Direct Shipping Ruling

The
ruling concerns only wine, not beer and spirits,
and throws out as unconstitutional New York and
Michigan’s restrictions on direct wine shipments
from out-of-state if in-state vintners can ship
their wines within and beyond state borders. It
will not open the floodgates and let wineries
immediately start shipping their wines to states
previously closed to direct shipping. While the
court’s ruling sets no specific deadline for
changing the rules, industry observers believe
little time will be wasted and that legislative
battles will begin soon.

The main issue was
whether the 21st Amendment of the Constitution,
which gives states wide latitude to regulate
alcoholic beverages, trumped its Interstate
Commerce Clause when shipping wine is concerned.
The Court’s majority ruled for the latter, but did
not invalidate the three-tier system.

“The court case
was both a victory and a defeat for the industry,”
says Michael Epstein, Vice President/General
Counsel of Horizon Beverage Co. “It was a defeat in
the sense that the status quo was not maintained by
the court. They shot down that dichotomy (of
allowing in-state wineries to ship within the state
but not allowing out-of-state wineries to do the
same). The states couldn’t maintain a dual system.
That was the loss. But the victory was that the
right for a state to maintain a unique system of
alcohol distribution control was explicitly
reaffirmed by the court. That was a victory for
everybody in the industry,” he says, adding “The
Court did recognize the unique nature of alcohol
and did accept the three tier system. States can
maintain it, but not in a way that is
discriminatory.”

The greatest
danger in allowing direct interstate wine
shipments, Epstein says, is what he calls a
“tremendous potential” for minors to obtain alcohol
unlawfully. “The current system we have in place,
with face to face off-premise sales in a licensed
package store, is the most effective way to keep
minors from alcohol. Once sales start going over
the internet you can only hope that it’s as
effective as the system we have now. Alcohol sales
via the internet is inherently a bad thing, and I
think laws that restrict that are in the public
good, whether in Massachusetts or another state. I
don’t think states want unchecked alcohol sales
over the Internet.

“Many argue this
point by saying ‘That’s ridiculous. Kids aren’t
going to buy alcohol on the internet because they
want instant gratification. Kids aren’t going to
buy wine over the internet because they don’t drink
wine. They drink beer or spirits – wine is not the
beverage of choice for a minor’.” The reality,
Epstein claims, is that “Once you open a door it’s
very hard to shut it. Spirits and beer will flow
into the state and it will flow into the hands of
minors. People don’t appreciate the problem. They
see it as just wine coming in. The Court’s decision
is not about wine, it’s about discrimination in the
shipping of out-of-state alcohol
products.”

Although many
proponents of direct shipping see it mainly as a
way to let smaller, low-production wineries enter
more markets, this view may be simplistic, he
contends.

“A consumer who
wants to order wine from a small boutique winery in
California may say ‘I just want to order a bottle
of this delicious Merlot my wife and I had during a
trip out there’. If that’s all it was, they might
be right. But they’re not appreciating the greater
issues beyond that. They’re not thinking about the
exposure that kind of practice might give to minors
to get alcohol. By allowing that wine to come in,
you open up the possibility of alcohol coming in to
someone who isn’t of age and shouldn’t be buying
it. That being the case, why allow a less secure
system to evolve simply to appease some wine
enthusiasts who aren’t able to get limited
production wines?” Epstein says.

He disagrees with
those who charge the primary interest of Horizon
and other wholesalers is to control the entire
market. “With regard to small, boutique wineries,
we’re talking about an insignificant volume for any
wholesaler in this state. Most of these wines
aren’t represented by wholesalers now so it’s not
lost business opportunity. We don’t think the
volume is ever going to be at a level that is
significant enough that we’re talking about a
business protection issue. Nobody’s looking to
attack anyone else’s business.” Epstein comments.
“I don’t see internet wine purchases being a drain
on our business. The two customers would be
consumers of boutique wines and minors. The latter
is business nobody wants. We’d like that to
disappear. The former is such a small drop in the
bucket that it’s not about dollars and
cents.”

“Very few wine
brands have distribution in all 5O states. In many
cases, a wholesaler not only won’t represent you,
but advocates a law making it a felony to ship wine
into that state,” says Jeremy Benson, Executive
Director of Free the Grapes, an organization that
opposes restricting direct wine shipments. The
group is funded by consumers and wineries. Many
smaller wineries want to sell directly to customers
because large wholesalers are not interested in
carrying them, effectively locking them out of the
market, he says, adding “Direct shipping helps
build brands that would not be sold by wholesalers,
anyway.” The assumption is that “many of the wines
(affected by direct shipping laws) are broadly
available across the three tier system. The reality
is that they’re not,” he notes.

“No one’s talking
about getting rid of the three tier system,” Benson
stresses. In California, where direct shipments are
allowed, most wineries choose to sell through the
three tier system even though they are free to sell
directly to consumers, stores and restaurants, he
says. The reason is that wholesalers, with a
trained sales force, know the market and can do a
better job of selling their wines, he explains.
Benson allows that the danger of underage alcohol
purchases is a serious issue that must be
addressed, citing a recent Federal Trade Commission
study that found no evidence of underage purchases
in states that permit direct wine shipping. Also,
he points out that no states allowing direct
shipping have ever repealed such regulations
because underage purchasing was a
problem.

