Tennessee Legislators Aim to Limit Winery Direct Shipping Sales

Lawmakers propose banning winery direct shipping through fulfillment houses, which handle logistics for small wineries; federal court upholds Missouri ban on out-of-state wine merchants

Tennessee Legislators Aim to Limit Winery Direct Shipping Sales
Lawmakers in Nashville are trying to limit how wineries sell and ship wine to consumers. (Getty Images)
Feb 17, 2021

Two Tennessee lawmakers have proposed a law that would make it prohibitively difficult for many small wineries to sell direct to the state's consumers. The bill, introduced in both the state house of representatives and senate, would prohibit wineries from shipping to Tennessee residents through fulfillment houses, firms widely used by U.S. wineries to handle shipping logistics.

Owners of small wineries tell Wine Spectator that if the bill is passed it could be a devastating blow to many wineries' sales in the state. It could also inspire legislators in other states who oppose wine sales outside the three-tier system. Courts have knocked down numerous other restrictions since the Supreme Court's 2005 Granholm decision forbade states from discriminating between in-state and out-of-state wineries when it comes to direct-to-consumer sales.

Tennessee State Rep. William Lamberth introduced House Bill 0742 on Feb. 10, and State Sen. Page Walley has introduced it as Senate Bill 0705. The bill would limit Tennessee residents to direct shipments sent from licensed wineries' premises, "public welfare requiring it." It also forbids Tennessee's Alcoholic Beverage Commission (ABC) from granting shipping licenses and permits to fulfillment houses.

Many wineries shipping out of state use fulfillment houses. Because every state has different laws on how wineries can ship, what licenses are needed and how taxes are collected, the firms help small wineries navigate the landscape and keep costs down. Producers could face substantial expenses if they opt to start shipping to Tennessee consumers without fulfillment houses. Many might simply abandon Tennessee's direct-to-consumer market.

Chicago-based lawyer Sean O'Leary, who has participated in multiple wine commerce cases, believes that the bill is intended to stop wines from being sold outside of the industry's three-tier system by making direct-to-consumer shipping more difficult. "I am sure [the legislators] are doing this at the behest of wine wholesalers," he told Wine Spectator via email. O'Leary believes the bill would essentially mean "de facto prohibition" on small wineries' business while they already face tightened margins due to the COVID-19 pandemic.

Because many small wineries don’t distribute their wines through the three-tier system, instead relying on direct orders, O'Leary predicts that the bill could eliminate smaller wineries from Tennessee's market and leave consumers wanting for variety. And this effect would be compounded if other states follow Tennessee's lead. "Bad ideas have a way of catching fire," O'Leary observed, "If this [direct-to-consumer] revenue stream is eliminated, expect to see potentially thousands of wineries going out of business."

State Sen. Walley disagrees, arguing that the bill will be a boon for small Tennessee businesses. "Nothing in this legislation prohibits the direct shipping of wine to consumers, [as long as it comes] from the primary source of production," he told Wine Spectator. "We cannot allow California companies to subvert our laws for their own benefit. We must protect the safety of Tennesseans by ensuring alcohol is sold in a safe manner. It's as simple as that," Walley explained. "I introduced this legislation because it puts the people of Tennessee first." (Walley did not elaborate on how fulfillment houses are subverting the law or endangering Tennesseans.)

Several winery owners interpret the bill differently. "I don't see how it benefits Tennessee's residents," says Adam Lee, co-founder of Siduri and current owner of Clarice Wine Company and Beau Marchais. Though Lee doesn't use fulfillment houses, approximately 90 percent of his sales are direct shipment orders. "The only thing this proposed legislation does is make it more difficult for wineries to fulfil the desire of Tennessee wine lovers."

Sonoma's Carlisle winery uses fulfillment houses for all its direct shipping orders. "How does a fulfillment company using a licensed carrier for delivery of alcohol beverages on the behalf of a licensed winery represent a danger to the residents of Tennessee?" asks Carlisle winemaker Mike Officer. "Clearly the answer is, it doesn't." Officer says Carlisle ships more than 7,000 cases of wine direct each year.

Officer thinks that Tennessee's tax coffers will also suffer if the bill passes, losing permit and tax revenue. "In short, no one benefits from this piece of special-interest legislation except for distributors in Tennessee," he continued.

The bill could significantly hit tax revenue. "We believe that, conservatively, over 60 percent of [wine] shipped into Tennessee comes from licensed fulfillment houses," said Jeff Carroll, general manager for beverage alcohol at Avalara, a tax software company used by many wineries.

O'Leary observed that restrictions on fulfillment house shipping already exist in Kentucky and Oklahoma, but this is the first clear legislative ban he has seen. Under current Tennessee law, wineries can ship up to 3 cases per year per customer.

Shipping by out-of-state retailers is prohibited. Tennessee became a focus for wine retail law in 2019 when the U.S. Supreme Court quashed its residency requirement for obtaining a liquor license, potentially opening the state's retailer direct shipping laws to challenges.

Federal Court Rejects Challenge to Missouri Wine Retail Law

A federal appellate court also cited the Supreme Court's Tennessee decision in a Feb. 16 ruling on Missouri's shipping laws in the case Sarasota Wine Markets, LLC v. Schmitt. The circuit judges dismissed a challenge to Missouri's ban on direct-to-consumer wine shipments from out-of-state retailers. Several Florida-based wine retailers alleged that Missouri's retailer residency requirements discriminated against out-of-state sellers. Lawyers argued that the Tennessee decision is broad and that it means states cannot discriminate against out-of-state wine merchants.

But in the 8th Circuit decision, the judges stated that while the Supreme Court struck down Tennessee's requirement that residents live in the state for two years before getting a liquor license, the ruling did not apply to the Missouri case because its plaintiffs hadn't challenged such a requirement. "Rather, they challenge Missouri's requirements that licensed liquor retailers be residents of Missouri, have a physical presence in the state, and purchase liquor sold in the state from licensed in-state wholesalers," the ruling stated.

The plaintiffs argue that the Supreme Court's decision is broader than just striking down the durational residency requirement. Retail shipping advocates have challenged similar laws in other states and hope to have the Supreme Court weigh in.

Where can you order wine from? Check out Wine Spectator's comprehensive guide to state shipping laws.

News Direct Shipping Economy Legal and Legislative Issues United States

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