DC*, MN*, MO*)

• Right now, there are three states and the District of Columbia that have neither permit fees nor significant reporting requirements. Thank goodness for them! But, 4 of 51 isn't a great percentage. All of the others make it more difficult or expensive to ship wine to customers who want it. It's also worth noting that the permit-free status of these states is a holdover from pre-Granholm conditions and it's unclear that continuing without required permits is constitutional. DC and Minnesota are "economic nexus" destinations. If you're large enough to trigger those thresholds, bump them up to Tier II. Missouri will join them as a nexus state next year.
• Total percentage of US population: 4.02%
• Total number of reports required annually: 2
• Total permit fees: $0

Tier II: Inexpensive and/or fairly easy (CA*, FL, ID, IA*, KS, MA, ME, MD, MI, MT, NC, ND, NY, OH, OR, WA, WI)

• There are an additional seventeen states with permit fees of $200/year or less and modest reporting requirements (0-24 times per year). These states include some big ones like our home state of California, Florida, New York, Oregon, and Washington, but even for the smaller ones, the number of orders that a winery would need to fill in order to pay for the annual investment is very reasonable. You'll notice that most of the major wine-producing states fall into this tier. The two states with potential nexus-triggered reporting include Iowa (a small enough market that most wineries won't hit the nexus threshold) and California (where wineries who are based here likely already have the infrastructure in place). If you're an out-of-California winery selling here, or a winery big enough to trigger Iowa's nexus status, they'd both probably move to Tier III. 
• Total percentage of US population: 46.93%
• Total number of reports required annually: 178 (10.5/state avg.)
• Total permit fees: $1,225 ($72/state avg.)

Tier III: Moderate expense or requirements (AZ, CO*, GA, IL*, IN, NV, NH, NM, PA, TX, VT, VA)

• Once you get to the next tier of twelve, a small winery would be excused for starting to run cost-benefit analyses before springing for the permits.  Some permits start to get expensive in this tier, like Illinois' $350/year or Vermont's $330/year. Others are less expensive, but have difficult reporting requirements, like Georgia and Nevada (36 reports/year each). Colorado would be in Tier II except for the nexus requirements, which are pretty arcane. If you're small enough not to trigger the statute, move it down a tier. Illinois is probably Tier III even if you don't trigger the nexus, with separate excise tax reporting required for the city of Chicago. But even with their added challenges and expense, there are some pretty large-population states in this tier, and most wineries choose to ship to all or nearly all of them.
• Total percentage of US population: 30.72%
• Total number of reports required annually: 289 (24/state avg.)
• Total permit fees: $2,063 ($172/state avg.)

Tier IV: Difficult or expensive enough to be a real question (HI, NE, SC, WV)

• At this point, we get to four small states with difficult requirements, to the point that it's not worth it for many wineries to bother. Permits cost as much as $500/year (Nebraska) and $600/two years (South Carolina). West Virginia charges $250/year and requires the submission of 36 reports. And Hawaii requires you to get separate annual permits from each county, at a total cost of $324, and to submit 25 reports. With limited rewards, these costs tend to feel disproportionate.
• Total percentage of the US population: 3.14%
• Total number of reports required annually: 78 (19.5/state avg.)
• Total permit fees: $1374 ($344/state avg.)

Tier V: Compliance Headaches (KY, OK, SD, TN, WY)

• This next tier of five states aren't hugely expensive, but each has at least one unusual requirement. These include South Dakota's requirement that you register every label you're planning to ship into the state at a cost of $25/label/year, Oklahoma's prohibition from using fulfillment houses (so everything must be shipped from the winery location), and very low per-person or per-household import limits: 1 case/month and 3 cases/year maximum per person in Tennessee, and 4 cases/year per household in Wyoming. I could have added Minnesota in here as well, with its 2 cases/customer/year limit, but it's otherwise so easy (no permit, no reporting) that I left it in Tier I. Kentucky is the newest state to pass a direct-shipping law, and is still working out the kinks. It will probably end up in Tier II, but for now, it's like Oklahoma and not allowing wineries to use fulfillment houses, instead requiring that they ship only from their winery. A headache. 
• Total percentage of the US population: 5.10%
• Total number of reports required annually: 68 (13.6/state avg.)
• Total permit fees: $550 ($110/state avg.)

Tier VI: Extremely Difficult/Expensive (CT, LA, NJ)

• Connecticut is a shipping state for many wineries, but its expenses and challenges are significant. First, it's a costly permit, at $315/year, and requires 36 reports to be filed annually. Second, you must register each label you propose to sell in the state at a cost of $200/label, renewable every 3 years. At Tablas Creek, we sold 28 different wines direct last year (different wines, not different vintages). That would require a $5600 investment, adding $1866 to the already-considerable annual $1295 cost of permit and reporting. And finally, you can't have different label registrants for wholesale and direct sales. So, if you're like us and sell our wines to our Connecticut distributor through an agent (ours is Vineyard Brands) we couldn't register the same wines ourselves for direct sale.
• Louisiana, at $400 and 36 reports/year, would be the most expensive state in Tier IV even if it didn't add the extra hurdle of requiring you to choose between selling a wine direct and selling it through wholesale. But it does, and that pushes it over the edge for us. There used to be more states with "distributor exclusivity" requirements like this, but Louisiana is the last one left.
• How does New Jersey make direct shipping difficult? Let me count the ways. The permit is the country's most expensive at $938 and there are 29 reports to submit annually. There is a significant bond wineries have to post. There are registration fees of $150 per partner per year, an issue for a winery like ours owned by two families, each with several owners. Receiving a permit means that we have established a nexus with the state of NJ and are liable for paying an annual corporate income tax of at least $500. Plus there's a capacity cap of 250,000 gallons (around 100,000 cases) to ship that we fall under, but many wineries don't.
• Total percentage of the US population: 5.18%
• Total number of reports required annually: 101 (33.7/state avg.)
• Total permit fees: $1653 ($551/state avg.)

