Posts from the Arizona Category
Arizona Clarifies On-Site Shipping Law
June 4th, 2008
Following our May 6th submission, Wine Institute received further clarification from the Arizona Department of Liquor Licenses & Control regarding their continuing interpretation of the on-site sales law. Wineries may ship up to 2 cases of wine per Arizona consumer per calendar year as long as the consumer purchases the wine while physically visiting the winery. The wine paid-for by the consumer may then be shipped at anytime during the year to a residential or business address. The purchased wine may be broken down into multiple shipments during the year. No off-site orders are permitted at any time except by wineries holding a direct-to-consumer permit*. If Arizona consumers wish to have additional wine shipped to themselves in subsequent calendar years, they will need to physically visit the winery each and every year. There continues to be no reporting, tax or permit requirements under the “on-site shipping law.”
*The rules and requirements for wineries producing up to 20,000 gallons of wine in a calendar year with an approved direct-to-consumer permit/self-distribution license are different. Please visit the Wine Institute website for additional information about shipping to Arizona or contact Annie Bones, State Relations Coordinator, Wine Institute at 415-356-7530 or abones@wineinsittute.org.
Annie Bones, State Relations – Wine Institute
City Tax in Arizona: Get with the Program… and the Non-Program
June 2nd, 2008
Just as a state can create their own alcoholic beverage regulations, so can they implement their own, distinct, taxing regulations. Arizona has recently clarified their sales tax requirements, applicable to wineries licensed to sell offsite sales of wine directly to Arizona consumers.
According to the Arizona Department of Revenue, sales tax (called, “transaction privilege or use” tax) must be remitted on a local basis. This is the way Arizona tax has been handled since Arizona first became available to direct shippers in September of 2006; tax rates are based on the destination of the order. Most cities in Arizona have the State Department of Revenue collect their taxes for them. However, there are thirteen cities within Arizona that collect their own taxes. These cities are commonly referred to as “Non-Program” Cities. Non-Program Cities collect their own taxes independently from the State. This means direct wine shippers are required to register with all of the thirteen Non-Program cities that they ship to, individually, and remit separate sales tax returns to each of the cites they are registered with.
What does this mean to you? If you are licensed to sell wine directly to consumers in Arizona, you must contact each of the Non-Program cities directly in order to register to collect and remit sales tax with each Non-Program city (this is in addition to becoming licensed to pay County and “Program-City” tax with the state of Arizona). Only wineries that produce less than 20,000 gallons per year can currently become licensed to ship wine directly to consumers in Arizona via the Out-of-State Domestic Farm Winery permit. Wineries that produce more than 20,000 gallons and wineries without a permit can ship onsite sales to Arizona without a permit. In this scenario, wineries are not required to remit sales tax.
The thirteen Non-Program cities are: Apache Junction, Avondale, Chandler, Flagstaff, Glendale, Mesa, Nogales, Peoria, Phoenix, Prescott, Scottsdale, Tempe, and Tucson. A sales tax license usually costs around $50 per city annually, in addition to an application fee, which can range from $0 to $25.
Wine Distribution Notes - Release 28
May 21st, 2008
The latest version of Notes on Wine Distribution by R. Corbin Houchins is now available for viewing or downloading. Release 28 highlights changes in the following categories: Age & Identity Verification, Rethinking Reciprocity and State Notes, specifically Arizona, Florida, Georgia, Maine, Ohio, Oregon and Pennsylvania. Headings of sections with substantial changes since the preceding release (published in early April, 2008) are highlighted, so that you can easily find the updated sections.
You can always view the most current version of Houchins’s Notes on Wine Distribution by visiting ShipCompliantBlog.com and clicking on the “Wine Distribution Notes” link under “Compliance Resources” on the right-hand side of the page.
Arizona Confirms a Minor Change to its Direct-To-Consumer Law
May 6th, 2008
The Arizona Department of Liquor Licenses & Control has confirmed a minor change to its direct-to-consumer wine shipping regulations, effective immediately. Under the original interpretation of the direct shipping law Arizona residents could not receive direct-to-consumer wine shipments unless they purchased the wine on-site, and shipments did not exceed 2 cases per consumer per year.
