Archive for June, 2006
Dropping the Second Shoe
June 19th, 2006
Recent lawsuits in California, following the preliminary consent decree in Texas, bring home the second major implication of Granholm.
The Supreme Court opinion of May 2005 told us that a state may not allow its own wineries to sell directly to consumers if it excludes out-of-state wineries. Its first implication �that states allowing their own wineries to distribute directly to retailers may not deny out-of-state wineries access to those customers� is expressed in the November 2005 Costco ruling, which is part of the April 2006 judgment in that case.
Reports from the Central District of California, where one of the current suits is filed, indicate the state may respond like the Texas authorities, negotiating a preliminary injunction that would expand market access while the case is pending, but not definitively forfeit the state�s right to defend the suit by attempting to distinguish Granholm. Some concession seems necessary, because as the result of political maneuvering the current California statute incorporates reciprocity as a requirement for shipment by retailers, although the statute was passed primarily to eliminate that feature and the tax waiver for direct shipment by wineries. Most analysts agree reciprocity is inconsistent with Granholm.
The third shoe of the three-legged issue will be shipment by wholesalers across state lines. A suit championing that theory was rumored in Texas and appears to be a logical next step. Whether there or elsewhere, one can expect another thump soon.
Questions remain on the pivotal question whether states can make a case for discriminating against the more numerous and perhaps less stable out-of-state retail businesses in ways Granholm says they can�t against out-of-state wineries. In cases decided to date, no state has put together a coherent record supporting its approach. Opponents of freer trade read Granholm as a bad record case and hold out hope of state victory in a better-litigated suit.
On the other hand, Granholm states the principles of non-discrimination very broadly and defines the 21st Amendment very narrowly. Moreover, the new members of the Supreme Court replace Granholm dissenters and appear unlikely to affect the balance if another case reaches them under the Commerce Clause. My guess is that Granholm issues won�t be in the Supreme Court again any time soon, because the current spate of cases involves outright discrimination against interstate commerce and is likely to be settled in the circuit courts of appeals in favor of the plaintiffs. If the circuits do not split, the Supremes probably won�t hear appeals.
The following round of cases will challenge volume caps, high license fees, and other limitations the wholesalers have been able to pile on in state legislatures. If they are analyzed as direct discrimination, they are probably winners, but they may be decided as burdening cases, in which regulatory interests are balanced against effects on commerce, with far less certain outcomes.
Sinking the Playing Field
June 13th, 2006
Recent reports that state ABC stores in Virginia are running low on Virginia wines illustrate an interesting ripple effect of the direct shipment litigation. (See http://www.roanoke.com/business/wb/wb/xp-68853.)
By now nearly everyone has gotten the message that Granholm is neutral on freeing trade in wine, requiring only that states apply economically equivalent conditions to in-state and out-of-state suppliers in granting or denying access to resident customers.
The level up or down question arose well before the Supreme Court spoke, with results differing by particularities of the state statutes and their legislative histories, as well as by the predilections of judges. Thus, federal circuits that preceded Granholm in recognizing the unconstituionality of discrimination reached opposite conclusions on remedy in Dickerson and Beskind . Latitude to even the playing field by restricting trade continues, notwithstanding the irony of basing contraction of commerce on the commerce clause.
Most of the attention to leveling has properly centered on state legislatures, where the battle with wholesalers is mostly over how many restrictions will be piled on rather than closing trade channels altogether. There is, however, a role for regulatory agencies in states where existing statutory schemes are unconstitutional and the legislatures have not enacted substitutes.
Consider the apparent plight of an administrative agency that operated under a system intended to help local wineries by restricting or eliminating access by out-of-state producers to certain channels of trade. Administrative agencies exist as creatures of statute and can legitimately act only as authorized by legislative enactments. If a statute gives an alcoholic beverage commission the right to purchase and resell wine made in the state, but not other wine, and a court says the agency may not deal in one and exclude the other, what course of action is open to the agency? Like all executive branch instrumentalities, the agency is supposed to follow the law, including federal law that supersedes inconsistent state law under the Supremacy Clause, but application of broad principles in practice yields to specifics. If a state statute merely allows the agency to deal in local wine, and the federal constitution merely says that other wine must come if if the agency chooses to deal in local wine, the conservative course is to stop dealing in local wine �with the result reported in Virginia.
