Archive for March, 2008
Rhode Island and Alabama: Let My Pinot Go!
March 27th, 2008
As legislative sessions continue to progress across the country, more and more legislative bills concerning direct shipments of wine are being considered. If the bills mentioned in this post pass, two states will change from being prohibited states to permit states. The last state to change from a prohibited state to a permit state was Indiana, and that turned out to be a little messy. The bills for Rhode Island and Alabama are straight forward and fair – let’s hope they make it through the process.
If HB 520 or its companion SB 412 in Alabama, and S 2125 in Rhode Island pass, they would allow for any licensed wine producer, supplier, importer, wholesaler, distributor or retailer to apply for a direct shipper license ($100 initial fee; $50 per year thereafter) that would allow them to ship up to 24 cases of wine per year to an of-age resident of the state, as long as the resident is not located in a dry area. Sales and excise taxes must be paid annually.
Thanks Again to Our Readers
March 26th, 2008
As you might have noticed by the re-emergence of the logo on the sidebar of this page over the last week, we have been nominated as a finalist for the second edition of the American Wine Blog Awards in the category of Best Wine Business Blog. We are very honored by this distinction and we thank everyone that has nominated us. The voting ends this week, so if you have not yet visited the virtual poll, you can cast your vote by clicking here.
We owe the success of this blog to the support of our dedicated readers – your emails, tips, suggestions, and words of encouragement have made it easy to continue to use this forum to provide up to date news, analysis, and editorial on the topic of direct shipping compliance. A big thank you as well to the contributors of this blog, especially Corbin Houchins, Annie Bones, Sarah Werner, and Jeff Carroll.
Thanks again for your support. I’d strongly recommend checking out the finalists in all categories and voting for your favorites by visiting the virtual poll.
An Accident On The Way To Court
March 25th, 2008
The February 26, 2008 decision by an Arizona federal district court in Black Star Farms LLC v. Oliver supports an in-person purchase requirement, one of the principal legislative attacks on the level-field principle enunciated in Granholm.
In-person purchase as a precondition to direct shipment solves a fundamental political problem for the middle tier. Although Granholm allows states to eliminate discrimination against interstate direct shipment by forbidding in-state shipment, pursuing that “level down” strategy requires extravagant expenditure of political capital, because it constitutes a death sentence for a significant fraction of local wineries. Thus, wholesaler trade associations are faced with reconciling survival of direct shipment for local wineries with the core objective of forcing wineries in other states to go through three tiers, a conceptual problem after Granholm.
The solution is the “accident of geography” theory, which contends that the impracticality of, e.g., an Arizona consumer’s visiting a Yakima Valley winery to place an order for a wine advertised on the Internet, compared to the convenience of visiting an Arizona winery for the same purpose, does not discriminate against interstate commerce. The Black Star court, like a New York federal district court in Buy Right, Inc. v. Boyle and a Tennessee federal district court in Jelovsek v. Bresden, appears to have bought the theory; federal district courts in the Kentucky case, Cherry Hill Vineyards, LLC v. Hudgins, and the Indiana case, Baud v. Heath, rejected it. Appeals are reportedly under way in the fourth, sixth and seventh federal circuits; if the plaintiffs appeal in Black Star, the ninth circuit will also be involved.
At first impression, the wholesalers’ argument does not seem logical. With respect to governmental restrictions, the Commerce Clause is supposed to provide equal access to markets for interstate commerce originating in any location. True, it does not require states to neutralize natural effects of geography, such as the greater cost of shipping from a distant point, but the trade restriction in question arises from the legislative pen, not from geography itself. For legislation, the Commerce Clause supports location parity by voiding state enactments with substantial discriminatory effects, including the effect of leveraging location advantages of local businesses against distant competitors.
