The past year demonstrated the continuation of certain trends and the emergence of another that we believe will carry forward in 2012. The trend of more states opening their borders to the direct shipment of wine from other states continued steadily. Maryland and New Mexico both opened their borders to permit-based direct-to-consumer shipping in 2011, a continuation of a movement toward regulated consumer access to wine that began in 2005 with the Granholm v. Heald Supreme Court decision. Tennessee also saw a change in their law in 2011 that made the entire state “wet” for direct shipments from wineries.

The past 12 months also saw an increase in new “Third Party Providers” that help wineries market their products to a broader collection of consumers. Either as flash sites, wine product advertisements, or multi-offer marketplaces, these new entries into the wine market were helped along by a new California Department of Alcoholic Beverage Control (ABC) Advisory that set down specific rules as to how suppliers and non-licensed Third Party Providers can work together compliantly.

Finally, 2011 demonstrated that various forms of privatization of the sale and distribution of wine and spirits in control states are an important trend to watch. The passage of Initiative 1183 in Washington State that took the sale and distribution of spirits out of the hands of the Washington Liquor Control Board was the most tangible example of the privatization trend.

What To Expect in 2012

Direct-To-Consumer Shipping
Winery-to-Consumer shipping laws will continue to be modernized in those now few states that continue to prohibit interstate shipping. We expect New Jersey, the most important wine consuming state currently outlawing interstate shipments, to pass legislation allowing some form of direct shipments to consumers. Currently, a bill working its way through the legislature would allow all wineries making up to 250,000 gallons annually to obtain a direct shipment permit. The capacity cap of 250,000 gallons will be a point of concern, but wineries should expect passage and should be prepared to ship to New Jersy consumers in 212. The bill, which has passed the senate, is expected to be voted on in the assembly before the close of session tomorrow, January 10th.

Massachusetts too has seen a number of direct shipment bills introduced over the past couple of years, but none have found their way to the Governor’s desk. Recently, however, Governor Deval Patrick put a spotlight back on the issue by saying in a radio interview that he would sign legislation that permitted direct-to-consumer wine shipments. 2012 may be the year that Massachusetts finally opens to direct-to-consumer shipping.

Finally, Pennsylvania, traditionally one of the states where alcohol sales and distribution is most tightly controlled, may see a move to allow direct-to-consumer shipping. As talk continues in that state to privatize wine sale and distribution, there has also been much talk and the introduction of bills to “modernize” the PLCB, including allowing direct-to-consumer shipping, opening up a state with big consumer potential for wineries.

Modernized Marketing
Digital marketing in the wine industry has been behind the curve due primarily to the massive amount of regulations that govern the industry on a federal and state level. It’s unlikely that the wine industry will see significant deregulation. However, it appears that some clarity is coming to the issues that have historically deterred modern marketing methods.

Late in 2011 the California ABC issued an “Advisory” that spelled out the conditions under which non-licensed Third Party Providers (TPPs) and suppliers must arrange their relationships in order to work together. In a nutshell, the California ABC made clear that wineries and other licensed suppliers must always be in control of the transaction from approving each transaction to controlling the flow of funds. (Read our blog post that explains these new rules). While adhering to the new California ABC rules can be a complex task and require very specific actions and programming on the part of licensed suppliers and non-licensed TPPs such as flash sites and community buying sites, we believe this new clarity represents an important development for suppliers and marketers that will yield interesting developments in 2012

We expect to see a rise in the number of TPPs. In addition, we expect other states to follow California’s lead in issuing rules and regulations for how licensees and non-licensed marketers can work together to help market wine to consumers in innovative ways.

Privatization
With Washington State paving the way in the realm of privatization of sales and distribution with the passage of Initiative 1183 in November, we predict the privatization trend to regain momentum in 2012. Most eyes are on Pennsylvania where serious discussions are underway concerning the privatization of the sale and distribution of wine in that highly controlled state. Virginia too has seen discussions in the past years concerning the merits of reforming its alcohol control system. Meanwhile, in Michigan a task force has been empowered to look at updating its alcohol beverage laws.

