Michigan

Direct shipping permits for Michigan are renewable on May 1. The annual renewal cost for the Michigan Permit is $100; the same as the initial permit fee. For those wineries that do not have a direct shipping permit for MI now is good time to consider applying. Licenses are valid from May 1 – April 30 and the $100 fee is not prorated.  The permit allows wineries to ship up to 1,500 9-liter cases to Michigan consumers.  Brand registration is required. This can be completed through the MLCC’s online label registration program for no fee. Sales tax and excise tax must be paid and reports must be filed.

New Hampshire

New Hampshire has updated its direct shipping permit application. The updated application is now available on Wine Institute’s website along with the instructions. Please be sure to complete the application in its entirety and attach all required documents. Incomplete applications will be returned.  Applicants will be happy to note that there is no permit fee. Approved shippers are allowed to ship up to 60 containers of not more than 1 liter each to each consumer during a calendar year. Monthly reports and tax payments are required.

Tennessee

The Tennessee Alcohol Beverage Commission has updated their ”Direct Shipper Application Requirements – ABC” document posted on the TN ABC and Wine Institute websites. The original version of the document did not include the “Wholesale Gallonage Letter” requirement. The Wholesale Gallonage letter is one of 2 documents issued by the TN Department of Revenue that wineries must submit with their application. The second document is the “Certificate of Registration for Sales and Use Tax.”  While the application on the TN Department of Revenue website says a bond is required, a bond is not required for wineries. For the TN DOR wholesale gallonage and sales and use tax application form, go to:  http://www.state.tn.us/revenue/forms/general/f13005_1.pdf.   Licenses are valid 1 year from the date issued and the annual license fee is $150.00. There is also a 1 time non-refundable application fee of $300.  Additional information about the application process is available on the Wine Institute website. Wineries may also contact Sharon Loveall at the TN Alcoholic Beverage Commission with any questions about winery direct shipping permits at 615.741.1602, ext. 141

By Annie Bones, State Relations – Wine Institute

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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.

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As readers of this blog know, direct-to-consumer shipping has been a watchword among wineries for more than a decade. The result of all of this attention is a national shipping market that allows consumers in 37 states representing 82% of the U.S. population to receive wine purchased off-site legally. Persistent lobbying efforts and the collapse of counterfactual objections have built momentum for state acceptance of winery direct-to-consumer shipping. It is now only a matter of time before the few last holdout states allow winery shipping. But the system is far from perfect.

Many winery shipping laws passed in the last ten years were the best that could be achieved at the time, the result of crucial last minute horse trading and political calculation. Since it was critical to ensure the channel existed, administrative cost and effectiveness often became secondary considerations. While this was practical and necessary, implementation has revealed a system that is often creaky and unwieldy.

While the wine business is lucky to have organizations like ShipCompliant that reduce the hassle of direct shipping, for many wineries the expense and complexity of state regulation make shipping a daunting prospect. The system needs to be simplified and refined to make direct shipping more efficient, cost effective, and reflective of market needs. Not that any of this is going to be easy.

Broadly speaking, we need to accomplish at least three things:

How many pages is this thing? Licensing needs to be less costly and more efficient for both wineries and regulators. Qualifying for a shipper’s license shouldn’t be so burdensome that it discourages small businesses from making use of a tool whose principal object is to help them.

I need to send a 25¢ check? Recordkeeping and reporting requirements need to be made more transparent and practical. Wineries shouldn’t be forced to write a check that costs more to process than its worth, and regulators shouldn’t be asked to sift and retype mountains of paper each month. States could easily follow the Alcohol & Tobacco Tax & Trade Bureau model of filing electronic reports on a monthly, quarterly, or annual basis depending on the prior year’s shipments.

But market support makes shipping work better. States should facilitate use of efficient and practical tools—such as marketing websites and pick-and-pack warehouses—that have developed around direct shipping. Recently, these tools have come under fire with investigations in both California and Virginia. But wineries aren’t trying to do anything unreasonable here. Virtually every industry is allowed to use market aggregators that make the consumer experience for finding niche products better. The wine industry’s goal isn’t to make wine deliveries less secure or accountable, it’s to unlock demand and facilitate fulfillment.

Most states now recognize that shipping can be safely regulated. With new and simpler regulatory models wineries can demonstrate that smarter laws mean better enforcement. States always look to each other for guidance, and nothing relieves administrative concern like a system that functions.

For this reason, state regulators could be real partners in this process. They are as familiar with the problems of winery shipping as wineries themselves and would likely welcome legal refinements that could shift scarce agency resources to ensuring their shipping laws are followed. By working with state ABCs to streamline and reduce the cost of administrative oversight, wineries can build momentum for modifying state shipping laws. We could also ensure that the models that are established work both for regulators and the regulated industry.

