REthink Wine Blog

Much has been written about the benefits of direct shipments to consumers since Granholm opened up many states to legal interstate shipping.  There is much worthy conversation about the growth in consumer shipments, the growing dependence of smaller boutique wineries and specialty retailers on direct to consumer sales in markets otherwise unavailable to them, and the greater margins to be realized by selling directly to the ultimate consumer rather than through the wholesale tier.

Despite this conversation and the current debate over the possible impact of HR 5034 on the future of direct shipments, many wineries remain unsure as to which states they can ship.  Additionally, many other licensees, specifically retailers and importers, are unaware that they are also able to ship to consumers in a number of states.  All of this begs the question…to how many states can you ship?  And what are they?

Winery Direct
The actual number can be a topic of some debate because it can vary depending on your approach.  It also will depend on how you are licensed, as direct-to-consumer reach is greater for wineries than it is for retailers.  Another issue is whether to include only direct-to-consumer states or also states that can be reached through an established 3-tier network.  Some resources like to include any state that has a permit system in place, whether feasible or not, as well as states allowing onsite-only shipments or through consumer-obtained permits. 

Under the broadest approach, a licensed winery can ship to 45 states including all permit and open states, onsite-only states (DE,NJ,OK,RI,SD), consumer permit states (AL,MT), and 3-tier (MA,NJ).  This broad approach has its issues however.  Onsite restrictions and consumer permit systems aren’t workable for online sales.  Even some of the permit states have restrictions that may be problematic from a practical perspective.  

Indiana would be such a state.  The Hoosier state’s permit includes a “face-to-face” requirement, meaning the purchaser must make an initial visit to the winery (ostensibly so that identification can be confirmed) before any future shipments can be made to the consumer under the permit.

The only states completely off limits to direct shipments are AR,KY,MD,MA,MS,PA,UT, which are primarily control or partial control states with no practical permit system in place.  In fact, it’s a FELONY to ship to either KY or MD without a permit, which isn’t generally available in either state.

Practically speaking, consumer direct shipments by wineries are available to 36 states:  AK,AZ,CA,CO,CT,DC,FL,GA,HI,ID,IA,IL,KS,LA,ME,MI,MN,MO,NE,NV,NH,NY,NC,ND,NM, OH,OR,SC,TN,TX,VT,VA,WA,WV,WI,WY.

Retailer Direct
The options for retailers and imported brands are less broad but still available for some very desirable states.  There are as many as 15 states (AK,CA,DC,ID,LA,ND,NE,NH,NM,NV, MO,OR,VA,WV,WY) that permit retailers to ship directly to consumers, either with or without a permit, although with some restrictions.

The 3-Tier Alternative
There is a 3-tier alternative to shipping to consumers, even to some states that do not have direct shipment permit systems.  Through IBG’s Fulfillment Center, we offer a 3-tier network allowing wineries, retailers, and importers to reach up to 23 states, including MA and NJ, which are otherwise unavailable.  Through our network of licensed wholesalers and retailers, licensees can reach consumers in CO,DC,CT,FL,IL,MA,NJ,NY,NC,VA, and WI by shipping within the 3-tier system.   Combined with our partner’s direct shipment capabilities to most of the retailer direct states shown above, fully 23 states are available without the need for the licensee to acquire direct shipment permits.

We all know the wine industry has been hit as hard as any by the tough economic times.  Maximizing potential market access can be a key to growth and continued viability for many wineries and retailers.  The decision to ship to some states is easy because of the size of the market and ease of access.  Others may be more difficult.  Either way, be aware of your options and keep in mind alternative methods are available.  I’ll have more to say on accessing consumer direct markets in future posts.

It looks like the Texas retailer case of Siesta Village Market is headed back to court for a second look.  The plaintiff’s announced they are petitioning for a rehearing of the panel’s decision a few weeks back to refuse to rehear the case en banc before of the entire 5th Circuit Court of Appeals.  The plaintiffs understand it is necessary to exhaust their options before the full Court of Appeals before proceeding to the Supreme Court, should it come to that.  The plaintiffs cited the following in their petition:

“The panel opinion errs in two areas of exceptional importance.  First, the panel opinion contradicts substantive holdings of the Fifth Circuit and the Supreme Court by permitting the State of Texas to discriminate between in-state and out-of-state participants in interstate commerce.  Second, the panel opinion applies an analytical method contrary to the method mandated by both Fifth Circuit and Supreme Court precedent in Commerce Clause cases such as this one.”