This slow moving trend toward privatization, if it continues and gains more momentum, could lead to significant changes in the area of wine sales and distribution and the compliance measures that suppliers must undertake.

Federal Action on Wine Sales and Distribution
In early 2011, with the introduction of H.R. 1161 (read our series on the CARE Act here) in the House of Representatives, it looked like supporters of federal legislation that would give states greater control over how they can regulate alcohol and overcome judicial rulings that have put limits on state powers, would push hard to see this bill passed. Yet, H.R. 1161 garnered fewer supporters in the House than a similar bill, H.R. 5034, gained in 2010. Furthermore, no hearing was held in the House Judiciary Committee on H.R. 1161 and no Senate sponsor was introduced.

This bill, opposed by all supplier organizations and by retailers, has another year to gain more support and move through the legislative process. Most in the industry are taking a wait and see attitude on H.R. 1161 to determine its fate, but it seems unlikely that the bill will move on to President Obama’s desk in 2012.

Finally, federal legislation is moving forward concerning the United States Postal Services, and it could have long-term effects on the wine industry. The new bill moving forward is the 21st Century Postal Service Act 2011. If enacted as currently written it would allow the United States Postal Service to deliver wine to consumers and compete with Federal Express and United Parcel Service.

As always, ShipCompliant will continue to watch the political and regulatory landscape throughout the coming year and will work to keep you up-to-date on important changes that impact your ability to market and sell wine.

Annie Bones, State Relations – Wine Institute

Two important factors paved the path to the passage of direct shipping legislation in Maryland. First, a local citizens organization, “Marylanders for Better Beer and Wine Laws”, kept pressure on the Maryland legislature year after year even though earlier direct shipping bills were defeated. Second, the Maryland Comptroller’s office released a Direct Wine Shipment Report late last year debunking many of the claims made by opponents of wine shipping concerning minor access to wine and harm that might come to local business as a result of wine shipments.

Though retailers were included in original versions of the direct shipping legislation, they were left out of the final language, perhaps in part, because the Comptroller’s Report did not advocate for retail-to-consumer shipping.

The new law takes effect July 1, 2011 and allows wineries to obtain a Direct Wine Shipper’s Permit for $200 (renew annually). Each licensed winery will be allowed to ship up to 18 cases of wine to a single delivery address each year and will be responsible for quarterly reporting and payment of excise and sales taxes on all shipments made into the state. Potential shippers now await permit application and instruction forms from the Maryland Comptroller, which could be made available any time. We will keep you updated as more information becomes available.

The annual fee for a Direct Shipper’s license is $50 and must be paid within 30 days of making the initial shipment. Wineries with an approved license may ship up to 3 nine liter cases each month to a consumer. All shipments must originate from the address listed on the licensee’s permit. Applications and reporting information are available on Wine Institute’s website under State Shipping Laws.

by Sally Jefferson, Regional Government Affairs Manager, Wine Institute

New Mexico will be the last state to change from reciprocity to permit status for winery shipping since it was the last state that had a reciprocity law still on the books for wineries. The move from reciprocity laws to state permit laws was instigated by the 2005 Granholm v. Heald Supreme Court decision. That landmark ruling not only held discriminatory shipping laws to be unconstitutional but also noted a constitutional problem with reciprocity agreements when Justice Anthony Kennedy, writing for the majority, proclaimed that “States should not be compelled to negotiate with each other regarding favored or disfavored status for their own citizens.”

It should be noted that in changing its wine shipping laws, New Mexico has left in place “reciprocity” arrangements for retailer-to-consumer shipping.