Tier VII: Almost entirely prohibited (AL, AR, DE, MS, RI, UT)

• Three states (Arkansas, Delaware, and Rhode Island) allow a winery to ship with few hurdles and minimal reporting requirements if a customer purchases wine at a winery, but won't allow the same customer to order wine by phone or email from home. The logic written into the laws is typically couched in the guise of ensuring that only of-age buyers can purchase, but given that common carriers routinely check ID's in the 40+ states that allow direct shipping, it doesn't pass critical muster and is better understood as local protectionism.
• Three other states (Alabama, Mississippi, and Utah) allow customers to order wine from a winery, have it shipped to a state-licensed store, where taxes are collected, and then the wine released to the customer. It's slow and expensive, because it requires the customer to request and complete a state "special order" permit before shipping, and while the taxes aren't massive in Alabama, they're a whopping 88% in Utah. Mississippi's permit program is brand new, and may not be workable as initially published. In all three cases, the process is cumbersome enough that the Wine Institute still lists the three states as "prohibited".
• Total percentage of the US population: 4.92%

Every winery has a different breaking point. For us, it comes in the middle of Tier V. We've decided that 41 states (everything in Tiers I-IV, plus Tennessee and Wyoming) warrant the expense of the annual permits and the reporting. Kentucky will come on line soon to be our 42nd, and I'm going to take another look at South Dakota now that we have a full team in our accounting department. That leaves 8 states that we either can't ship to, or have found that the requirements to do so are unreasonable. At what cost? Shipping to the 43 "shipping" states in Tiers I-V costs a total of $5,212 in permit fees plus the time and expense of preparing and filing 615 reports each year. Figure an hour for each report, at $25/hour ($15,375) for a total expense of $20,587. But for that cost, we can ship to 89.9% of the US population. Available tools (like SOVOS ShipCompliant and Avalara) provide a savings over the labor of preparing the many individual reports and are indispensable for wineries looking to ship to a broad swath of states, but still come with a cost.

Why are there some states that have made it so difficult or expensive that they're choosing to give up the state income that direct shipping would provide? The reasons vary, but mostly fall into one of two camps. Either they're making it difficult for religious or cultural reasons (think the deep south, or Utah) or they've crafted their laws in a way that protects distributors from as much competition as possible. This occurs because alcohol distributors (which are all state-licensed) see direct shipping as a threat to their businesses and are also some of the largest donors to state legislative campaigns.

So, while wine in America is not sold in a free and open market, most of that market is at least accessible to most wineries with some effort and expense. And if we're a long way from the Supreme Court's 1949 ode to the Commerce Clause of the US Constitution in H.P. Hood & Sons vs. Du Mond, the relevant text of which is below, we're at least making incremental progress:

"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."

Notes

1. If you're interested in diving into the state-by-state regulations, the Wine Institute's Direct Shipping Laws for Wineries page is a great place to start.
2. Thank you to Jeff Carroll, GM of Avalara for Beverage Alcohol for his feedback on this topic and particularly for his explanation of the growing challenge that economic nexus laws will pose.
3. If you'd like to get involved in the push for more open direct shipping laws, the nonprofit Free the Grapes, on whose board of directors I serve, has information, resources, and templates for contacting state representatives. 

No, 100% tariffs on European wines won't be good for California wineries

[Editor's Note July 21, 2020: These potential 100% tariffs, which would have crippled the wine wholesale infrastructure in the United States had they been established, were tabled for six months in January. Those six months are up, and they're back on the table. All my arguments from below are still at least as true as they were then, and the health of the wine wholesale ecosystem is shakier than it was then because so many restaurants are closed due to Covid-19. I strongly encourage all American wine lovers to contact your elected officials in Congress as well as the Office of the US Trade Representative. Comments need to be submitted by July 26th. You can do so from this link. And thank you.]

This morning, I submitted comments to the Office of the US Trade Representative, in opposition to the threatened 100% tariffs on European wines that could be imposed as soon as February of 2020. While I believe in an open market and am (like most of the people I know who work for domestic wineries) a lover of wines from around the world, it wasn't for that point. I am convinced that these tariffs would have severely disruptive effects on the whole system that has been legislated to provide a pathway between wine producers, like us, and the consumers who eventually want to buy the wines.

I'll share my comment, and then add some additional thoughts at the end of the blog.

December 23, 2019

I am writing to you to argue against the proposed 100% tariffs on European wines. As a partner in and General Manager at a California winery that just celebrated its 30th anniversary, it might seem surprising that I would opposed these tariffs. But I believe that the net effect that they would have on California wineries would be negative.

We sell about half our production direct, and half through a network of state-licensed wholesalers. This distribution system is mandated by law and known as the “3-tier system.” A producer like us cannot sell directly to restaurants and retailers in other states, and our ability to sell directly to consumers, while growing, is still restricted. So, our success is dependent upon the health of this distribution network. None of the 50+ distributors that we work with represents exclusively domestic wines; all have a diverse portfolio including wines that will be impacted by the proposed tariffs. Many get the majority of their business from European wines. For those distributors, the proposed tariffs amount to a death sentence. Sales will fall, in most cases dramatically, impacting their ability to represent our wines. In my experience, distributors react to the loss of a major supplier (a similar impact to these tariffs) by attempting to source new wines for their portfolio, rather than by selling more wine from their existing suppliers, many of whom are unable to increase production in the short term. If they do look for wines from other parts of the world, they will inevitably be distracted by the massive task of finding these new producers, integrating them into their portfolio, and educating their sales team on their new items. That will mean less focus for us, not more.

What’s more, the rising number of “franchise” laws, currently affecting wine sales in about 20 states, means that we don’t even have the freedom to leave a distributor who isn’t performing well (or isn’t able to maintain their sales team and delivery schedule because of a market disruption) to find another who could do a better job. In nearly half the country, if the work of our legally-mandated representatives is impacted by these tariffs, we have no recourse. Beyond the impact on wineries and distributors, other related businesses will be caught in the crossfire. Restaurants are famously low-margin businesses anyway. Increasing the costs of their wine programs will push some out of business, further reducing outlets for our wines. Wine retailers, too, including both independent and chain outlets, will be forced to source different wines (which comes with its own costs) or double the costs of their inventories. And American consumers will be faced with higher costs and fewer choices for products that they would like to buy, leaving less disposable income in their wine budgets.