Most critically, wineries need to stay involved in the policymaking process and understand the arguments for supporting refinement. To get their voices heard, wineries must speak with the strength of their grassroots, a clear voice, and irrefutable logic. As any winery that has been through the last decade knows, this is the only way to ensure that winery policy works better.

by Cary M. Greene, Esq.

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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

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Last year, Washington State relaxed some of its restrictive alcoholic beverage laws as a result of a couple of comprehensive bills that passed the legislature (SB 5834 and HB 2040). The mandatory minimum markups between suppliers and wholesalers and between wholesalers and retailers are now history. Retailers can now pay suppliers using electronic funds transfers if they want to. Price posting (which required beer and wine suppliers and distributors to file their product prices with the state and hold those prices for 30 days) was officially abolished.

Another change in the law that has more significance than it might appear to on the surface is the expansion of the state law’s definition of “Authorized Representative.” First, some definitions are in order: a Certificate of Approval is the Washington license given to a U.S. winery or brewery located outside of Washington that enables it to ship its products to a Washington importer or distributor. An “Authorized Representative” is an entity located outside of Washington but in the U.S. that is appointed by a Certificate of Approval (COA) holder to market and sell the COA holder’s products into the state of Washington through the three-tier system.

Before last July, Washington made it very hard for out of state wineries and breweries to sell their products into Washington through marketing agents, unless they wanted to give over all of their brands to the marketing agent.

That’s because, through a quirk in Washington law whose origins aren’t very clear, there could be only one source (i.e. either one Certificate of Approval license holder, or one Authorized Representative) for an out of state winery or brewery’s products. For example, if you were a winery that produces Brand A and Brand B, and you have been selling your Brand A to a Washington importer, you couldn’t appoint an Authorized Representative to market and sell your Brand B in Washington.

That all changed on July 26, 2009. As part of the “omnibus bill” and other sweeping legislative changes that took place last year in Washington, the definition of Authorized Representative was amended to remove the exclusivity portion that had been so problematic. As a result of the change to RCW 66.04.010(2), a Certificate of Approval holder can now divide up its brands, selling some itself and using one or more Authorized Representatives to market and sell different ones, if it wants. The state does require the producer to have written agreements with each of its Authorized Representatives, and there can be only one Authorized Representative per brand, but even with these restrictions, this one seemingly minor change in the law gives producers a lot more control and flexibility over how they market their products in Washington.

-Sara Mann, Beverage Industry Attorney

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On January 26th, the Fifth Circuit Court of Appeals ended the puzzling status of interstate retailing in Texas created by the lower court’s decision in Siesta Village Market. The district court had ruled that out-of-state retailers had a Commerce Clause right to sell wine to Texas consumers, but only wine that had been purchased from a Texas-licensed wholesaler.

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

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Justified jubilation greeted the 14 January 2010 decision of the United States Court of Appeals for the First Circuit, which affirmed the federal district court decision of 19 November 2008 in Family Winemakers of California v. Jenkins, invalidating the Massachusetts “volume cap.” (see previous post “Huge win for wineries, but can I ship to Massachusetts now?” )

Oddly enough, the appellate ruling may be more important outside Massachusetts than within. There are two reasons, one quite straightforward, the other less so.

The simple reason is that the First Circuit decision merely leaves things within the state as they have been since 18 December 2008, when Judge Zobel enjoined application of the state’s maximum volume requirement to “small winery” shipping licenses, which are necessary for sales directly to consumers. Since that order, wineries of all sizes, with and without Massachusetts wholesalers[1], have been eligible for the license. Nevertheless, the state is not practically open to direct shipment, because the major interstate carriers find the delivery vehicle licensing requirement too burdensome and wineries have no reliable way to know whether an order would be the 27^th case of direct shipment wine purchased in the year by that consumer, putting the shipper in violation of a 240-liter limit. (Those obstacles, which were not involved in Family Winemakers, are described in a previous post “Why can’t I have a Boston wine party?”)

A more subtle reason is that the First Circuit has articulated an analysis, arguably even more favorable to trade than the decision it affirmed, that may prove persuasive in other circuits with challenges to volume caps and to other so-called facially neutral features that operate to the detriment of interstate trade. That aspect of the decision is well worth a closer look –though it does require striding into a bit of a legal thicket.

Which Yardstick?

Stripped to essentials, Family Winemakers is about choosing the proper test for determining the constitutionality of a state law that burdens interstate commerce in wine.

