• Wine with an ABV of 14% or less – $0.204/gallon
• Wine with an ABV over 14% – $0.408/gallon
• Sparkling wine – $0.516/gallon

The updated rates are in effect for the current quarter (December – February), and the next payment is due on March 15th.

Texas Form C-240

Denial of review leaves standing the 5th Circuit opinion, which reads Granholm to mean only that states giving their in-state manufacturers the right to circumvent the “three-tier system” cannot for protectionist purposes deny the same dispensation to out-of-state manufacturers. In that analysis, the state can allow its own retailers to deliver directly to Texas consumers while denying the same privilege to out-of-state retailers, because Granholm does not address application of the Commerce Clause to non-producing sellers.

Judge Leslie Southwick’s opinion in Steen does not shrink from the basic Granholm question: Does the state law facially and intentionally discriminate against out-of-state retailers relative to in-state retailers? Although he points out that Texas has not authorized circumvention of the three-tier system for local retailers and thus, he believes, cannot be discriminating when it prevents out-of-state retailers from circumventing the same system, Steen is about justifying location discrimination, not about whether it exists.

The justification Steen offers is that without excluding interstate retailing, the state could not maintain a mandatory three-tier system — thus elevating the form of regulatory structure to a constitutional principle outweighing Commerce Clause considerations. Does denial of Supreme Court review advance that position in the ongoing controversy over state barriers to interstate retailing and wholesaling?

When the Supreme Court Passes

It is a truism in the law that the Court’s denying review carries no implication that the decision in question was correct. Many considerations go into review decisions, and it is not difficult to justify excluding from a packed court calendar a case revisiting a difficult and divisive precedent that affects only a relatively small segment of the economy. As noted in previous blogs, I suspect it will require inconsistent rulings among the appellate circuits to drag the Court into confronting the internal contradictions of Granholm.

Nonetheless, even if denial of review is technically meaningless, it may add a bit of luster to the lower court opinion in the eyes of judges in other circuits and at least justifies a close look at where the Steen decision leaves us.

Before Granholm

Ironically, it was the 5th Circuit that presaged Granholm in the 2003 Dickerson case, by invalidating facially discriminatory Texas direct shipment laws. In Dickerson the 21st Amendment did not save the state statutes because they had been adopted for a protectionist purpose, rather than a recognized 21st Amendment objective such as temperance. Reasoning based on purpose followed straightforwardly from the 1984 Supreme Court decision in Bacchus.

In 2005, Granholm supplanted Dickerson as the definitive statement of Commerce Clause versus 21st Amendment jurisprudence on discrimination against out-of-state wineries relative to in-state wineries. Both cases dealt exclusively with the producing wineries’ direct sales and shipments to consumers.

While Dickerson was merely silent on application of the nondiscrimination principle to other tiers of distribution, Granholm contains the famous quotations from Justice Scalia’s one-judge opinion in a 1990 Supreme Court case that did not involve direct shipment to consumers, North Dakota v. U.S., “We have previously recognized that the three-tier system itself is ‘unquestionably legitimate’ . . . . The Twenty-first Amendment . . . empowers North Dakota to require that all liquor sold for use in the State be purchased from a licensed in-state wholesaler.”

A Little Latin

Because Granholm involved no challenge to a state three-tier system itself, but dealt only with discriminatory application of a three-tier requirement, the above quotations play no role in the strict logic of the ultimate decision. They are, in legal parlance, “obiter dicta,” which means things said in passing — usually shortened to “dicta,” and sometimes seen in its singular form, “dictum.”

Portions of an opinion that are mere dicta, even coming from the Supreme Court, are not binding on lower courts. Lower courts are obliged to accept the Supreme Court’s determinations of matters of law that are pivotal to its decisions and to follow the doctrinal principles necessarily implied by how a Supreme Court case came out. That source of mandatory guidance is known as the “holding” of the case. The Commerce Clause principle of nondiscrimination that actually drove the Granholm result is part of its holding. Dicta are not part of the holding, and lower courts are entitled to give them as much or as little weight as they see fit in applying the Supreme Court precedent in which they appear.

The Court itself has been lax in distinguishing dicta from holdings. For example, the 1980 landmark Midcal opinion admits states have “virtually complete control” over fashioning their liquor distribution systems, but that observation could not be a holding, because Midcal overturned the California price posting system. Nevertheless, Granholm quotes the passage without labeling it as dicta. Similarly, Granholm says the Court “held” in North Dakota that “States can mandate a three-tier distribution scheme in the exercise of their authority under the Twenty-first Amendment,” although eight of the nine justices deciding North Dakota disagreed with that unqualified statement.