This case is tremendously important to opening up Texas to DTC for retailers and imported brands as well as setting precedents for retailer direct in other states.  It is unclear at this point when the petition will be decided and I’ll continue to track.  My guess is, regardless of who wins, if the case is decided by the full 5th Circuit the losing side will appeal.  This one looks to be going the distance.

A few recent developments on the direct shipping front of which you should be aware:

Texas:  The U.S. 5th Circuit Court of Appeals has refused a rehearing en banc of last January’s Siesta Village Market decision by a panel of 5th Circuit judges.  The panel had ruled to uphold the Texas law prohibiting out-of-state retailers from shipping consumer direct to Texas residents.  This means such retailer shipments will remain illegal unless one of two things occurs:

• The case is appealed to the U.S. Supreme Court.  This is certainly a possibility but dependent on the financial wherewithal of the plaintiffs and with no guarantee of success; OR
• The Texas Legislature acts to change the law, which seems unlikely.

Massachusetts:  A bill to allow both instate and out-of-state wineries to ship direct to consumer to Massachusetts residents stalled in committee in the Massachusetts House and has until this week to pass before the current session ends.  HB 4497 is based on the Model Direct Shipping Bill and features the usual permit, age verification and volume limits requirements.  It does not appear to include retailer direct shipments.

Virginia:  The state ABC has resolved an issue that has prevented wineries & retailers from using 3rd party fulfillment services when shipping direct to Virginia residents.  The ABC created a direct to consumer permit specifically for such services.  The cost of the permit is $120.  This can be considered both good and bad news at the same time.

• It’s good that they resolved the issue in a manner that helps everyone:  consumers, wineries and fulfillment services because there was much confusion after the ABC issued a ruling last year preventing such shipments, so this clarifies the situation in a high wine consumption state.
• It’s bad because it sets an unfortunate precedent for other states to copy.  In most states, fulfillment services can ship direct to consumers as a service for their licensed winery customers without any permit requirements.  Now, other cash starved states could possibly look at this permit model and emulate it, adding an additional expense to consumer direct shipments.

Until next time.

If anyone doubts the opposition to direct consumer access to interstate wine shipments is largely about money, they need look no farther than the recent rejection of a direct consumer access bill by the Delaware House Economic Development and Commerce Committee.  In a 5-3 vote the committee decided not to allow the bill to be considered by the entire House.  You can read about it here in an article by the Associated Press on BusinessWeek.com.

The usual concerns of access to minors and collection of taxes were foisted up by opponents of the bill, but the real opposition was centered on concerns by wholesalers and retailers of revenue lost to out-of-state wineries from consumers seeking to purchase wines that the wholesalers and retailers likely don’t carry in their own inventories anyway.

Of particular interest were comments by the Teamsters union representative, who said direct shipments would hurt drivers and warehousemen who work in Delaware’s three-tier distribution system.  Not stopping there, he further suggested that instead of making consumer access to wine easier for Delaware residents, the state should follow the Maryland example and make such access to an otherwise legal product a felony.  It doesn’t appear his primary concern was minor’s gaining access to wine shipments.

It’s interesting that Maryland should be brought into the conversation, since a bill introduced in their own legislature recently failed to get out of committee as well, held back by the powerful committee chairperson, who also happened to be a political ally of the Maryland wholesale tier.

Finally, the director of the Division of Alcohol and Tobacco Enforcement commented on the difficulty of enforcement, despite acknowledging that the paper trail created by the bill would make it easier to investigate illegal shipments.

I’ll be the first to say I’ve never been to Delaware.  I don’t know first-hand the situation in that state.  But if I had to guess based on experience, the issues identified by opponents as making direct shipments to consumers a dangerous proposition are not substantially different than those in the 37 states that presently allow such shipments.  Why they can manage direct shipment programs and Delaware or Maryland cannot defy an answer, except money and politics.

