REthink Wine Blog

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.

Direct-to-Trade (DTT) is Inertia’s ground-breaking technological solution that allows trade buyers in key states to purchase wine online from participating wineries’ DTT-enabled websites…connecting buyer and seller in a manner never previously possible.  Boutique wineries producing high quality wine are able to reach restaurants and retailers in markets that were otherwise unavailable to them due to an inability to obtain representation in the traditional 3-tier system. 

In most of our active DTT states this can be accomplished through direct distribution, without any intervention by a distributor in the recipient trade buyer’s state.  In a few others, an even more sophisticated channel is employed…”virtual 3-tier”.

Direct Distribution
Just as some states allow winery direct-to-consumer shipments with direct shipper permits, a handful of states allow wineries to ship direct to trade accounts, bypassing the traditional 3-tier system of producer - distributor - retailer.  Currently there are 10 states with such laws: 

• AZ,CT, DC, IL, OH, OR, VT, WA, WY and CA (for CA wineries).  Maryland and Massachusetts also have direct distribution but it is currently impractical for other reasons. 

 

Direct distribution is often available only to small production wineries, as many states have production capacity caps ranging from 20,000 gallons annually and up.  Even with this restriction, direct distribution is a viable alternative for wineries seeking to reach key markets in these states.

Virtual 3-Tier
In a select few states wine may still be shipped direct from a winery to a trade buyer in the state without directly touching a state distributor.  In these states, an order is placed with the winery and the transaction is processed by a wholesale distributor partner in the trade buyer’s state, with the inventory “virtually” passing through the distributor even though it physically moves directly from the winery to the trade buyer.  All invoicing and reporting documentation is the responsibility of the distributor of record in compliance with that state’s law. 

This system is possible because of the language of those state’s “at rest” provisions.  “At Rest” laws require wine to pass through the respective tiers of the 3-tier system before reaching their ultimate customer, the trade buyer.  Most state’s “at rest” provisions require a distributor to actually take physical possession of the wine for some period of time.  However, a few state’s “at rest” provisions do not have such a physical possession requirement.  In these states, such an inventory “pass through” is permissible, effectively allowing the wine to ship directly from the producer to the trade buyer while the documentation of the transaction lawfully passes from the producer to the wholesale distributor partner to the trade buyer.

Direct-to-Trade is a growing market channel.  While legal restrictions remain, Inertia is working to develop distribution channels and expand in-market outreach to build producer-trade buyer relationships while working within the legal framework of distribution laws in several additional states.  Keep your eye on our DTT blog for additional opportunities in the coming months.

A bill has been introduced to the Kansas state Senate’s Federal and State Affairs committee that could finally bring Kansas into the family of states allowing direct shipment of wine to resident consumers.  Currently, the Kansas permit system is not truly consumer direct.  With the appropriate permits, a winery can ship wine to a licensed Kansas retailer for delivery to a Kansas consumer who has placed the order through the retailer.

While all the details are not available, the Kansas bill would allow for direct shipment to the consumer on orders placed directly to the winery without the intervention of the Kansas retailer.  The usual safeguards regarding adult signature for delivery would apply.  It includes a 12 case per consumer annual volume limit.

This bill is very early in the legislative process with no guarantee of passage.  Still, it is a positive step in the movement towards responsible legislation that allows adults to purchase wine freely in interstate commerce.  As more states realize such shipments can be monitored, taxes collected and be responsibly delivered to adult recipients, more states will continue to move in such a sensible direction.  I will track the bill and let you know how it fares in the Legislature.

Even at a small level, entrance into the wine industry is a capital intensive and effort intensive undertaking.  Purchasing premium barrels and grapes is expensive.  Equipment and space, even if you are initially renting, comes at a cost.  Let’s not forget packaging:  bottles, closures, capsules and labels add up quickly.  Finally, you have sales, marketing and overhead.  Oh yes, one more thing, you need to put this money out a year or two in advance before you ever see a dime of income. 

I don’t say this to scare people out of the business or to educate those looking to take on this financial hurdle.  Most come into the business fully expecting and prepared to experience such costs and efforts.  They even relish the prospect in order to pursue their passion.  I mention all of this because as prepared as many new winemakers are to handle these burdens, they more often than not have no idea about the licensing required to operate.  Sure, they may call the state alcoholic beverage authorities to find out which licenses they will need and how much they will cost, but rarely do they look into exactly what privileges that license conveys. 

In California, the Type 02 Winegrower license conveys a bevy of privileges that go far beyond the mere right to produce wine.  It grants the right to -

• Sell the wines they produce at wholesale to on- and off-premise retailers and at retail direct to the public. 
• Purchase wine in bulk from other producers to blend or bottle under their own label. 
• Import wine to be packaged under their label. 
• Produce wine under multiple different labels if properly approved by the TTB. 