Before getting into the technicalities of constitutional tests, a little context may be helpful: As the readers of these blogs know, state laws that disadvantage interstate trade raise issues under the Commerce Clause of the federal constitution, which gives Congress power to legislate regarding commerce among the states. In subject areas, like wine distribution, where Congress has not enacted legislation that serves as a comprehensive regulatory scheme, states have some room for regulation, even if it affects interstate trade to a degree. However, the fact that interstate commerce is within Congress’s power to regulate means that in subject matter where it has not acted (where, in other words, its regulatory power is “dormant”) certain unwritten principles inherent in the Commerce Clause nevertheless limit state regulatory power. State laws that exceed those limits are said to offend the “dormant Commerce Clause.” As a leading case puts it, “The modern law of what has come to be called the dormant Commerce Clause is driven by concern about economic protectionism –that is, regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors.”

In Granholm, the Supreme Court famously invalidated Michigan and New York laws for violating the dormant Commerce Clause by reserving direct shipment privileges for home state wineries. Family Winemakers is one of the most promising among many lawsuits attempting to discern the core message of Granholm and apply it to different facts.

Why Granholm Doesn’t Provide All the Answers

Granholm dealt with laws whose “object and design” to discriminate against out-of-state wineries was “evident” from their text and which in fact did discriminate. The Court considered how the presence of those factors —intent to discriminate and effect of discriminating— affected the answers to two distinct questions.

The first question concerned the 21st Amendment and certain federal legislation, which, taken together, affirmed the right of states to regulate wine from outside the state as fully as wine produced in the state and declared it illegal to ship wine into a state in contravention of “any” its laws. Does that broad language, the Court asked, permit the states intentionally to discriminate against interstate commerce (as a literal reading might suggest)? After an extensive and somewhat controversial historical analysis of the federal statutes and the constitutional amendment, the Court answered “no,” concluding that the dormant Commerce Clause subjects alcoholic beverage regulation to the same tests of constitutionality as apply to laws governing other goods.

The second question was what test would apply. In Granholm’s analysis, the choice between the two relevant tests was obvious. As stated in a leading case:

[W]here simple economic protectionism is effected by state legislation, a virtually per se rule of invalidity has been erected . . . . But where other legislative objectives are credibly advanced and there is no patent discrimination against interstate trade, the Court has adopted a much more flexible approach . . . .

Having caught the two states before it red-handed at economic protectionism, the Court had no trouble applying the strict test, which invalidates a law unless the state clearly demonstrates with “concrete” evidence that it is necessary for an essential state purpose and there is no workable less-discriminatory means of achieving the purpose. Neither defendant state even came close to meeting that standard, with the result we all know.

So, great: No 21st Amendment immunity and a flunked dormant Commerce Clause test; commerce wins, grapes are freed. But what if the law in question were not overtly discriminatory? What if it treated all wineries alike and only incidentally burdened interstate commerce? Would it then receive the “more flexible approach?”

Pretty Faces

On its face, the law invalidated in Family Winemakers took no account of whether a winery were in-state or out-of-state. It was, in the phrase popular with its proponents, “facially neutral” as between local and interstate sellers.

Defenders of volume caps and on-site requirements argue that facial neutrality has two profound effects: For alcoholic beverages, it invokes 21st Amendment immunity from dormant Commerce Clause challenge, which was repudiated in Granholm for facially discriminatory laws; and, even if there were no immunity, it would require application of the “more flexible” test of constitutionality, under which a statute will be upheld unless the burden imposed on interstate commerce is “clearly excessive” in relation to the claimed local benefits, rather than the strict necessity test Granholm applied to facially discriminatory laws. Neither argument survived the First Circuit’s treatment of Family Winemakers.

Not a Vaccine

The district court judge had dismissed the immunity argument summarily, citing a passage in Granholm that actually refers to an extraterritoriality case in which the Court did not expressly reject immunity, but rather spoke of the need to “reconcile the interests protected by the two constitutional provisions” (i.e., the 21st Amendment and the Commerce Clause), and two post-Granholm decisions in other circuits that did not deal explicitly with the immunity issue at all. While her no-immunity conclusion seems sound, the opinion left room to argue that the lower court did not fully deal with the facial neutrality immunity argument.

The appellate opinion takes a different tack. First, the Court of Appeals articulates a more specific repudiation of a 21st Amendment immunity defense for all facially neutral laws, formulating a useful test: Even though the statute is “neutral on its face,” if its effect is to “change the competitive balance” between in-state and out-of-state wineries in a way that benefits local wineries and “significantly burdens” their out-of-state competitors, the result is the same as for facially discriminatory statutes in Granholm –no 21st Amendment immunity.

