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from NewsLink, Vol. 4, No. 2, Winter 2000
First the good news. Today, 1,600 wineries across the nation produce wines to please just about any palate. Spiced cherry wine? Michigan has it. In Maine, you can find wild blueberry wine. Virginia and New York are producing award-winning reds and whites. Even Mississippi and Arizona have wineries. And in California, of course, they're in the world-class wine business, making some of the best on the planet.Now the downside. Don't try to ship yourself a case of the merlot you loved at that Washington State winery. And don't think you can order a few bottles of that “library” Russian River through the winery's web site. Not if you want to send it to Massachusetts. Massachusetts is one of 30 states that make it illegal to ship wines directly from out-of-state wineries to residents within their borders. According to the Alcoholic Beverage Control Commission, transporting includes not only commercial carriers, but also the odd bottles carried into the state in suitcases or in trunks of cars. It is a criminal act carrying a maximum fine of $2,500, imprisonment for not more than six months, or both.
Of these 30 states, seven, though not Massachusetts, make such shipments a felony and at least ten others are considering enacting felony laws.
The lion's share of the wines and other alcoholic beverages we drink come to us via the so-called three-tier system of alcohol distribution. Wineries sell to wholesalers who sell to retailers. From there the wines become available for purchase by consumers. Wholesalers extract up to 25% of the retail price.
According to Free the Grapes!, less than 5% of wine production is likely to be shipped directly to consumers. Most of these shipments come from small family-owned and operated wineries in 43 states, producing on average, 8,000 cases per year. It is not economically profitable for wholesalers to handle such small amounts of wines. Thus, for most of these wineries, on-site and Internet sale from wineries direct to consumers is their lifeblood. It is also the only way in which we consumers can sip the fruits of their labor.
The rationale for prohibiting direct sale of wine comes from the 21st Amendment of the Constitution, which repealed Prohibition. It gave individual states the absolute power to regulate and control alcoholic beverages within their borders.
Wholesale arguments
Wholesalers argue that the three-tier system works to the advantage of the individual states. They say it's easier for states to enforce laws and examine records and inventories of a few local wholesalers than of a myriad of small wineries scattered around the country. They also argue that it prevents the mega-wineries from swallowing up dozens or even hundreds of wine and spirit stores, creating winery super-outlets which they claim would be anti-competitive.
Wholesalers have good reason to want to keep the interest of the direct-shipment proponents at bay. By keeping themselves in the distribution chain they get billions of dollars in revenues. That's why they lobbied the U.S. House of Representatives to pass the “Twenty-First Amendment Enforcement Act,” which would strengthen the hands of states' attorneys general in dealing with interstate shipment violations.
If direct sales account for only 5% of today's wine sales, why, you might ask, are the wholesalers so worried? The answer is the Internet and the future. In the exploding world of the Internet, 5% sales today could easily grow to 50% or more in a few years.
The arguments against direct sales are two-fold. First, there is the threat of sales to minors. There is scant evidence, however, that large numbers of teenagers are ordering cases of Adler Fels'95 for direct delivery. And even if they were, there are solutions to remedy delivery of wines to underage buyers. Just as liquor stores require identification for alcohol purchases, delivery services like FedEx and UPS could easily require identification and signatures for delivery of wines. Cartons could be labeled, “Contains Alcohol. Adult Signature (over 21) Required.”
It's really about taxes and trade barriers
A more practical argument has to do with taxes, or more specifically, loss of state tax revenue. The Wine and Spirit Wholesalers of America (WSWA), an industry trade organization, argues through its web site (www.wswa.org) that the current system “ensure[s] collection of billions of tax dollars to federal, state and local governments, thereby creating the world's most reliable and cost effective system of revenue collection...” Bypassing that system through direct shipment, they say, costs states excise tax revenue.
Clint Bolick, litigation director at the Institute for Justice, doesn't buy this argument. He says that trade associations representing wineries have already agreed to be licensed to administer tax-collecting functions, thus ensuring that the states receive their revenue.
Bolick is more concerned with what he considers to be a more fundamental issue. The laws that prohibit transportation of alcohol across state lines do not apply to in-state transportation. Thus, a New York resident cannot have his California cabernet delivered to him, but he can legally receive a delivery from a winery in New York State. This, Bolick says, constitutes the erection of unfair trade barriers between states, something the Constitution sought to eradicate. It is states protecting their interests against each other's.
The WSWA has a solution. It has endorsed a plan, currently in the development stage, whereby consumers can use the Internet to purchase wines through traditional three-tier distribution channels.
Indeed, it is possible now to go to web sites like wine.com and order certain wines for shipment into Massachusetts. The trouble is that the Internet provider can't ship the wine directly to the customer but must ship it first to a state retailer, who then delivers it to the customer. That causes delays. And in Massachusetts, it limits choices. At least one Internet provider does not ship popular labels to Massachusetts through this mechanism.
If there is any product for which Internet retailing is made to order it is wine, with hundreds of small wineries around the country ready to offer thousands of labels catering to every taste and every budget. Consumers have nothing to gain from laws that keep this competition bottled up.
NewsLink is the quarterly newsletter of the Beacon Hill Institute for Public Policy Research at Suffolk University. © 1996-2002. All rights reserved.
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