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08.2005

Massachusetts Beverage Business

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Article By: Ken Sternberg

The ruling concerns only wine, not beer and spirits, and throws out as unconstitutional New York and Michigan's restrictions on direct wine shipments from out-of-state if in-state vintners can ship their wines within and beyond state borders. It will not open the floodgates and let wineries immediately start shipping their wines to states previously closed to direct shipping. While the court's ruling sets no specific deadline for changing the rules, industry observers believe little time will be wasted and that legislative battles will begin soon.

The main issue was whether the 21st Amendment of the Constitution, which gives states wide latitude to regulate alcoholic beverages, trumped its Interstate Commerce Clause when shipping wine is concerned. The Court's majority ruled for the latter, but did not invalidate the three-tier system.

"The court case was both a victory and a defeat for the industry," says Michael Epstein, Vice President/General Counsel of Horizon Beverage Co. "It was a defeat in the sense that the status quo was not maintained by the court. They shot down that dichotomy (of allowing in-state wineries to ship within the state but not allowing out-of-state wineries to do the same). The states couldn't maintain a dual system. That was the loss. But the victory was that the right for a state to maintain a unique system of alcohol distribution control was explicitly reaffirmed by the court. That was a victory for everybody in the industry," he says, adding "The Court did recognize the unique nature of alcohol and did accept the three tier system. States can maintain it, but not in a way that is discriminatory."

The greatest danger in allowing direct interstate wine shipments, Epstein says, is what he calls a "tremendous potential" for minors to obtain alcohol unlawfully. "The current system we have in place, with face to face off-premise sales in a licensed package store, is the most effective way to keep minors from alcohol. Once sales start going over the internet you can only hope that it's as effective as the system we have now. Alcohol sales via the internet is inherently a bad thing, and I think laws that restrict that are in the public good, whether in Massachusetts or another state. I don't think states want unchecked alcohol sales over the Internet.

"Many argue this point by saying 'That's ridiculous. Kids aren't going to buy alcohol on the internet because they want instant gratification. Kids aren't going to buy wine over the internet because they don't drink wine. They drink beer or spirits - wine is not the beverage of choice for a minor'." The reality, Epstein claims, is that "Once you open a door it's very hard to shut it. Spirits and beer will flow into the state and it will flow into the hands of minors. People don't appreciate the problem. They see it as just wine coming in. The Court's decision is not about wine, it's about discrimination in the shipping of out-of-state alcohol products."

Although many proponents of direct shipping see it mainly as a way to let smaller, low-production wineries enter more markets, this view may be simplistic, he contends.

"A consumer who wants to order wine from a small boutique winery in California may say 'I just want to order a bottle of this delicious Merlot my wife and I had during a trip out there'. If that's all it was, they might be right. But they're not appreciating the greater issues beyond that. They're not thinking about the exposure that kind of practice might give to minors to get alcohol. By allowing that wine to come in, you open up the possibility of alcohol coming in to someone who isn't of age and shouldn't be buying it. That being the case, why allow a less secure system to evolve simply to appease some wine enthusiasts who aren't able to get limited production wines?" Epstein says.

He disagrees with those who charge the primary interest of Horizon and other wholesalers is to control the entire market. "With regard to small, boutique wineries, we're talking about an insignificant volume for any wholesaler in this state. Most of these wines aren't represented by wholesalers now so it's not lost business opportunity. We don't think the volume is ever going to be at a level that is significant enough that we're talking about a business protection issue. Nobody's looking to attack anyone else's business." Epstein comments. "I don't see internet wine purchases being a drain on our business. The two customers would be consumers of boutique wines and minors. The latter is business nobody wants. We'd like that to disappear. The former is such a small drop in the bucket that it's not about dollars and cents."

"Very few wine brands have distribution in all 5O states. In many cases, a wholesaler not only won't represent you, but advocates a law making it a felony to ship wine into that state," says Jeremy Benson, Executive Director of Free the Grapes, an organization that opposes restricting direct wine shipments. The group is funded by consumers and wineries. Many smaller wineries want to sell directly to customers because large wholesalers are not interested in carrying them, effectively locking them out of the market, he says, adding "Direct shipping helps build brands that would not be sold by wholesalers, anyway." The assumption is that "many of the wines (affected by direct shipping laws) are broadly available across the three tier system. The reality is that they're not," he notes.

"No one's talking about getting rid of the three tier system," Benson stresses. In California, where direct shipments are allowed, most wineries choose to sell through the three tier system even though they are free to sell directly to consumers, stores and restaurants, he says. The reason is that wholesalers, with a trained sales force, know the market and can do a better job of selling their wines, he explains. Benson allows that the danger of underage alcohol purchases is a serious issue that must be addressed, citing a recent Federal Trade Commission study that found no evidence of underage purchases in states that permit direct wine shipping. Also, he points out that no states allowing direct shipping have ever repealed such regulations because underage purchasing was a problem.