“I don’t think
that’s an endorsement of success,” Epstein says.
“They haven’t even looked at the issue to see
whether there’s a problem. The fact that you don’t
hear about minors getting shipments of alcohol in
other states probably means that no one’s getting
caught. If no one’s getting caught, that means
there are no effective enforcement methods in
place. Can you afford to take that chance? When
we’re talking about minors and alcohol can we be
too protective? Is a little bit of underage
consumption okay? No, it’s not,” he
continues.

What’s more,
Epstein says, the consequences of a minor’s failed
attempt to buy alcohol via the internet are
virtually nonexistent. In fact, in most cases
they’ll even get their money refunded, he notes.
But under the three-tier system, “If a retailer
fails to take adequate precautions he puts his
liquor license at risk. That’s his whole business,
everything he and his family have worked for. That
can all go away if he’s not constantly vigilant
about the sale of alcohol to minors. Also, the
minor risks being arrested and losing their
driver’s license. There are a lot of disincentives
for a minor to try to buy alcohol from a package
store.”

Some observers
suggest underage alcohol purchases could be
minimized or stopped if FedEx, UPS and other
carriers tighten their procedures by always
insisting that recipients provide proof of age.
Epstein contends this would fail. “The problem with
that is that these companies are delivery
companies. Their primary responsibility is
delivering packages, not making sure kids don’t get
alcohol. It is a significant and serious obligation
which our package stores bear very well. But they
are specifically charged with preventing minors
from getting alcohol. I don’t know if I would feel
comfortable entrusting (delivery carriers) with
that obligation.”

A secondary issue
is excise tax revenue, he says. “Our primary role
as a wholesaler is to collect and pay state
beverage excise tax. It’s a very effective system
for the state because there is only a small handful
of wholesalers and it’s easy to keep an eye on
everyone charged with tax collection. There’s
little the state needs to do to collect its money.
It’s natural to assume there’s going to be an
erosion of the amount of state excise taxes
collected from interstate sales. Some people might
pay it, others might not. What are you going to do
if they don’t?”

Addressing this,
the Court maintained that “New York could protect
itself against lost tax revenue by requiring a
permit as a condition of direct shipping. This is
the approach taken by New York for in-state
wineries. The State offers no reason to believe the
system would prove ineffective for out-of-state
wineries.” Michigan requires all outside sellers of
wine to submit monthly sales and tax reports to the
state, the Court noted, adding “If licensing and
self reporting provide adequate safeguards for wine
distributed through the three-tier system, there is
no reason to believe they will not suffice for
direct shipments.”

“By this time next
year I think most states will have modified their
laws or regulations,” says Richard Blau, a partner
with Tampa, Florida, based law firm Holland &
Knight. He heads the company’s Alcohol Beverage
Team. “It’s now up to states to decide if they’re
going to level the playing field by banning
shipments from within and from outside their
states, or take away the benefit in-state wineries
have over out-of-state wineries by banning all
shipments,” he says. The issue of underage buyers
making illegal alcohol purchases is real, he
remarks, adding that it has the potential to
encourage states to cut off all
shipments.

“It’s pretty
unlikely there’s going to be a lot of leveling
down. Early announcements by Michigan officials
that they intend to outlaw all wine shipments drew
a lot of negative reaction from consumers and that
state’s 46 wineries,” says Benson.

“I’m definitely
concerned for a few different reasons,” says Gary
Park, owner of Gary’s Liquors in Chestnut Hill,
when asked his feelings about possible direct wine
sales in Massachusetts. “I’m concerned about how
the state will handle sales to minors” he says.
“There are a lot of small wineries that can’t get
representation here, but there are also a lot of
high end, boutique wineries that could start
selling directly to consumers,” Park says, citing
Harlan Estate, a California winery. “They could
stop selling to Horizon Beverage and that could
hurt me,” he says. “I’m concerned about my high end
customers to whom direct sales would hold appeal.
They may say ‘Gary couldn’t get me this bottle of
wine,’ and buy it on the internet.”

Another thing Park
says he worries about is permit fees paid for
delivery vehicles. “Is FedEx (and other carriers)
going to buy a permit for each of its vehicles? If
not, they’re at an unfair advantage because we have
to buy one for each of ours,” he points out. And,
he wonders, “Will each out of state winery get a
permit from Massachusetts and pay the fees and
taxes on what they sell? Will they be held to the
same conditions as retailers? Direct shipping
sounds like a win for the consumer, but it needs to
be fair to us, also.”

“I don’t see
losing business from direct shipping,” counters
Keith Mills, owner of Esprit du Vin in Milton. “In
general, I’m not happy about it, but I don’t see
how it’s going to have a lot of effect on stores
like mine,” he says. “Nothing takes the place of
going into your local wine store and seeing the
wines. If you just want to buy everything online,
that’s fine. But you don’t have the ability to
taste wines at in-store tastings. My customers like
to come in to talk about wine, share recipes and
opinions, and learn about wine. I’m trying to
empower people,” says Mills.

“Direct shipping
would help us, but I don’t really agree with it
because distributors and small businesses in
Massachusetts will suffer,” says Ed Costa, General
Manager/Managing Partner of Boston’s Vinalia
Restaurant, Lounge and Wine Bar. “I have mixed
feelings. The system we have now works well enough.
Everyone is getting their share now.”