In reaching that conclusion, the First Circuit somewhat surprisingly begins by distinguishing[2] Granholm. That is, after admitting that Granholm dealt only with facially discriminatory statutes, the court set forth on its own to decide whether the 21st Amendment provided Massachusetts with immunity from dormant Commerce Clause challenge to a discriminatory statute everyone agreed was facially neutral. It nonetheless took guidance from Granholm in viewing the question as resolvable by historical context and in reading the 21st Amendment as preserving only the pre-Prohibition regulatory power Congress allows states under the Wilson Act and the Webb-Kenyon Act –i.e., the right to regulate out-of-state wine on the same basis as in-state wine, but not to discriminate against the former in favor of the latter.

By engaging in relatively extensive history-grounded analysis, the First Circuit has provided sound support for the proposition that Granholm’s no-immunity ruling applies to all discriminatory measures, whether overtly protectionist or facially neutral. Courts adjudicating laws that burden interstate commerce relative to local have in Family Winemakers well-expounded judicial authority for ignoring putative 21st Amendment immunity. On the other hand, extension of Granholm to different scenarios, no matter how persuasively reasoned, cannot forestall further argument over the “narrow Granholm” approach advanced by states and wholesalers, which would preserve pre-2005 law for every situation that does not exactly match Granholm’s facts.

Question and Answer

If immunity is out of the picture, the primary issue becomes how to test a statute under the dormant Commerce Clause –i.e., what questions should a court ask to determine whether a statute will be upheld or struck down? Family Winemakers follows prevailing Commerce Clause jurisprudence in recognizing the two possibilities noted above, a strict “per se” test requiring proven necessity or a more flexible balancing test.

The states and wholesalers argue that facial neutrality would, at least in the absence of proven intentional protectionism, automatically require the more flexible approach, known as the Pike test after the shortened name of the case that first formulated it[3]. However, the Pike test as developed in case law is not invoked by superficial characteristics.

As enunciated in Granholm and its progeny, the Pike test requires a two-stage inquiry. First, a court asks two questions: Does the challenged state law regulate “even-handedly” as between interstate commerce and local commerce? Is whatever burden it places on the former an “indirect” consequence of its pursuit of a legitimate local interest? Only if the answer is “yes” to both does one apply the balancing test, which asks whether the burden on interstate commerce is “clearly excessive” in relation to the legitimate state purpose. If the answer to that highly subjective third question is “no,” the state law stands. For none of those questions is the answer determined by facial appearance.

In the district court analysis, a law adopted for a protectionist purpose that has the intended effect of favoring in-state commerce relative to interstate cannot meet the even-handed regulation and indirect burden requirements for application of the Pike balancing test, and is thus subject to the strict necessity test employed in Granholm, irrespective of facial neutrality. Judge Zobel went on to buttress her ruling by declaring that that even if the law constituted even-handed regulation with only incidental burdens on interstate sellers, entitling it to application of the Pike test, it would still be invalid because it did not advance any local purpose (other than the illegitimate objective of protectionism). The court’s reasoning seems almost mathematical: As the Pike test preserves a statute only when its adverse impact on interstate commerce is not excessive in comparison to a legitimate local benefit, if its local benefit is zero, any burden is excessive, and Pike won’t save it.

Adding the “but even if” reference to Pike as insurance against reversal for applying the wrong test is de rigueur in the courts and good for the prevailing litigant in the case at hand. The district court approach does not, however, prevent argument that Family Winemakers is “really” a Pike balance decision because the statute’s “facial neutrality” should have averted application of the strict necessity test –i.e., the outcome is a simple failure of the state to make an adequate record of local benefit, correctible in future litigation.

Again, the Court of Appeals opinion has a slightly different slant. The appellate court regards application of the strict necessity test as unquestionable under Granholm when, as in that case, a statute is protectionist in both intent and effect. Probably the most significant aspect of the First Circuit opinion is the means by which it so classifies the Massachusetts law.

Put Away that Smoking Gun

If anything moderated pro-trade celebration of the district court decision in Family Winemakers, it was the concern that the record was so strong on protectionist purpose that the case might not serve as a highly useful precedent for other cases, whose records will mostly be at best ambiguous on legislative intent.

Judge Zobel placed great stress on what is by any standard a sensationally revealing legislative history. Senator Morrissey, who sponsored the legislation, is quoted at length in the district court opinion, but a short bite will serve here to illustrate the tenor: “[W]ith the limitations that we are suggesting in the legislation, we are really still giving an inherent advantage indirectly to the local wineries.” The court was also impressed by the fruit wine exemption, a product of lobbying whose sole purpose appeared to be shielding a large local winery from going over the cap by producing cider.