"I don't think that's an endorsement of success," Epstein says. "They haven't even looked at the issue to see whether there's a problem. The fact that you don't hear about minors getting shipments of alcohol in other states probably means that no one's getting caught. If no one's getting caught, that means there are no effective enforcement methods in place. Can you afford to take that chance? When we're talking about minors and alcohol can we be too protective? Is a little bit of underage consumption okay? No, it's not," he continues.

What's more, Epstein says, the consequences of a minor's failed attempt to buy alcohol via the internet are virtually nonexistent. In fact, in most cases they'll even get their money refunded, he notes. But under the three-tier system, "If a retailer fails to take adequate precautions he puts his liquor license at risk. That's his whole business, everything he and his family have worked for. That can all go away if he's not constantly vigilant about the sale of alcohol to minors. Also, the minor risks being arrested and losing their driver's license. There are a lot of disincentives for a minor to try to buy alcohol from a package store."

Some observers suggest underage alcohol purchases could be minimized or stopped if FedEx, UPS and other carriers tighten their procedures by always insisting that recipients provide proof of age. Epstein contends this would fail. "The problem with that is that these companies are delivery companies. Their primary responsibility is delivering packages, not making sure kids don't get alcohol. It is a significant and serious obligation which our package stores bear very well. But they are specifically charged with preventing minors from getting alcohol. I don't know if I would feel comfortable entrusting (delivery carriers) with that obligation."

A secondary issue is excise tax revenue, he says. "Our primary role as a wholesaler is to collect and pay state beverage excise tax. It's a very effective system for the state because there is only a small handful of wholesalers and it's easy to keep an eye on everyone charged with tax collection. There's little the state needs to do to collect its money. It's natural to assume there's going to be an erosion of the amount of state excise taxes collected from interstate sales. Some people might pay it, others might not. What are you going to do if they don't?"

Addressing this, the Court maintained that "New York could protect itself against lost tax revenue by requiring a permit as a condition of direct shipping. This is the approach taken by New York for in-state wineries. The State offers no reason to believe the system would prove ineffective for out-of-state wineries." Michigan requires all outside sellers of wine to submit monthly sales and tax reports to the state, the Court noted, adding "If licensing and self reporting provide adequate safeguards for wine distributed through the three-tier system, there is no reason to believe they will not suffice for direct shipments."

"By this time next year I think most states will have modified their laws or regulations," says Richard Blau, a partner with Tampa, Florida, based law firm Holland & Knight. He heads the company's Alcohol Beverage Team. "It's now up to states to decide if they're going to level the playing field by banning shipments from within and from outside their states, or take away the benefit in-state wineries have over out-of-state wineries by banning all shipments," he says. The issue of underage buyers making illegal alcohol purchases is real, he remarks, adding that it has the potential to encourage states to cut off all shipments.

"It's pretty unlikely there's going to be a lot of leveling down. Early announcements by Michigan officials that they intend to outlaw all wine shipments drew a lot of negative reaction from consumers and that state's 46 wineries," says Benson.

"I'm definitely concerned for a few different reasons," says Gary Park, owner of Gary's Liquors in Chestnut Hill, when asked his feelings about possible direct wine sales in Massachusetts. "I'm concerned about how the state will handle sales to minors" he says. "There are a lot of small wineries that can't get representation here, but there are also a lot of high end, boutique wineries that could start selling directly to consumers," Park says, citing Harlan Estate, a California winery. "They could stop selling to Horizon Beverage and that could hurt me," he says. "I'm concerned about my high end customers to whom direct sales would hold appeal. They may say 'Gary couldn't get me this bottle of wine,' and buy it on the internet."

Another thing Park says he worries about is permit fees paid for delivery vehicles. "Is FedEx (and other carriers) going to buy a permit for each of its vehicles? If not, they're at an unfair advantage because we have to buy one for each of ours," he points out. And, he wonders, "Will each out of state winery get a permit from Massachusetts and pay the fees and taxes on what they sell? Will they be held to the same conditions as retailers? Direct shipping sounds like a win for the consumer, but it needs to be fair to us, also."

"I don't see losing business from direct shipping," counters Keith Mills, owner of Esprit du Vin in Milton. "In general, I'm not happy about it, but I don't see how it's going to have a lot of effect on stores like mine," he says. "Nothing takes the place of going into your local wine store and seeing the wines. If you just want to buy everything online, that's fine. But you don't have the ability to taste wines at in-store tastings. My customers like to come in to talk about wine, share recipes and opinions, and learn about wine. I'm trying to empower people," says Mills.

"Direct shipping would help us, but I don't really agree with it because distributors and small businesses in Massachusetts will suffer," says Ed Costa, General Manager/Managing Partner of Boston's Vinalia Restaurant, Lounge and Wine Bar. "I have mixed feelings. The system we have now works well enough. Everyone is getting their share now."

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