The New Mexico Wine Shipping Permit goes into effect on July 1, 2011. It’s provisions include:

Cost of Permit: $50 per year
Bond requirements: None
Limits on Amount of Wine Shipped: 2 cases per individual per year month
Taxes: Sales and Gross Receipts tax must be paid by the direct wine shipping permit holder
Reporting: Due annually

Maryland

Marylanders have long awaited a bill that would allow direct wine shipments into the Old Line State. This past Tuesday, both the Senate and the House acted on all three direct shipping bills proposed in the current session. The Economic Matters Committee both withdrew HB 234 and passed as favorable, HB 1175. SB 248, the counterpart to HB 234 (introduced not long after the Direct Wine Shipment Report by Maryland’s Comptroller, in support of winery direct shipping), was also passed as favorable, but includes amendments, touted as a “compromise”, which removed in-state and out-of-state retailers’ ability to ship direct to consumers. Additionally, the customer volume limits are now set to 18 liters per household per year (down from the original 24 cases per individual per year, as was initially introduced), the permit cost has increased to $200.00 per year, and the bond security increased to $1000.00. As introduced, HB 1175 also made no allowances for direct shipments from retailers. The Senate and House bills are scheduled to be presented for a third reading today on the floor of the House. Amendments concerning a new study on retailer shipping and the ability of Maryland retailers to ship Kosher wines to Marylanders will likely be introduced on the House floor.

New Jersey

If direct shipping legislation passes this year, New Jersey could open up to wineries for direct shipments for the first time. S 766 and counterpart A 1702 would allow permitted wineries to ship up to 24 cases annually. S 766 passed the Senate on 2/4/2010. The Assembly bill remains in the Regulatory Oversight and Gaming Committee, which is chaired by the bill’s lead sponsor, Assemblyman John J. Burzichelli. Burzichelli is also the lead sponsor of another, less desirable, direct shipping bill (A 3897) that would impose a capacity cap of 250,000 gallons on direct shippers. A3897 is also waiting for a vote in Committee. It remains to be seen if the recent Freeman decision will complicate the bills that are on the table.

Florida

Florida is currently open to direct shipments from wineries. The state’s previous direct shipping legislation was found to be unconstitutional under Granholm and was overturned in a 2005 court ruling under Bainbridge, et al. v. Turner. For the fifth time in six years, direct shipping legislation is being considered in Florida (no bills were considered last year). As introduced, HB 837 and counterpart SB 854 would allow wineries (not retailers) to ship directly to consumers. The bill contains severely onerous restrictions that would prevent most wineries from obtaining a permit or shipping into the state, including a 250,000 gallon production volume cap (capacity cap), bond, and a mandate to give wholesalers a year’s notice that the winery plans to direct ship.

HB 837 was voted on and determined “favorable” by the Business & Consumer Affairs Subcommittee on March 22, 2011, and is now in the Government Operations Appropriations Subcommittee.

Massachusetts

There are several problems with Massachusetts’ existing unworkable direct shipping laws. The 30,000 capacity cap restriction was found to be unconstitutional by the First Circuit Court in 2010, but other statutes regarding customer aggregate volume limits and carrier licensing remain in effect, and need to be updated in order to truly open the state to direct shipping. HB 1029 and HB 1883 would address these issues and would allow permitted wineries to ship wine to consumers. Both bills were referred to the Joint Committee on Consumer Protection and Professional Licensure in February, and still have a ways to go before becoming law.

Indiana

Currently, only wineries that have not had a relationship with a distributor in the past 120 days can obtain an Indiana direct shipping permit, and wine can only be shipped to Indiana residents who have previously visited the winery in person. Two bills in the current legislative session aim to remove these restrictions and open up direct shipments in Indiana to many wineries that are currently unable to get a permit. HB 1081 would remove the requirement for an initial face-to-face transaction, as well as remove the restrictive wholesaler relationship provision in the law. A similar bill, HB 1132, was also introduced in January of 2011, but has been amended to become a study “concerning the viability and efficacy of instituting a policy to permit the direct shipment of wine to consumers in Indiana.”