Now that a bill, H.R. 5034, has been introduced in Congress to stop the continued “deregulation” of the wine industry, it’s interesting to look at the game of semantics that is being played by the bill’s supporters in Congress and the wine industry. See So-Called Alcohol Deregulation Bill Introduced in Congress from Wine Business.com.  Most interesting is the use of the word “deregulation” itself. 

The very definition of deregulation indicates “the reduction or elimination of government power in a particular industry,” (Source:  Dictionary.com).  The idea is that what once was governed, limited, and restrained by regulations is now without restriction, free to operate in any manner the industry deems appropriate and most profitable, regardless of consequences good or bad.  One could create a picture of a Wild West free-for-all, with bad guys and good guys fighting it out in the streets at the risk of the community.

This “deregulation” impetus in the wine industry is often associated with the 2005 Supreme Court decision in Granholm v. Heald.  As most in the industry now know, Granholm held that while the 21st Amendment granted considerable authority to states to regulate and control the manufacture, sale and distribution of alcohol within their borders, the states could only do so within the confines of the Commerce Clause and its opposite by implication, the dormant Commerce Clause.  Since Congress is granted the ultimate authority over interstate commerce by the Constitution states may not create laws, even under the great authority offered by the 21st Amendment, that burden or restrict such commerce between the states.

Granholm’s Result 

Granholm created an elegant interweaving of Commerce Clause jurisprudence and 21st Amendment prerogatives.  It conceded the states’ near complete authority granted by the 21st Amendment as sublimated only to the absolute authority granted to Congress by the Commerce Clause.  To do otherwise would have undermined the authority over interstate commerce held by Congress, creating an exception that would also implicate the Supremacy Clause, as state authority would be considered supreme to that of the federal government in the area of alcohol regulation.

In reaching its decision, the Granholm Court did not throw out the baby with the bathwater.  It did not simply say that all state alcoholic beverage laws and regulations are invalid or suspect.  It did not call for the “deregulation” of anything.  It did not wipe out state regulatory schemes but rather required them to be rewritten in such a way as to not discriminate against out-of-state interests.  It upheld the states’ general grant of authority under the 21st Amendment.  Drawing from years of previous Commerce Clause precedent, the Court crafted a test to determine if such discrimination existed and, if so, whether the discrimination served a legitimate local purpose and that no other non-discriminatory means were available that could achieve that purpose.  This is hardly the underpinnings of “deregulation”.

The real result of Granholm is not “deregulation”, but rather “reregulation”, and this is where the game of semantics is played.  The bill’s proponents and industry allies would like to paint that picture of a Wild West free-for-all to the public.  They seek to benefit from the idea that state control is thrown out the window; that anyone and everyone can buy alcohol on any street corner or through the internet; that states are losing tax revenue because of illegal wine shipments to their residents that are outside the 3-tier system.

State “Reregulation” 

The reality for most states is that their legislatures went back to the drawing board after Granholm and created new regulations that either permitted or denied access to direct shipments of wine to their residents in a way that did not discriminate between instate and out-of-state interests.  They passed meaningful and rather sophisticated laws and rules to regulate the direct shipments coming into their states.  They required permits, fees, and taxes and put in place defined requirements to ensure wine did not fall into the hands of minors.  Additionally, they created new regulations for common carriers as another layer of protection against deliveries to minors.  Quite simply, they “reregulated” the industry under their authority to do so granted by the 21st Amendment.

Regardless of where you stand on the issue of direct shipments of wine between the states…good, bad, or indifferent; make no mistake that alcoholic beverages continue to be a highly regulated industry and that the states hold considerable authority to determine the manner in which they are manufactured, sold and distributed within their borders.  The idea of a newly “deregulated” industry as a result of Granholm and its progeny is simply not so.  Instead, it is the product of a clever but inaccurate game of semantics.