Because North Dakota is the primary source of current judicial defense of the three-tier system, it merits careful examination. There the conflict was between North Dakota’s distribution system and federal regulations that called for supplying spirits to armed services post exchanges at a price achievable only by direct distribution from distillers. The Court’s opinion, endorsed by four of the nine justices, declared that the state’s three-tier law survived a Supremacy Clause challenge for conflict with federal regulations (not a dormant Commerce Clause challenge) only because the state provided a workable alternative to three-tier distribution — i.e., requiring an identifying sticker on bottles distributed directly. Four other justices found the alternative too burdensome and would have overturned the state law.

The swing justice was Scalia, who wrote a separate opinion expressing the view that the practicality of the sticker alternative didn’t matter, because the state’s right to enforce three-tier distribution was absolute under the 21st Amendment. With five justices voting to uphold the law, the case resulted in a victory for the state, but with no majority view of the rationale and only one justice advancing the absolutist position. That one-judge concurring opinion is the sole source of the above quoted statements that famously appear as dicta in Granholm.

Making it Big

Some dicta fade into obscurity. The three-tier system dicta of Granholm have gone on to achieve prominence. Circuit Judge Richard Wesley in a New York retailer case, Arnold’s Wines, quoted the trial judge Richard Howell with reference to Scalia’s North Dakota assertions, “But if dicta this be, it is of the most persuasive kind.” The same text appears crucially in Steen.

Judge Howell’s subjunctive “if” clause is mere rhetorical flourish, for the text he quoted from Granholm is obviously and unquestionably a dictum. To find it compellingly persuasive, one must draw, from the fact that one justice in North Dakota found the state’s 21st Amendment right to a three-tier system weightier than a cost-saving Department of Defense liquor procurement regulation, the conclusion that the state right is also weightier than national consumer and merchant interests protected by the Commerce Clause. In reaching that conclusion, the Steen court reasoned that a state could not exercise its Granholm-sanctioned right maintain a mandatory three-tier system if retailers from outside the state, who presumably had not purchased from a “licensed in-state wholesaler,” were free to compete from local retailers for resident consumer trade.

Even if the quoted statements were authoritative, it is questionable whether they would sustain the Steen position. Although the Granholm majority states that in North Dakota the Court “recognized the three-tier system as ‘unquestionably legitimate,’” in context the North Dakota opinion recognized a three-tier system as legitimate, not “the” system in the sense of all instances of it:

“In the interest of promoting temperance, ensuring orderly market conditions, and raising revenue, the State has established a comprehensive system for the distribution of liquor within its borders. That system is unquestionably legitimate. [Here the Court cites two of its opinions, Young’s Markets, whose reasoning was essentially abandoned in Bacchus and given burial in Granholm, and a case allowing states to regulate bootleggers traveling through en route to another state.] The requirements that an out-of-state supplier which transports liquor into the State affix a label to each bottle of liquor destined for delivery to a federal enclave and that it report the volume of liquor it has transported are necessary components of the regulatory regime.”

Nothing in North Dakota deals with discrimination between a North Dakota retailer or wholesaler and an out-of-state retailer or wholesaler. It is at bottom not even a Commerce Clause decision, as it turns on the right of a state to compromise an express federal objective under the Supremacy Clause. Even if its rhetoric can be transferred to dormant Commerce Clause jurisprudence, it unambiguously legitimizes the North Dakota system on grounds of its pursuit of traditional aims (temperance, orderly markets and tax revenues), not for the sake of the system structure itself.

In Summary

Fifth Circuit law on interstate retailing now rests on the theory that because the legitimacy of the tiered distribution system in North Dakota (with its provision for circumvention by stickered goods) was unquestionable, any state law that is part of a tiered system, even one directly contravening the Commerce Clause, must be valid.

It is one thing to say tiered systems are legitimate distribution structures (“Texas may have a three-tier system”), quite another to say that they can be used to discriminate against interstate commerce in ways that fail standard Commerce Clause tests. On careful reading, the holding of Granholm (as Justice Thomas correctly observed in his dissent) amounts to taking the 21st Amendment out of cases of intentional protectionism favoring local sellers over interstate sellers; in such cases there is no special “saving” of liquor laws that would be invalid under general Commerce Clause nondiscrimination principles applicable to all goods. In contrast, what the Steen court refers to as “our read” of Granholm takes the North Dakota dicta as insulating anything that is an “inherent part” of the “traditional three-tier system” from Commerce Clause scrutiny.

Whether Granholm’s arguably radical application of the dormant Commerce Clause is limited to the top tier of wine distribution cannot be determined by parsing the text of that opinion. Rather, it is a policy choice between the Marshallian vision of a national market with only rare departures from free movement of goods across state lines and the Repeal era view of alcoholic beverages as disfavored articles of commerce over which states are given almost unlimited rights of regulation in consequence of their undoubted 21st Amendment right to control importation. Judges in cases yet to be presented will have to make that choice.

Meanwhile, Judge Howell’s bon mot about North Dakota dicta gains familiarity. The 2nd Circuit Arnold opinion in which it appears ultimately does not rely on it, but rather saves the state law on non-21st Amendment grounds, as pursuing a legitimate state purpose that cannot reasonably be achieved without discriminating against interstate commerce. The Steen decision goes farther by enshrining it as a primary basis for decision.