Ironically, the court in Black Star appears to have recognized that aspect of the Commerce Clause, as it cited a 1994 Supreme Court case on the subject, C & A Carbone, Inc. v. Clarkstown, which invalidated a facially neutral city ordinance requiring all nonhazardous solid waste received and processed in the town to be deposited at the defendant township’s transfer station. The fatal flaw of the Clarkstown ordinance was that in practice it favored local waste management business to the exclusion of all non-local competition, which sounds pretty similar to a three-tier requirement for out-of-state businesses, but the Black Star court decided not to follow that precedent for reasons that are difficult to divine in its opinion.
There is, nevertheless, a solid basis for the anti-trade result in Black Star and other recent cases, which is widely (and perhaps erroneously) understood as endorsement of a geographic accident defense to Granholm-based suits. If there were only one message I’d want readers of these blogs and Notes on Wine Distribution to take away from discussion of Granholm, it would be the enormous evidentiary difference between a facial discrimination case like Granholm itself and a de facto discrimination case like Black Star. The latter category, which includes challenges to volume caps as well as to on-site limitations, requires much more extensive preparation, with economic expert testimony, to satisfy the plaintiffs’ substantial burden of proof. The Black Star judge underlines that point in refusing to reach the same result as Hudgins and Baude: “However, Plaintiffs proffer no evidence to suggest that such a limited exception, applicable to both in-state and out-of-state wineries, erects a barrier to Arizona’s wine market that in effect creates a burden that alters the proportional share of the wine market in favor of in-state wineries, such that out-of-state wineries are unable to effectively compete in the Arizona market.” Providing the kind of evidence the court would have to see before invalidating a facially neutral statute adds something like $150,000 on top of all the other costs of the litigation, which should be a sobering, but not surprising, fact for enthusiasts of law reform by litigation, and especially for those who think Granholm provides a lay-down slam in direct shipment cases.
Tennessee Wholesalers – Crossing the Line?
March 24th, 2008
There are a couple of direct shipping bills in the Tennessee legislature that would allow Tennessee consumers to order wine from any winery or retailer in the country, with some of the regular restrictions. This would be a big deal, considering direct shipments into Tennessee have not been allowed from any state in recent history. However, what would normally be a run-of-the-mill direct shipping bill has turned into a subject of controversy over actions taken by Tennessee wholesalers to sway public opinion of the bill.
Wine Spectator Online reports that Tennessee wholesalers have been sending direct-mail and online initiatives to Tennessee residents, saying that SB 1977 and its counterpart, HB 1850 are a threat to Tennessee’s youth and asking them to sign a petition for children to come first. Jackson, one of the authors of the bill, has notified the Tennessee ethics commission of the wholesalers’ intent, saying that this is illegal lobbying because the direct-mail and online initiatives say nothing about being funded by the Tennessee wholesalers. He argues, “[those who view the teen drinking initiatives] think it’s some sort of philanthropic organization that’s concerned about youth consumption of alcohol. But the populous is deprived of the ability to find out who’s really behind this campaign” and that the bill wouldn’t increase availability of wine to minors. Tom Wark of the Specialty Wine Retailers Association issued a press release about Tennessee SB 1977 and has this to say about minors obtaining wine via direct shipping:
The Supreme Court of the United States and the Federal Trade Commission both looked at the issue and determined that minors are highly unlikely to use direct shipping to obtain wine. No state that allows direct shipping has reported even a small problem with minors accessing wine via direct shipping.
That being said, we should focus on what is really important about this bill: consumer choice. If passed, SB 1977 would allow permitted wine manufacturers, producers, suppliers, importers, wholesalers, distributors and retailers to ship wine directly to Tennessee residents. Permitted shippers could ship no more than 18 liters per year to an of-age Tennessee resident in a “wet” area. The permitted shipper would have to pay a $100 application fee, a $50 annual license fee, and pay sales and excise taxes on all shipments.
