In short, yes, for a couple of reasons:
1. Wineries already pay sales tax in most states
2. The vast majority of wineries will likely be exempt from the law
So what is it, exactly?
Senate Bill S. 743, more commonly known as the “Marketplace Fairness Act“, is a pretty simple bill that would give states the ability to require out of state businesses that have “remote sales” in excess of $1 million annually to remit sales taxes. Each state would be able to opt in to the Act, but only after they have simplified their tax structure, either by joining the Streamlined Sales and Use Tax Agreement or to follow the steps outlined in the bill to simplify their sales tax requirements.
Will it pass?
With broad bi-partisan support, S. 743 passed out of the Senate with a vote of 69 to 27. However, a tough battle is expected in the House, and therefore the Marketplace Fairness Act has a long way to go before it is enacted with a signature from President Obama. Amazon.com is supporting the bill (presumably because they would like to move forward with their plans to build warehouses in each state to support same-day shipping), while eBay is one of the main voices in opposition.
What will it mean for wineries?
A lot hinges on the definition of “remote sales”. Keep in mind the fact that state legislation to allow wine shipments typically includes a provision that also requires wineries to register for and pay sales tax. As it stands in the Senate version, and based on our interpretation of the current language, sales by wineries to states where they are already required to pay sales tax would not be counted when considering the $1 million threshold for remote sales.
Based on some quick analysis, there are a few hundred wineries in the US that ship more than $1 million worth of wine to consumers each year. BUT, if you include sales only to those states (Alaska, Colorado, D.C., Florida, Iowa, Kansas, Minnesota, Missouri, New Hampshire, Oregon, and Wyoming) that do not require wineries to pay sales tax, then we estimate that less than 25 wineries would exceed the $1 million cap. In other words, the vast majority of the 7,000+ wineries in the US would be exempt from this law.
Wineries are already accustomed to calculating, collecting, and remitting sales taxes in most states. So, for those wineries that would not be exempt from this law, it would probably not be that big of a deal to add a few more states (initially the states of Iowa, Kansas, Minnesota, and Wyoming) to the list of states to which they would be required to remit sales tax. They already have the technology and processes to do so.
The bill would take effect, at the earliest, on October 1st, 2013. Once effective, the 22 “Streamlined” sales tax states would begin requiring sales tax for remote sellers with over $1 million in sales. After that, each of the remaining 28 states would choose whether to opt in to the Act and start requiring sales tax from remote sellers.
As the snow melts here in Boulder, it’s time for a status update on the direct shipping bills we expected to see in 2013, as well as other notable legislation.
1. How are Direct Shipping Bills Stacking Up?
Massachusetts has seen six direct shipping bills introduced this session, and though there hasn’t been much movement yet, HB 294 has the most promise – especially since former New England Patriots quarterback Drew Bledsoe has recently announced his support for this direct shipping bill.
Pennsylvania currently has three direct shipping bills under consideration: HB 121, SB 36, and SB 101. Only HB 121 has moved out of committee, but all three bills are being considered as part of the privatization push in the state. These bills will move forward if and when an agreement is reached on which portions of the modernization efforts are going to be moved independently from one another. Currently, all three of these bills include the very high “Johnstown Flood Tax” rates – 18% to 24%. The Wine Institute is working to negotiate a lower tax rate before passage of any of these three bills occurs.
Montana, which is effectively closed to direct shipping because of the problematic “connoisseur’s license” system, should see a change when HB 402 is made law. The legislation would replace the wine connoisseur’s license with a direct shipping “supplement”, available to Montana wineries and to out-of-state wineries holding an Importer License. Breweries, however, would still be subject to connoisseur license regulations. HB 402 has passed both the House and Senate, and is on its way to the governor’s desk for his expected signature.
Arkansas’ House and Senate passed HB 1749, a very restrictive direct shipping bill sponsored by the Speaker of the House. The bill was signed by Governor Mike Beebe on March 21, 2013, turning it into law. Act 483 will open up “direct shipping” to Arkansas consumers by wineries that obtain a $25 annual permit. All orders must be placed in person, at the winery; internet orders will not be allowed. Additionally, permit holders may only ship one case per calendar quarter to an individual’s residence only, state sales taxes and excise taxes must be paid, and a special label provided by the ABC at the cost of no more than $10 per label must be on all shipments.