Those of us wanting freeer trade might urge agencies to take a more creative stand. Of course they must follow the law, but “the law” is not just what’s written in the lawbooks, but the combination of that text with the legislative intent and the requirements of applicable federal law. Add to that the rule in most states that agencies are entitled to deference in interpreting the statutes under which they operate. Agencies could reason that the protectionist measures imbedded in their authorizing legislative constitute a legislative intent that they deal in the local wines to the maximum extent possible under the law, that they must read the statute consistently with the supreme law of the land, and that it is therefore more law-abiding to read into their authorizing legislatiion the right to deal in other wines to the extent necessary to carry out the legisltive intent to promote trade in local wines. Unfortunately, that approach is contrary both to the natural inclinations of administrators and state attorneys general (who tend to view the literal text of statute books as turf they were hired to defend) and to the well-articulated interests of wholesalers.
Newspaper sets up sting in Minnesota
June 7th, 2006
The St. Paul Pioneer press on Monday reported a series of underage stings that the newspaper “Watchdog” group set up in the state of Minnesota. As you recall, Minnesota recently lifted their ban on Internet wine sales. The details of what exactly happened in the five different stings are a little vague in this article, but I’ll attempt to summarize.
This was not a sting in the true sense as police were not involved. Beer, wine, and vodka were ordered online from both retailers and a winery, and violations were found in four cases out of five. In two cases, alcohol was delivered to minors. In the first case, the package was properly labeled as containing alcohol but UPS delivered the package to the teenager anyway. In the second case, the online retailer did not properly label the package as containing alcohol and UPS had “no way of telling the contents from looking at the box”. The only shipment that originated from a winery did not end up in the hands of a minor. FedEx denied the minor access to the wine package that was properly labeled. The two other shipments were violations in that beer and spirits are prohibited from being shipped into Minnesota from out of state.
So, what do we learn from all of this? First of all, the article sums it up well when they say:
Getting the alcohol into the right hands is a dual responsibility: The shipper must put stickers on the box declaring that there’s alcohol inside and that the person who signs for the box must be 21 or older; the delivery company can hand over the package only to customers who can prove they’re at least 21.
Second, there are a number of groups that are trying to raise awareness of the dangers of buying wine online. The visibility of offsite wine purchasing is already high and events like this will do nothing but increase that visibility. States have put safeguards in place to prevent this from happening, but in some states these laws are not yet well enforced.
Michigan recently set a new precedent by requiring that wineries perform age verification at the time of transaction on top of requiring the common carriers to make sure that the recipient is 21 upon delivery. The age verification at the time of transaction can be done by either checking the driver’s license and taking a photocopy as proof or by using an approved electronic age verification vendor. Although Michigan has not yet finalized the details of how they will enforce these new laws, they will likely set a new bar for states that want to better enforce age verification.
Idaho permit instructions posted
June 5th, 2006
Idaho released instructions for getting permitted for direct shipment on Thursday. The document can be found in Word format on the Wine Institute site here. Three different permits are actually required before wineries can ship.
1) Wine tax permit from the Idaho State Tax Commission: To get the tax permit, first fill out the updated Beer and Wine Tax Permit Application (BWA), which is not yet available.
2) Seller’s permit from the Tax Commission: Register online for a seller’s permit at business.idaho.gov.
3) Direct shipper permit from the Idaho State Police�s Alcohol Beverage Control Bureau (ABC): The Tax Commission will forward your BWA to the ABC, who will automatically issue the direct shipper permit.
Also listed in this document are more details about the new rules.
- Excise, sales, and use taxes
- Annual reporting
- Volume limit of 24 cases per individual per year
- Package label requirements
- Common carrier must verify the age of the recipient
Napolitano signs Arizona wine shipping bill
June 4th, 2006
On Thursday, Arizona Governor Janet Napolitano signed into law SB 1276, opening Arizona for limited direct shipping and self distribution. As we mentioned below, this will establish a capacity cap for offsite sales of 20,000 gallons (roughly 8,400 cases). Onsite sales will continue to be allowed with a per customer volume limit of 2 cases per year. The new law will be effective 90 days after the end of the legislative session.
Reactions are mixed on this result. Arizona wineries are pleased with the decision as are wholesalers, but medium and large sized wineries outside of Arizona as well as the Wine Institute and Free the Grapes! are not happy with the outcome. Many of our readers point out that we should view this as a glass half full instead of a half empty. Arizona was previously completely prohibited for offsite sales, so it is a small step in the right direction even though a large number of wineries are excluded.
Tom Wark at Fermentation notes that the Wine & Spirits Wholesaler Association has stepped up their presence and will continue to use whatever means they have to limit and prohibit direct shipping and self distribution. The Arizona battle seems far from over as the the capacity cap will almost certainly be challenged in the courts.
