Retailers engaged in direct-to-consumer (DtC) shipping of beverage alcohol have faced unexpected setbacks in the last few months.
—Alex Koral, Regulatory General Counsel, Sovos ShipCompliant
Primarily, Idaho and Nevada, separately determined to remove the right of their respective residents to receive DtC shipments of alcohol from out-of-state retailers. These reversals in law come as retailers and advocates continue to fight in court, with limited success, to gain the right for DtC shipping in more states. At the same time, retailers across the country have had to shut down shipping programs at the behest of carriers, who themselves face scrutiny for any and all improper shipments state regulators hear rumors of.
This all adds up to a great deal of uncertainty for the retailer DtC shipping market, only a couple of years since it was predicted that a sea change in beverage alcohol related jurisprudence would open up the highly restricted industry.
As such, it is fair to ask why those hoped-for predictions haven’t yet panned out for retailers. How are states, instead, able to extend these discriminatory regulations that restrict the ability of retailers and consumers to enjoy the potential fruits of interstate commerce?
The state of DtC alcohol shipping
DtC shipping of alcohol is not new. Throughout the 19th century, consumers in many states would avail themselves of purchases from out of state vendors to bypass local prohibition laws. Arguably, such activity made some determine that national Prohibition was needed, leading to that failed experiment in state-mandated moralizing.
In the 20th century, DtC shipping regained popularity in the years around the 1976 Judgment of Paris, as the entire nation became aware that wonderful wines were being produced domestically. Connoisseurs, on the hunt for champion vintages but finding them not distributed to their local stores, had to work through back channels and black markets to get their hands on the wines they could otherwise only read and dream about.
Over the next decades, winery and consumer advocacy groups worked to establish a legal, though still limited, market for DtC wine shipping. But this market was hampered by regulatory intransigence and determined efforts to restrict such interstate shipments.
In 2005, the DtC shipping market won a hard fought victory in the Granholm v. Heald Supreme Court case. Under that ruling, the Court determined that New York and Michigan laws that permitted local wineries, but not out-of-state wineries, to make DtC shipments was an unconstitutional violation of the Dormant Commerce Clause. Thereafter, states would have to enable national shipping permissions if they wanted local shipping to go on.
What followed was a concerted effort by the wine industry to change laws in all states to create a legal framework for direct-to-consumer shipping of wine. The compromise that states and wineries reached was that a state would enable DtC shipping as long as the wineries would agree to get licensed by the destination state and abide by a variety of regulatory requirements, including paying the state taxes on their shipments, preventing sales to minors, and accepting the jurisdiction of the destination state. Today, 47 states allow for DtC shipping of wine by wine producers and the market earns just under $4 billion per year.
However, as winery shipping laws proliferated, some notable parties were left out. Shipping of beer and spirits was made available only in a handful of states. And in most states, wine retailers were excluded from DtC wine shipping privileges.
A primary reason for the exclusion of beer, spirits and retailers was a lack of lobbying efforts. Often, only wine producers worked to change the laws and were at the table to rebut those opposed to DtC alcohol shipping. As such, in most states, shipping only of wine and only by domestic producers was enacted into law.
Breweries and distilleries have a clear case for applying the Granholm ruling, in that the Court found there that since a winery already complies with regulations on a national scale and is often already engaged in interstate sales, states could readily regulate their DtC shipping as well. As similarly positioned members of the supplier tier, breweries and distilleries should readily prevail if they were to bring legal challenges in states with discriminatory beer and shipping laws. Instead, they would benefit most when expanding their DtC shipping permissions by following the wine industry’s concerted state-by-state lobbying efforts.
Interstate DtC shipping of alcohol by retailers, however, faces a more uncertain future as states continue to argue that the principles of Granholm do not apply to retailers, and thus that the states are able to pass discriminatory laws that allow local DtC shipping but prohibit out-of-state retailers from enjoying that same privilege.
Granholm and alcohol retailers
For much of the 20th century, courts had given great deference to state laws regarding the sale and transportation of alcohol, reasoning that the 21st Amendment (specifically clause 2) gave states near free rein to control alcohol markets as they saw fit. In Granholm, though, there was a clear confrontation between different parts of the Constitution, which the Court had to settle.
In other markets, it would be unconstitutional on its face for a state to establish a market for local businesses but deny access to out-of-state businesses, as New York and Michigan had done for DtC shipping of wine. Only because the laws involved the sale of alcohol did the states have any justification.
In the end, the Court reasoned that in the conflict between the 21st Amendment and other Constitutional provisions, deference to the 21st Amendment would only apply when a state could clearly demonstrate that their otherwise unconstitutional action was closely tied to the purposes of the 21st Amendment, namely, enabling a state to protect the health and safety of its populace from the evils of alcohol.