The new interpretation of the law allows wineries to ship to Arizona consumers, as long as the consumer has physically visited the winery at anytime during the calendar year prior to placing the order. Now Arizona consumers who have visited the winery may place off-site orders and have multiple shipments of wine sent to them so long as the combined shipment (throughout the calendar year) does not exceed the 2 case limit. If Arizona consumers wish to have additional wine shipped to themselves in subsequent years, they will need to physically visit the winery each and every year. There continues to be no reporting, tax or permit requirements under the “on-site shipping law”.
Please visit the Wine Institute website for additional information about shipping to Arizona s or contact Annie Bones, State Relations Coordinator, Wine Institute, at 415-356-7530 or abones@wineinstitute.org.
*The rules and requirements for wineries producing up to 20,000 gallons of wine in a calendar year with an approved direct-to-consumer permit/ self-distribution license are not affected by this change.
Annie Bones, State Relations - Wine Institute
Caps Off to Dolan’s Intentions
April 11th, 2008
In October of last year, wineries began shipping directly to Ohio residents under a new direct shipping permit law. When the provisions of the law in Ohio were first announced, one of the major subjects of controversy was the capacity cap, which only allows wineries that produce less than 150,000 gallons annually to obtain a permit. Capacity caps continue to be a subject of controversy in all the states that use them (currently Arizona, Massachusetts, Indiana Kentucky and Ohio; Florida could adopt a 250,000 gallon cap if SB1096 or HB1293 is passed).
Continuing the controversy, Ohio Representative Matthew J. Dolan is looking to increase the capacity cap for wineries from 150,000 to 250,000. Though the increase in production volume may be a “little step” in the right direction, it certainly seems like a very little step, allowing only 17 more California wine labels to be shipped to Ohio residents. According to The Plain Dealer, Dolan originally vowed to eliminate the cap altogether, but got a lot of pushback from the Ohio Department of Commerce and from Ohio Distributors (as Uncorked points out, “no surprise”).
Just next door, Indiana also prevents wineries producing over a certain amount of wine per year from shipping directly to its residents. Indiana’s original capacity cap was 500,000, but will increase on July 1, 2008 to 1,000,000 gallons since SB0107 was signed on March 13th by governor Daniels. Though this is the highest volume cap of the four states that have said restrictions,
Many will agree that any permit system that discriminates against a winery for the amount of wine produced is not an ideal permit system. Furthermore, the constitutionality of these caps is being challenged through litigation (see Family Winemakers of California vs. Jenkins). State legislators may adopt a capacity cap restriction for any number of reasons, but none of them seem very fair. The state may claim that it is trying to protect its own wineries by establishing the volume cap just above that of the highest producing in-state winery, but who else is being protected while the consumer’s interests fall by the wayside?
Update: In our original post, we mistakenly stated that that Indiana has a capacity cap that is similar to OH, KY, MA, and AZ. The 500,000 gallon “cap” in Indiana that will increase to 1,000,000 gallons on July 1st, 2008 only applies to wineries in that the applicant must not sell more than this amount of wine per year IN Indiana, excluding wine shipped to an out-of-state address.
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.
Free The Grapes! legislative update
March 19th, 2007
Free the Grapes! recently provided an update on direct to consumer shipping legislation and litigation for 2007. As you can see below, many changes are likely to come this year.
LEGISLATIVE UPDATE
Wine Institute provided the following summary of direct shipping legislation around the country.
Alaska –House Bill 34 (Ledoux) would specifically allow in-state wineries to make DTC shipments to AK consumers, with a 5-gallon per shipment limit. Status: passed House 2/14/07 and moves to Senate Community and Regional Affairs and to Senate Labor and Commerce.
Arkansas – Senate Bill 592 (Whitaker), a positive bill, creates a DTC shippers permit for wineries. Provisions include: 24 cases annually, $10 permit application fee, sales and excise tax payments annually. Status: Introduced.
Connecticut — Senate Bill 1204 (Joint Committee on General Law) makes a change to the time period specified in the DTC shipping statute from 60 days to 2 months for the 5 gallon limit. Status: Passed out of General Law on 2/27/07.