Kill the Bill: Maryland and Direct Wine Shipping
March 19th, 2008
Maryland continues to be one of six states in which direct shipping is completely prohibited. In a previous post we reported that HB1260 and SB616 were favorable direct shipping bills in Maryland’s current legislative session. Both of these bills died in committee. If passed, they would have allowed permitted wineries and retailers to ship directly to Maryland residents. Though the bill was widely supported, the Licensed Beverage Distributors of Maryland argued that the bill would “hurt Maryland wineries, reduce distribution-related jobs in the state, hamper tax collection and make it easier for minors to obtain alcohol” (as reported in the Baltimore Sun), “It’s always a tough fight when a majority of people stand up for the common good against entrenched special interests”
Wisconsin Direct Shipping Bill Receives Governor’s Signature
March 14th, 2008
Senate Bill 485 was passed into law yesterday, making Wisconsin the newest addition to the list of permit states. Wisconsin was one of the three remaining states that had yet to change their direct shipping laws since the Granholm ruling. Direct shipping law did not authorize intra-state shipments of wine to consumers, and the reciprocity agreement defined by Wisconsin only allowed California wineries to ship directly to the state’s residents. Now, a winery in any state may ship wine directly to a Wisconsin resident once the winery has received a direct wine shipper permit from Wisconsin.
The new direct wine shippers permit allows licensees (licensed wineries that are located in- and/or out-of-state) to ship wine directly to an of-age and non-intoxicated individual in Wisconsin. The individual may receive no more than 108 liters of wine annually from any combination of licensees. The individual is responsible for compliance with this annual limit. The fee for this permit is no more than $100/year. Sales tax, excise tax and reporting are required quarterly.
This is good news for direct to consumer sales – no capacity caps, no touchy age-validation restrictions… but there’s a catch concerning self-distribution: all sales to retailers must go through a wholesaler.
Legislative Intent… Without the 3-tier system, the effective statewide regulation and collection of state taxes on alcohol beverages sales would be seriously jeopardized. It is further the intent of the legislature that without a specific statutory exception, all sales of alcohol beverages shall occur through the 3-tier system, from manufacturers to licensed wholesalers to retailers to consumers. Face-to-face retail sales at licensed premises directly advance the state’s interest in preventing alcohol sales to underage or intoxicated persons and the state’s interest in efficient and effective collection of tax.
Luckily, there are a couple safeguards for small manufacturers.
“All wholesalers must work diligently to ensure that distribution channels are available for the sale of intoxicating liquor products through wholesalers to retailers in this state.”
The legislation isn’t clear about methods or consequences for wholesalers if they fail to adhere to this clause.
The other safeguard: small wineries (producing under 25,000 gallons of wine in a year) may group together to form a “Cooperative Wholesaler”; this Cooperative must become licensed to act as a regularly-licensed-wholesaler in order to sell to retailers or other regularly-licensed-wholesalers. The maximum number of Cooperatives allowed is six, and they must be created between October 1, 2008 and December 31st, 2008. The Cooperative must have a single location within the state of Wisconsin (a winery can only belong to one Cooperative). If the Cooperative’s members consist of both in- and out-of-state wineries, then the board of directors must also include both in- and out-of-state members. Members may not be employees of the Cooperative, but may volunteer.
The bill passed through the Senate and the House in late February and was approved by Governor Doyle on March 13th. Last year, a similar bill was passed by the House and Senate, but was vetoed by Governor Doyle partly because the bill would have banned self-distribution altogether, and did not “adequately address the needs of small entrepreneurial wineries.” This year’s bill seems to address the aforementioned needs and received backing by the Wisconsin Wine and Spirit Institute. The new law goes into effect on October 1, 2008.
Just Peachy: More Wineries Could Be Eligible for Direct Shipping
March 10th, 2008
A bill is being considered in Georgia that could potentially open up the state to all wineries for direct shipping. The permit system that is in place right now works pretty well for eligible wineries, but the major issue is that some funky language makes it so that wineries cannot ship offsite orders to Georgia residents if the winery is represented by a distributor in Georgia.