Attorney General Martha Coakley of the Commonwealth of Massachusetts, which saw its wine shipping law declared unconstitutional in January, announced she will not appeal the ruling.  The deadline to file an appeal was April 14th.

Now, all eyes are watching the Commonwealth as a new direct wine shipping bill is moving its way through the Legislature.  As currently written, the bill would create a permit allowing out-of-state wineries to ship up to 4 cases of wine per year to an individual.  The permit cost is $100 per year.  The bill would also require permit holders to report monthly on shipments into the state and to pay sales and excise taxes.  The bill could take several months to pass and amendments could change its content, a common practice in the legislative process, so that what the final bill contains is yet to be determined.

The previous Massachusetts law only allowed wineries that produced 30,000 gallons or less and did not have a wholesaler in the state for the previous six months to ship direct to consumers and retailers.  It was found to be unconstitutional by the First Circuit Court of Appeals for its discriminatory practical effect, which prevented more than 90% of out-of-state wineries from shipping to state residents while allowing all Massachusetts wineries to ship in-state. 

IBG will be watching the bill closely as it proceeds through the Legislature and will alert clients as to the determination of its passage.

“Everybody talks about the weather, but nobody does anything about it!”

                                                             — attributed to Mark Twain.

Wine shipping compliance is much the same way, with most wineries grumbling about whether it is worth taking on the hassles compliance can bring.  The question is whether they want to do anything about it.

Much noise is made about compliance issues in the wine business.  There is a tug-of-war in state legislatures debating direct shipment bills about what it means, how it should be accomplished, and in the minds of the opponents of such bills, whether wineries shipping into their state will stay compliant (see the recent battles in Maryland).  There is also a tug-of-war within individual wineries over the allocation of resources in tight economic times and whether attention should (or can) be given to compliance issues.  Compliance is rarely viewed as an opportunity opening doors to new markets and frequently viewed as a barrier to competing within those markets.  It’s considered confusing, time-consuming and boring (even I have to give a nod to that last one).  Until now.

In January we launched an updated version of our REthink Compliance web tool as a service to our IBG eCommerce clients at no addtional charge.  REthink Compliance provides complete consumer direct wine shipment compliance reporting and, as an integrated compliance solution with our REthink Engine technology, sales order compliance checks at the point of transaction.  All with quite literally a few clicks of your mouse.  The website is at www.rethinkcompliance.com and is newly redesigned with an attractive look and more topical information on wine compliance and shipping issues, including updates on changes to state law, agency contacts and resources for acquiring permits and licenses.

• Compliance Reports - Powered by eCompli, REthink Compliance will generate complete, accurate compliance reports using the sales data automatically passed from the REthink Engine directly to REthink Compliance.  No order file uploads required! Just login and view whichever reports you need.  Even reports for periods with zero activity are generated to make staying compliant in every state you ship easy.

• Compliance Checks - The new REthink Compliance also can check orders for compliance status at the point-of-transaction from the REthink Engine.  Check for permit status, volume limitations, dry areas, or prohibited states before you ship to ensure each shipment meets the requirements for each state.

For years I’ve said that compliance is important.  Many of the dramatic changes to direct shipping laws in the five years since Granholm are directly related to whether wineries are willing to follow the rules, report and pay state taxes, and stay compliant.  Doing so convinces non-shipping states to open their borders to direct shipments because it allays their fears of unauthorized shipments and unremitted taxes.  That opens new markets and creates new customer opportunities.  Now, IBG eCommerce clients have a new tool at no additional charge to solve their direct shipment compliance issues:  quickly, inexpensively and with minimal effort. 

Change the “whether” in handling compliance.  Contact your Account Manager to learn how easy it is to set up your account in REthink Compliance.

By issuing a circular on July 22nd requiring Virginia direct shipper licensees to take orders and ship wine only from their own facilities using only their own employees, Virginia ABC fired a warning shot at direct shippers who were not reporting their shipments in a manner compliant with state requirements.  But stay calm, my guess is this rather extreme dictate will soften once reality comes back to the forefront.