 

These are just a few of the key privileges.  There are a multitude of other privileges from sampling to pouring that Type 02 Winegrowers can take advantage of in operating their business.  Learn what they are and use them to develop opportunities to bring in revenue.

I don’t have the space here to go into each state’s winery licenses and their privileges.  As with so much in wine laws and regulations, they vary dramatically by state.  But the point is to learn what privileges your license grants in your state.  The wine business is expensive.  You license has value.  It is important to properly utilize every opportunity offered by the privileges your license grants to maximize that investment, especially in tough economic times where survival can depend upon it.

January brings a new year and usually that means changes to the compliance landscape.  Yes, just when you’re finally into a nice routine of filling out your compliance forms and knowing where you can ship and how much, the powers that be go out and change everything.  A new form here, a tax change there, some new volume limitation, or a new filing deadline.  It’s the kind of thing that can drive a compliance specialist nuts, as we tend to be rather detail-oriented creatures by the nature of our jobs.

There are some new filing requirements for 2009 but relative to some years January 2009 is proving to be a pretty quiet start to the year as far as compliance changes are concerned.  Some changes involve the manner in which you file (e-Filing continues to be a growing trend) and some reports are requiring additional information not previously collected, so be aware.  But nothing truly earthshaking happened to the compliance landscape as a result of the turn of the clock to midnight on December 31st.  No new states suddenly became open to consumer direct shipping and no significant new rules took hold. 

There was the Cherry Hill decision handed down by the U.S. Court of Appeals for the 6th Circuit on the last day of 2008 striking down Kentucky’s ”face-to-face” statutory requirement.  This was a tremendous victory for direct shipping advocates and, along with the Baude ruling by the 7th Circuit earlier in the year that reached the opposite conclusion, will go a long way to bringing this issue before the U.S. Supreme Court in the future.  But in and of itself the ruling will not open Kentucky to direct shipping in the near future without other changes to Kentucky law.

Still, January is always a good time to take stock, break your routines, and stay aware of any possible changes to the compliance landscape.  Just because there were no major changes doesn’t mean you don’t need to be aware of little changes or even to verify that nothing has changed.  A couple good ideas to follow:

• Check all compliance forms for any changes.  Sometimes lines are omitted and/or added or information is required to be formatted in a different way.
• Be aware of even small tax changes.  You may not see new taxes imposed but that doesn’t mean small changes don’t occur, particularly to local sales taxes which can rise or fall as authorizing statutes become effective or expire.
• Verify deadlines remain the same.  Deadlines can be all over the map so be sure nothing has changed.
• Volume limits can change so it’s always a good idea to check the limits, at least in the states to which you ship most frequently.  REthink Compliance maintains a menu of all state shipping laws that is accessible to anyone as a resource.
• Finally, verify that you still need to file in the same manner you did previously.  As mentioned above, e-Filing and e-Pay solutions are becoming more and more prevalent and are moving from option status to mandatory.  Check to be sure that paper form still satisfies state requirements.

 

The coming year will certainly see more changes to the direct shipping environment so be thankful for the relatively quiet January.  As always, I’ll do my best to keep you up to date as these changes occur.  Happy New Year!

This is neither a retrospective on the wine industry events of 2008 nor a prediction of what will happen in 2009.  These are simply my observations on wine, shipping and compliance issues as they currently stand.

• Wine Sales Growth
  I believe wine sales will continue to grow in the United States despite the economy.  They may not grow as rapidly as in the last few years and certainly lower price tiers will benefit at the expense of higher end super-premium wines but overall wine sales will continue to grow.  The reasons are pretty straight forward.  Relative to Europe and some other parts of the world, not many people in this country drink wine with a meal or on a regular basis.  There is still a large untapped market of potential wine consumers.  Instead of battling over market share, the battle is still over opening new markets and attracting new consumers.

 

• Shipping Costs Stay Where They Are
  I think that despite the recent drop in gas prices, wine shipping costs will not drop substantially.  For the initial period when gas prices were rising earlier this year, freight and carrier services were absorbing the increases until prices reached a point when that was no longer economically feasible and fuel surcharges and price increases became necessary.  As gas prices go back down these shipping company’s want to get back the money they ate in fuel prices earlier in the year.  The slow-down in the economy is reducing freight traffic and the volume of goods moved, which usually leads to higher unit costs.  I’m no economist but it seems unreasonable that price cutting will happen anytime soon.

