REthink Wine Blog

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!

A consistent is developing in the wine shipping court decision’s handed down this year in Texas, Indiana, Michigan and now Massachusetts.  The losing parties invariably are failing because they are unable to generate the evidence necessary to support their claims.  One can argue that the legal claims presented are the reason these cases failed.  The recent Michigan case is an example.  The wholesaler’s claims that strict adherence to the 3-tier system is necessary to maintain an orderly market, ensure the collection of tax revenue and prevent alcohol from falling into the hands of minors seem particularly dubious.  When stated alone these are admirable goals. 

Mere Platitudes

The problem is they become mere platitudes when not supported by evidence.  The courts have consistently ruled that when the discriminatory nature of a law is determined, simply stating claims is not sufficient to support the dormant commerce clause doctrine that an important public purpose must be served by the challenged law and that no alternate solution other than the discriminatory behavior is available.

Why is this important, you may ask? 

For one, it could indicate that the claims are in fact merely platitudes and that no real evidence to support them exists.  More importantly from a legal standpoint is that each of these cases establish a precedent.  Courts, particularly at the trial court level, rely heavily upon precedent.  Once set, precedents become hard to overturn, usually requiring clear cut distinctions in order to deviate to a new rule of law.  Well-thoughtout litigation plans involve pursuing cases that are ripe for litigation but also marshaling sufficient evidence to make your case.  Taking a case to court with insufficient evidence will usually lead to bad results for the claimant.  This is the case in the wine shipping cases here.  Precedents predominantly favorable to wineries have been set, in part due to weak legal arguments but also to the losing parties’ inability to present evidence necessary to their claims.  As we continue down this path of litigating each hurdle the legislature’s place in the way of the free trade of wine between the states, litigants would be well-advised to make sure their evidence is strong before entering court.

I see in the Chicago Tribune an article on the Michigan legislature’s move to eliminate Michigan wine retailers’ shipping privileges in response to losing a discrimination suit in U.S. District court in September.  While nothing is final yet, the situation doesn’t look good to prevent the bill from passing.  You may recall a few weeks ago that a U.S. District judge ruled that Michigan law discriminated against out-of-state wine retailers by preventing them from shipping wine to Michigan consumers, a privilege enjoyed by in-state Michigan retailers.  At the behest of Michigan wholesalers, yesterday the Michigan legislature moved towards bringing state law into concordance with the court’s ruling.  Unfortunately, it is doing so by “leveling down”, which is a euphemism for removing the privilege from Michigan retailers.  This is not the desired result as it restricts consumer access and choice only to protect the interests of wholesalers. 

Precedent Prevails

But all is not lost here.  While the Michigan response to the court decision is not a positive for anyone except Michigan wholesalers, the good news is that, while Michigan can change the law, the important precedent set by the court that retailers fall within the Granholm rationale remains.  Precedents such a this one, combined with other precedent-setting decisions like Siesta Village Market in Texas earlier this year, provide much needed legal ammunition for the argument that this type of disparity in treatment of in-state and out-of-state commerce is discriminatory and in contravention of the dormant Commerce Clause.  Consumers may have lost in Michigan, but the movement towards consumer choice and access continues forward.

I note with interest the November 3rd announcement from Annie Bones at the Wine Institute that the Washington State Liquor Control Board (WSLCB) has provided the option to file monthly reports and taxes online at their website.  This is a tremendously positive step on many levels. 

• First, it saves time.  Sure, there is a brief learning curve, but once overcome e-Filing systems are invariably easier to use and save time.  Less time in preparation by the winery, less time in review by the WSLCB. 
• Second, they save paper and thereby trees.  I think we can all agree that’s a good thing. 
• Together these equal a savings of money for both the winery and the state.  In tight times where both private entities and the government are looking to cut costs, efficiencies created by e-File and e-Pay systems can make significant savings. 
• Finally, and maybe less obvious, they encourage compliance.  This leads to a couple of benefits.  One, they make it easier to be in compliance because it takes less work.  Two, they create greater accountability through better tracking and document management. 

This last point is important because better compliance and accountability will result in more states permitting consumer direct wine shipments since they have a higher degree of confidence that wineries will follow the rules.  That in turn makes it more likely that states reluctant to open their borders will be willing to do so, creating new markets and opportunities.  In the end, more tax revenue to the states is generated with greater accountability, which always makes politicians and bureaucrats happy. 

As this trend towards e-Filing/e-Pay solutions evolves, be assured that REthink Compliance will evolve with it, as our goal is to provide the easiest, most cost efficient way for wineries shipping consumer direct to stay compliant.

Halloween is now in the rear view mirror.  As I sat on my front porch handing out my collection of Snickers, Butterfingers and Crunch bars to the elaborately dressed Princesses and Jedi Knights, I couldn’t help but notice that all of the kiddies’ bags were filled with the same variety of candy that I was giving.  I thought, “what happened to the variety of candies I would get as a kid?”  I quickly realized that the candy market had become very much like the wine market:  a few key brands dominating the store shelves.  I wondered if the candy wholesale lobby had as much control as the wine wholesalers, deciding which candies would be available to children in the same way the wine wholesalers decided which wines would be available to the wine consumer.

A stretch maybe.  But it points out just how important the rise of direct to consumer wine shipments are in this country.  The multitude of quality, small producers who can’t land a distribution deal in key markets can still reach customers desirous of their wines.  Needless to say, both the consumer and the winery benefit.  Variety is important in the wine industry.  Maybe more important than in other industries where a widget is a widget is a widget.  Limiting variety is harmful in a free market and the fundamental problem in the 3-tier system as it is presently operating.  Consolidation among wholesalers is ongoing, with fewer and fewer major distributors dominating the market.  With over 6,000 licensed wineries in the United States, the few hundred brands generally available in major markets is just a slice of all of the wonderful wines produced.  Responsible, accountable direct to consumer shipping is the logical answer to this gateway that limits selection.  The benefits are real and several.

Key Benefits of Direct to Consumer Shipping: 

Access:  New markets and customers
Profits:  Higher margins per bottle than wholesale
Brand Recognition:  Reaching the individual consumer with direct, word of mouth guerilla marketing
Availability:  Reaching those consumers who can’t otherwise get your product
Franchise:  Building a base of loyal, repeat customers who know where they can get your wine
Variety:  More wines, more wine selection

As a leader of the direct wine shipping revolution, Inertia is all about variety.  Our goal is to make the incredible selection of fine wines produced in this country available to any legal adult who wants it.  Wine consumers shouldn’t be limited to the same small selection of wines available through wholesale channels.  Even kids don’t want to eat the same candy bar every night after Halloween.    Join the wine revolution!

The 6th Circuit Court of Appeals upholds the Tennessee ban on direct wine shipping.  There is a nice summary of the decision in Forbes.  Tennessee laws are archaic and confusing and in fairness the court’s hands were tied in this one because the law didn’t violate Granholm.  The good news is this case has brought the issue to the forefront and advocates in the Tennessee legislature will review the current alcohol laws.  The bad news is the Tennessee wholesalers have a lot of sway with the legislature.  I suspect not much will change soon.  If you know anyone in Memphis, tell them to keep enjoying their Chablis from the five gallon jug.