Florida – Shipping into FL is currently legal. Senate Bill 126 (Saunders) and SB 2282 (Geller) would implement a version of the industry’s model direct shipping bill, but both bills include a discriminatory 250,000 gallon capacity cap opposed by consumers and wineries. Alternatively, House Bill 1217 (Bogdanoff) does not include a cap.
Georgia – House Bill 159 (Willard) and its companion Senate Bill 56 (Untermann) create a DTC shipping license for all wineries (and retailers in SB56), repealing existing law which prohibits wineries with a wholesaler from obtaining a license. Other provisions: $100 permit fee, 24-case annual limit, sales and excise taxes to be collected. This bill is getting industry support.
The wholesaler’s House Bill 393 (Stephens) includes a discriminatory 100,000 gallon capacity cap, creates a new “domestic farm winery” using at least 50% GA grapes, and a national “farm winery” definition of a winery under 100,000 gallons that uses at least 40% grapes from its state of domicile. Such wineries can obtain a DTC shipping permit to ship up to 20 cases of wine per consumer annually. Status: Favorably reported out of House Regulated Industries Committee on 2/21/07.
Hawaii – Two bills, House Bill 1093 (Say) and Senate bill 1019 (Taniguchi), appear to be dead in committee. They would have reduced consumer choice by limiting shipments under the existing DTC shipping permit to 6 cases annually per household from an aggregate of wineries (current system is 6 cases per winery).
Idaho – House Bill 11 would modify the permit legislation passed in 2006 to allow wholesalers and retailers in Idaho and other states to ship wine directly to consumers. Status: Referred to House Revenue and Taxation on 1/22/07.
Illinois – House Bill 429 (Acevedo) is similar to last year’s transition bill that creates a winery-only DTC shipping permit to replace the existing reciprocity law. Provisions include a tiered permit fee based on size of the winery from $150 to $1,000, 12 cases annually, with sales and excise tax collection. Free the Grapes! is encouraging inclusion of retailers in the bill. Status: Passed from House Consumer Protection Committee on 2/20/07 by vote of 11-0. There is also a similar bill in the Senate (SB123, Silverstein).
Iowa – ABC hearings were held on 2/24/07. The ABC recommended to legislators that the reciprocity statute be replaced with a DTC shipping permit system. Other proposals addressed at the hearing include changing the local winery preferential tax rate, changes in Iowa wine labeling rules for IA wineries, and changes to existing designation of 5% of wine tax revenues to Iowa Wine Development Board. Status: Awaiting action by legislature.
Maine – Senate Bill 54 (Bromley) creates DTC shippers permit for wine & beer. Winery or retailer obtains a COA and nonresident shipper’s license ($100 fee). Annual sales and excise tax payments required. Status: Introduced.
Missouri – House Bill 944 (Cooper) creates a DTC permit for wineries to ship 2 cases per month, and requires permit and tax collection. Carriers must obtain permit. Amendment to add retailers drafted on 2/26/07. Status: Introduced.
Montana – Senate Bill 524 (Wanzenried) proposes changes such as adding “purposely, knowingly or negligently” language to the connoisseur’s license, which does not currently work for consumers or wineries. Status: Reported “Do Pass” from Senate Business, Labor and Economic Affairs on 2/21/07.
New Mexico – House Bill 1018 (Silva) creates DTC shipping permit for wineries and retailers to replace reciprocity. Provisions: $50 fee, pay excise and Gross Receipts Tax, 24 cases annually. Status: Passed favorably on 9-1 vote from House Business & Industries Committee on 2/25/07. Companion bill is Senate Bill 1047 (Taylor).
New York – Interestingly, Assembly Bill 4345 (Destito) replicates the wine DTC shipping program for beer manufacturers and beer wholesalers. Free the Grapes! has no activities or campaigns concerning this bill because it deals with beer and not wine. Status: Introduced.
North Dakota – Senate Bill 2135 (Senate Finance and Taxation Committee) makes changes to existing DTC shipping statute. Provisions: increases amount of shipments to 3 cases per month (currently 1 case per month), removes “reciprocal” provision passed in 2005 but never implemented. Removed vague language that could have been interpreted to allow an in-state winery to also hold a wholesalers license – clarifies no self-distribution, which was believed to be the case by in-state industry at this time anyway. Status: Passed Senate 1/23/07 and now to House Finance and Taxation.