Why wouldn’t the wine community just switch its sources to other, non-tariff countries? Wine is not a commodity, where a customer can simply swap in a wine, even one made from the same grape, from one part of the world for another and expect them to be comparable. Wines are products inextricably tied to the place in which they are produced. And the disruption of 100% tariffs on wines from the world’s oldest wine regions would have cascading impacts that would reach deep into a whole network of American businesses, investors, and consumers.

Even those of us who make wine in California.

Respectfully,
Jason Haas
Partner & General Manager
Tablas Creek Vineyard
Paso Robles, California

I'm not sure that most consumers realize how little option wineries have to get their wines to markets around the country. In most cases, it is neither practical nor legal for us to sell to restaurants and retailers directly. So, we have relationships with distributors in each state. These distributors are licensed by their state to purchase wine from suppliers (domestic wineries like us, and importers of wines from other countries) and to then in turn sell those wines to restaurants and retailers. Restaurants and retailers are licensed to sell the wines to customers. While a string of court decisions and state law liberalizations have allowed us to ship wine directly to consumers in many states, nearly a third of what we sell to consumers for home consumption, and essentially 100% of what we sell to restaurants, passes through these various distributors. 

Every one of the 50+ distributors who sells our wine also sells wine from countries around the world. Every one. There is no such thing, in my experience, as a domestic-only distributor. And for many of these distributors, a majority of their sales comes from European wines. These distributors would be devastated by tariffs that would slow that segment of their business to a trickle. Distributor salespeople, who are paid by commission, would see an immediate decline in their standard of living. Distributors would likely result by cutting sales staff and increasing the number of accounts each salesperson called on, reducing their ability to interface with accounts and sell the other wines in their portfolio.

But would there be a larger piece of the pie for California wineries? Not much of one, I don't think. At the low end, the likely substitute for European wines would be wines from other New World countries, like Chile, Argentina, and Australia, all of which do better in the under-$15 segment than American wineries. At the high end, there is really no substitute. An Oregon Pinot Noir isn't going to smoothly replace a Grand Cru Burgundy, nor is a California Nebbiolo going to replace a Barolo. High-end wines aren't commodities produced by formula from specific grapes, that could be grown anywhere. The places that they come from are inseparable from the wines' identities. My guess is that at the high end, there would be a period where restaurants and retailers scavenge inventory from warehouses around the country, and then sales would just decline as people wait and hope the tariffs are rescinded. In the middle? I'm not sure. There might be a few additional opportunities for wineries like us, but I doubt that these would amount to a net positive given the disruption in our distribution network.

What's more, I think there's every likelihood that European countries would retaliate with tariffs on American goods, including wines. While export markets aren't a huge piece of our business, they've been growing in recent years, and European countries like Germany, Denmark, Sweden, and France have been leading that growth. I would expect that piece of our market to disappear, as has our Chinese market since that particular trade war began a few years ago.

All of these economic costs are bad enough. The human costs would be worse. While our business would likely be OK, thousands of American jobs at restaurants and distributors would be at risk. The American consumer, who enjoys the world's most dynamic wine market, would see increased costs and decreased selection. And the cost to the European farmers and winemakers, many of whom have been farming their lands for centuries, would be heartbreaking.

What can you do? Submit a comment in opposition to the proposed tariffs:

• By January 6th: comment on the tariff related to France’s Digital Services Tax (specific to French goods)
• By January 13th: comment on the retaliation over Airbus subsidies
• Write your elected representatives; the NAWR put together form letters you can modify to your US Representative and US Senator.

Will it matter? There's no way to know. But the more voices they hear from, the better the chance.

A New Winery Wastewater Wetlands Area

Back in 2005, the state of California passed a law requiring wineries to treat their wastewater rather than releasing it to a normal septic system. This made a lot of sense to us because the lees and other winery by-products can be acidic enough that they impact the normal microbial function of leach fields. But, what sort of water treatment system was an important question. Most wineries chose a contained treatment unit, basically a small version of the treatment plants that cities or industrial operations install. We chose to go a different way. One available option was to build a wetland area where the roots of water plants would filter the winery wastewater as it passed through a series of gravel-filled lined ponds, until it was clean enough to be applied as irrigation water or to keep dust down on the roads. This solution creates wetland habitat for water-loving birds, amphibians, and insects. We were the first winery in the Central Coast to choose this (at the time novel) solution, and completed the construction of our first iteration of this project in 2006. We have enjoyed the benefits (including getting visits from this great blue heron) ever since.

But we're processing more grapes than we were in 2006, between the winery expansion we completed in 2011 and the growth of our Patelin de Tablas program, and in busy periods in recent years we've been pushing more water through those wetlands than they could really process. So, one of our big projects for this year was to expand the wetland area to the appropriate scale for our production. If you've driven into (or by) the winery in the last six weeks, you've likely seen the work going on:

As of last week, the ponds are filled and the plants are planted. You can see in the foreground how the wastewater is distributed across the surface of the pond.

I think the whole thing looks glorious. This next photo shows off the flowers a little better. It also shows a view of the holding pond in the background. We'll make good use of this water, likely to keep the animal enclosure that's right next to this green and growing all summer long:

All wineries (and all businesses) are faced with problems to solve, whether they be inherent in the business or mandated by regulation. Finding solutions like this, that fit into our larger goals and ethos, is one of the real pleasures of running this particular business. The next time you come out to see us, look left as you turn into our gate and you'll see it. Maybe our heron will even make an appearance for you.

Direct Shipping Shenanigans, Delaware Edition

After a burst of progress on wine direct shipping in 2016, in which Pennsylvania, Indiana, and Arizona all opened up, we've had a bit of a pause for the last 18 months or so. Some of that is because most states are now open, and most of the states that are left are relatively small wine markets without their own wine industries, which reduces the pressure both from consumers in that state and from job-creating wineries.  Some of that is because the holdouts tend to be clustered in areas like the deep south (where cultural norms tend to resist the liberalization of alcohol laws) or the northeast (where arcane blue laws, most of which protect powerful distributor lobbies, are long-entrenched). But for the first time in over a year, we have a bill up for vote in a non-shipping state that has the potential of opening a formerly closed market to wine shipments.  Sure, the state is Delaware, the 39th largest state in wine consumption and only 0.42% of the American wine market. But I identified it a few years ago as the likely next state to open up, and we'll happily take any progress we can get.