Rhode Island

Rhode Island remains closed to offsite direct wine shipments. SB 170 would create a direct shipping permit and allow shipments of up to 24 cases of wine per year, per resident from permittees. On March 23, 2011 the Senate Special Legislation Committee recommended the measure be held for further study.

Tennessee

Pending legislation in Tennessee would open up the entire state to direct wine shipments, eliminating the “dry” areas of the state that wineries are not allowed to ship wine into. The bill is currently on the calendar in both the Senate and the House.

Pennsylvania

At a hearing on March 22, 2011, the Liquor Control Board asked that the legislature “modernize” the liquor code. As part of the modernization, the PLCB asked that direct wine shipments to consumers’ doorsteps be allowed. Pending legislation (HB 110) would allow for a workable permit system. Thus far, the bill has yet to move out of the House.

When comparing the text (see our redline version) of the current bill to that of the revised version of the original bill (HR 5034) from September, you’ll notice that not much changed in terms of substance. Aside from the assignment of a new bill number (HR 1161), the re-introduced bill was renamed to be the “Community” Alcohol Regulatory Effectiveness Act of 2011 from the “Comprehensive” Alcohol Regulatory Effectiveness Act of 2010. The Purpose (Sec. 2) and Declaration of Policy (Sec. 3a) were also rewritten and are now slightly more concise. However, the meat of the Act lies within the Construction of Congressional Silence (Sec. 3b) and the Amendment to Wilson Act (Sec. 4), both of which were untouched. For additional background on the CARE Act and its potential effects, see our previous post, which was published just before the House Judiciary Committee hearing on September 29th, 2010.

Because HR 5034’s lead sponsor, Bill Delahunt, retired from congress last year, HR 1161 has a new lead sponsor in Rep. Jason Chaffetz of Utah. Rep. Chaffetz was one of the original co-sponsors of HR 5034, which was shelved with 152 total co-sponsors. HR 1161 was introduced with only eight co-sponsors last week, but that number will certainly grow as the lobbying efforts begin to ramp up. The bill has yet to be introduced in the Senate.

And so the battle continues. NBWA and WSWA both applauded the introduction of HR 1161 as necessary to enable “states to defend their alcohol laws from litigation designed to eviscerate state control over alcohol policy decisions.” A coalition of supplier groups, including the Brewers Association, Beer Institute, Distilled Spirits Council of the United States, Wine Institute, National Association of Beverage Importers, and WineAmerica, remain opposed and immediately responded by referencing their preemptive February joint producer letter to Congress urging them to refrain from spending “valuable time wading into an intra-industry squabble and unraveling a successful regulatory structure to the detriment of consumers, the industry, and the federal interest in a fair, competitive, and orderly marketplace for alcohol beverages.”

“Ultimately, this legislation is about who should make decisions regarding alcohol regulation, not what those decisions should be,” said NBWA President Craig Purser in a statement. “Alcohol is different than other consumer products and that’s why the 21st Amendment to the U.S. Constitution created a state-based system of alcohol regulation that effectively balances local community control, tough consumer protections as well as choice and variety. The majority of Americans believe that laws regarding the regulation of alcohol should be made at the state and local level – and so do we.”

Paul Kronenburg, President of Family Winemakers of California, summarized the supplier opposition to HR 1611. “Family Winemakers of California (FWC) remains opposed to efforts at the national level to undermine the Commerce Clause and embolden states to pass discriminatory alcohol laws.  Rarely are states reluctant to regulate and they don’t need H.R. 1161 to remind them of their authority.  Florida is a prime example where wholesalers recently introduced a production cap bill despite last year’s Massachusetts decision finding caps unconstitutional.  FWC will work with others to preserve our national economic union and consumer choice by opposing H.R. 1161.”

"We see HR 1161 as a radical departure from the principles of a single economic union laid down in the Constitution," said Tom Wark, executive director of the Specialty Wine Retailers Association. "This bill would revoke all Commerce Clause protections against discriminatory state laws that wine retailers currently enjoy and would undoubtedly lead to protectionist laws that hurt retailers and consumer access to wine, beer and spirits."

