Topic:
CONSUMER PROTECTION; MAIL-ORDER INDUSTRIES; LIQUOR; SUPREME COURT DECISIONS; ECONOMIC DEVELOPMENT; RETAIL TRADE;
Location:
LIQUOR;

OLR Research Report


Direct Shipment of Wine to Consumers

You asked for an analysis of Granholm v. Heald concerning the direct shipment of wine to consumers by producers and its impact on Connecticut wineries and consumers.

SUMMARY

The U.S. Supreme Court recently ruled on a challenge to state regulatory schemes in Michigan and New York brought by small wineries (Granholm v. Heald (544 U.S.___(2005), Nos. 03-1116, 03-1120, and 03-1274, May 16, 2005). The Court heard oral arguments on December 7, 2004 on the following question: “Does a State's regulatory scheme that permits in-state wineries directly to ship alcohol to consumers but restricts the ability of out-of-state wineries to do so violate the dormant Commerce Clause in light of 2 of the 21st Amendment?” In general, the Commerce Clause prohibits states from adopting laws that benefit in-state economic interests to the detriment of out-of-state interests. In similar broad terms, 2 of the 21st Amendment forbids transporting or importing liquor into a state in violation of its laws.

In Michigan, the wineries successfully argued that the regulatory scheme violates the Commerce Clause. In New York, the State of New York successfully argued that the 21st Amendment gave it the authority to establish the regulatory scheme.

The Supreme Court held, in a 5 to 4 decision, that laws banning or severely restricting the ability of out-of-state shippers to ship wine directly to consumers while allowing in-state wineries to do so violate the Commerce Clause. The Court's opinion stressed that, if states choose to allow the direct shipment of wine to consumers, they must do so on even-handed terms.

The Court determined that laws of both states discriminated against out-of-state wineries in violation of the Commerce Clause. Having made the determination, it considered whether the laws were justified because there is no other way to achieve the states' goals of preventing deliveries to minors and ensuring that state taxes are collected. It found that the states could meet their goals by requiring an adult's signature as a condition of delivery and requiring the out-of-state winery to obtain a liquor permit.

The decision apparently does not affect Connecticut's law. The Liquor Control Act does not prohibit out-of-state wineries from shipping directly to Connecticut consumers and it prohibits in-state wineries from shipping directly to Connecticut consumers. The requirements the state places on out-of-state shippers are the same as, or similar to, the requirements suggested in the Court's opinion. Connecticut requires liquor packages shipped into the state to bear a label stating their contents. It requires the delivery company to obtain the signature of an adult or someone legally authorized to accept delivery. It requires the excise and sales taxes to be paid on these shipments. It differs from the suggestions in the opinion in that Connecticut's law places the burden of paying the tax on the consumer and the Court suggested placing the burden on the out-of-state shipper.

If the legislature decides that it the law should be changed to make certain that it meets the Court's requirement that the law be even-handed, the legislature may: (1) allow both in-state and out-of-state wineries ship to Connecticut consumers under the same conditions and up to the same limits, (2) require both to obtain a liquor permit and pay the state's excise and sales taxes, (3) require both to ship using companies holding a liquor permit, and (4) establish administrative penalties for a delivery company that fails to obtain an adult's signature when delivering wine.

GRANHOLM V. HEALD

Facts

Michigan and New York both establish regulatory systems that generally require liquor to be distributed through a three-tier system: producers, wholesalers, and retailers. The court noted that it has previously held that states can require this system while exercising their authority under the 21st Amendment.

Both states create exceptions to the system for in-state wineries. In both, in-state wineries can obtain licenses that allow them to ship directly to consumers. In both, out-of-state wineries cannot ship directly to consumers.

The discriminatory treatment towards out-of-state wineries limits the direct sale of wine to consumers. Even so, national consumer spending on direct shipment of wine, the court noted, has increased to $500 million per year, or 3% of all wine sales. Simultaneously, the number of small wineries has increased to approximately 3,000 and the number of wholesalers declined from 1,600 in 1984 to 600. This means that many small wineries do not produce enough wine to make it economical for wholesalers to carry their products. These wineries rely on direct shipment.

Approximately 26 states allow direct shipment. Thirteen of these have “reciprocity laws,” which allow direct shipment only if the shipper's state has a reciprocity law that allows direct shipment on the same terms. In many states, there are laws that prohibit or severely restrict direct shipping.

Domaine Alfred, a California winery and one of the plaintiffs, produces 3,000 cases per year and has had requests to ship directly to Michigan consumers. Michigan law does not allow this and, if it could find a wholesaler to distribute it, the wholesaler's markup would increase costs too much. Michigan requires most producers to distribute through the three-tier system, but creates an exception for its approximately 40 in-state wineries. These wineries can obtain a license allowing them to ship directly to consumers.