Enter Delaware bill HB 165. It contains pretty standard wine direct shipping language, establishing a reasonable annual permit ($100) for wineries wanting to ship wine into the state and requiring that wineries collect and remit taxes as though the sale were completed in the location where the wine was delivered.  Common carriers are responsible for checking ID's at delivery.  Reporting requirements are reasonable (quarterly). There is a quantity restriction (three 9-liter cases per household per year) that I don't think is necessary, but it shouldn't cause too many people much angst.  In essence, it's a good bill, and would put Delaware in Tier 2 of the five-tier hierarchy I devised a few years back to evaluate the ease and cost of state shipping regulations.

Except for one clause. A restriction, found in Section d, Clause 5 (lines 61 and 62 of the bill's text) dictates that:

A wine direct shipper licensee may not ... Ship wine that is listed in the current publication designated by the Commissioner for sale by Importers in this State to retailers in this State."

What's the big deal here? Delaware is one of many states that require that any wholesaler register with the state any alcohol product that they offer for sale within the state's borders. States see a role for themselves here in ensuring that wine, beer, and liquor be offered equitably to different retailers and restaurants, and that it not be (for example) given away to prejudice an account into giving preferential treatment to one wholesaler or another. Again, this is fairly routine.  But this shipping bill would eliminate any wine that a Delaware wholesaler is offering for sale from the direct shipping permit. Although this seems straightforward on its face -- you're opening access to the market for wines that aren't available in distribution, and wineries without a wholesaler relationship in Delaware would see this as a win -- it's a major headache for several reasons.

First, just because wineries have a wine listed with a distributor doesn't mean that this wine is actually in stock in retail anywhere.  A quick search of wine-searcher.com for Tablas Creek in Delaware shows four wines available, all at one shop in Claymont.  Only one is current vintage (the 2015 Patelin de Tablas), one is back vintage (the 2013 Esprit de Tablas) and two look like they're the Cotes de Tablas and Cotes de Tablas Blanc, but don't have vintages listed.  I know that our distributor there, who also covers Virginia and West Virginia, also has Esprit de Tablas Blanc, Patelin de Tablas Blanc, and Patelin de Tablas Rosé available for sale.  It's possible that they just haven't sold any recently (our total wholesale sales in Delaware in the last 12 months totaled just 24 cases), or that what they've sold has all gone to restaurants.  But in either case, even the wines that aren't in stock wouldn't be eligible to ship to Delaware consumers. 

Second, just because it's at retail, it doesn't mean it's convenient to a customer.  I had to look up where Claymont, Delaware is, and learned that it's north of Wilmington, at the very northern tip of the state, right on the Pennsylvania line. If a consumer is in the middle of the state (think Dover) they're looking at a drive of about an hour, without traffic.  It's a two-hour trip each way for a resident of a southern town like Laurel.

Third, wineries typically sell a different mix of wines in wholesale than they do direct. Our wine club shipments include early access to our top wines (like our Esprit de Tablas and Esprit de Tablas Blanc) as well as small-production wines that don't make it into distribution. A restriction like this means that our wine club shipments wouldn't be legal to ship into Delaware, which means that we couldn't sign up club members.  Our point of sale system -- which is one of the most sophisticated winery platforms available -- isn't capable of restricting residents of certain states to only certain wines, so we wouldn't be able to take any orders online from Delaware, or would have to then cancel out the portion of orders that weren't eligible for shipment, which would be a nightmare.

Taken together, if that restriction stays in HB 165, it wouldn't make any sense for us to get a shipping permit.  And there are many, many wineries like us out there, which means that the bill wouldn't do much to make available new wines to Delaware consumers, and will likely leave them frustrated and baffled as to why some of their favorite wineries will ship to them and others won't.

Why would this restriction have been entered into the bill?  It's a case of wholesaler (and retailer) protection.  Wholesalers (and retailers) are state-licensed companies, and contribute big money to state campaigns ($107 million in the last decade, according to one study) to protect their share of this $135 billion industry.  Although some individual distributors have more progressive views, wholesaler associations see direct shipping as a threat, and have consistently opposed the liberalization of shipping laws.  They tend to argue that restricting shipping combats underage drinking and ensures the orderly collection of taxes, but given that no one has ever shown a link between wine direct shipping and underage drinking, and that most shipping bills add revenue to state coffers, neither holds up, and it's pretty clear to me that this resistance is at its root protectionism, pure and simple.

Opposing these forces are an array of winery and consumer groups, most notably the Wine Institute and Free the Grapes, both of which support liberalized direct shipping and have seen a remarkable run of success in opening up one state after another since the 2005 Granholm v. Heald decision struck down laws that protected in-state wineries right to ship to consumers but prohibited out-of-state wineries from doing the same.  It was on the Facebook page of Free the Grapes that I found a remarkable exchange that included Paul Baumbach, the principal sponsor of HB 165.  Free the Grapes was urging consumers to contact their Delaware representative and support an amendment to HB 165 (Amendment 1, proposed by Delaware House Rep Deborah Hudson) that proposed the elimination of lines 61 and 62 that restrict the shipping permit to non-distributed wines.  Rep. Baumbach wrote the following (remarkable) comment:

This post is paid for, not by those concerned about Delaware vineyards, but by a California lobbyist organization. Why does HB165, which I am prime-sponsoring, prohibiting the Direct shipping of Delaware wines which are available in our stores? Because they are available in our stores! This bill s designed to help Delaware wine consumers have access to all wines? That means that it works to provide access to wines which aren’t legally available to Delaware residents? HB165 as filed accomplishes that, despite what a California group is spending money on Facebook to make you believe. Make sense?

The level of obfuscation here is pretty remarkable, and makes clear that the goal is not in fact to "help Delaware wine consumers have access to all wines". I would submit that it's in fact a delaying tactic, in much the manner that New Jersey has done, appearing to pass a shipping bill while not actually opening the market much and protecting as much of the state-licensed distributors' profits as possible.