 

• Shipping Compliance Increasingly Important
  As I work with it daily, I continue to see shipping compliance as a critical factor to the success of any winery direct marketing program.  The movement towards increasing state accessibility to direct shipment to consumers continues.  Even hardcore prohibition states like Utah are creating some form of consumer shipping process (while Utah’s model is not truly direct it is a start in the right direction).  To continue this push to open more states, wineries must get and stay compliant.  Only if states see wineries playing by the rules will they acquiesce and open their borders to direct shipments.  And remember, as states become more sophisticated in their knowledge of wine shipping, so do their accountability systems.  It will continue to become more difficult to ship outside the rules.

 

• Winery Startups Will Continue To Grow
  The bad economy will likely thin out the herd of wineries in the market in the short term as some boutique brands operating in the higher price tiers cannot maintain their operations and some larger brands consolidate to survive.  However, overall and in the long-term new winery start-ups will continue to grow.  While the market may seem saturated with brands, there are simply too many new wine regions coming online to slow overall growth.  The wine business has cachet and that will always attract capital.

 

• Consumer Direct Works
  With all the above said, I believe that a marketing campaign oriented towards shipping wine direct to consumers is the best way for boutique wineries to develop a base of loyal fans and sell wine at prices that can sustain their operation.  It requires a targeted program using technology to reach consumers on a large scale.  It also includes well-thoughtout, selective choices on which markets to target initially and then the long-term.  It requires staying compliant to keep those markets open.  Even with the increased cost of shipping, the margins derived from selling at retail direct can offset the increased cost and gain access to markets the small winery will never see in the 3-tier distributor model.

 

• Cool-Climate Syrah
  Finally, because they are my favorite:  cool-climate Syrahs will continue to be the under-appreciated bargain of the wine world.

Seventy-five years ago today a mistake was corrected when the 21st Amendment repealed Prohibition.  This noteworthy event resulted in the current 3-tier distribution system and the host of legal challenges to it as it begins to show it’s age with technological and cultural changes making it increasingly archaic and in need of an update. 

I support the fundamentals of the 3-tier system but it clearly needs some fine-tuning as the marketplace and relationships between suppliers-distributors-retailers has changed over the decades.  Still, today is a day to celebrate the end of a great American mistake in social engineering.  Raise your glass!

Thanksgiving is the time for food, family, friends and your favorite glass of wine.  As a lawyer with a keen interest in the great successes in wine shipping law accomplished this year I thought a brief list of “Thank You’s” to the people, advocates and organizations whose tireless and focused efforts have brought about these developments is well-deserved.  Their efforts are opening new markets for wine and, in the greater scheme of things, expanding and defining the application of dormant Commerce Clause principles necessary to maintaining fair trade policies between the states.

I’m thankful for-

• Family Winemakers of California president Paul Kronenberg and the crack legal staff of Tracy Genesen of Kirkland & Ellis.  Their well-planned, wisely litigated case poked holes in the Commonweath’s case as Massachusetts’ defended discriminatory and protectionist laws that effectively excluded out-of-state wineries from shipping to Massachusetts consumers to the benefit of in-state wholesalers and wineries.
• The lobbying efforts of the Wine Institute, Free the Grapes, Family Winemakers, and the Coalition for Free Trade, among others, to protect the interests of small wineries against the well-funded efforts to limit access to wine taking place in the legislatures as laws are shaped in response to Granholm and its progeny.
• The insight of district court judges in Texas, Indiana, Michigan and Massachusetts who saw the dubious assertions by state’s arguing that discriminatory regulations were necessary to maintain an orderly market, collect tax revenue and prevent online wine purchases by minors.  Their legal analysis was responsible for recognizing the discriminatory effect of otherwise facially neutral laws and reinforcing the requirement of that alternatives to discriminatory laws be enacted where alternatives exist.  These judge’s upheld established constitutional principles requiring states allow access to their markets in a non-discriminatory manner.
• Wineries that play by the rules of direct wine shipping.  They understand that by following the rules they are establishing a foundation of compliance that will be useful in convincing currently prohibited states to open their markets to direct wine shipments without fear of the questionable arguments proffered by opponents that it will lead to an unregulated marketplace.
• Consumers demanding access to all of the wine products legally made in the United States, regardless of in which state they were produced.  Changes to discriminatory laws don’t happen in a vacuum.  Consumers who have contacted state legislators and challenged laws denying their right to market access have benefitted all wine lovers and consumers in general who simply want to choose, rather than having the choice made for them by state-backed wholesale monopolies.

 

I’m thankful for being able to raise a glass of the wine of my choice at Thanksgiving with my family and friends and knowing there are passionate people fighting to make sure I have that choice.  Happy Thanksgiving!