Posts from the New York Category
At A Glance: Get into a New York State of Mind — Direct Shipping to the Empire State
December 15th, 2010
Hidden Costs of Direct Shipping Licensing
March 3rd, 2010
Before jumping into a direct shipping program in a new state, wineries should consider their current prospect list, market potential, shipping difficulty and costs. When it comes to calculating start-up costs to enter a new state, there is often more than meets the eye. In addition to license fees, wineries may need to budget for a number of “hidden” fees including bonds, label registration fees and other application fees.
Bonds
Some states require wineries to obtain a bond in order to secure a direct shipping license. A bond is a written guaranty, purchased from a bonding company (usually an insurance firm or a surety company), to guarantee that all taxes due will be paid to the state. If there is a failure to pay, the bonding company will make good up to the amount of the bond.
Bonds for direct shippers range from $500-$1500 depending on the state, but premiums, or out-of-pocket costs, to wineries typically average around 10% of the total bond price, or $50-$180 out-of-pocket on an annual or biannual basis. Different bonding agents may quote different rates, so it pays to shop around.
Connecticut, Idaho, Illinois, Indiana, Kansas, Texas and Wisconsin all require that wineries secure a bond before submitting your license application. For wineries that ship 40,000 gallons or more annually, Oregon issues a bond document after the license application has been received but before the license is issued. Wineries that ship less than 40,000 gallons to Oregon annually can apply for a bond wavier.
Label Registration
Several states require brand or label registrations for direct shipping. Ohio, a state that 26% of direct shippers have in their program, requires wineries to register all the labels that will be shipped into the state for a one-time registration fee of $50 per label.
If that sounds pricey to you, consider Connecticut who charges $200 per label and requires labels to be re-registered every 3 years if they are still actively shipped into the state.
Georgia, Michigan, New York, North Carolina and Virginia do not charge a fee though label or brand registration is required in these states.
Application Fees
Some states may require business, Secretary of State or tax registration, or other one-time application fees. This varies from state to state and depends on how your business is structured. Wineries that start shipping to Arizona, Connecticut, Hawaii, Kansas, Maine, Michigan, North Carolina, Ohio, Tennessee, Virginia or Wisconsin may encounter one or more of these fees.
License, bond, label registration and application fees all factor into the true break-even costs of shipping to a new state. The key to ensuring a profitable direct shipping program is to research thoroughly in order to avoid getting caught off-guard with unexpected costs.
Notes on Wine Distribution v.32
February 4th, 2010
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.”
Annual Filing Option Now Available for Direct Shippers in New York
July 16th, 2009
New York has recently amended its alcohol beverage tax regulations to allow certain wine distributors to file Form MT-40 (Wine Tax Return) on an annual basis rather than a monthly basis. Out-of-State wineries must be licensed by the New York State Liquor Authority as a direct shipper and submit the “Application for Annual Tax Return Filing Status for Certain Beer and Wine Manufacturers” (Form MT-38) in order to receive annual filing status. Form MT-40 should be submitted on a monthly basis until the Tax Department confirms that the request for annual filing status has been approved. Additional information can be found in the notice entitled, “Annual Filing Option Available for Certain Wine Distributors,” published by the Department of Taxation and Finance on June 24, 2009.
Form MT-38 Annual Filing Status Application
Form MT-40 (Monthly filing)
-Annie Bones, State Relations – Wine Institute
Still Looking for Granholm’s Limits
July 3rd, 2009
Anyone hoping the intermediate appellate court reversed in Granholm had become pro-commerce would have been disappointed by the July 1st decision of the Second Circuit in Arnold’s Wines, Inc. v. Boyle.
At issue was whether a state permitting its local retail licensees to ship directly to consumers might constitutionally deny out-of-state retail licensees equivalent access. The Court of Appeals reached the less than crystalline conclusion that discrimination against interstate sellers is permissible under the 21st Amendment “insofar as it requires that all liquor sold within the State of New York pass through New York’s three-tier regulatory system.”