I hope consumers see through this.  If you live in Delaware, please make your voice heard, and support the bill provided it includes House Amendment 1.  An interface on the Free the Grapes Web site makes it easy to contact your elected officials.

Direct Shipping is not a Zero Sum Game

Earlier this year, I was having lunch in Boston with a key account manager from our Massachusetts distributor.  We were talking about what I'd done on my last visit, which included a really cool dinner at (sadly now closed) Blue Ginger that had such a large consumer response that they had to move the dinner into a larger room.  I also conducted a sold-out tasting seminar at the terrific retailer Gordon's in Waltham.  I mentioned that we'd sent news about the events out to our mailing list and wine club members, and that I thought this was a big reason why we'd gotten such a good turnout for the events.  His response took me by surprise, though it shouldn't have.  He said, "I know, we oppose direct shipping, but I guess it can have its uses."

I've been meaning ever since to write a blog post about how misunderstood direct shipping is among most actors in the wholesale market, and how those misunderstandings have driven policy positions that harm wholesalers' interests in the long run. After all, our wholesale business in Massachusetts is up 38% this year, and was up in 2016 and 2015 after nearly a decade of essentially flat sales.  Our Massachusetts wholesaler is on a pace to sell 55% more wine than it did in 2014.  Most businesses would kill for this sort of performance. So, what turned things around?

Direct shipping opened in February of 2015, bringing Massachusetts into the growing majority of states.

At first, it seems counter-intuitive that opening up a state to shipments of wines from wineries in other states should help the sales of that winery's wholesaler.  Doesn't each sale offset another in-state sale?  Not really.  Here's why the ability for a winery to ship to a state should generally increase their wholesale sales there:

• Wineries are better able to make and cultivate fans. This, I think, makes a lot of sense, and it works in at least a few ways. Each year, a winery like ours sees visitors from every, or nearly every, state.  Of course, more are from California than anywhere else, and a disproportionate number are from the larger western states, but we see a few hundred visitors from a state like Massachusetts each year.  
  • If these visitors can't sign up for our wine club and can't order wine from us, it's a lot harder for us to establish a meaningful connection with them.  That means that when these people return home and see a Tablas Creek wine on a wine list or the shelf of a wine shop, we're less likely to have developed enough of a connection with them that they choose that wine over others.  
  • They are also less likely to bring Tablas Creek to friends' houses, and therefore the critical peer-to-peer market is harder to activate.  
  • I also think -- though this would be hard data to gather -- that shipping bans discourage wine tourism from those states, since those consumers are likely to experience some degree of frustration in getting any new discoveries home.
• The wines that people order are not the same wines they buy at retail. The idea that consumers will exchange a purchase at their local shop for a purchase of the same bottle online is pretty far-fetched.  Consider why:
  • Wine is fundamentally a difficult product to ship direct to consumers.  It's heavy and perishable, which means that even if (like us) you subsidize the shipping costs, it's at least a few dollars per bottle to get that product shipped across the country.  Because it's alcohol, all packages have to be signed for upon delivery.  You have to wait at least a few days to get the wine.  And because of the mess left behind by Prohibition's repeal and the 21st Amendment's decree that states have the rights to legislate how they treat alcohol, wineries have to jump through significant legal and compliance hoops to get shipping permits.  The net result is that it's not worth it to ship inexpensive wines, or wines that have good representation in distribution, direct to consumers. The average price of a bottle of wine sold in the United States is about $7. Even with growing demand for higher-end wines, the vast majority of wines won't ever make sense to ship direct.  From a winery's perspective, it's not until you get to the $20 and up category where the shipping costs don't outweigh the extra margin a winery makes on a sale.
  • So, what sorts of wine do make sense for both wineries and consumers to order direct?  Those they can't find, or at least can't find nearby.  Direct shipping opens up the power and opportunities of long-tail marketing to wine lovers and producers.  We don't produce enough volume or have enough demand to have wines on the shelves of dozens of stores in each state outside of California.  So, in many cases, consumers don't have any Tablas Creek on the shelf anywhere near them.  And if they do, it's likely that what's easiest to find is our Patelin de Tablas line, which makes up about 70% of what we sell wholesale nationally.  What if they've read about our Vermentino, or our new Terret Noir?  Too bad.  As you would expect, the Patelin wines represented a much smaller proportion -- just under 15% -- of what we sold direct last year.  What did we sell?  A mix of everything.  But more than half of what we sold was our small-production varietals and blends that aren't found in distribution.  
  • I would guess that most wineries' data would show the same thing, and it's backed up anecdotally.  On a visit to another high-end winery near us last week, our server explained that they have two entirely separate lineups of wine for their wholesale sales and their tasting room.  And, of course, a large number of wineries don't distribute any of their wine nationally. 
• Restaurants work differently. Although many restaurants offer corkage, where customers can bring in their own wines and have them served at their table for a fee, and there are some states who allow wineries to sell direct to restaurants, the challenging logistics and planning (and cost) required means that nearly 100% of wine sold in restaurant comes through a state-licensed wholesaler.  Does opening direct shipping impact restaurant sales negatively?  Not at all.  And we have found that it is our wine club members -- read superfans -- who are the most likely to order our wines at a restaurant.  They feel a proprietary pride in the success of their favorite wineries, and when they are dining with friends it is often these restaurant opportunities that encourage the peer-to-peer sharing that starts new customers on the path to fandom.  If we can't ship direct to a state, it's a lot harder to sign up wine club members (they can, of course, have wine shipped to friends or relatives in nearby shipping-allowed states, but that's cumbersome and difficult). And the restaurant sales those club members will make don't happen.  
• Direct shipping changes wineries' incentives. All those reasons aside, I think the most important reason that we have seen our wholesale sales increase in state after state after that state opens to direct shipping is this last one.  Judging from our own actions, it's not in our interest to lavish the same amount of attention on states to which we are prohibited from shipping directly as we do to states to which we can ship.  I know that before 2015, I hadn't visited the Massachusetts market in several years, despite that I went to both high school and college in Massachusetts and have lots of friends -- and sports teams -- in Boston I love to see.  It just wasn't worth it.  In a state like New York or Illinios, where we can ship, I can go, spend my days working with our distributor reps to get the wines into new accounts, and spend my evenings doing consumer events at restaurants or wine shops.  I can help ensure that those events succeed, making the accounts that host them happy, by promoting the events to our consumer mailing list in the area.  And I can hopefully come out of those events with a new collection of names that I can add to our mailing list.  This makes these people more likely to come out to Tablas Creek, and to eventually join our wine club or buy wine from us.  Everyone is happy.  In a non-shipping state, I can still do the work days with the distributor, but I can't do much to help promote consumer events (so they're less likely to be successful) and I can't do much with any consumer contacts I make at these events.  Both time and marketing dollars are finite for any winery.  Wineries are only behaving rationally by focusing their attention where they can have the greatest impact, which means that states without direct shipping don't get as much winery-level help with their wholesale sales.