In Delaware, HB 60 was introduced on March 21, 2013; this bill would allow wineries to ship 12 cases annually under a new $100 permit program. Excise taxes would be paid quarterly, and carriers would be required to obtain a permit as well.
A direct shipping bill was introduced in South Dakota earlier this legislative session, but SB 100 has been tabled for the year.
2. COLA Processing at TTB Shifts to Electronic
In keeping with their word to streamline the label submission and approval process, the TTB has revamped their website and included several helpful resources on their labeling page, including a table with up-to-date information on label processing times. Additionally, on February 1, 2013, the TTB began processing paper COLA submissions in the same way they process electronic submissions; paper submissions are scanned into the system and the TTB will notify applicants of approval or rejection via email, if an email address is listed on the application. Industry Circular Number 2012-03 contains more detailed information on this change. We expect more changes to the COLA process as the year progresses. Jeff Carroll of ShipCompliant will be moderating a panel called “COLA Changes on the Horizon” at the NCSLA annual conference in June.
3. Pennsylvania’s Privatization and Modernization
The latest news on modernization centers on HB 790 – a bill that calls for and addresses privatization of the sale of alcohol in the state of Pennsylvania. Though there are several accompanying bills that supplement Pennsylvania’s privatization plan, this bill is leading the charge for ending Pennsylvania’s status as a control state. HB 790 addresses how the state should make the changeover to private distribution & retail sale of alcohol, what should occur in the interim, and what should be the end result of a privatized system. Currently, this bill has passed the House and is awaiting action in the Senate.
4. Third Party Marketing
Two bills were introduced to limit third party marketing in Maryland: HB 1420 and SB 990. These bills contained the following language: “An order may not be transmitted to the holder of the direct wine shipper’s permit by a retailer, a wholesaler, or any other third party, including a marketplace site on the internet in which sellers offer products to customers.” Following a hearing on SB 990, the author has withdrawn the bill, and the author of the House bill no longer intends to move HB 1420 forward either. Defeating both of these bills took a great deal of work by lobbyists working in Maryland on behalf of the wineries and the third party companies.
5. Existing Direct Shipping Laws, Reworked
Nebraska currently allows wineries and retailers to apply for a direct shipping license. LB 230, a bill that would add restrictions to the current process, originally contained language to eliminate access of direct shipments from retailers including online retailers. However, after two amendments, the bill creates a direct shipping license for both wineries and retailers. If passed, wineries (but not retailers) would be required to “identify” the brands they will ship to Nebraska consumers, and submit “notification to wholesalers of intent to direct ship” any brands that are also sold to Nebraska wholesalers. Both wineries and retailers would be subject to a status of nexus (likely requiring payment of corporate income taxes) and monthly excise tax reports (currently an annual filing). As of March 15, this bill is in Committee. Wine Institute is opposing LB 230.
SB 15 in Indiana was intended to help wineries that direct ship into the state, but fails to address all of the existing direct to consumer limitations. The bill would remove the “previous visit” requirement by consumers before direct shippers can send wine shipments. However, a new requirement to obtain a faxed or scanned copy of the consumers identification would be required. Also, wineries with a wholesale relationship are still not eligible for the direct shipping license in this bill. For these reasons, Wine Institute is opposing the bill at this time. Currently in Senate Committee.
6. Product Registration Updates
In Arkansas, HB 1480 would become active on July 1, 2013 if implemented, and would require all wineries to register their brand labels and label extensions at a fee of $15 per label per container size. Additionally, wineries producing over 250,000 gallons annually would have to register as a supplier and submit an annual permit fee of $50. This bill is currently out of committee and in the House with a recommendation of “do pass”.
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On December 17th, the US Court of Appeals for the 3rd Circuit (Delaware, New Jersey and Pennsylvania) rendered its decision in Freeman v. Corzine (formerly known as Freeman v. Fischer and Freeman v. Governor of New Jersey). The case applies Granholm to several aspects of New Jersey law, which banned direct shipment by all wineries, but allowed direct-to-consumer sales only by in-state wineries. To no surprise, it concluded that the facial discrimination created by giving only its own wineries a sales route around the three-tier system violated the dormant Commerce Clause, absent proof of a legitimate state objective it cannot achieve without discriminating against the interstate seller (the necessity test, which no state has passed so far in Granholm litigation).
