Hello and happy holidays from the ShipCompliant team! We’ve been a little quiet as we prepare to help all of our winery and retailer partners prepare for the big storm of reports that come due in January. Wineries that ship to all of the possible states for direct shipping can owe over 500 reports each year, depending on their filing frequencies with the state ABCs and Departments of Revenue. In January, all but one (for some reason, one of the New York reports is filed on a non-standard quarterly basis that starts on December 1st) of the reports come due. So, all other monthly, quarterly, semi-annual, and annual reports come due in January.
Tasting room, wine club, accounting, and compliance managers all get very busy just after the first of the year preparing their data for the annual reporting rush. A key to making this endeavor a success is to collect and maintain good, clean data from all of your direct to consumer order sources, including eCommerce, wine club, tasting room, and administrative orders. Many of the reports require copies of invoices or schedules of shipments that list order details. Also, remember that the three states that have abbreviations that end in the letter I (HI, MI, and WI) also require dates of birth on their reports.
Here’s to a happy new year and a successful reporting rush!
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.
Michigan�s direct shipping application process appears to be very straightforward (at least compared to other forms I have read through recently). Wineries who wish to ship wine directly to Michigan consumers must complete the Michigan Liquor Control Commission�s (MLCC) Direct Shipper Application, pay the $100 permit fee and register with the Michigan Department of Treasury. Wineries can register with the Department of Treasury by completing Sales/Use Tax Registration Form 518. All forms can be found by going to Wine Institute�s Direct Shipping web site at www.wineinstitute.org/shipwine/ and selecting Michigan under the State Shipping Laws section.
Michigan will begin issuing Direct Shipper Permits on April 1, 2006. Wineries who submit their applications after April 1 will have to wait about two weeks for their applications to be processed. Once a winery has received their approved Direct Shipper Permit it must register their brands. A password will be sent with the approved Direct Shipper Application that allows the winery to logon to the Michigan website www.michigan.gov/cis/ and register their brands. If registering online isn�t for you or your computer just exploded it is also possible to register brands by sending the information in via U.S. mail.
Okay, you have your license and registered the brands. It�s time to sell your wine, but make sure you only sell wines to consumers whose age has been verified as being 21 or older. Age can be verified by obtaining a copy of the consumer�s photo ID or by using an Age Verification Service, such as ChoicePoint.
Wineries must pay a 6% sales tax on all direct shipments. Sales Tax payments will be due either monthly, quarterly or annually. The payment schedule is determined by your estimated total sales. Wineries are also responsible for submitting the Michigan Wine Tax Report and payment of excise taxes quarterly. This is a little confusing because the Michigan Wine Tax Report has instructions to be filed monthly � ignore the instructions � the form has not been updated since the new law passed.
I hope the application process goes smoothly for you. I know there are a lot of Michigan consumers anxiously awaiting their shipments!
The Detroit News reports:
The state House on Tuesday voted 104-0 to approve legislation that would allow in-state and out-of-state wineries to ship up to 1,500 cases of wine a year directly to consumers. Direct shipment by out-of-state wineries had been banned under a state law ruled unconstitutional earlier this year by the U.S. Supreme Court.
Michigan wineries and the Michigan Beer & Wine Wholesalers Association may be close to a compromise in the Senate that would allow limited direct shipping of wine by out of state wineries. The Michigan House passed HB 4959, which would “allow limited wine shipments by Michigan and out-of-state wineries to individual Michigan consumers but would ban wineries from shipping directly to retailers and restaurants”.