Whatever the reason or combination of reasons, Massachusetts isn't the only state where we've seen wholesale sales increase in the aftermath of the state opening to direct shipping. It has happened again and again.  Between 2005 and 2013, our wholesale sales rose an average of 8% per year.  Check out how much some of the larger states (that opened to direct shipping over that period) grew in the first two years after they allowed direct shipping.  The year that we started shipping to each is in parentheses:

• New York (2005): + 68.0%
• Florida (2006): -38.1%
• Texas (2006): +61.7%
• Ohio (2007): +14.3%
• Georgia (2008): +24.0%
• Washington DC (2008): +72.5%
• Maryland (2011): +160.9%

On average, our wholesale sales in these seven states increased 51.9% in the two years after we received our direct shipping permit.  Why was Florida the one state to decline?  I didn't realize it had, until I pulled this data.  But I have a few guesses.  First, it's a state from which we see relatively few visitors, at least for the size of its population.  It's also a state with a very spread-out population, where (unlike, say, in New York or Washington DC) it's hard to schedule events in places that are central to a collection of mailing list members.  We also struggled to set up good consumer events in our early years there, so I doubt we were able to leverage or build our mailing list particularly efficiently.  Anyway, the rest of the states show a pretty strong trend, and our sales in Florida have rebounded strongly in recent years, so I'm not going to worry too much about the one data point.

Instead, I just booked my flights for my second work trip this year to Boston.  I'll fly in Tuesday.  Wednesday, I'll work with one of the distributor's top reps, and we'll try to get the wine into some more cool restaurants, before I host a dinner at Porto in Boston's Back Bay.  Thursday, I'll do it all again, and Friday I'll fly home.  I'll catch the Patriots season-opener on TV with some friends who live there.  And none of this would have happened if Massachusetts -- with a push from former Patriot turned vintner Drew Bledsoe -- hadn't decided to open their borders to wine shipping two years ago.

 

Celebrating the direct shipping progress we made in 2016... and all that's changed in 11 years

I am typing this from Vermont, where we've taken the boys for New Year's to get a dose of real winter.  And Vermont has been cooperating, with 8 inches of snow the day after we arrived and temperatures that have since that snowfall stayed below freezing to keep the snow light and powdery.

It's lovely to be able to come back to the place I grew up, and even more so to be able to bring our California kids to experience this magical place: to rediscover the best sledding runs that will take you over the frozen pond; to find the best icicle roofs; to explore the pine groves whose boughs, covered with snow, make a great secret fort.  Of course, you have to also make peace with the fact that the sun goes behind the western hills around 2:30pm.  It's typically full dark by 5.

Happily, we have lots of fireplaces and a wine cellar that my dad has given us free rein to plunder.  Some of the treats down there are wines from the very early days of Tablas Creek... wines like the 1997 Rouge, back in the day when we thought we were only going to make one red wine and one white wine each year.  Things have definitely changed at the winery.  

Things have changed around the country too. I remember the challenges my dad had in getting those wines from California to their Vermont house back in the day.  The nearest of the 13 states to which we could send wine legally via UPS or FedEx was West Virginia.  Because of his connections, he was able to get wine shipped to a distributor warehouse in a neighboring state and then have someone from the warehouse come and bring the wines here.  I used to help him load the cases down into the underground cellar after they arrived. But this clearly wasn't practical for most wine lovers. Happily, things have changed a great deal since the Granholm v. Heald decision in 2005¹.  Vermont is one of 39 states we can ship to, encompassing 86.7% of the United States' population and 88.4% of its wine market.  Of the 12 prohibited states, only New Jersey (#5) and Connecticut (#18) fall in the upper half of total consumption by state.

The progress has come in fits and starts, with several states opening up in the immediate aftermath of the Granholm decision and continued but irregular progress since then.  I thought it would be fun to look at how the shipping map has changed in a graphical way. Notice that until 2004, the states to which we could ship clustered around the west coast and the upper Midwest:

The key holding of the Granholm decision was that states could make whatever rules they wanted about wine shipping, as long as they didn't use the rules to give their in-state wineries a competitive advantage.  They could allow easy shipment, place restrictions on shipment, or prohibit it altogether.  But they couldn't carve out exceptions for their local wineries (read: constituents and potential donors).  This key point meant that change came first in other wine producing states like New York, Virginia, Texas and Michigan, whose local wineries demanded that their legislatures maintain their access to their local customers. The example that these states set -- and the fact that none of the negative side-effects warned of by liberalized shipping's opponents came to pass -- encouraged other states to follow suit. Typically, the resistance to liberalized shipping comes from wine & spirits wholesalers who don't want to miss out on their cut of profits on wine sales that might otherwise pass through their hands on the way to a retail shop. In the back rooms of state legislatures, where liquor wholesalers are major campaign donors, such an argument can be persuasive. But this sort of special interest legislation doesn't play so well out in the open, and the umbrella advocacy group Free the Grapes played (and continues to play) an important role in drafting model legislation and helping spread the word broadly whenever a state's legislature debates a shipping issue. By 2008 half the states and well over half the US population had the right to order wine from most wineries.