In the Court of Appeals, proof of protectionist purpose rests on a more broadly applicable base. The finding of discriminatory intent explicitly rests not on the “smoking gun” statements of legislators or lobbyists, which featured so prominently in the district court opinion, but on the appellate court’s reading of the statute itself. Close attention to the text revealed a volume cap at odds with prevailing industry classification of wineries as objectively large or small, or as able or unable to secure wholesaler distribution, as well as with the state’s own size demarcation for license fees. The court was particularly impressed by the facts that ultimately there was no winery size standard at all, given that non-grape wine volume would not be counted and that the fruit wine exemption allowed an over-30,000-gallon Massachusetts winery to enjoy “small” winery benefits. Revealing intent by a combination of textual analysis and reference to objective data should be applicable to other “facially neutral” restraints before other courts, without need for thrilling exposés.

Interestingly, the First Circuit’s discussion of what constitutes evidence of discriminatory intent includes the suggestion that putting forward palpably false claims of permissible purposes is itself evidence that the real purpose is impermissible. It would be charmingly ironic if the states’ and wholesalers’ practice of asserting that discriminatory statutes do not discriminate, were adopted to help small producers, and are indispensible for preventing a parade of horrible consequences resulted in judicial findings of protectionist purpose.

Objective data also underlie the First Circuit’s finding of burdensome effect. The court follows the approach of its petroleum product distribution decision, Exxon, when it says a statute is “plainly” discriminatory if its effect is to cause local goods to constitute a larger share, and goods with an out-of-state source to constitute a smaller share, of the total sales in the market –a demonstrable effect of the statute under consideration.

Once the statute was classified as discriminatory in purpose and effect, it became subject to the strict necessity test, with its “concrete record evidence” requirement, which the state did not attempt to meet. As the appellate court pointed out, the record revealed the opposite of necessity, i.e., the existence of a non-discriminatory means of helping wineries unable to secure wholesaler distribution –passing a direct shipment law based on the NCSL model bill, as he governor had urged– and no reason why that would have been unworkable.

Scaling Cherry Hill

The beneficial ruling from the First Circuit is all the more welcome in light of its earlier opinion in a failed suit challenging Maine’s on-site-only direct consumer sale law, Cherry Hill Vineyard v. Baldacci.

The Baldacci decision can be read in various ways and had been advanced by direct shipment opponents as recognizing a “no direct shipping market” defense to Commerce Clause challenge. In brief, the theory is that if no purchases in the state can be fulfilled by direct shipment, there is no market from which out-of-state wineries could be excluded or in which they could be disadvantaged, and therefore no discrimination. The Family Winemaker defendants claimed it supported the proposition that without “explicit” discrimination, a law would not violate the dormant Commerce Clause, or at worst would be judged under the Pike test.

In Judge Zobel’s view, Baldacci turned on the absence of evidence of indirect discriminatory effects and thus presented no obstacle to her decision in Family Winemakers, in which the plaintiffs had presented effects evidence. However, her argument for distinguishing Baldacci seems to consist of two conflicting lines of reasoning.

According to one branch of her analysis, it is possible to mount a Commerce Clause attack on “leveled down” systems that equally deny direct shipment to in-state and out-of-state wineries, provided the facts show that distant wineries are losing sales to locals because they cannot use the natural means of doing nationwide business, direct shipment. It follows that the result in Baldacci would have been different had the plaintiffs made the factual showing, a proposition consistent with statements in that opinion. Judge Zobel was able to cite extensive evidence of discriminatory effects in the record before her, supporting her decision not to reach the same result as in Baldacci. So far, so good; but judges have a tendency to pile on alternative rationales in distinguishing a difficult precedent.

The second branch of her reasoning explicitly adopts another aspect of Baldacci –that there was no discrimination in the Maine system because no winery was allowed to use direct shipment, while Massachusetts permitted it for wineries below the volume cap.

The “no direct shipping market” theory directly contravenes the district court’s first line of reasoning and is, I believe, fallacious, because the Commerce Clause protects commerce, not means of delivery. A Granholm issue arises if a state favors any local market in a line of goods, even one limited to on-site sales, by directly burdening interstate sellers who are compelled by economics to use a different distribution method. Whether leveling down to all face-to-face sales constitutes discrimination subject to the strict necessity test is a hotly contested question in current Granholm litigation.

