Protecting consumers from interstate shipments

Protecting consumers from interstate shipments of wine

Jim Leitzel at Vice Squad posts on state efforts to keep their consumers from buying wines in other states over the internet: "Other States Join Michigan Appeal On Interstate Alcohol Shipments".

The post is motivated by Michigan's appeal of a federal court ruling overturning Michigan regulations forbidding direct alcohol shipments from out of state, but not in-state, wineries. Leitzel links to the ruling, a press release from the Wine and Spirits Wholesalers of America, and testimony by Nobel Prize winning economist Daniel McFadden (owner of a vineyard). The press release is worth reading for items like:

"The vast majority of states recognize that we'll have alcohol anarchy if the influential, billion-dollar wine industry succeeds in getting alcohol sales to become unregulated, unaccountable and anonymous," President and CEO of the Wine & Spirits Wholesalers Association, Inc. Juanita D. Duggan said. "The fact is that the wine industry is putting soaring profits ahead of sound policy, with no concern for kids, communities or common sense. Today's action [Michigan's appeal of the federal court decision to the Supreme Court - Ben] deals a significant setback to the billion-dollar wine industry's concerted effort to make alcohol sales as easy as point, click, drink."

However, as Leitzel notes:

"Some state regulations that ban interstate direct wine shipments appear to be designed not to control alcohol distribution to minors, or to ensure alcohol tax collections, but rather, to protect the economic interests of some established in-state distributors and retailers -- at a cost to consumers..."

The divergence of interest between wine producers and wine wholesalers, reflected in the quote, is interesting. Moreover, clearly the wholesalers aren't worried about over-regulation by the government's heavy hand. Most people would concede that states have an interest in addressing the problems associated with underage drinking.

The crux of this case, however, are Michigan regulations that treat in-state and out-of-state wineries differently, and appear to suppress the competition faced by the in-state firms. As the federal court decision states:

"The plaintiffs allege that Michigan's system discriminates against out-of-state wineries in favor of in-state wineries because it prevents out-of-state wineries from shipping wine directly to Michigan consumers, which in-state wineries are allowed to do. As the district court correctly noted, this distinction between in-state and out-of-state wineries can only be understood by reading a number of provisions in conjunction with each other:

[The distinction] can be gleaned from various Michigan Liquor Control Commission regulations, which are codified within the Michigan Administrative Code. R436.1057 states that "[a] person shall not deliver, ship, or transport into this state beer, wine, or spirits without a license authorizing such action. . . ." The only applicable license, an "outstate seller of wine license," may according to R436.1705(2)(d) be obtained by a "manufacturer which is located outside of this state, but in the United States, and which produces and bottles its own wine." However, under R436.1719(4) the holder of such a license may ship wine "only to a licensed wholesaler at the address of the licensed premises except upon written order of the commission." In answers to interrogatories, a representative of the Michigan Liquor Control Commission indicates that "[a]t present, there is no procedure whereby an out-of-state retailer or winery can obtain a license or approval to deliver wine directly to Michigan residents . . . "

In contrast, the Michigan Liquor Control Commission indicates that the "ability to deliver wine to the consumer is available to winemakers licensed in Michigan, inasmuch as under the provisions of MCL 436.1113(9) these licensees are permitted to sell at retail the wines they manufacture. . . . A licensed Michigan winemaker may deliver their [sic] own products to customers without an SDM [specially designated merchant] license . . . .

The plaintiffs contend that this differential treatment of in-state and out-of-state wineries violates the dormant Commerce Clause because it gives in-state wineries a competitive advantage over out-of-state wineries. In-state wineries can, for example, bypass the price mark-ups of a wholesaler and retailer, making in-state wines relatively cheaper to the consumer and allowing them to realize more profit per bottle. In addition, the cost to an out-of-state winery of the license that enables it to sell to a Michigan wholesaler is $300, while a comparable Michigan winery must pay only a $25 license fee to qualify to ship wine directly to Michigan customers. Finally, for customers who desire home delivery, Michigan wineries have a competitive advantage over out-of-state wineries that cannot ship directly to customers. In response, the state argues that the regulations to which an in-state winery is subject "more than offset, both in costs and burden, any nominal commercial advantage given by the ability to deliver directly to customers" and characterizes the burden on out-of-state wineries as "de minimis." "

Michigan has a legitimate interest in getting its sales tax receipts and in protecting minors. But at least to some extent these goals appear to be used as a rhetorical cover for efforts to protect local wineries from competition.

The legal issues turn on a an analysis of the interaction of two provisions in the Constitution. Prohibition was repealed by the 21st Amendment. One part of the amendment reads, "The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited." On the other hand, the Commerce Clause, giving Congress the authority to "regulate commerce with foreign nations, and among the several states, and with the Indian Tribes..." has long been considered to place a limit on State powers to regulate interstate commerce.

Revised in the course of 3-7-04.