Swedenburg and Lucas, two of the plaintiffs in the New York case, operate small wineries in Virginia. They are unable to fill orders from New York, the nation's second largest wine market, due to New York's law. New York similarly requires most producers to distribute through the three-tier system. But wineries that produce wine only from New York grapes can obtain a license allowing them to ship directly to in-state consumers.

Procedural History

Several Michigan residents sued state officials seeking the ability to order wine directly from out-of-state wineries. Domaine Alfred joined the suit. The state defended its law by stating that it is a valid exercise of Michigan's power under 2 of the 21st Amendment. The state won in district court, but the Sixth Circuit Court reversed, holding that (1) the 21st Amendment does not immunize all state liquor laws from the Commerce Clause and (2) the state failed to show that it could not meet its policy objectives through nondiscriminatory means (Heald v. Engler, 342 F. 3d 517 (2003)).

Swedenburg and Lucas, joined by three New York customers, sued seeking a declaration that New York's limit on direct shipment violates the Commerce Clause. The plaintiffs won in district court, which found that the state did not show that its ban on direct shipment implicated its core concerns under the 21st Amendment. The Second Circuit Court reversed because it determined that the state's desire to ensure accountability through presence is aimed at its regulatory interests tied to importation of alcohol for consumption in New York (Swedenburg v. Kelly, 358 F. 3d 223(2004)).

Questions Presented to the Supreme Court

The Court joined the cases and agreed to hear them to decide whether a state's regulatory scheme that allows in-state wineries to ship directly to consumers but restricts the ability of out-of-state wineries to do so violates the Commerce Clause in light of 2 of the 21st Amendment.

Supreme Court's Holding

The Supreme Court held that a state may not ban, or severely restrict, the direct shipment of wine by out-of-state wineries to consumers while simultaneously allowing it by in-state wineries. It stated that if a state chooses to allow direct shipment of wine to consumers, it must do so on an even-handed basis.

Supreme Court's Reasoning

The Court stated that the discriminatory character of the Michigan system is obvious. In-state wineries may ship directly to consumers and out-of-state wineries may not. By requiring wine from an out-of-state winery to go through two tiers of the liquor industry, the law increases an out-of-state shipper's overhead and the cost of its wine to Michigan consumers. New York's system does not ban direct shipments to consumers, but instead requires out-of-state shippers to have a physical presence in New York. This is an indirect means, the Court wrote, of subjecting out-of-state wineries, but not local ones, to New York's three-tier system. The Court concluded that New York also discriminates against out-of-state wine shippers.

Both states argued that their systems were legally protected by 2 of the 21st Amendment, which states, “The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.” The Court reviewed a series of cases occurring before Prohibition concerned with interstate liquor deliveries and another series occurring after its repeal. It found that they confirmed the idea that the 21st Amendment does not displace the rule that states may not discriminate in favor of their own liquor producers.

In looking at modern 2 cases, the Court stated that they fall into the following three categories and that the current case falls into the third.

1. State laws that violate other constitutional provisions are not saved by the 21st Amendment.

2. Section 2 does not abrogate the Commerce Clause.

3. State regulation of alcohol is limited by the nondiscrimination principle of the Commerce Clause.

The Court stated that invalidating the Michigan and New York direct shipment laws does not, contrary to the states' contentions, mean that their laws creating the three-tier system are unconstitutional. Instead, state policies are protected if they treat liquor produced out of state in the same way they treat the domestic product.

Having determined that the laws of both states discriminate against out-of-state producers, the Court considered whether the burden imposed on interstate commerce was justified because the state goals could not be achieved with a lesser impact on interstate commerce. Both states claimed that their goals were to (1) keep liquor away from minors and (2) facilitate collection of the state excise tax on liquor. The Court noted that the states did not provide much evidence that minors purchase wine over the Internet. It stated that this was not surprising because (1) minors are less likely to consume wine, as opposed to beer, wine coolers, or hard liquor; (2) minors have more direct ways to acquire liquor, and (3) direct shipping does not give minors “instant gratification.” The Court stated that even if it accepted the states' claim that purchasing over the Internet is a problem, they could have addressed it with less discriminatory steps, such as by requiring an adult's signature on delivery and by requiring packages to bear a label stating the requirement.

The Court also found that protecting state tax revenues was an insufficient justification for the discrimination against out-of-state producers. A state that allows direct shipping to consumers has the potential to receive more tax revenue. By requiring a permit as a condition of direct shipping to consumers, a state can collect tax revenue directly from the shipper as it does from in-state wineries.