The no-local market defense theory arises from Baldacci’s misapplying Exxon, where there was no local market, to a local market in which in-state wineries made on-site sales, protected from out-of-state competition. The First Circuit clarifies Exxon in Family Winemakers:

Exxon held that a law that restricts a market consisting entirely of out-of-state interests is not discriminatory because there is no local market to benefit. Exxon is not apposite where, as here, there is an in-state market and the law operates to its competitive benefit. Massachusetts cannot apply Exxon only to "large" wineries as distinct from "small" wineries; the wine market is a single although differentiated market, and § 19F’s two provisions [the statute in question] operate on that market together.

The First Circuit went on to distinguish its decision in Baldacci (which was submitted for decision on an agreed written fact statement) as dealing with an unsupported challenge:

That case involved a challenge to a Maine law that allowed wineries to sell to consumers only in face-to-face transactions. That challenge failed because plaintiffs did not introduce any evidence that the law benefitted Maine vineyards or harmed out-of-state wineries.

Baldacci only addressed the kind of showing required when a statute is challenged as discriminatory in effect but is concededly non-discriminatory in purpose. We did not address whether a lesser showing might suffice when a law is allegedly discriminatory in both effect and purpose. We do not reach this question because even under the standard in Baldacci, plaintiffs have shown § 19F is discriminatory in effect.

The First Circuit decision encourages examination of what has been regarded as a central tenet of Granholm jurisprudence, the “level field” model. It is a commonplace that protectionist discrimination can be cured by leveling up or down; it other words, that a state can comply with the Commerce Clause by permitting direct shipment for both in-state and out-of-state wineries or by denying it to both. Such a mechanistic approach, however, leads to uncritical acceptance of formalistically even-handed schemes like on-site-only laws, notwithstanding their disparate impact on nearby and distant wineries. Putting facial neutrality in perspective, as occurs in Family Winemakers, should support critical examination of other playing fields that are only superficially level.

You Can’t Have Everything

Welcome as it is, the First Circuit opinion in Family Winemakers does not answer all the questions the case raises. Following sound judicial practice, the court prudently made the most easily defensible ruling on the record before it. The opinion’s principal limitation is that on both 21st Amendment immunity and choice of test under the dormant Commerce Clause it deals with a statute convincingly shown to be effectively and intentionally discriminatory against interstate commerce.

Thus, Family Winemakers throws a spotlight on unsettled post-Granholm issues: What test applies if a state statute is discriminatory in effect but not intent? What if it was intended to discriminate, but fails to do so (assuming anyone has an interest in arguing about it in that instance)? If it is evenhanded, but would flunk the Pike balancing test on proof of the local interest pursued, could it be saved by using a lower standard for liquor? What, if anything, is left after Granholm of the concept that a state can balance “core 21st Amendment interests,” such as temperance, against the Commerce Clause?

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^[1] The law had required wineries producing more than 30,000 gallons annually of grape wine to forego any sales to wholesalers in the state if they sold directly to consumers.

[2] To “distinguish” an earlier case is lawyer jargon for finding a difference in recited facts or some other aspect that could justify reaching a different result in the case at hand.

[3] I don’t have a snappy name for the first alternative, sometimes referred to in this post as the “strict necessity test.” If named after a case it could be the Philadelphia test, the Dean Milk test or the Maine v. Taylor test, etc., but no commonly accepted moniker has developed.

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First Circuit affirms District Court decision

On Thursday, January 14th, the United States Court of Appeals for the First Circuit affirmed the judgment of the District Court in the case of Family Winemakers of California v. Jenkins. The appellatte decision represents a major victory for wineries and may be the end of the case that was originally filed by Family Winemakers of California in September of 2006.

"We’re delighted with the decision on behalf of our members and all wineries across the U.S. We’re also glad that this court put its foot down about discriminatory laws, like production caps, not being able to withstand judicial scrutiny. Now it’s time to change Massachusetts law so that all wineries, not only in California but across the nation that produce more than 30,000 gallons will have an opportunity to fulfill the wine choices of Bay State residents," said Paul Kronenberg, President of Family Winemakers of California.

98% of domestic wine excluded

Massachusetts law allowed “small” wineries that produced less than 30,000 gallons per year to simultaneously ship wines directly to consumers with a “small winery shipping license” and to have their wines sold in traditional distribution through wholesalers. “Large” wineries (wineries that produce more than 30,000 gallons per year) did not have the same choices. They could either completely opt out of the three-tier system and ship wines to Massachusetts consumers with a “large winery shipping license”, or forego direct shipping to have their wines sold at wine retailers, restaurants and bars via traditional distribution.