Oklahoma – Several bills in the House and Senate have been introduced, several of which request a voter referendum to allow OK consumers to receive DTC shipments from out-of-state wineries, but a permit system has not been outlined.
Oregon – House Bill 2171 (Minnis) transitions OR from a reciprocal DTC to a permit system. Would cover wineries only. Status: Introduced. This is the OLCC bill. House Bill 2488 (House Business and Labor Committee) is similar, allowing wineries, retailers and “associations” to obtain permits. $50 fee. Excise taxes to be paid. Unlimited shipments. Status: Introduced.
Pennsylvania – House Bill 255 (Godshall) is a positive DTC shipping permit bill with a $100 registration fee, 2 cases per month to any individual. Taxes collected. Status: Introduced.
Tennessee – House Bill 1850 (Todd) creates a DTC shipping permit for 2 cases annually. Provisions: $100 fee, annual reports, annual excise and sales tax payments. Status: Introduced. Companion bill in Senate (1977, Stanley).
Virginia – Senate Bill 984 (Edwards) creates an “internet wine retailer license” to allow sales by a retailer having no physical premise. Status: Passed both House and Senate and sent to Governor on 2/22/07.
West Virginia – Senate Bill 712 (Kessler) is an omnibus liquor bill, that among many provisions, includes creation of a DTC shipping permit for wineries, wholesalers and retailers. Provisions include: $150 permit fee, 2 cases per month, sales and excise tax payments. Removes self distribution privilege for instate wineries. Original 50% tax increase has been removed. Creates a “wine spa” license, a wine B&B license, and a “mini” winery license to replace farm winery permits.
LITIGATION UPDATE
Texas — The Specialty Wine Retailers Association (SWRA, www.specialtywineretailers.org) litigation in Texas to address that state’s discriminatory stance between in-state and out-of-state retailers is in its discovery phase. Until the case is decided, out-of-state retailers may continue to ship to Texas consumers.
Massachusetts — The Family Winemakers of California reports that its lawsuit against the State of Massachusetts seeking to overturn the 30,000 gallon production cap in the DTC law is still in the discovery phase. Once discovery is complete both sides will be preparing motions for summary judgment for later in the year.
“New Vintage” of Wine Litigation
February 5th, 2007
There’s an excellent article on law.com titled “New Vintage of Wine Litigation is Fermenting”. The article summarizes the “next wave” of wine lawsuits that will continue to shake up the landscape of direct shipping.
New suits and amended complaints filed in the past year are attacking requirements that consumers must purchase wine in person, with the first court decisions recently issued in Maine and Kentucky. Wineries also are challenging legal shipping limits that are based on production volume.
In both types of cases, out-of-state wineries accuse the states of discriminating against them.
It’s interesting that almost two years after the Granholm decision there are over 30 lawsuits in over 20 states, and almost all of them are trying to clarify what the ruling actually meant. Richard van Duzer predicts,
Ultimately, this will be back before the Supreme Court, which will have to be more explicit about what it said and what it hasn’t said.
Ken Starr also contributes a quote to describe the de facto discrimination,
It appears that the wholesalers are simply seeking legislatively to do indirectly what the Supreme Court said in Granholm they can’t do directly.
Below is a summary of the litigation discussed.
Maine: In Cherry Hill Vineyard v. John E. Baldacci, No. 1:05-cv-00153 (D. Maine), the judge upheld the in-person requirement in Maine’s law , claiming the face-to-face restriction applies equally to in-state and out-of-state wineries.
Kentucky: In Cherry Hill Vineyards v. Hudgins, No. 3:05-cv-00289 (W.D. Ky.), on December 26th, 2006, the judge struck down the in-person requirement, but did not strike down the 50,000 gallon capacity cap restriction.
Indiana: In Baude v. Heath, No. 1:05-cv-00735 (S.D. Ind.), IN residents are suing over the requirement that the initial purchase of wine be made in person.
Massachusetts: In Family Winemakers of California v. Jenkins, No. 1:06-cv-11682 (D. Mass.), the Family Winemakers of California is suing over the 30,000 gallon capacity cap, which is conveniently just over the production of the largest producer in MA.