RELATIONSHIP BETWEEN THE DECISION AND STATE LAW

The Supreme Court considered laws in two states that ban or severely restrict the direct shipment of wine to consumers. Connecticut's Liquor Control Act does not ban the direct shipment of wine by out-of-state wineries to Connecticut consumers. Instead, it:

1. allows consumers to order wine from out-of-state wineries and import it into the state without being physically present at the shipper's place of business (CGS 30-77(a)),

2. requires that shipments made directly to Connecticut consumers be made by transport companies holding state liquor permits (CGS 30-19f),

3. requires shipped liquor packages to be labeled with their contents (CGS 30-93a), and

4. requires delivery companies to obtain the signature of an adult or someone legally authorized to accept delivery (CGS 30-93a).

Connecticut law does not directly limit the amount of wine that an out-of-state shipper may ship to a Connecticut consumer. Instead, the Alcoholic Beverages Tax law limits the amount an individual may import to up to five gallons in a 60-day period from anywhere within the United States (CGS 12-436(b)(2)(B)). The law also requires consumers to obtain prior approval from the Department of Revenue Services (DRS) and pay the excise and sales taxes before importing any liquor. The process is described in DRS Informational Bulletin IP 2000-15 (Copy included). About 300 consumers per year import liquor this way and pay the taxes, according to DRS.

Concerning in-state wineries, the law does not clearly authorize or prohibit the shipment of wine directly to consumers in Connecticut. The law allows the holder of a farm winery permit to sell or deliver its wine or brandy products to “persons outside the state” (CGS 30-16(e)). The law is silent on shipments to in-state consumers. Jack Suchy, Director of the Division of Liquor Control within the Department of Consumer Protection, stated that the division allows shipments to consumers outside of Connecticut but prohibits them to consumers within the state.

Because of these significant differences between Connecticut's regulatory scheme and those of Michigan and New York—such as the fact that Connecticut allows out-of-state shippers to ship directly to Connecticut consumers while prohibiting in-state producers from doing the same—one could reasonably conclude that the decision does not invalidate any state law.

CONFORMING STATE LAW TO THE OPINION

The opinion also stated that states that choose to allow the direct shipment of wine to consumers must do so on even-handed terms. Because the current system apparently gives an advantage to out-of-state wineries over in-state wineries, the legislature may choose to follow the Court's guidance. Further, if the decision generates an increase in frequency and amount of wine shipped directly to consumers, the legislature may wish to strengthen the current signature and labeling laws.

Ability to Ship to Connecticut Consumers

The law permits out-of-state wine producers to ship to Connecticut residents. The legislature may wish to amend the terms of the manufacturer permit for a farm winery to also allow in-state wineries to ship to Connecticut residents (CGS 30-16(e)).

Permit Requirements

The law requires in-state wineries to obtain a liquor permit. It does not require out-of-state wineries to obtain a permit unless they sell to Connecticut wholesalers. The court, when addressing the states' concerns about sales to minors and tax collection, suggested that the states could require out-of-state wineries to obtain a liquor permit as a condition of allowing them to ship directly. The legislature may wish to amend the law requiring these businesses to obtain a liquor permit (CGS 30-18 and 30-18a).

Import Limits

The law does not directly limit the amount that an out-of-state winery may ship to Connecticut residents, but it does limit the amount an individual may import in a 60-day period (CGS 12-436). The legislature may wish to place the limit on the shipper in addition to the consumer. If it does so, the decision indicates that the limit should be the same for both in-state and out-of-state shippers.

Tax Collection

Connecticut law requires consumers to pay the excise and sales taxes before importing any liquor (CGS 12-436). The Court, when addressing the states' tax collection concerns, suggested that states could require the out-of-state shippers to pay the excise tax. Connecticut's wineries pay the excise tax to DRS. The legislature may wish to require out-of-state wineries to pay the excise and sales taxes in the same way that in-state wineries pay them.

Signature and Labeling

Connecticut law establishes a criminal penalty of up to $1,000, one year imprisonment, or both, for each offense of shipping a package into the state containing liquor unless (1) the package bears a label stating its contents and (2) delivery is made contingent on obtaining the signature of an individual who is at least 21 years old or legally authorized to receive it (CGS 30-93a). The Court stated that a state could achieve its goal of preventing minors from ordering wine over the Internet by requiring the delivery company to obtain an adult's signature and the package to bear a label stating the requirement. The legislature may wish

to amend the law establishing the liquor permit for delivery companies to require the companies to obtain an adult's signature (CGS 30-19f). It may wish to require out-of-state shipper's to put a label stating the signature requirement on the package (CGS 30-18 and 30-18a).

ADDITIONAL RESOURCES

The U.S. Supreme Court decision:

http://a257.g.akamaitech.net/7/257/2422/16may20050800/www.supremecourtus.gov/opinions/04pdf/03-1116.pdf

An OLR report discussing a model direct shipment bill adopted by an NCSL task force: http://www.cga.ct.gov/2004/rpt/2004-R-0944.htm

The Liquor Control Act: http://www.cga.ct.gov/2005/pub/Chap545.htm

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