According to the decision, the 637 wineries that qualified as “large” accounted for 98% of all wine produced in the United States in 2006. Of those 637, the top 30 producers accounted for 92% of the national market. The remaining 2% of U.S. wine production came from 4,713 “small” wineries, and 1,780 of those produced less than one gallon. In 2007, 100% of the 31 Massachusetts wineries produced less than 30,000 gallons per year.

Discrimination against interstate commerce

In November, 2008, the District Court ruled in that Massachusetts law had a discriminatory effect on interstate commerce. On Thursday, the First Circuit affirmed the judgment of the District Court. The decision states in relevant part:

The primary question before us is whether § 19F unconstitutionally discriminates against interstate commerce in light of both the Commerce Clause, Footnote art. I, § 8, cl. 3, and § 2 of the Twenty-first Amendment.

It is clear that § 2 of the Twenty-first Amendment does not protect state alcohol laws that explicitly favor in-state over out-of-state interests from invalidation under the Commerce Clause. Granholm v. Heald, 544 U.S. 460, 489 (2005). But § 19F is neutral on its face; it does not, by its terms, allow only Massachusetts wineries to distribute their wines through a combination of direct shipping, wholesaler distribution, and retail sales. Section 19F instead uses a very particular gallonage cap to confer this benefit upon "small" as opposed to "large" wineries.

We hold that § 19F violates the Commerce Clause because the effect of its particular gallonage cap is to change the competitive balance between in-state and out-of-state wineries in a way that benefits Massachusetts’s wineries and significantly burdens out-of-state competitors. Massachusetts has used its 30,000 gallon grape wine cap to expand the distribution options available to "small" wineries, including all Massachusetts wineries, but not to similarly situated "large" wineries, all of which are outside Massachusetts. The advantages afforded to "small" wineries by these expanded distribution options bear little relation to the market challenges caused by the relative sizes of the wineries. Section 19F’s statutory context, legislative history, and other factors also yield the unavoidable conclusion that this discrimination was purposeful. Nor does § 19F serve any legitimate local purpose that cannot be furthered by a non-discriminatory alternative.

We further hold that the Twenty-first Amendment cannot save § 19F from invalidation under the Commerce Clause. Section 2 of the Twenty-first Amendment does not exempt or otherwise immunize facially neutral but discriminatory state alcohol laws like § 19F from scrutiny under the Commerce Clause. We affirm the grant of injunctive relief.

New legislation needed

As we posted about almost three years ago, the capacity cap was not the only troubling issue with the Massachusetts wine law. The consumer aggregate volume limit provision and, more importantly, the requirement that carriers obtain a permit for each of their delivery trucks have been in some ways just as problematic for wine consumers. After DHL pulled out of the business of delivering wine, FedEx and UPS are by far and away the major two carriers for interstate delivery.

Both FedEx and UPS have chosen to avoid interstate wine shipments to Massachusetts because of the delivery vehicle permit system. This will likely not change following this decision. Technically, Massachusetts is now open to any domestic winery that holds the appropriate permit, regardless of its use of middle-tier distribution. But, without FedEx and UPS, Bay State consumers will still be out of luck for now. New legislation that eliminates the consumer aggregate volume limit and changes the delivery vehicle requirements will likely be necessary to truly open the state for Massachusetts consumers. This decision may just provide the momentum to pass a new wine shipping bill.

We’ll post further analysis from R. Corbin Houchins in the coming days, so please stay tuned. Also, for more background, see our previous posts:

Massachusetts Still Question Mark for 30K-Gallon Wineries

Up and Running (So Far)

A Battle Well-Picked and Well-Fought 

Family Winemakers Court Win is Big for the Industry

Family Winemakers of California Making Headway in Massachusetts

Why Can’t I Have a Boston Wine Party?

“New Vintage” of Wine Litigation

A response to the Family Winemakers lawsuit

Family Winemakers sues Massachusetts over capacity cap

The broader effects of Costco

MA Congress overrides Romney veto, court challenge likely

Romney introduces new bill

Massachusetts Governor vetoes wine bill

Family Winemakers v. Jenkins

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Each January, monthly, semi-annual and annual reporting periods for direct shippers collide for a perfect report storm. This year, for wineries that ship to all available states, 69 different direct shipping and tax reports are due—53% more than the average monthly load.

In 2009, direct shippers were required to submit a total of 722 direct shipping and tax reports, which includes 2 additional annual reports and 34 additional report submissions from new states that opened up this year. With currently available states, the total number of report submissions in 2010 will be 741.