A less predictable part of the 3rd Circuit ruling involved personal importation, a subject courts have not heretofore directly examined under Granholm. The Freeman opinion takes a straightforward nondiscrimination approach: If a state allows its resident wineries to sell directly to consumers without volume limits, it cannot impose significant volume limits on wine a consumer purchases at an out-of-state winery and brings into the state, without meeting the necessity test. To comply with Freeman, it appears that states must either fashion demonstrable proofs of necessity that will withstand close judicial scrutiny (as New Jersey failed to do) or choose between (a) imposing on their wineries’ tasting room sales the same, usually extreme, limits that apply to personal importation and (b) allowing consumers personally to import out-of-state on-site purchases with no more limits than apply to local tasting rooms.
Because the federal direct shipment law permits wineries to ship on-site purchases directly to consumers who could lawfully have carried it home as luggage under personal importation laws, independently of state direct shipment laws, invalidating state volume limits could in theory expand direct distribution geographically and make it available to wineries that do not hold shipping licenses. It seems highly unlikely, however, that states would by inaction permit creation of a significant market in untaxed personal importation of on-site sales.
Plaintiffs in Freeman also challenged the ban on all direct shipment, on the grounds that on-site laws, though not facially discriminatory, discriminate in effect by prohibiting out-of-state wineries from using the only method at hand to compete with local wineries, a visit to which by the local consumer is not as burdensome as a trip outside the state. (Non-facial discrimination is usually examined under a less stringent standard, whether the purported benefit to the state outweighs the harm to commerce, known as the Pike test.) Like most courts that have encountered it, the 3rd Circuit rejected the differential burden argument in conclusory terms, finding that the law “even-handedly forces all wine sales out of one channel and into other available channels” –i.e., no proven discrimination in effect. However, unlike some other courts, it held out the possibility that in another case the pro-commerce litigants might successfully prove differential burden by demonstrating economic loss because of the disproportionate travel requirement inherent in on-site laws. It also implied that future plaintiffs who could prove even modest economic loss to out-of-state producers might profitably argue that benefits from the non-facial discrimination are too slight to pass the Pike balancing test.
By R. Corbin Houchins, 12/23/2010, CorbinCounsel.com
The latest version of “Notes on Wine Distribution”, by R. Corbin Houchins, is now available. Release 32 includes updates on legislation, litigation and general discussions on available distribution channels for wine. This release includes substantial changes, including new sections on age and identity, facial neutrality, and logistical support services, as well as updates to state summaries in Arizona, Delaware, Kansas, Kentucky, Maine, Maryland, Massachusetts, Montana, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Tennessee, Texas, Virginia, Washington, and Wisconsin. Read about these and other updates that affect the way wine is sold and shipped within the United States.
If you are at all interested in the shipping and distribution of wine, this is an excellent resource that is well worth reading. You can view the most recent version of the document anytime by visiting the ShipCompliant Blog and clicking the link located under “Compliance Resources”, or by visiting CorbinCounsel.com and clicking on the home page link, “Notes on Wine Distribution.”
Click Here to View NWD Release 32
The Delaware Commissioner of Alcohol has released a letter clarifying the regulations for consumers in Delaware who wish to obtain wine from outside the State. The letter confirms that Delaware consumers are permitted to carry an unspecified amount of wine into the State on their person provided the wine is for the consumer’s personal consumption and arrangements have been made to pay excise tax to the Delaware Department of Revenue. Additionally, Delaware consumers are able to purchase wine on the premises of a winery and arrange for the winery to ship the wine directly to their residence or business per the Federal On-Site provision included in the 2002 Department of Justice Appropriations Authorization Act.
Wine purchased at the winery and shipped to the consumer under the Act is subject to the same conditions as wine carried into the state by a Delaware consumer on their person. The Federal On-Site provision does not allow Delaware consumers to receive future shipments of wine (including wine club shipments) or make additional purchases once they have left the winery. The wine cannot be for resale and excise tax must be paid by the consumer.
Additional information and instructions for consumers to pay excise tax can be found in the attached letter from the Delaware Commissioner of Alcohol, John Cordey, “Re: Purchase of Wine from Wineries”.
-Annie Bones, State Relations – Wine Institute
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.