Supreme Court weighs direct wine shipments

The Supreme Court on Tuesday faced one of the thorniest questions about doing business across state borders: Should consumers who can buy wine directly from suppliers in their state be allowed to buy it from other states as well?

Laws prohibiting such sales are unconstitutional and should be upended, lawyers for a coalition of winemakers and consumers told the high court's justices.

At issue are laws in Michigan in New York that allow in-state wineries to ship to state residents, but bar other wineries.  The court heard appeals of cases from both states. Its decision could significantly reshape the way alcohol is sold in the United States.

“A state power over alcohol has ebbed and flowed over the years, but one principle has remained constant: States may regulate alcohol by only one set of rules,” said lawyer Clint Bolick of the Institute for Justice, arguing on behalf of Virginia winemaker Juanita Swedenburg, California winemaker David Lucas and several New York wine drinkers.

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Michigan solicitor general Thomas L. Casey disagreed: “There are substantial differences between policing instate wineries and those out of state.”

Casey echoed arguments made by many state attorneys general, and most of the nation's liquor wholesalers, that a state must have final control to regulate sales of alcohol in order to protect minors and collect taxes.

The court must decide whether the 21st Amendment, which lets states regulate their own sales of alcohol, is more important than a federal doctrine known as the dormant Commerce Clause, which prohibits states from restricting interstate commerce or discriminating against out-of-state businesses.

Both New York and Michigan have growing wine industries, which are permitted to ship orders to state residents. But they prohibit other states' wineries from doing so, a move the wineries consider unfair.

"It's the discrimination that's the critical problem with these statutes," said UCLA law professor Stephen Bainbridge.

The justices offered sharp questions to both sides. Justices Antonin Scalia and David Souter focused in on the discrimination issue, and asked how states enforce liquor laws on their own wineries and might enforce them on other states' wineries.

Three tiers
The 21st Amendment repealed Prohibition in 1933 but left states broad latitude in how they regulate liquor. Since then, a so-called "three tier" system has developed that requires different companies to take the roles of producing, distributing and sales of alcohol. 

At the same time, most wineries have long been able to sell their products directly, a practice greatly enhanced through Internet sales that gained popularity in the mid-1990s.

Tuesday's case hinges in large part on a 1984 court decision, Bacchus Imports v. Dias, which found that state liquor laws allowed under the 21st Amendment were still subject to the Commerce Clause, especially those that favor in-state businesses.

Complicating things are two decisions by federal appeals courts that were rolled up into the current high court case. Judges in the 2nd Circuit ruled in favor of New York state, while 6th Circuit Judges sided with winemakers and wine drinkers.

Both sides said Tuesday they found favor with the court. "The justices got it," said David Sloane, president of WineAmerica, a national trade group for wineries. "They really zeroed in on: Is this stuff really essential to your state?"

Juanita Duggan, CEO of the Wine and Spirits Wholesalers of America, said in a statement: "We certainly believe the court seemed receptive to our view."

Though the current case focuses on a narrow topic, all sides acknowledge that the court's decision will have a larger impact on liquor sales across the nation. 

Most wineries endorse the three-tier system, usually because they need distributors to sell their wine to an enormous network of retailers and restaurants, but they want the right to sell directly as well. They see some states' laws as legal protection for a $32 billion wholesale liquor industry that has wielded enormous power since Prohibition ended.

"The wholesalers are just dug in with both feet and both hands to a role that's been their role for 70 years," said Tom Shelton, president of Joseph Phelps Vineyards in St. Helena, Calif. "But they see the ground slipping below their feet."

Some 23 states effectively ban direct shipments of wine, a number that has shrunk in recent years as wineries have sought to overturn bans.  Most recently, a Texas court ruling last year overturned that state's law.

States worry
Opponents' arguments in this fight are diverse — from underage drinking to tax collection. Thirty-three state attorneys general have sided with liquor wholesalers in fighting against changes to state laws.

Keith Fuller, state supervisor of the Missouri Division of Alcohol and Tobacco Control, acknowledged that the current case would not affect his state's laws, which allow some direct shipments.  But he worries a ruling for wineries would lead to attempts to overturn the three-tier system.

"That may be the next argument," he said. "I don't want to see the three-tier system weakened."

Occasional state and private sting operations have documented loopholes in online alcohol sales, but most studies have concluded that retail sales to minors remains a far greater problem. A National Academies of Science study this year found 10 percent of minors bought alcohol online or through a home delivery, but noted that 40 to 90 percent of retailers had engaged in underage sales. It did not endorse a ban on direct shipping.

Wineries have proposed laws that would toughen delivery practices and require clear labeling and adult signatures for wine shipments, a move endorsed by shipping companies like UPS and FedEx.  Online retailers also want the laws changed, believing the wildly varying state regulations unfairly restrict their business.

Despite a 2000 federal law that allows states to pursue civil sanctions against wineries who violate their laws, some state and local officials worry about their ability to enforce state laws on wineries in other states. "We believe that this is a very real risk," said Ted Deeds of the Law Enforcement Alliance of America.

When asked by the justices Tuesday about checks of in-state wineries' compliance with liquor laws, Casey and New York Solicitor General Caitlin Halligan were hard pressed to describe widespread enforcement.

States also worry about direct sales' impact on lucrative liquor tax revenues. Few studies have considered how much tax is being lost through direct shipping. Some states, like New Hampshire, ask wineries to charge tax to state residents if they sell directly.

Since the Texas laws were overturned, the state estimates it lost about $8,000 due to shipments, but has since increased overall tax revenues for wine sales by over $70,000.

The Supreme Court is expected to issue a ruling next spring.

The Associated Press contributed to this report.