Keeping Within the Spirits of the Law

During the past year liquor wholesalers have urged the U.S. Supreme Court to uphold the constitutional right of a state to regulate, and restrict, the sale of liquor by mail within its borders. According to Washington-based lobbying group Wine and Spirits Wholesalers of America, a ruling to uphold that right could curb the liquor industry’s effort to deregulate the sale of beer, wine, and liquor over the Internet. But there’s a chance that the high court’s agreement to rule on two cases involving Michigan and New York could end up benefiting direct marketers.

The Supreme Court, which agreed in May to hear the cases, is expected to hear oral arguments the first week of December. It probably won’t hand down a decision until spring 2005.

In the Michigan case, attorney general Mike Cox is asking the Supreme Court to overturn an appeals court ruling that struck down the state’s ban on home shipments of alcohol by unlicensed out-of-state merchants. Cox argues that these kinds of shipments bypass the state’s alcohol tracking and distribution system, which is intended to protect citizens from unaccountable sales of alcohol.

The case in New York was brought by Washington-based libertarian organization Institute for Justice, which represents two family winemakers, Juanita Swedenburg of Virginia and David Lucas of California, and several New Yorkers who want to buy alcohol from these companies. The organization argues that it is unfair that Swedenburg must go through a costly bureaucracy, attaining a liquor license and paying the fee that goes with it, while New York mail order wine companies can circumvent distributors and ship directly to residents.

Currently most states require mail order companies to have a liquor license for that state before they can ship alcohol products directly to customers there. To attain a license, marketers must have a physical presence — such as a store or a warehouse — in the state. An exception to this standard are the 13 states, including California, Colorado, and Washington, that fall within the “reciprocity” zone, in which catalogers with a license in any one of the states can ship to all the other states participating in the reciprocity agreement. On the other end of the spectrum are states such as New Jersey and New York, where direct-to-customer shipments of alcohol from out of state are prohibited altogether.

Many direct marketers would like to see the federal government legislate the distribution of alcoholic beverages, which would presumably eliminate the various state requirements and enable them to ship wine as easily as they ship chocolates or office supplies. The defendents in the cases under consideration by the Supreme Court want to uphold the right of the states to enact such prohibitions.

Free flow of shipments

“If I had to guess, I would guess that the status quo will prevail,” says Richard Marmet, cofounder of New York-based wine cataloger/retailer Best Cellars. “Right now the status quo is that states regulate [the sale of alcoholic beverages]. The federal government does so little in this area that it really lets the states have free reign. That’s why it’s a checkerboard of rules and regulations.”

A broadening of the laws regulating mail order sales of alcohol would enable marketers such as Best Cellars to expand their business beyond the states in which it already has a license or reciprocity. Small wineries could see even greater benefits. For instance, Broad Run, VA-based Pearmund Cellars Winery would expand its direct shipments across the country if the laws became less stringent, says owner Chris Pearmund. “I could see 10% of our business being shipped out of state,” he says.

Pearmund Cellars, which makes about 5,000 cases of wine a year, sells about 80% of its product onsite. Another 19% is shipped to restaurants and inns in Virginia and to distributors in Maryland and Washington. The remainder is shipped to consumers in Virginia. But if shipping alcohol throughout the country became simpler, Pearmund says, he would “in a heartbeat” create a wholesale division to sell to catalogers that produce gift baskets.

Even if the Supreme Court rules in favor of continuing to let the states establish their own regulations regarding direct shipments of alcohol, direct marketers may gradually find it easier to sell to more out-of-state consumers. “There has been a gradual loosening of the laws relating to direct shipment,” Marmet says. “There has even been a bill introduced in New York to allow direct shipment. I think the number of states that allow reciprocity will increase, but it may not increase as quickly as it will if direct shippers prevail” in the pending Supreme Court cases.

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