E-Commerce Stokes the Wine Wars

Published March 1, 2005

On December 7, the U.S. Supreme Court heard oral arguments in a case that will help determine whether producers of wine can sell their product to a national market over the Internet and ship it directly to customers.

That is now possible only on a limited scale. Current restrictions on the practice raise constitutional issues, which the Court will address when it hands down a decision later this year.

The case, and the attention it has generated, demonstrate how borderless electronic commerce is having a ripple effect on state laws that at one time could be easily enforced. Consumers want to order wine like they order books and movies; small vintners want to increase sales. In the process, long-entrenched laws, and commercial interests behind them, are disrupted.

Those in favor of Internet sales and direct shipping of wine to consumers believe the Commerce Clause of the U.S. Constitution mandates free trade among the states and forbids discrimination against business from out of state. Those on the other side charge the 21st Amendment gives states complete control over the sale, importation, and distribution of alcoholic beverages and, thus, takes precedence over the Commerce Clause.

Winemakers, particularly smaller enterprises with niche markets, are in favor of Internet sales and direct shipping. Twenty members of Congress and five states have filed briefs in favor of direct shipping. So have two Nobel Prize-winning economists from the University of California.

The Wine and Spirits Wholesalers of America heads the forces against direct shipping. They are joined by the Beer Institute and various law enforcement and temperance groups.

Growth in the Wine Industry

The conflict comes at a time of increasing wine sales.

In 2003, wine shipments from all sources rose 5 percent, to 627 million gallons. California accounts for 67 percent of the total market. While the number of wine producers has increased, the number of distributors has decreased.

There are more than 25,000 wine labels in the United States, but only about 500 of them are available in the larger market. Distributors fail to keep pace with new products, and the ban on direct shipping prevents small wineries from benefitting from high-technology marketing. Nevertheless, online retail sales are growing at 10 times the rate of “brick-and-mortar” sales.

The shipment of wine directly to consumers is prohibited in 23 states: Alabama, Arkansas, Connecticut, Delaware, Florida, Indiana, Kansas, Kentucky, Maine, Maryland, Massachusetts, Michigan, Mississippi, Montana, New Jersey, New York, Ohio, Oklahoma, Pennsylvania, South Dakota, Tennessee, Utah, and Vermont.

In Florida, Kentucky, Tennessee, and Utah, such shipments are a felony, and 10 other states are considering similar felony laws. Many prohibitionist states forbid consumers from buying wine in other states and shipping it to themselves at home.

The FTC Weighs In

“Consumers could save money, choose from a much greater variety of wines, and enjoy the convenience of home delivery. Indeed, in states that are litigating the constitutionality of direct shipping bans, several courts have found that the bans deprive the state’s consumers of lower prices and greater variety,” according to a Federal Trade Commission study released in July 2003.

The study notes e-commerce offers lower prices and more choices for consumers. State bans on direct shipping, the study found, prevent consumers from saving as much as 21 percent. The FTC study also found that states that allow direct shipping report few or no problems with shipments to minors, the principal argument made by opponents of direct shipping.

Toward a True National Market

The issue is not one of public welfare but protectionism. Reciprocity arrangements are working in 13 states, up from four a decade ago, and such agreements should be extended to all states. That would end the legacy of Prohibition, stop discriminatory treatment, and promote free trade and competition. It would also bring the entire nation into line with the intent of the Commerce Clause and the speed of the Internet.

K. Lloyd Billingsley ([email protected]) is editorial director at the Pacific Research Institute.