In addition to opening markets for their local wineries and making their own consumers happy, states realized that creating direct shipping legislation was also an easy way to bring revenue into their coffers.  For most states, we have to collect and remit sales taxes on each shipment (though it's worth noting for the record that I have trouble seeing why this is constitutional when Quill Corp. v. State of North Dakota determined in 1992 that states cannot ask merchants to remit taxes unless they have a physical presence in the state in question). In general, as far as I can tell, most wineries are so happy to just have access to these markets that they've made the pragmatic decision not to rock the boat.

The three states that opened up this year are all in the top half of wine consuming states: Pennsylvania (#10), Arizona (#17), and Indiana (#23). Together the more than 26,000,000 residents of these three states represent 6.2% of the American wine market and more than a third of the consumers we couldn't ship to at the beginning of the year.

What lies ahead for direct shipping in 2017? With fewer and fewer states prohibiting it, and with no problems reported in any of the states that have opened up, the pressure will continue to mount on the handful of holdouts. That said, we're unlikely to see another year like 2016, not least because there aren't many states left of the importance of those that opened up this year. What's more, several of the remaining states to which we don't ship actually have shipping laws on the books; they're just too convoluted and/or too expensive for it to make sense to take out the license. New Jersey and Connecticut fit that description, as do South Dakota and Louisiana.²  That leaves a handful of low-consumption states in the deep south (Oklahoma, Arkansas, Mississippi, Kentucky, and Alabama), as well as mostly-Mormon Utah, whose general resistance to alcohol and lack of in-state wineries to apply pressure are likely to mean change will come slowly if at all. And it leaves two small states on the east coast (Rhode Island and Delaware) with complicated post-Prohibition blue laws, which seem the most likely to open up next. Delaware, in particular, has debated shipping legislation the last two years.

We'll keep working on both the prohibition states and those like New Jersey whose laws were written to protect distributors from as much competition as Granholm would allow.  Maybe 2017 will be the year the ball will drop for them.  Meanwhile, I'm going to open up another great bottle and enjoy knowing that for 86% of the country, it's no longer just those connected to someone in the distribution business who can patronize the wineries they love. That's progress anyone can root for.

Footnotes
1. If you'd like to read our thoughts in the immediate aftermath of the Granholm decision, I posted them in our Summer 2005 Newsletter. Although this was a while ago -- in the same newsletter we announce the release of our first-ever Mourvedre -- the observations and predictions are still relevant. 
2. For a sense of the calculus involved, check out this post from early 2015 that broke down states into tiers based on the cost of doing business there.

Pennsylvania is on the verge of allowing direct wine shipping!

Don't faint.

This afternoon, I saw an alert from Free the Grapes that the Pennsylvania Legislature passed House Bill 1690 by a tally of 157-31. The bill is on its way to Governor Tom Wolf's desk, and while he has not indicated that he will sign it¹, the statement he posted on his Web site, the fact that he's on the record as supporting direct wine shipping, and the fact that the file name of the page calls the bill "historic" all seem encouraging:

Although it does not do away with the state-run liquor stores, the bill does modernize the sales of alcohol in several ways. It allows wine to be sold in grocery stores (where beer is sold already) as well as in other establishments that sell prepared food. It allows state-run stores to be open more consumer-friendly hours, including on Sundays and holidays.  And it allows those same stores to implement discount and loyalty programs, which should be good for consumer prices.

Almost hidden in the announcements about the bill's passage were the sections that allow out-of-state wineries to apply for a $250 permit to ship wine to Pennsylvania consumers. As is typical in direct shipping bills, we will collect the sales taxes that are due the state, and remit them to the state.² Of course, the permit details will have to be worked out; I couldn't find in the text of the bill anything about how often and to whom the tax reports would have to be filed.  But it looks fairly straightforward, which would place Pennsylvania into either Tier 2 or Tier 3 of my State of the Union, Wine Shipping Edition that I published early last year. The bill would go into effect 60 days after being signed by Governor Wolf.

As Pennsylvania is easily the largest state to prohibit direct wine shipping outright, it was at the top of the target list for wineries. But given the arcane and unique nature of Pennsylvania's liquor distribution system, and the breakdown of last year's negotiations over a Republican requirement to tie modernization with the privatization of the state stores, it really wasn't on my radar screen as a possibility this year. I'm evidently not the only one caught by surprise; the Free the Grapes home page today offered "hot topic" templates for contacting legislators in Rhode Island, Delaware, Arizona, and Oklahoma (but not Pennsylvania). Why was it revived?  Apparently, as a relatively uncontroversial way to help close a projected $1.6 billion budget shortfall. The additional liquor licenses, and the increases in liquor tax revenue, are projected to add an additional $150 million/year to the state's coffers.

More money for a state in need of it? More choice and potentially better prices for consumers? And access to consumers in the 6th-largest state in the country for wineries? Sounds like a win/win/win. Thank you, Free the Grapes, for staying on this.

Footnotes:
1. At 6am Wednesday, June 8th (PDT), Governor Wolf tweeted that he would sign the bill, calling it "historic" and "the most significant step to reform the liquor system in 80 years". 
2. An earlier version of this article indicated that purchasers would still be responsible for paying the 18% PA "Johnstown Flood Tax". It appears that this is not the case (!) and only the 6% statewide sales tax, plus any applicable county and city taxes, will be collected on direct wine shipments.

What's next for the new Paso Robles AVAs

Last month, I had the pleasure of sitting on a panel discussing the process behind and prospects for the 11 new Paso Robles AVAs (short for American Viticultural Areas). This panel was a part of a conference organized by the Continuing Education of the Bar (CEB), for attorneys interested in wine law from around California.  Joining me on the panel were Steve Lohr (of J. Lohr Vineyards & Wines, another founding member of the Paso Robles AVA Committee) and Carol Kingery Ritter (of Dickenson, Peatman & Fogarty, the law firm that shepherded the AVAs through the federal approval process). [Map below, courtesy of Paso Robles Wine Country Alliance. Click to enlarge, or here for a PDF that also includes descriptions of the sub-AVAs.] 