Arizona: In Black Star Farms v. Morrison, No. 2:05-cv-2620 (D. Ariz.), five AZ consumers are suing over the 20,000 gallon capacity cap.
Arizona permit available, FedEx begins shipping
September 22nd, 2006
The new wine shipping laws took effect yesterday in Arizona. Arizona has posted the Application for Out-of-State Domestic Farm Winery or Domestic Microbrewery on their website. Currently, only wineries that produce less than 20,000 gallons per year can ship directly to Arizona residents. Wineries that produce more than 20,000 gallons must “Provide the names and addresses of the wholesalers licensed in this state through which you will ship spirituous liquor into this state.”
FedEx began shipping to Arizona from out of state wineries yesterday. The following is from their update:
FedEx is expanding wine shipping services to accept legal wine shipments to consumers into, out of, and within Arizona. The effective date is September 21, 2006. For those shipping wine to AZ consumers, please note changes on the State Pairing Guide.
https://www.dmz.fedex.com/cgi-bin/wineShipping.cgi?State=CA
For more info on shipping wine with FedEx: http://www.fedex.com/us/wine/
For more info on the new AZ direct shipping changes: http://shipcompliantblog.com/blog/?p=121 and http://wi.shipcompliant.com/Home.aspx?SaleTypeID=1
New offsite rules take effect in Arizona on September 21st
September 16th, 2006
As we mentioned in June, the new laws for shipping into Arizona are scheduled to take effect on September 21st. However, the Arizona Department of Liquor Licenses and Control has not made available the forms or processes necessary for obtaining a permit and is not expected to until at least September 21st. Once the forms are available, only wineries producing less than 20,000 gallons (roughly 8,400 cases) can apply for a direct shipping permit. FedEx will begin shipping to Arizona on September 21st for permitted wineries.
As expected, a group will immediately challenge the new laws in court. Because the 20,000 gallon capacity cap will exclude 90% of wine produced outside of Arizona but include all but one Arizona winery, the rules are seen as discriminatory and in violation of Granholm. The lawsuit will be watched closely by everyone in the industry since several states have introduced similar capacity caps.
We’ll keep you updated as the permits become available and the lawsuit unfolds.
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.
“Domestic farm winery” bill passes Arizona legislature
May 29th, 2006
Senate Bill 1276 passed the Arizona state House last week and now awaits Governor Janet Napolitano’s signature. SB 1276 would continue to allow for the direct shipment of orders where “the wine was purchased while the purchaser was physically present at the winery”. The bill would also allow for off-site orders, but with serious restrictions. Only “limited production wineries” would be allowed to ship off-site orders, where a limited production winery is defined by SB 1276 to mean:
A licensed domestic farm winery that produces not more than twenty thousand gallons of wine in a calendar year may make sales and deliveries of wine that the licensed domestic farm winery produces to consumers off of the licensed premises and that is ordered by telephone, mail, fax or catalogue, through the Internet or by other means.
20,000 gallons equates to roughly 8,400 cases, which means that a significant number of U.S. wineries would be excluded from shipping off-site orders to Arizona.
The good folks at Free the Grapes are encouraging Arizona residents to ask Governor Napolitano to veto this bill. From their action alert:
SB 1276 is not an incremental step in the right direction; it is a big step backwards for Arizona consumers. And if it becomes law, wholesalers who oppose direct shipping will surely promote it as a workable model for other states to adopt. This will threaten years of diligent, successful work by winemakers, legislators and regulators to enact reasonable laws that allow limited, regulated direct shipments.
If passed, this bill will almost certainly be challenged in the courts. Just when it seemed like the Granholm dust was beginning to settle, states began introducing these bills with discriminatory capacity caps. New rounds of court cases challenging these caps will mean many more changes to come in the world of wine direct shipping.
The broader effects of Costco
May 1st, 2006
I. Discrimination against Direct Distribution from Outside the State
There seems little doubt that Costco�s reading of Granholm will survive appeal. Nothing appeared in the Costco record to distinguish direct shipment of beer and wine to retailers from direct shipment of wine to consumers.