In a previous post, we discussed how the CARE Act would not change anything overnight, despite hyperbole to the contrary. Effectively, it would allow states the ability to pass new laws that include non-facial forms of discrimination such as capacity caps, in-person purchase requirements, and limits on production capacity. One certainty is that the hyperbole and rhetoric on both sides will escalate as the industry associations dig in and make their case for (and against) federal legislation. Wholesaler groups are going out of their way to say that this is not an “intra-industry” squabble, but the battle lines are currently drawn with wholesalers united on one side, and suppliers united on the other.

Further Reading:
HR 5034 Bill Summary and Status
HR 1161 Bill Summary and Status
NBWA Press Release
WSWA Press Release
Beer, Wine and Spirits Producers Press Release
Viewpoint: Back to the Future with HR 5034 (June 2010)
H.R. 5034 Update: Revision Reignites Debate, Important Hearing Set for Wednesday (September 2010)

House Bill 234 and Senate Bill 248 follow closely the recommendations of Franchot in his Direct Wine Shipment Report. The new $100 Direct Wine Shipper’s Permit that renews annually at $50 would allow licensees to ship no more than 24 9-liter cases of wine annually to any one consumer in Maryland. Licensees would be required to submit to the jurisdiction of the Office of the Comptroller and remit quarterly sales and excise tax reports. An interesting feature of the bill, as recommended by Franchot, is a prohibition on delivery of wine shipments on Sundays. Licensees would be able to ship wine via common carriers, who must also get a $100 Common Carrier Permit and file quarterly reports of shipments.

Based on the broad sponsorship and many endorsements, it seems likely that Maryland consumers will have access to direct wine shipments this year, although stranger things have happened in the legislative process. Winery direct shipping marketers might want to get to work on a business plan for opening up a brand new market for wine direct shipments in 2011.

Proponents of the bill, including the National Beer Wholesalers Association (NBWA) and the Wine & Spirits Wholesalers of America (WSWA) claimed the proposed legislation was necessary to protect state-based regulatory systems from “attack” (i.e., legal scrutiny under the U.S. constitution), claiming that “25 states have faced challenges in federal courts to their authority to regulate alcohol and their ability to maintain a licensed system of alcohol controls” since 2005.

Following months of intense debate, heated rhetoric, and an incredible amount of public relations and lobbying activity on both sides, the House Judiciary Committee did not schedule the bill for a hearing until after the August congressional recess. During the recess, Representative Bill Delahunt, lead sponsor of H.R. 5034, sent a letter to House Judiciary Committee Chairman John Conyers Jr., introducing new text in an what he terms effort to “perfect the language”, following “concerns about unintended [sic] consequences of the language as written”.

To help clarify the changes from the original version of H.R. 5034, we put together a redline document that highlights the revisions. The main change is the removal of section 3c, which established the presumption of validity and shifted the burden of proof in legal actions involving the regulation of alcoholic beverages. Like the original bill, the new version would immunize state laws that effect non-facial discrimination, such as capacity caps and in-person purchase requirements, if the discrimination were not proved to be “intentional”.

To better understand the revisions and the corresponding responses, we spoke with individuals from each of the tiers (the “three-tier system” includes suppliers, wholesalers and retailers) that are on the front lines of the debate.

Wholesaler organizations laud the new version as meaningful change. “While the proposed changes to the legislation address a narrower set of deregulatory concerns than the original legislation, it is certainly a step in the right direction,” says Karin Moore, Vice President and Co-General Counsel at WSWA. “The new version clarifies that the Granholm holding prohibiting facial or intentional discrimination against out-of-state producers remains the law of the land by incorporating the exact language used by Justice Kennedy in that landmark decision. The new language clearly and unequivocally confines itself to dormant Commerce Clause challenges, and addresses many of the concerns raised by opponents of the bill.”