3-6-31.(c)(4)No holder of a special order shipping license shall accept any order for any wine that is otherwise registered and designated pursuant to this title or from a person who is licensed under this title;
That little paragraph causes big problems for many wineries. House Bill 1061 would eliminate the distributor restriction, and would introduce a few more minor changes:
- a winery would no longer have to pay a bond, designate sales territories, or name a wholesaler in each territory (a conflicting law);
- brands must still be registered;
- the person placing the order must state affirmatively that he or she is of age before the order can be processed;
- of-age individuals are limited to 12 cases of wine from each licensee per year (up from 5 cases per household); and
- it is explicitly stated that wineries may not ship to licensed premises,that sales and excise taxes must be paid and that a shipper must be a winery.
House Bill 1061 has already been approved by the house and was read and referred to a committee on February 28th by the Senate. All in all it’s not a bad bill: More wineries can ship to Georgia, the law makes more sense, and Georgia gets more money.
WSWA on Wine Shippers: “Flaunting their disdain”
March 9th, 2008
Just over a week ago, on the same day that the Specialty Wine Retailers Association held their first annual symposium, the Wine & Spirits Wholesalers of America issued a press release. This in itself was not remarkable – the WSWA has an active PR effort working to ensure their views are presented to the mainstream media and impact their lobbying efforts. However, this press release requires some attention. WSWA President and CEO Craig Wolf penned a letter that was sent out to regulators in all 50 states, calling on the state alcoholic beverage boards to step up their enforcement of alcohol shipping laws. Below are a few choice excerpts from the letter.
I write to call your attention to a serious and ongoing breach of state alcohol control laws. While the breach is alarming enough, almost as troubling is the brazen disregard the perpetrators continue to show for the rule of law and those appointed to enforce it.
I refer to the illegal transportation of alcohol via common carrier across state lines and into your jurisdiction. These shipments fall outside of the controlled distribution system mandated by state law. As you are well aware, the sidestepping of state-controlled alcohol distribution channels causes a host of negative effects—the inability to collect taxes, the absence of a face-to-face transaction that addresses myriad regulatory aims, and the very real possibility of introducing tainted or counterfeit product into your marketplace, to name but a few.
a growing number of interstate purveyors of beverage alcohol are flaunting their disdain for laws designed to prevent underage access and ensure accountability. They appear both utterly remorseless and resolute in their intention to keep breaking those laws, with little fear of retribution.
I have little doubt that as a respected enforcement agent of your state’s codes and statutes, you will bring your full attention to this rampant problem and help restore the rule of law to a highly sensitive area of commerce. If you have any further questions concerning any of the matters I have raised, please do not hesitate to contact me directly.
I was happy to be a part of the first SWRA symposium. Dean Kenneth Starr, the keynote speaker, presented a very positive outlook for wine retailers and their battles on the wine shipping litigation and legislation fronts. Tom Wark, Executive Director of the SWRA, began the day with the news of this press release and issued a call to retailers to join him in rising up to this challenge from the WSWA.
The first step towards success in reaching the goal of gaining access to more states for the direct shipment of wine is to simply demonstrate compliance with the laws of the states. We have been working with wineries for years, helping them comply with all of the laws of the states, so I know that they are up for the challenge. And I know wine retailers are up for this challenge as well, because I heard it at the symposium and could see that they are coming together effectively, through the hard work of the SWRA, to fight this battle as a group.
Wine Distribution Notes – Release 26
March 6th, 2008
Release 26 of Notes on Wine Distribution by R. Corbin Houchins is now available for viewing.
These notes are a great resource for keeping up to date with developing trends in direct shipping and direct distribution. As always, you can find the most recent version of these notes at the ShipCompliant Blog by clicking on the “Wine Distribution Notes” link under “Compliance Resources” on the right hand side of the page.
Each new release shows green highlighting on sections with changes from the preceding release. Release 26 highlights changes from the last two releases: highlights from release 25 include updates to Alaska, Maryland, New Mexico and Tennessee. Highlights from release 26 include updates to Florida, Indiana, and others. Read the notes to find out what else is new.