Most states with wine industries allow local wineries some form of direct distribution. Only Washington extends an equal privilege to out-of-state wineries, a result of the Costco remedial legislation. A few states, such as New Jersey, have taken preemptive action by eliminating or restricting direct distribution rights of in-state producers. Limiting direct distribution according to annual production of the producer is emerging as a common theme. Florida recently arrived at a legislative “compromise” that set the cutoff just above the size of the largest Florida winery, a transparently protectionist measure that may or may not evade analysis as discrimination, but, like all size caps, is open to Commerce Clause objection for disproportionate burden on commerce originating outside the state.
Thus, the immediate concern is with legislation in the states that must level up or down. The Costco decision accommodated state concerns by leveling down (with a stay for legislative override) and thus does not constitute precedent for requiring open access to local markets. Because other lower courts may also find the unconstitutionality of discriminatory schemes in the protectionist measures favoring local wineries, rather than in the more basic regulatory objective of controlling the traffic pattern of liquor entering the state, neither Granholm nor Costco suggests that suppliers can rely on widespread opening of markets to direct distribution.
II. Posting and Ancillary Restraints
Costco illustrates a great divide in basic Sherman Act jurisprudence. For some observers, no contract, combination, or conspiracy can be inferred from private actors� facially unilateral acquiescence in state restraints, even if the effects are anticompetitive. That is, roughly, the Fisher v. Berkeley view. See, e.g., Sisters of St. Vincent Health Services, Inc. v. Morgan County, 397 F. Supp. 2d 1032, 1046 (S.D. Ind. 2005), citing Massachusetts Food Ass’n v. Massachusetts Alcoholic Beverages Control Comm’n, 197 F.3d 560, 564-66 (1st Cir.1999).
Naturally, the district court in Seattle regarded Miller v. Hedlund as controlling 9th Circuit precedent. The reasoning in Miller is difficult to pin down. It appears influenced by anticompetitive effects (which we know are alone insufficient), but also to rely on the participation of private actors, consisting of filling in the blanks of a posting system which was then enforced by the state. The opinion mentions potential for collusion, but does not seem to require it. Last December�s antitrust rulings in Costco clearly rest on the wholesaler�s participation in the form of supplying prices that then become mandatory by the power of the state, resulting in a hybrid system requiring state supervision (which was lacking in Washington’s case) to survive preemption. However, all the U.S. Supreme Court authority overturning price posting deals with systems that require or condone private conduct that itself violate the Sherman Act. The Costco judge, like the Court of Appeals in Miller, seems to find a combination by, so to speak, putting the state in the same room with each private actor who posts a price. By contrast, Midcal and the other Supreme Court cases invalidating price posting laws deal with systems that send the private actors to a room where they constitute the unlawful combination on their own. How the Fisher-Miller dissonance resolves is, I think, the most important issue for the Costco appeal.
Another significant issue in applying Costco to the law in other states is the extent to which the cluster of other restraints that frequently accompany posting would fall with it. I see three bases on which that might occur. First, the court might conclude that the system is so integrated that the legislature would not have enacted the other restraints if it had known posting itself to be illegal. Second, on general principles of equity, a court issuing an injunction against unlawful conduct has power to enjoin lawful conduct associated with it if necessary to render complete relief from the threatened harm. Third, a court might conclude that the other restraints constituted per se antitrust violations on their own, which appears as an alternative basis for decision in the December opinion on summary judgment motions, incorporated by reference in the conclusions of law for the final judgment.
That third possible approach would extend Costco�s effects to more states, including some without price posting. It is, however, the most controversial of the three, as it requires finding a public-private hybrid restraint without an overt role for private parties, such as providing prices the state then enforces.
In sum, Costco is not carte blanche for ignoring other states’ posting laws, although within the Ninth Circuit an aggressive position could be justified. As a rough first look, here are some immediately vulnerable points: AZ quantity discount limits, CA beer posting, CT posting, DE delivered wholesale pricing, FL malt beverage price change waiting period and possibly the limits on quantity discounts, GA posting, HI possibly restrictions on quantity discounts, ID posting, IN posting, IA posting (possibly), KS posting (possibly), ME posting and discount restraints, MD posting and quantity discount ban (already analyzed in TFWS I through III), MA posting, MI posting and quantity discount ban, MN posting and possibly restriction on quantity discounts, MO posting and 1% limit on quantity discounts, NH beer posting, NY posting (including amendments effective in September), NC quantity discount ban, OH posting, OK posting and quantity discount ban, OR price record-keeping (possibly, because of deterrent effect on spot pricing) and price uniformity requirement, SD posting, TN posting and quantity discount ban, VT posting, VA posting, WV beer posting.