Judge Wesley, writing for an essentially undivided three-member panel, asserts that the locals-only licensing system “allows the state to oversee” (1) financial relationships among manufacturers, wholesalers, and retailers,” which relate to state tied-house statutes limiting vertical integration, and (2) the prices and other terms of sale, which the state purports to regulate with the objective of averting overconsumption and disorderly marketing. He also notes that New York claims the system allows the state to collect taxes more efficiently than with alternative systems and to prevent sales to minors.
One cannot accurately maintain that the challenged licensing system “allows” those regulatory objectives in the sense of being necessary to achieve them. It is even less defensible to assert that location discrimination in applying a licensing system is necessary to oversee financial relationships and sales terms, to collect taxes with acceptable efficiency, or to prevent underage purchases. Thus, the court cannot escape the question whether less discriminatory means exist –unless it takes the discrimination entirely out of Granholm’s analysis of discriminatory laws. Most of the opinion is an attempt to do just that.
To circumvent the nondiscriminatory means issue, Judge Wesley articulates the “narrow Granholm” 21st Amendment-Commerce Clause theory: “It is only where states create discriminatory exceptions to the three-tier system, allowing in-state, but not out-of-state, liquor to bypass the three regulatory tiers, that their laws are subject to invalidation based on the Commerce Clause.” His opinion recognizes (or carves) an exception to the equal access principle, based on the famous North Dakota statement that the 21st Amendment “empowers [a state] to require that all liquor sold for use in the State be purchased from a licensed in-state wholesaler (emphasis supplied),” even though that text appears in Granholm only as a “see also” citation that is not part of the Granholm holding and is also dictum in North Dakota itself. He does not overtly consider whether Granholm’s undoubted assertion of the legitimacy of three-tier systems includes the qualification (arguably inherent in the Granholm holding) that such systems may not employ location discrimination unless it is necessity-justified by some purpose other than perpetuation of the system itself. Without inclusion of that qualifier, it is easy to stop analyzing the Granholm opinion for effects on tiered distribution when one reaches its quotation from North Dakota.
Thus, Arnold’s Wines puts us squarely into the fundamental uncertainty about Granholm: Are only what the majority calls “valid” or “generally applicable” (i.e., location-nondiscriminatory) restrictions permissible, even in areas of traditional state’s rights under the 21st Amendment, as Justice Thomas says disapprovingly in his dissent, or is there something special about passage of title through a wholesaler that provides ipso facto legitimacy to location discrimination between in-state and out-of-state resellers of the product?
Clearly in the second camp, the Arnold’s Wines majority opinion advances two propositions as rationales for its decision:
1. The “three-tier system” means goods physically moving through all three tiers, the lower two of which are located in the same state as the consumer who purchases the goods. A ruling requiring equal access to the same consumers by out-of-state retailers is therefore an attack on the three-tier system, which would not be consistent with Granholm, because the majority in that case said the three-tier system is unquestionably legitimate.
2. New York’s law “treats in-state and out-of-state liquor evenhandedly” once it is in the state’s three-tier system, and “thus complies with Granholm‘s nondiscrimination principle.” Equal treatment of products by allowing them all, regardless of original site of manufacture, to pass through the three-tier system, satisfies Commerce Clause requirements, even if the law prohibits interstate sellers to reach the same consumers as local sellers. The dormant Commerce Clause protects goods, not merchants.
In a concurring opinion, Judge Calabresi agrees with his colleagues’ reasoning, but adds an eloquent originalist plea for judicial caution in “updating” constitutional provisions that (unlike, e.g., due process of law) are not drafted loosely with an implied invitation to reinterpret them as society changes. One has the impression he wishes he could have restrained the impetuosity of the Granholm majority. He was, in any event, determined not to extend that opinion’s 2005 update of the 21st Amendment beyond his panel’s delimited reading.
Relatively short in comparison to the complexity of the issues, the majority opinion does not address a number of questions raised by its stated rationales.