In that reasoning, though, a purely discriminatory law, such as permitting only local DtC shipping of wine, was not tied to the health and safety of the people of New York and Michigan. And therefore those laws had to fall. Indeed, the Court’s majority opinion noted there were readily available means for states to regulate even out-of-state DtC shippers (essentially the licensing arrangement that now exists in 47 states for wineries) and thus there was no justification for discriminating against out-of-state interests.
This understanding of the 21st Amendment was carried forward in the 2019 Tennessee Wine & Spirits Supreme Court case, where the Court determined that Tennessee’s requirement that owners of an alcohol retailer must reside in the state was entirely divorced from any health and safety rationale, and therefore was unconstitutional. After that case, many reasoned it would be a short distance to apply Granholm directly to the question of DtC shipping by retailers, and require states to establish DtC shipping permissions for national retailers if they were to allow it for local retailers.
However, those predictions have not borne out in the intervening years. In several cases, most notably Lebamoff v. Michigan in the 6th Circuit and Sarasota Wine Market v. Schmitt in the 8th Circuit, appellate courts have found in favor of state laws that discriminate against out-of-state retailers in regard to DtC shipping permissions. (The Supreme Court has denied petitions to review Lebamoff and Sarasota.)
Part of the courts’ reasoning in those cases seems to be a return to old 21st Amendment jurisprudence, namely, that when alcohol is involved, states cannot be restricted. But the courts have also worked to differentiate between wineries and retailers when applying Granholm.
In Granholm, the Court reasoned that wineries (and, as noted above, other suppliers) often already operated on a national scale. They had to be licensed by the federal government. They often sold across state borders. They were familiar with shipping processes and excise taxes, and could work to prohibit sales to minors. In contrast, recent courts have said, retailers are only licensed by their local regulators and lack the ability to abide by laws in other states; and even if they did agree to so abide, those other states would be unable to enforce their laws against foreign businesses. As such, when it comes to retailers, those courts have said, states should be free to restrict remote access to their markets.
While there are some obvious flaws to this logic—there are numerous alcohol retailers operating nationally, retailers are just as capable as anyone of paying taxes and blocking sales to minors, DtC statutes already require the license holders to accept the jurisdictional authority of the states they ship into, over a dozen states currently allow retailer DtC shipping of alcohol without apparent harm—this does seem to be the general trend of the courts, and it is far from assured that the Supreme Court would extend Granholm to retailers if they choose to take up a case.
Where do retailers go from here?
All of this begs the question, how can retailers create a bigger market for DtC shipping? How can they add states to their map?
For many, litigation has seemed like the way to go. Having the Supreme Court establish a national right for retailers to ship alcohol, eliminating states’ ability to discriminate against out-of-state shippers, would be a very effective step. However, that misses the actual effect of Granholm, which did not in itself change any state laws or require any DtC shipping per se. Instead, Granholm merely provided that if a state were to allow shipping of alcohol, they had to extend that permission to remote shippers. It then took a great deal of time, money and effort to convince states to adopt those laws, at least for wineries.
And there is nothing inherent about Granholm that required the ruling before states could change their laws. Even back in 1935, if a state wanted to allow DtC alcohol shipping by anyone anywhere, it would have been free to.
While of course it would be a great boon to have the Supreme Court eviscerate discriminatory state laws regarding DtC shipping by retailers, it will not be sufficient in itself.
Instead, the retailer DtC shipping market needs to convince states to change their laws. It must engage in lobbying. It must reach out to consumers who increasingly want access to alcohol products that they cannot find distributed locally, and can only access through a DtC shipment. It must assure state regulators that taxes will be paid, minors will be protected, and laws will be abided by. The DtC wine shipping market is where it is because it undertook these efforts and worked hard year after year to campaign in state legislatures for its interests and the interests of its consumers.
State regulators should themselves look back on the lessons of Prohibition, that the best (and really only) way to combat a black market is to shine light on it. Banning certain sales does not eliminate them, it merely criminalizes those who still want to enjoy them and profits those who are willing to break the law making them. Instead, creating a regulated framework for legal sales and shipments to operate, enabling law-abiding retailers and consumers to engage with each other, is the best way to reduce illegal shipments of alcohol.
The history of DtC shipping by wine indicates that these efforts are not necessarily easy. But it also shows that they bear fruit.
Alex Koral is a Regulatory General Counsel for Sovos ShipCompliant. He actively researches beverage alcohol regulations and market developments to inform development of Sovos’ ShipCompliant product and help educate the industry on compliance issues. Alex has worked with the company since 2015, after receiving his J.D. from the University of Colorado Law School.