Supreme Court Asked to Uncork Online Wine Sales

Published January 1, 2005

A state’s right to regulate liquor sales and the federal government’s right to regulate interstate commerce clashed on December 7 when the U.S. Supreme Court heard arguments over bans on direct-to-consumer sales of wine from out-of-state producers.

Twenty-four states ban out-of-state suppliers from shipping wine directly to consumers within their borders. Three lawsuits centered on the bans were argued before the justices: Granholm v. Heald, 03-1116; Michigan Beer & Wine Wholesalers Association v. Heald, 03-1120; and Swedenburg v. Kelly, 03-1274. The Court’s decision is expected to arrive in the next few months.

21st Amendment vs. Commerce Clause

The 24 states argued that the 21st Amendment, which ended prohibition in 1933, gives them the power to control alcohol sales, including restrictions on the importation of liquors from out of state.

The plaintiffs challenged the restrictions by arguing that the Commerce Clause of the Constitution gives the federal government the right to regulate interstate commerce. The Commerce Clause has been interpreted to mean states may not discriminate against out-of-state businesses.

Attorneys general from 36 states have sent friend-of-the-court briefs asserting the right of states to control liquor sales. Associations representing wine producers, beer producers, and wine and spirits wholesalers are at odds over the issue, with the wine producers wanting the bans lifted and the beer producers and wholesalers wanting them left in place.

“California wineries, particularly smaller, family-run operations, should be able to ship their product directly to customers in all states,” said K. Lloyd Billingsley, editorial director of the Pacific Research Institute and author of the new report Wine Wars: Defending E-Commerce and Direct Shipment in the National Wine Market, in a statement issued with the report.

“This is clearly an issue of protectionism, at odds with the Commerce Clause of the Constitution,” Billingsley said. “The high court has an historic chance to end the legacy of Prohibition and rule in favor of direct shipping. It should not be a felony, as it is in some states, to buy a bottle of premium wine and ship it to your own home.”

However, attorneys for Michigan Governor Jennifer Granholm (D), who defends Michigan’s ban on out-of-state wine sales to residents, argued in their filing with the Supreme Court, “The historical basis for the [state] structure, as recognized by this court, is to protect against the collusion, price-fixing, and monopolization problems that existed before Prohibition.”

The Michigan governor’s attorneys also argued, “the recent proliferation of small-production wineries, whose sole marketing and sales agenda is direct shipment with sales made over the Internet, means that this area of regulation is increasingly important, both to the states from a police power perspective and to wineries and consumers.”

Michigan requires out-of-state producers to sell alcohol only through licensed wholesalers or vendors.

Wine Reviewers Sue

Michigan residents Ray and Eleanor Heald, who write wine reviews, had brought the matter to a head when they asked a California winery for a sample bottle to review. The winery informed them that, because of Michigan law, the bottle could not be shipped.

The Healds then sued to overturn the ban. In 2003 the 6th U.S. Circuit Court of Appeals sided with the Healds, ruling the Commerce Clause of the Constitution makes Michigan’s law unconstitutional.

New York Ban Challenged

Meanwhile, Juanita Swedenburg, who owns an independent winery in Virginia, wanted to sell her wine to customers outside her home state. She challenged the New York ban on direct sales from out-of-state wineries in 2000. A federal appeals court sided with the state of New York in 2004.

New York allows in-state wineries to ship their wines directly to New York customers. Lawyers for Swedenburg told the Supreme Court she should have the same right to make direct-to-consumer sales in New York as New York wineries have.

The Wine & Spirits Wholesalers of America, which supports state bans on direct-to-consumer sales from out-of-state wineries, estimates that at least $1 billion of liquor is illegally shipped to consumers each year.

The current distribution system prevents illegal trafficking, market manipulation, and access of alcohol to minors, according to an official statement by the organization. The statement also cites “efficient collection of applicable state and local excise taxes” as another reason the Supreme Court should rule in favor of the states.

“WSWA is committed to preserving the integrity of the state-based alcohol control system that has evolved under the 21st Amendment, and which is threatened by illegal direct shipping,” the statement says.

Steve Stanek ([email protected]) is managing editor of Budget & Tax News.