In the first place, it is not at all clear that Judge Wesley’s three-tier system is the same thing as the three-tier system declared legitimate in Granholm. The Granholm majority unmistakably implies there are such things as constitutional systems funneling all wine sales through local wholesalers, but is silent (to the exasperation of Justice Thomas) on how they would operate without producing impermissible favoritism toward local versus interstate commerce. One court has already attempted to resolve the conundrum by preserving a state requirement that sales go through a locally licensed wholesaler, but requiring the state to process retail license applications without location discrimination. If one adds drop shipment to that scenario, it becomes possible to run all sales through an in-state distributor (who would presumably also be responsible for tax and price reporting) and avoid location discrimination in access to local consumers.
Ultimately, the first rationale rests on the court’s pronouncement that unequal access to customers by retailers is “part of the three-tier licensing structure” (vice distribution system) established in New York. When the court concludes that exemption of unequal access from Commerce Clause scrutiny is established by that proposition, it is committing what a logician would call a mereological fallacy. That is, assuming the state’s licensing structure could be part of a three-tier system, it does not follow that special exempted status accorded three-tier systems applies to each part of it. That logical gap would exist even if the North Dakota dictum were established law, and even if one further assumed that all members of the class “three-tier systems” were exempt from the dormant Commerce Clause.
With respect to the second rationale, the Court of Appeals may have made a bold departure from the conceptual underpinnings of Commerce Clause jurisprudence in its attempt to diminish Granholm’s scope. Most judges and commentators have assumed that the Commerce Clause is intended to protect commerce, not merely choice of manufacturing site. It is, of course, entirely proper for a court to attempt to limit a disliked precedent to its specific facts, but drawing the line at products, excluding protection of downstream merchants, seems extreme.
Judge Wesley may have been forced to an extreme position to support his assertion that the facts before him were in “stark contrast” to those of Granholm. Viewed from another angle, the distance between the cases does not appear so great. Mrs. Swedenburg’s wines and those of the other Granholm plaintiffs had equal rights with New York wines to direct delivery to New York consumers from bricks-and-mortar locations within New York. That may not be so easy to distinguish from the Arnold’s Wines plaintiffs’ equal right to sell to New York consumers through bricks-and-mortar wholesalers and retailers within New York. One need not read Granholm very broadly to conclude that if the former was invalid, the validity of the latter is at least questionable.
Because the court seems to believe no nondiscriminatory means inquiry is necessary, its reference to state purposes may be only a makeweight. However, it is worth noting that the listed objectives themselves are not all necessarily legitimate. If the purpose of tied-house laws is to prevent supplier interests in New York retailers, regulation of sales by those retailers within New York is sufficient. Only if New York’s objective is to prevent such interests in retailers located in other states is it necessary to “oversee” the financial relationships of those sellers. That objective, however, raises significant issues of extraterritoriality. In a 1989 beer pricing case, the Supreme Court enunciated limits on state legislation, 21st Amendment notwithstanding, short of regulating conduct that occurs entirely outside the state (which would appear to include financial relationships among entities in another state, whether or not one of them sells into the state) or causing a patchwork of different requirements for businesses engaged in interstate commerce (as seems the case, given the widely differing requirements of state tied-house laws). Those limitations suggest that tied-house oversight of out-of-state sellers is a not legitimate purpose that can be advanced to justify discrimination. Worse, extraterritorial effect of state laws is ordinarily considered not merely discrimination against, but direct state regulation of, interstate commerce –an unconstitutional invasion of the federal sphere that cannot be rendered legal by laudable purpose.
In sum, Arnold’s Wines is a forceful formulation of the narrow Granholm position, with a forthright end run around less-discriminatory-means analysis. Its clarity emphasizes the developing differences among federal circuits in understanding that landmark case. While it is doubtful the Supreme Court has much appetite for revisiting Granholm, divergent interpretations at the intermediate level slowly increase the probability of high court review.
by R. Corbin Houchins, CorbinCounsel.com
