A Tale Of Wine - And Whining?

December 27, 2004
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GRAND RAPIDS — The U.S. Supreme Court heard arguments earlier this month on a consolidation of cases in Michigan and New York concerning the Internet sale of wine across state borders.

If the case were to be discerned only from either side’s press releases, it appears to be a caricatured battle between the high-end wine industry and well-intentioned regulators protecting a government-sanctioned monopoly.

On one side are wine aficionados upset that they can’t purchase a $5,000 bottle of chardonnay and obscure out-of-state wineries equally upset that they cannot mail $5,000 bottles of wine to Michiganders.

On the opposing side are the states of Michigan and New York with the argument that wineries would like nothing better than to put said $5,000 bottles of wine in the hands of teenagers behind the wheel of a car on a snowy night, while the loss of excise taxes bleeds dry the states’ coffers.

But the case is much more complicated than that, as a pair of opposing constitutional doctrines battle head-to-head in what could become a landmark case for interstate sales of alcohol.

“The case is not so much about wine as states’ rights,” said Kent Beverage Co. Inc. President Kim Gary. “A lot of people say it’s an economic issue for us. They say we’re just protecting our turf by making everyone go through the three-tier system. That’s really not so; (Internet) sales is such a small part of the business. It’s not a big issue — what we’d lose, you and I could sit down here and drink tomorrow.”

Kent Beverage is one of the largest of 10 wholesalers that sell wine in Grand Rapids, representing the middle tier of Michigan’s three-tier system.

Originally designed to protect against the collusion, price-fixing and monopolization that existed before Prohibition, the structure now serves to prevent illegal sales to minors and collect taxes, according to the Michigan Beer & Wine Wholesalers Association (MB&WWA) and the Michigan Department of Attorney General.

Under the current system, consumers can receive alcoholic beverages only from licensed retailers, who must receive them from licensed wholesalers that in turn receive their product from licensed manufacturers.

In recent years, an exception was made within the three-tier system to cut out the secondary tiers and allow licensed Michigan wineries to sell directly to Michigan residents.

But out-of-state wineries are not permitted that exception and cannot ship wine across Michigan borders, prompting wine industry writers Eleanor and Ray Heald of Troy, along with California winery Domaine Alfred, to sue the state in federal court in 2000.

Citing the rights of states to govern the transportation or importation of intoxicating liquors granted Prohibition’s repeal in 1933, the district court judge upheld the law.

But when the case went before the 6th U.S. Circuit Court of Appeals in 2003, the judges declared Michigan’s laws discriminatory and struck down the three-tier system, concluding that it was in violation of the Constitution’s unwritten commerce clause, which bars states from enacting protectionist, discriminatory measures against interstate commercial activity.

“They struck down the section of Michigan law that deals with all importation of alcoholic liquor,” said Michael Lashbrook, MB&WWA president. “If that were to happen, the way we read the ruling is that anybody outside of our borders can ship alcohol directly to consumers’ homes, which we believe will lead to a totally unaccountable system.”

Lashbrook and Gary both were present at the Dec. 7 hearing, the only two Michigan wholesale representatives.

“The wineries are really the ones behind this,” Gary said. “They want to sell the wine direct … the consumer isn’t going to get a better deal, (the wineries) are just going to make my margin and the retailer’s margin on top of theirs.

“And it’s really not even a wine issue. Underage people aren’t going to buy fine wines on the Internet, but why not 150 proof vodka or rum? Once you open that flood gate of alcohol coming across, who knows what’s in the package?”

Brian Cain is a wine columnist for Grand Rapids Magazine, a former retailer and a wholesaler for Viviano Wine Importers.

“They can buy wine over the Internet right now from a Michigan-based shipper,” Cain said. “Why would anyone think that if they order wine from Indiana that it’s going to be more likely to get into the wrong hands? There is a far greater risk of minors walking into a store with a fake ID than buying online.”

Cain also cited the paper trails of online credit card transactions, as well as the good sense of a UPS or FedEx deliveryman as further deterrents against minors buying online. On top of that, Cain said, shipping costs on a case of wine are at least $45. The only time consumers will buy online is when products are not available through the local distribution chain, he said.

“You can try to come up with a million arguments to restrict interstate wine shipments, but none of them hold water. These laws have almost no effect at all.”

According to Cain, Michigan’s regulators and wholesalers fear the commerce practiced by the 26 “reciprocal” states that do allow wine to cross their borders because it would expose a system based on outdated laws.

And while the current structure helps no one, Cain said, it harms small Michigan wineries that could benefit from off-season sales to summer tourists.

“It doesn’t affect my business anyway because I don’t sell those items,” Cain said. “Those are the things people want to buy online. It’s ridiculous that (the state and wholesalers) are paranoid. It’s a little crack in the door, but if you’ve always had total control, that is threatening.”

There were opposite rulings in a parallel case in New York now combined with the Michigan cases on the Supreme Court docket. In New York, the District sided with the plaintiffs, while the 2nd Circuit Court ruled in favor of the state.

A ruling is expected on the consolidated cases by July.    

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