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Reds, Whites, And Blue Laws By Max Garrone
Reds, Whites, And Blue Laws
Max Garrone on how to get a boutique zinfandel from California to Texas.
STAND BY THE CASH REGISTER IN ANY small winery in California's Napa and Sonoma Valleys, and you may witness a strange dance between the wine seller and his out-of-state customers. A couple from Texas will pay for a case of wine, then ask to have it shipped to their home address. The law-abiding wine seller will explain that Texas is one of 28 states that make it illegal to ship wine, beer, or liquor directly to a consumer, exposing the winery, the customer, and the shipping company to prosecution. Annoyed or confused, the customer will drive down the road to the next winery—and be relieved yet baffled when his order there is processed without comment.
The choreography for this dance comes from the Twenty-First Amendment, which ended Prohibition but enabled each state to continue to regulate alcohol. The amendment disallowed 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."
Ever since its passage in 1933, the states have interpreted the Twenty-First Amendment as they saw fit. States divide into three categories as regulators of alcohol. California allows alcohol to be distributed relatively freely, as long as makers, distributors, and consumers pay taxes on it. Texas, New York, Florida, and some other states force alcohol suppliers to go through certain wholesalers, giving these buyers the exclusive right to import alcohol over the states' borders in exchange for collecting the states' taxes and enforcing their laws. Then there are a few states—Utah, New Hampshire, and Pennsylvania—that themselves act as wholesaler and retailer to make sure their laws are being followed and their taxes collected.
Not surprisingly, this patchwork of restrictions drives independent wine merchants crazy. Some follow a "Don't ask, don't tell" policy; their standard operating procedure is not to warn out-of-state customers that they may be breaking the law. That strategy makes good business sense: The wine sellers are rarely caught or prosecuted, and they make a lot of money. No one keeps official figures on illegal wine sales, but in California, which produces 93 percent of the nation's wine, it's estimated that illegal wine purchases account for up to $1 billion in sales each year. Still, some wine sellers, like Todd Zucker, president of K&L Wine Merchants in San Francisco and Redwood City, insist that they will not illegally ship to out-of-state customers. Their problem is keeping track of 50 different laws.
These include Texas's byzantine scheme, which allows counties to decide whether they want to remain "dry" while also permitting companies that buy an import license from the state (or ship through a Texas business that has bought the license) to ship wine, beer, and liquor directly to customers. And then there are the reciprocal trade agreements—among California, Washington, Oregon, New Mexico, and nine other states—that allow vineyards in some states to ship legally to others. But Zucker often refuses to ship to reciprocal states as well. "Frankly," says Zucker, "if you read the specifics of the reciprocal agreements, you'd be scratching your head looking for clarity."
The clash here is a basic economic one. The wine merchants want to ship directly to their customers so they can cut out the middleman expense of dealing with wholesalers and a lot of regulatory red tape. The states and the wholesalers, on the other hand, have an enormous financial stake in maintaining the status quo. Alcohol is one of the consumer items that bring in the most tax revenue, which gives each state a strong motive to collect their cut on all the alcohol their citizens purchase. Many states with restrictive shipping laws, including Utah and Florida, have few wineries or microbreweries operating within their own borders, so they don't have strong in-state lobbyists urging them to relax their regulations. What they do have are wholesalers with a big stake in holding on to their virtual monopolies. The buyers and their lobbyists "have a lot of influence, and they exercise their influence to maintain their monopoly," says Steve Simpson of the Institute for Justice, a public-interest group that was involved in the case that overturned New York's ban on direct shipping. "This kind of political patronage dies hard."
The states and the wholesalers have argued since 1933 that the Constitution is on their side. In response, the wine sellers' best argument is that the distribution restrictions clash with the constitutional rule under the Commerce Clause that no state can pass laws that get in the way of interstate commerce. Their opponents retort that the Twenty-First Amendment explicitly trumps that rule, and for good reason. The restrictions are necessary, they say, because without them teen-agers could blithely order alcohol over the phone or the Internet. Alcohol is the "sole product that has its own constitutional provision, a reflection of the unique history of alcohol in this country," said C. Boyden Gray, a former White House counsel and an attorney for the Wine and Spirits Wholesalers of America, in his testimony before the Federal Trade Commission last fall.
But wine lovers and their independent sellers argue that the simplest way to prevent underage drinking is to require an adult to sign for shipments of alcohol, not to ban direct shipping. And in the past two years, a diverse group, often represented by public-interest attorneys, have filed lawsuits against seven states to make direct shipping legal. These cases have a narrow focus. The attorneys filed suit only in those states that allow in-state wineries to direct-ship to customers while banning direct shipments from out-of-state wineries. These policies are clearly meant to "discriminate" against out-of-state wineries, says Tracey Geneso, the legal director for the Coalition for Free Trade. Judges in Texas, North Carolina, and, most recently, New York have ruled against bans on direct shipping. At the same time, courts in Florida, Michigan, and Indiana have upheld similar restrictions. Federal appeals courts will most likely hear four of these cases in 2003. (In 2002, an appellate judge upheld Indiana's ban on direct shipping, and the Florida case was sent back to the trial court.) The split means that the Supreme Court may be inclined to weigh in on some of these cases, which are working their way toward it.
Meanwhile, Congress has attempted to sort out the conflict with two new federal laws. The first, signed by Bill Clinton in 2000, makes it more likely that those who continue to ship wine illegally will be caught. It allows state attorneys general to use the federal courts to prosecute wineries, customers, and shipping companies who violate their states' direct shipping laws. UPS has responded to the new law by warning wineries that it will seize and destroy any illegal shipments.
