Home Wine Business Editorial Government / Regulations Tennessee Sues Out-of-State Retailers: Frivolous or Far-Reaching?

Tennessee Sues Out-of-State Retailers: Frivolous or Far-Reaching?

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In July, Tennessee attorney general Jonathan Skrmetti filed a federal lawsuit against
six out-of-state retailers, claiming they illegally shipped alcohol into the state. 

By Jeff Siegel

 

Alex Koral
Alex Koral

The Tennessee attorney general’s decision to sue a handful of out-of-state retailers for illegally shipping alcohol into his state should not be a surprise, say attorneys who work with alcohol regulation and laws. In fact, they say, it’s part of a trend – what Alex Koral, the regulatory general counsel for Sovos ShipCompliant, says is an increased effort among state regulators to address what they see as “one of their primary compliance issues.”

In July, Tennessee attorney general Jonathan Skrmetti filed a federal lawsuit against six out-of-state retailers, claiming they illegally shipped alcohol into the state. He sued under the federal 21st Amendment Enforcement Act, which has also been used by Ohio and Michigan officials over the past couple years in similar situations. The act lets state attorneys general bring civil actions in federal court against anyone believed to be illegally importing or transporting alcohol within their state.

The Tennessee action says the retailers didn’t have licenses to ship liquor directly to consumers from outside the state. In addition, it says, the companies ignored cease-and-desist letters from state officials and continued to sell alcohol to Tennesseans illegally.

Jason Canvasser
Jason Canvasser

“I think, with the growth of e-commerce, online ordering and direct shipping, more retailers are popping up who will ship into states where it isn’t allowed,” says Jason R. Canvasser, a member at law firm Clark Hill in Detroit, Mich., whose practice includes clients in the alcohol business. “As this trend increases, the [state] responses are going to increase.”

State coffers suffering

In Tennessee, the state sued internet retailers Bottle Buzz, Cask Cartel, The Liquor Bros/Lena’s Liquor, My Bev Store, Prime Time Liquors and Wooden Cork. State liquor agents bought what the suit calls “unauthenticated and untaxed distilled spirits from each defendant.” The purchases included a 750ml bottle of Evan Williams peach whiskey from Bottle Buzz.

Tennessee’s motives here — and why several attorney observers expect to see more such lawsuits — were similar to those in Ohio and Michigan. Not only were the retailers violating state shipping laws, but each state action emphasized that the retailers weren’t paying state taxes on the products shipped into the state. Michigan has been especially aggressive, filing lawsuits against at least two wineries and four retailers since 2018; Ohio’s 2020 federal lawsuit included Wine.com as a defendant, claiming it had been shipping wine to Ohio from out-of-state wholesalers instead of using its Ohio distributors for Ohio orders, as required by law.

Tricky and expensive

It’s also worth noting, say the attorneys, that the federal law cited in the lawsuits has rarely been used and, says Koral, that lawsuits targeting out-of-state retailers can be “very tricky and expensive to carry out.” In addition, the states’ motives, though they acknowledge lost taxes and protecting the health and safety of residents, may also include pressure from in-state distributors, who want the shipping stopped because they’re cut out of the supply chain. In fact, both the Ohio and Michigan actions mentioned this prominently.

Will Cheek
Will Cheek

“I don’t think anyone doubts that the states have an obligation to enforce the law and protect their interests, but I also really think the states are late to this game,” says attorney Will Cheek, a partner with Adams and Reese LLP in Nashville, Tenn., whose practice includes licensing and regulatory compliance under Tennessee state and local liquor and beer laws. “There is illegal shipping going on all over the place, and I think they see it happening and feel they have to do something because it’s all too common.”

So what comes next?

The consensus from those interviewed for this story is that state regulators probably won’t go after consumers who purchase wine, beer and spirits illegally; the public relations backlash would likely be too great (though Texas did use UPS and FedEx shipping lists in 2011 to identify consumers who bought wine illegally). But, Koral says, some state regulators, including those in Massachusetts, have been “extremely vocal” about illegal shipping — and especially illegal sales to minors. So more lawsuits are likely.

Nevertheless, there is some doubt about whether increased enforcement can make much of a difference. For one thing, says Cheek, cash-strapped states may have more important things to spend their money on than ferreting out direct shipping violations. For another, new out-of-state retailers keep popping up all the time, either assuming what they’re doing is legal or that the penalties for getting caught are worth the risk.

For a third, many – if not most – consumers remain oblivious to the intricacies of direct shipping laws. If a retailer says it can ship to them in their state, who are they to argue? Can’t wineries ship to them? So why not retailers?

“The lawsuit may be Custer’s Last Stand for wholesalers,” says Cheek. “Although Tennessee may win the case, I would bet that 10 years from now, consumers in most states will be able to legally purchase beer, wine and spirits shipped by UPS and FedEx to their homes.”

Which would render these kinds of lawsuits moot.

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Jeff Siegel

Jeff Siegel is an award-winning wine writer, as well as the co-founder and former president of Drink Local Wine, the first locavore wine movement. He has taught wine, beer, spirits, and beverage management at El Centro College and the Cordon Bleu in Dallas. He has written seven books, including “The Wine Curmudgeon’s Guide to Cheap Wine.”

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