Direct shippers can help ease the increased reporting burden with these steps:

1. Start Early
   Many annual reports require detailed information not always stored with your order data, such as tracking numbers, dates of birth, and label identifiers (TTB IDs/COLA numbers). Gathering that information now and collating with shipments can only help reporting go more smoothly.
2. Store Common Carrier & Tracking Numbers with your Orders
   In particular, Missouri’s Form 12 and Form 40 Direct Shipper Annual Report and Tax Computation require each tracking number to be listed with its respective shipment. Virginia requires the common carrier to be specified for all orders shipped to recipients within the state.
3. Store Label IDs with Product Information
   For example, New York’s semi-annual report due in July and January requires the ‘TTB ID’ from the Certificate of Label Approval (COLA) of each bottle shipped to a consumer in New York.
4. Collect and Store Date of Birth with Shipping Orders
   Wisconsin and Michigan require you to report the DOB of the purchaser and recipient of each shipment into their state. Michigan law states, “The person receiving and accepting the order on behalf of the direct shipper shall record the name, address, date of birth, and telephone number of the person placing the order…”
5. Collect Orders & Submit Reports Electronically
   North Dakota, New York and Wisconsin now require you to submit your summary report and listing of invoices electronically. Other states offer it as a more convenient option than paper filing.

Maine

• Sales and Use Tax Return – Short Form
1. Monthly, quarterly, semi-annual or annual
2. Almost all of the wineries licensed in Maine will be filing the sales tax return for the first time this January (due January 15).
• Combined Table Sparkling and Fortified Wine Tax Report and Schedule
1. This annual report is due January 10

Tennessee

• ALC 102 Wholesale Alcoholic Beverage Return for Direct Shippers of Wine
1. Originally due monthly, Tennessee has now requested an annual file date of January 15
2. Wet areas only
• SLS 450 State and Local Sales and Use Tax Return
1. Monthly, quarterly or annually, due within 20 days of period end

Kansas

• ABC-1040 Special Order Shipping Annual Gallonage Tax Return and Sales Report
1. Due annually, within 15 days of period end
• LE-3 Liquor Enforcement Tax Return
1. If you are licensed in Kansas, you have likely already submitted the monthly Enforcement tax return.

New York

• A new policy (in effect July 2009) allows approved wineries to file the MT-40 annually instead of monthly

Wisconsin

• This October, Wisconsin began requiring local taxes to be paid when filing the ST-12

Contact ShipCompliant to learn how you can reduce your compliance burden by over 90% even while the total number of reports due to increase.

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On November 19, Terri Beirne, Wine Institute’s Eastern Counsel, met with the Virginia ABC Board, their Director, and representatives of Wine America and the Virginia wineries to continue discussions about the July Circular Letter 09-05 prohibiting direct shippers from using any third party service providers. Despite earlier indications, the Board has no plans to issue additional circulars on this issue. They suggested that a statutory change is essential to reinstate use of pick and pack/fulfillment warehouse and other third party service providers by Virginia licensees. They also offered to work with industry to craft legislation for the 2010 Virginia General Assembly Session which starts on 1/13/10 and concludes on 3/13/10.

However, the VA ABC offered two interim solutions for Wine Institute members until the law can be changed. Nothing in Virginia law currently prevents direct shipper licensees from obtaining two (2) direct shipper licenses with two different addresses, even though a second location is not owned or controlled by the licensee. Therefore, if a winery sends wine from BOTH their tasting room and a fulfillment warehouse, it can keep a current direct shipper license intact and secure a second one with the address of their fulfillment facility, from where wine can also be shipped. The Virginia direct shipper license application fee is $65 and the annual license fee is $65. Separate tax payments and reports associated with each licenses would have to be filed.

Additionally, if the winery sends ALL wine shipments into Virginia from a pick and pack warehouse with NO shipments originating in their tasting room, the winery’s Virginia direct shippers license could be changed to list the address of the warehouse from which ALL wine will be shipped. Wineries may make such an amendment to a current license by sending a letter on winery letterhead explaining the reason for the change and including the old and new addresses to Dallas “Burnie” Gaskill, VA ABC Licensing Technician at P.O. Box 1597, Spotsylvania, VA 22553-1597. Burnie can be reached by phone at (540) 538-7838 or e-mail at dallas.gaskill@abc.virginia.gov with questions. Such letter MUST include a copy of the state license issued to the warehouse making shipments on the winery’s behalf. The letter must also contain an e-mail address for the winery, where the amended license will be sent in an electronic format.

Members can contact Annie Bones at abones@wineinstitute.org or at (415) 356-7530 with additional questions. Terri would also be pleased to talk more about this situation and can be reached at (804) 301-5505 or tbeirne@wineinstitute.org.

-Terri Cofer Beirne, Eastern Counsel, Wine Institute

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