Cary Greene, Chief Operating Officer & General Counsel at WineAmerica, sees broader implications. “There are many cases other than Granholm that elucidate how states can regulate interstate commerce in alcohol.  As revised, 5034 would undermine or reverse dozens of court decisions.  By scrambling settled case law, 5034 will cause years of re-litigation to try and figure out exactly what the new limits are.  The fact is courts have not done anything to jeopardize core Twenty-first Amendment powers.  State laws run into Constitutional trouble when they try to do something underhanded like fix prices or give an unfair market advantage to certain licensees or products.  5034 allows states to blatantly discriminate against out-of-state products without any concern for Twenty-first Amendment core purposes.  From a policy standpoint, I’m not sure why that would ever be a good thing.”

“The problems with HR 5034 remain significant, despite the changes to the language,” says Tom Wark, Executive Director of Specialty Wine Retailers Association. “Discrimination against out of state products would still be allowed on a number of levels and consumers are bound to be hurt by this legislation. Significantly for retailers, HR 5034 would strip wine retailers and merchants everywhere in America of their protection under the Constitution’s Commerce Clause from discriminatory state laws. It has happened only one other time in American history that an entire industry lost its Constitutional guarantee of free and open markets based on the constitutional principle of non-discrimination. Wine merchants would be catastrophically disadvantaged by H.R. 5034.”

A hearing in the House Judiciary Committee will take place at 11:00 ET this Wednesday, September 29th. This is an important hurdle in the process of moving legislation through Congress. Expert witnesses will testify in front of the full committee on Wednesday, and many parties will also provide written testimony to debate both sides of the bill. Barring technical difficulties, the hearing should be available via live webcast. Click here to watch the webcast (RealPlayer required).

So, what are the chances that H.R. 5034 will pass? Well, it’s important to note that the bill has 146 (not an insignificant number) co-sponsors from both parties in the House. On the other hand, supplier organizations continue to be unified in their opposition (Click here to view the joint opposition letter issued by the Brewers Association, WineAmerica, Distilled Spirits Council of the United States, Wine Institute, Beer Institute, and National Association of Beverage Importers on the revised 5034). We hope to learn a lot more in the hearing on Wednesday.

If H.R. 5034 moves through both chambers of Congress (no companion bill having yet been introduced in the Senate) and is signed by President Obama, not much would change overnight. Despite numerous reports that it would mean the end of direct shipping, it would not change current state laws that allow direct shipping. It would likely be an uphill battle to completely repeal existing direct shipping laws in most states. However, H.R. 5034 would open the door in states like Florida, New Mexico, and Massachusetts, where the direct shipping laws are in flux because of court cases and Granholm issues, for new state laws that introduce non-facial discrimination such as caps on production capacity (proposed for the last several years in Florida and recently nullified as unconstitutional in Massachusetts) or in-person purchase requirements. It would also provide discriminatory options for the remaining holdout states, such as Maryland, if their resident consumers’ support for direct shipment should become effective. With potentially greater long-term significance, it would tilt the field decidedly against extension of Granholm’s nondiscrimination principle to interstate retailing by non-producing shippers and to interstate wholesaling.

On August 23, 2010 the Kansas Department of Revenue issued Revenue Ruling, No. 19-2010-03 which states that taxpayers are not required to remit alcoholic beverages gallonage tax due and owing for the reporting period, if the amount is less than $5. The change in policy was made due to the administrative costs associated with processing payments of less than $5. The ruling does not exempt a licensed direct shipper from any reporting requirements. The reporting period for Special Order Shipper Licensees is one calendar year. Gallonage reports are due no later than January 15th of the following year.

The Special Order Shipping License is required for all offsite shipments to consumers in Kansas and requires wineries to use an approved age verification service and to pay enforcement tax and gallonage tax when applicable. The shipping license is not required for on-site sales. Any winery may ship to a Kansas consumer that purchases wine when visiting their tasting room. Applications and additional direct shipping information is available on the Wine Institute website.

-Annie Bones, State Relations, Wine Institute