III. Central Warehousing
Central warehousing bans are difficult to analyze, because (unlike the case in Washington) they are often based on interpretation of retail license privileges or tied house laws, rather than on express prohibition. Caveats regarding ultimate application of Costco to posting and its ancillary restraints apply strongly to central warehousing bans, because they may appear more severable from direct restraint on price than, e.g., quantity discount bans. The Costco antitrust opinion of December and the recent findings of fact and conclusions of law do not present a clear rationale for distinguishing the central warehousing ban, which it classified as an antitrust violations, from the retailer-to-retailer sales ban, which it found was unilateral state action not preempted by federal antitrust law. Thus, it is difficult to predict how courts, even those following the Miller v. Hedlund line on antitrust combinations, will respond to the Costco ruling if asked to evaluate central warehousing in other states.
The following represents a currently incomplete survey of states potentially affected by Costco on use of central retail warehouses:
Central retail warehouses banned: AL, AR, CO, DE, ID, IL, IA, KS, MD, MI, NH, NM
Not banned: AK, AZ, CA, CT, DC, MA, OR
We are still researching the status of central warehousing in the states not listed above.
Small farm winery bill passes Arizona Senate committee
February 17th, 2006
Three wine shipping bills were proposed in Arizona, and one made it out of the Senate committee. This bill would allow small farm wineries that produce less then 50,000 gallons each year to make offsite shipments of wine to Arizona consumers.
The Arizona distributors, of course, are pulling out all the stops to prohibit direct shipments and stifle free trade. Their argument, which he have heard in every single state, is that they want to prevent the sale of alcohol to minors.
That argument just doesn’t fly anymore. States have a number of measures that they can use to prevent sales to minors. Distributors just want to protect their state-mandated monopolies, which hurt small wineries and consumers.
Read more about the new bill here.
Costco case could set precedent for Arizona
January 3rd, 2006
Interesting editorial explaining why Arizona is watching the Costco case in Washington closely.
Granholm signs Michigan direct shipping bill into law
December 15th, 2005
Michigan Governor Jennifer Granholm signed into law the direct shipping bill passed by the state House.
The bill allows in-state and out-of-state wineries to ship up to 1,500 cases per year to Michigan residents. Click here to see the final legislation.
Granholm v. Heald
October 1st, 2005
On May 16th, 2005, the Supreme Court of the United States issued a landmark decision in the case of Granholm, Governor of Michigan, Et Al, v. Heald Et. Al.. We will discuss this case at length in this blog, but let’s start with the basics.
You can see the official Supreme Court decision here, but the key passage from Justice Kennedy’s opinion follows:
These consolidated cases present challenges to state laws regulating the sale of wine from out-of-state wineries to consumers in Michigan and New York. The details and mechanics of the two regulatory schemes differ, but the object and effect of the laws are the same: to allow in-state wineries to sell wine directly to consumers in that State but to prohibit out-of-state wineries from doing so, or, at the least, to make direct sales impractical from an economic standpoint. It is evident that the object and design of the Michigan and New York statutes is to grant in-state wineries a competitive advantage over wineries located beyond the States� borders. We hold that the laws in both States discriminate against interstate commerce in violation of the Commerce Clause, Art. I, �8, cl. 3, and that the discrimination is neither authorized nor permitted by the Twenty-first Amendment. Accordingly, we affirm the judgment of the Court of Appeals for the Sixth Circuit, which invalidated the Michigan laws; and we reverse the judgment of the Court of Appeals for the Second Circuit, which upheld the New York laws.
Basically, because the states of New York and Michigan were allowing in-state wineries to ship directly to consumers while prohibiting out-of-state wineries from shipping directly to consumers in their state, the states were in violation of the Commerce Clause.
As a result, states must treat in-state and out-of-state wineries evenhandedly. This effectively means that states have two options - allow both in-state wineries and out-of-state wineries to ship directly to consumers in their state or prohibit direct shipments altogether.