Much of the discussion focused on how the AVAs came to be: the genesis of the idea, the research that took place to discover and support how to draw the boundaries, and the convoluted process that took place once the petition had been submitted to the TTB, lengthened by the TTB's decision to reconsider the fundamental nature of AVA labeling after receiving the submission.  I've written about all of these, and particularly the TTB's struggle with the concept of nested AVAs, on the blog in the past (you can find them all by scrolling through the Legislation and Regulation category tag).  I won't repeat those thoughts here, though I encourage anyone interested in the often convoluted regulations that govern the production, marketing and sales of wine to explore the archive at their leisure.

More interesting, to me, were the questions I received about why I thought the approval of the AVAs a good thing for Paso Robles, and how I saw them being used in the marketplace.  I'll dive into both topics in this blog.

Why the 11 AVAs area a good thing for Paso Robles

For me, there are three main reasons why the approval of the AVAs are good for the Paso Robles region as a whole.  

1. Their approval is a concrete data point that the region is maturing. When the Paso Robles AVA was first proposed and approved back in 1983 it contained only five bonded wineries and fewer than 5000 planted acres of vineyard.  Big swaths of the AVA, including the area out near us, were largely untouched by grapevines.  In the last thirty years, Paso Robles has grown to encompass some 280 wineries and 32,000 vineyard acres.  Until the new AVAs were approved, it was the largest unsubdivided AVA in California, at 614,000 acres. By contrast, the Napa Valley appellation (which includes sixteen AVAs delineated within its bounds) is roughly one-third the area at 225,000 acres. The growth of the region has been a story in itself in recent years, but the approval of the AVAs is something tangible and official that encourages press, trade and consumers to take a new look at what Paso Robles has become. 
2. The approval was done collectively, as a region.  There were 59 different Paso Robles growers and wineries involved in the Paso Robles AVA Committee, and the work was done hand-in-hand with the Paso Robles Wine Country Alliance.  This cooperation allowed the region to push (and eventually pass) a conjunctive labeling law, which guarantees that any winery who uses one of the sub-AVAs on their label will also be required to state Paso Robles equally prominently.  This safeguard ensures that the region will keep the accumulated marketing capital that we've all been working to build in the national and international marketplace.  And the cooperative nature of the AVA Committee reinforced the bonds of our community, which is in my experience a rare and valuable point of distinction for Paso.
3. It provides a framework for wineries, sommeliers, and wine educators to discuss the incredible diversity of Paso Robles.  Those of us making wine here have been talking for years about how varied the climate, soils, and geography are in Paso Robles, and largely relying on anecdotal descriptions to support our points.  The research that went into the AVAs puts these facts at our fingertips, and facilitates the discussions that show why Paso Robles can make world class wines from grapes as diverse as Cabernet, Syrah, Roussanne, Mourvedre and Zinfandel.  As a quick summary: 
   • The Paso Robles AVA stretches roughly 42 miles east to west and 32 miles north to south. 
   • Average rainfall varies from more than 30 inches a year in extreme western sections (like where Tablas Creek is) to less than 10 inches in areas farther east. 
   • Elevations range from 700 feet to more than 2400 feet. 
   • Soils differ dramatically in different parts of the AVA, from the highly calcareous hills out near us to sand, loam and alluvial soils in the Estrella River basin. 
   • The warmest parts of the AVA accumulate roughly 20% more heat (measured by growing degree degree days) than the coolest.  This difference in temperatures is enough to make the cooler parts of the AVA a Winkler Region II in the commonly used scale of heat summation developed at UC Davis, while the warmest sections are a Winkler Region IV.  This is the equivalent difference between regions like Bordeaux or Alsace (both Winkler II areas) and Jumilla or Priorat (both Winkler IV areas).

How I expect to see the AVAs used in the marketplace

A criticism that I see commonly tossed out by the opponents of new AVAs (and not just Paso Robles') is that an AVA may be approved before it has meaning in the marketplace.  To me, that's putting the cart before the horse.  At the time ours were approved, really only the Templeton Gap AVA had any particular association in the market, and that was mostly as a geographical feature more than as a delineated area (in fact, much of what locals refer to as the Templeton Gap lies west of the Paso Robles AVA entirely).

Given that relative lack of market knowledge about the sub-regions of Paso Robles, should the TTB have denied the petition?  If they had, it's hard to see how these regions could ever be recognized.  Drawing the lines is an essential step in allowing those regions to develop an identity.  At that point, it's up to the wineries within (or at least, who source grapes from) those regions to make their names.  If they're successful at associating the region with quality and distinctiveness, the market will follow.  What is key is that the lines are drawn using good science, and I think that it's here that the Paso Robles petitions were particularly strong.  The climate, soils, and elevation studies that went into the proposals were the most comprehensive that the TTB has ever received, and I believe they will stand the test of time.

To get a sense of how we're using the new AVA designations, take a look at some of the wines that we bottled during the second half of this year.  You can see several (Tannat, Petit Manseng, Mourvedre, Cotes de Tablas Blanc, and Panoplie) with the new Adelaida District AVA noted.  The Patelin de Tablas, which incorporates fruit from four of the sub-AVAs, retains the umbrella Paso Robles AVA.  The Full Circle Pinot Noir, sourced from my dad's property about 8 miles south-east of us, carries the Templeton Gap AVA (click the photo to expand it):

The distinctions between these different labels will make it easier for us to tell their stories: whether they are estate or not.  Whether they are single-vineyard or not.  Whether they are from our home vineyard or not.  And the fact that they all say Paso Robles should keep the market from being confused as to the bigger picture.

If I had to look into my crystal ball, I'd guess that of the 11 AVAs, there will be 4 or 5 that will achieve some market recognition within the next few years.  There will be another 2 or 3 that will achieve it, but somewhat later.  And there will be a few that never achieve much recognition in the market, either because there doesn't develop a critical mass of wineries located within that AVA to champion their AVA, or because the wineries that are located there decide that they would prefer to remain associated with Paso Robles rather than their sub-region.  And that's OK.  How many AVAs can anyone but the most bookishly-inclined sommelier name?  Even among wine lovers, most would be hard-pressed to name more than 30 of the 231 approved AVAs (as of November 2015).  If Paso Robles can add a few more to the common lexicon, it's a win for all of us here, and for wine lovers everywhere.