By R. Corbin Houchins, CorbinCounsel.com

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.

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 decision is another example of uncertainties resulting from the principal unresolved Granholm question: How does one reconcile the location-neutrality principle with the infamous North Dakota dictum to the effect that states may discriminate against out-of-state wholesalers? The Fifth Circuit’s answer, like that of the Second Circuit, is that Granholm extended Commerce Clause protection to wineries, but not to wholesalers or retailers, because national markets in the lower tiers would make it impossible for a state to protect the “traditional three-tier system.” As the Court of Appeals judge said about setting aside fundamental economic policy embodied in the dormant Commerce Clause to follow a judicial aside that was not part of the Granholm holding, “That language may be dicta. If so, it is compelling dicta.”

Post-Granholm litigation shows clearly enough that judges, though not bound to follow dicta, will elevate it to persuasive precedent when it coincides with their value systems. The values question is whether states’ asserted 21st Amendment right to maintain a privileged middle tier trumps the Commerce Clause policy against differential treatment of in-state and out-of-state economic interests. All one can say at this point is, “to be continued.”

by R. Corbin Houchins, CorbinCounsel.com

The decision is another example of uncertainties resulting from the principal unresolved Granholm question: How does one reconcile the location-neutrality principle with the infamous North Dakota dictum to the effect that states may discriminate against out-of-state wholesalers? The Fifth Circuit’s answer, like that of the Second Circuit, is that Granholm extended Commerce Clause protection to wineries, but not to wholesalers or retailers, because national markets in the lower tiers would make it impossible for a state to protect the “traditional three-tier system.” As the Court of Appeals judge said about setting aside fundamental economic policy embodied in the dormant Commerce Clause to follow a judicial aside that was not part of the Granholm holding, “That language may be dicta. If so, it is compelling dicta.”

Post-Granholm litigation shows clearly enough that judges, though not bound to follow dicta, will elevate it to persuasive precedent when it coincides with their value systems. The values question is whether states’ asserted 21st Amendment right to maintain a privileged middle tier trumps the Commerce Clause policy against differential treatment of in-state and out-of-state economic interests. All one can say at this point is, “to be continued.”

by R. Corbin Houchins, CorbinCounsel.com

Currently, licensees may ship up to three gallons of wine within “any 30-day period”. This rule was perhaps the most difficult, and most commonly violated rule in a compliance check out of all state limitations. First, three gallons translates to just over 15 standard 750 mL bottles, whereas most states stick to a standard case or two-case limit. More importantly, the “rolling” 30-day period was very problematic to track for wineries that did not use an automated compliance solution. The majority of state volume limits are tracked on a calendar (month or year) basis, but this effectively created 365 different 30 day periods to track.

The new bill establishes three different volume limits for direct shipments to Texas:

1. No more than nine gallons (46 bottles)  to the same consumer within any calendar month
2. No more than 36 gallons (181 bottles) to the same consumer within any 12-month period
3. No more than 35,000 gallons (14,721 cases) to  all Texas consumers annually

Although some coverage of the changes has highlighted a “tripling” of the volume limit (from 3 gallons to 9 gallons), the annual consumer limit actually stays the same at 36 gallons. According to the House Research Organization’s bill analysis,

Increasing from three to nine gallons the maximum amount of shipments to the same consumer within a month would acknowledge the unique seasonal requirements of wineries as well as the realities of Texas summers. Wine is a perishable product that spoils at temperatures above 75 degrees Fahrenheit, so many out-of-state wineries are reluctant to ship to Texas, especially during July and August.

CSHB 1084 would not increase the overall amount of wine that a winery or out-of-state shipper could ship to the same consumer per year. In fact, it would codify in statute the current limit of 36 gallons per year, which is based on the existing restriction of no more than three gallons per month. It simply would allow wineries to ship somewhat larger quantities of wine to Texas consumers during the cooler seasons of the year.

Annie Bones, State Relations – Wine Institute

August is the last month that will require a monthly return, which will report shipments to Texas consumers only for the month of August. This report is due September 15th, and should include tracking numbers for each shipment. The newly updated quarterly frequency will commence on September 1, 2008, including orders shipped from September through November, and is due December 15th. Also, please note that the new quarterly frequency is based on Texas’ fiscal year (beginning September 1st), not on the familiar calendar year (beginning January 1st), therefore the quarterly reports will be due on the following schedule: December 15th, 2008; March 15th, 2009; June 15th, 2009; etc.

All permit holders have been mailed a copy of the Quarterly Direct Shipper’s Report by the Texas Alcohol Beverage Commission and the form will soon be available on the TABC and Wine Institute website. The last monthly reporting period is August 2008. Shipments sent on or after September 1, 2008 should be included in the quarterly report.

Annie Bones, State Relations – Wine Institute