Last November, President Bush signed a federal law making it legal for anyone who buys wine in person from a winery to have it shipped home. The law was designed primarily to stop airport delays caused by passengers with bottles of wine in their carry-on bags, and it applies only selectively. Under this law passengers are allowed to ship their wine only to states that allow it to be carried into the state in person. This means that residents of 11 states, including Pennsylvania and Utah, will still not be allowed to ship wine to their homes. So the law's effect is piecemeal and unclear.
WHILE THEY WAIT FOR THE LEGAL DUST to settle, some wineries in Napa and Sonoma have developed creative ways to ship their products. Some are perfectly law abiding: The boutique zinfandel specialist Charlie Meeker of Geyserville, Calif., contracts with a Texan winery so that he can ship to members of his wine club there. Others are more questionable. One Sonoma retailer describes a technique popular with his Texas clients: A customer will fly to California on a one-way ticket and drive back to Texas in a Winnebago filled with wine. Other clients ship their wine to an office of their company located in a different state that allows direct shipping, ask an employee there to sign for the case, then swing through to pick up the purchase on their next business trip.
These ploys are mostly used by wealthy collectors, the ones who can afford to travel to a winery in person and purchase expensive vintages by the case. But the majority of illegal shipments are ordered over the phone, by mail, or over the Internet and shipped directly to customers' homes in standard unmarked brown boxes. Some retailers have back rooms full of wine ready to ship to customers across the country.
In court, some states have argued that there's no reason for wine sellers to act like tricksters or outlaws. Lawyers for the State of Texas, for example, pointed out that Charlie Meeker's wine club arrangement showcases their state's embrace of out-of-state wineries. Texas lost its suit. Pennsylvania state stores will accept direct shipments of wine and hold them for customers.
None of this satisfies the independent wineries. They say the law needs to keep pace with two big changes in the marketplace. First, Americans drink a lot more wine now than they did 70 years ago. In 1934, Americans drank 33 million gallons of wine. In 2001, they consumed 563 million gallons. During the same period, the number of domestic wineries more than doubled. Many of these new businesses, including about half of the 847 wineries operating in California, are boutique shops that sell fewer than 5,000 cases of wine annually.
Meanwhile, the number of wholesalers, which distribute 90 percent of the wine, beer, and liquor in the United States, shrank from more than 5,000 in 1950 to less than 400 in 2002. People in the wine industry like to describe the distribution system for wine as an hourglass, with a huge number of wineries on one end, a similarly large number of retailers and consumers on the other, and a slender group of lucky wholesalers in the middle.
Some small wineries don't mind having limited distribution. The owners of Navarro Wines in Philo, Calif., say that they prefer to sell wine through their tasting room and their wine club. Many others would like to sell their wine through a wholesaler, but none will represent them.
The wholesalers argue that they stock plenty of specialty wines from small wineries and are anxious to add many more. It's "simply untrue" that consolidation among wholesalers has pushed smaller wineries off store shelves, says Craig Wolf, the general counsel for the Wine and Spirits Wholesalers of America, a lobbying group for liquor wholesalers; in fact, retail stores today stock more specialty wines than they ever did before.
In his view, the problem isn't too few wholesalers, but too many small wineries competing to stock limited shelf space in local grocery and wine stores. "If you had 10,000 wholesalers," he says, "it wouldn't change the amount of available shelf space."
Still, the wholesalers generally prefer to work with large wineries that can offer them large quantities of wine at bulk-rate discounts. Wholesalers typically represent only the 50 to 100 largest wineries, Bill Nelson, vice president of the American Vintners Association, pointed out in his testimony before the Federal Trade Commission in 2002. "The other 2,600 wineries are effectively shut out of the commercial mainstream," Nelson said. For these smaller wineries, direct shipping may be the only way to stay in business.
THE CHALLENGES FROM WINERIES ON their way to the Supreme Court may run into the conservative doctrine of federalism, one of the most controversial developments of the last few years, which increases the power of states to regulate their own affairs. Three key members of the current court, Chief Justice William Rehnquist and Justices Sandra Day O'Connor and John Paul Stevens, voiced dissent in a ruling on state liquor laws often cited as an example demonstrating that the Commerce Clause trumps the Twenty-First Amendment. In the 1989 case, Healy v. the Beer Institute, the court overturned a Connecticut law requiring out-of-state wholesalers intending to ship beer to Connecticut to keep prices at the same level as in surrounding states.
In his majority opinion, Justice Harry Blackmun wrote that because the states can't interfere with interstate commerce, the Twenty-First Amendment doesn't allow them to restrict alcohol distribution when the "practical effect is to regulate liquor sales in other States." Rehnquist disagreed. Championing the states' right to enforce liquor laws, he argued that the Twenty-First Amendment gives states "virtually complete control over whether to permit importation or sale of liquor, and how to structure the liquor distribution system."
If that thinking prevails and the wineries lose before the Supreme Court the next time, they'll have a choice. They can ignore the state retrictions, treating them as virtually unenforced "blue laws," the still-on-the-books relics that were intended to preserve the Sabbath by making it illegal to, for example, cut hair or trade horses on Sunday. They can try to repeal the Twenty-First Amendment. Or they can work for state-by-state legislative change, as the Wine Institute is doing. A half century ago, no one would have predicted that American wineries would grow into a nearly $20 billion industry, producing vintages to rival those of France and Italy. Their best chance to expand even further may involve convincing the states that they can benefit more by opening their borders than by shutting them down.