Look at the situation.  Virginia’s direct shipment statute requires shipper licensees to ship to consumers using approved common carriers and to report to the ABC the carrier used.  Certainly not unreasonable, since tracking shipments seems a legitimate way to monitor illegal shipments into the Commonwealth.  Many wineries, particularly large ones in California, use third party logistics companies (3PL’s) to stage and fulfill both daily and wine club orders.  They are legitimate businesses providing a service more efficiently than wineries could do it themselves.  Even the recent California ABC advisory made it clear that such businesses operate legally.  While these 3PL’s provide reporting information to their winery clients, I’m guessing that some wineries were not properly reporting carrier information because they didn’t have it in front of them at the time the reports were due and Virginia ABC got tired of trying to follow up to get the information.

There are many legal issues involved, including the real possibility that the Virginia governing statute violates the Commerce Clause.  In Healy v. The Beer Institute (1989) the Supreme Court rejected the “extra-territorial” application of a Connecticut law that had the “effect of controlling commercial activity occurring wholly outside the boundary of the State” in violation of the Commerce Clause.  While certainly not a slam-dunk, you could make an argument that this application of Virginia’s law could be considered unconstitutional on the same grounds.

But aside from the legal considerations, the Virginia rule just doesn’t make good sense.  The obvious problem is that Virginia ABC’s response was to throw out the baby with the bath water.  Requiring all shipper licensees to ship from their own facilities will likely cause many wineries to simply not ship to Virginia.  It doesn’t make economic sense for wineries to change their entire shipping regime or carve out a more expensive exception to accommodate the requirements of one state, even the 9th largest consumption state.  There are no winners here.  Wineries lose customers, Virginia consumers lose access to many wines, and the Commonwealth of Virginia loses tax revenue at a time when most states can use all of the revenue they can get!

My hope and expectation is that Virginia will pull back from the requirements set out in the circular and recognize that wineries using 3PL’s are perfectly legitimate, as well as efficient, ways for wineries to get wine to Virginia consumers.  If not, it’s going to be a long, dry winter in the Commonwealth.  

According to the Tennessee legislative webpage, Governor Phil Bredesen signed SB0166/HB 1155 into law on June 4^th, legalizing direct shipments by wineries to Tennessee consumers.  This is a pretty reasonable direct shipping bill, requiring a $300 fee and $150 annual renewal, payment of excise and sales taxes and the usual adult signature requirements.  The consumer volume limitation is no more than 9-liters per consumer in a month and 27 liters (3 standard cases) per year.  This is a big step forward for consumer direct shipping as it is another state adapting reasonable rules in conformance with successful direct to consumer shipping programs in other states, a trend seen recently in Kansas and hopefully soon, Maine.  I haven’t seen an effective date but will get out the details once I have them.  Still waiting to find out on the status of Maine, which is pending before their governor.

Kansas became the most recent state to adopt sensible, verifiable direct wine shipment when Gov. Sebelius signed a law passed by the Kansas legislature that would permit Kansas residents to purchase up to 12 cases of wine per calendar year from out-of-state wineries who obtain a Special Order shipping license for only $50.  The law takes effect on July 1st.

Of significance the law includes an age verification requirement that will assure that only adults can make a purchase and a tax bond requirement to assure the state that the licensed winery will remit the appropriate taxes.  It is a win-win across the board and is a model of the type of shipping laws states can adopt to allow wineries to sell to customers in their state without undue restraints yet still provide the level of security and accountability desirable to prevent wine from falling into the hands of minors and for the payment of excise and sales taxes.

Age verification is a relatively new wrinkle in the laws being promulgated by states entering the world of direct shipment and I think it is a good idea.  Age verification services now make it possible to efficiently verify a potential purchaser’s age online for a transaction fee of around 40 cents each.  Yes, it creates an extra burden on wineries shipping to the state.  But it also gives assurance to states considering opening themselves to direct shipment and is powerful ammunition against specious arguments that teenagers will be able to order wine online.  As more states adopt age verification requirements it is reasonable to expect these transaction fees to come down as the volume of orders using the systems increase.

It’s all about making wine available in more states and to more consumers who want that access.  Age verification is a tremendous use of technology to accomplish that goal.