Internet Wine For All

May 16, 2005
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WASHINGTON, D.C. — The U.S. Supreme Court ruled 5-4 against bans in Michigan, New York and 23 other states prohibiting out-of-state direct Internet wine sales, declaring it a violation of the commerce clause of the U.S. Constitution.

In a decision some analysts say could lead to lower prices and more choices for consumers, Justice Anthony Kennedy said the laws at issue in the two states were designed to give in-state wineries a competitive advantage over wineries located in other states.

“We hold that the laws in both states discriminate against interstate commerce in violation of the commerce clause (of the U.S. Constitution) and that the discrimination is neither authorized nor permitted by the 21st Amendment,” Kennedy said.

Even if the ruling doesn’t provide a landmark for interstate alcohol sales, it dealt a symbolic blow to the interstate traffic laws in Michigan and New York and marked the harshest defeat in recent memory of one of the state’s strongest lobbyists.

With several compliance issues to be dealt with, it will still be months before wine can start moving easily across state lines.

“The case is not so much about wine as states’ rights,” Kent Beverage Co. Inc. President Kim Gary told the Business Journal earlier this year. “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 by the Prohibition-repealing 21st Amendment of 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 hearing last December, 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 former retailer and current 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 distinct paper trail left by an online credit card transaction, 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, the reason that Michigan’s regulators and wholesalers fear the commerce practiced by the 26 “reciprocal” states that do allow wine to cross their borders to and fro is that any change in the law would expose a system based on laws that do not apply to modern times.

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

“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 court sided with the plaintiffs, while the 2nd Circuit Court ruled in favor of the state.    

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