On Jan. 26, Mississippi Attorney General Jim Hood and Revenue Commissioner Herb Frierson stood before reporters at a press conference, surrounded by 67 bottles of wine and spirits. Hood announced that the alcohol had been purchased by state investigators online from retailers outside state lines. It's illegal for merchants to ship alcohol into Mississippi, but 22 of the 63 retailers that investigators tried to order from had shipped alcohol into the state. One bottle was sent to Frierson’s office.
Hood announced that he has asked a judge to order out-of-state merchants to stop sending alcohol to Mississippi residents and that the state is suing four wine retailers, two in New York and two in California. "No moonshiner in the state of Mississippi would ship his product to the commissioner's office," Frierson said.
The lawsuit is the latest salvo in a battle between state governments and some of the most well-known wine merchants in the country. And wine consumers are caught in the middle.
Tightening the Rules
Since the Supreme Court's 2005 Granholm v. Heald decision, more than a dozen additional states have legalized direct shipping by wineries to consumers. That has given many wine lovers unprecedented access to wines they could not buy before, and given small wineries increased business opportunity. The number of states that permit winery direct-to-consumer shipping has risen from 27 in 2005 to 42 today.
But Granholm did not cover shipping by retailers. So while winery direct shipping has grown, the number of states permitting out-of-state retailer direct-to-consumer shipping has fallen from 18 states in 2005 to just 13 today.
The 21st Amendment repealed Prohibition and delegated alcohol regulation to the states, which has led to a patchwork of rules that differ from jurisdiction to jurisdiction. Ten states and D.C. allow retailer shipping, and three states are so-called "reciprocal" states, allowing only retailers from states that allow shipping themselves to ship there.
Despite these laws, many retailers had been shipping into states that don't permit it, because these laws were rarely enforced. "All the packages look the same, they're all treated the same, the states treated it that way," said Daniel Posner, owner of Grapes the Wine Company, a retailer in White Plains, N.Y. He is also the president of the National Association of Wine Retailers (NAWR), a group of store owners advocating for shipping rights.
States that banned the practice had little recourse. A spokesperson from the Washington State Liquor and Cannabis Board (WSLCB) explained that, because an out-of-state retailer shipping into Washington—which does not allow it—does not hold a license with the state, there is only so much a state liquor authority can do. The WSLCB will send a warning to the retailer, informing them that they are not permitted to ship into the state (some might not know, the spokesperson added). They can also contact the regulating authority in the home state of the retailer to inform them of the illegal shipment.
But in the past two years, some states have passed stricter laws, while others have tightened enforcement. In 2015, New York state's liquor authority fined an Albany store that was shipping to out-of-state consumers. Last year, Michigan passed a law prohibiting out-of-state retailers from shipping wine into that state and Missouri repealed a law that had allowed Missouri residents to receive wine from out-of-state retailers in "reciprocal" states, those whose residents could in turn legally buy wine from Missouri retailers.
And in August, Illinois made it a felony to ship into the state.
Another key change has significantly cut down on retailer shipping, according to leading merchants. Until recently, common carriers like FedEx and UPS often made the deliveries for retailers. But that’s no longer the case.
Two years ago, UPS began sending notices reminding retailers that it could not transport alcohol to states that did not allow out-of-state retailer shipping. The company's policy had always been that customers must comply with all state laws. In practice, that did not mean the shipper always rejected boxes from wine retailers. But after the notice, the company increasingly rejected shipments going to prohibited states.
FedEx began following suit a year later. (DHL and the U.S. Postal Service do not accept alcohol shipments.) As Mississippi state investigators found out, the carriers are not completely blocking shipments, but retailers tell Wine Spectator shipping is becoming increasingly difficult.
A spokesperson for FedEx would only tell Wine Spectator that, "Our shipping guidelines and conditions of service are periodically reviewed and adjusted as laws and regulations change."
UPS sent the following statement: "UPS takes its responsibility to comply with all applicable laws, whether state or federal, very seriously. For many years UPS has specifically required approved wine shippers to comply with applicable state laws on alcoholic beverage shipments, and has provided guidance on the states to which wineries and retailers are allowed to ship. Shippers are responsible for complying with applicable state and federal law, and when UPS discovers violations it will take appropriate action in response, including but not limited to termination. This policy applies regardless of whether a state regulator has contacted UPS regarding alleged violations."
Lost Business, Lost Selection
For many of America’s top retailers, this clampdown on retailer shipping has led to a significant loss of business. For consumers, it’s a loss of options.
Calvert Woodley, a chain of retail stores in Washington, D.C., offers a wide range of premium wines. It’s also a prime source for Bordeaux futures, which allow customers to order the latest Bordeaux vintage and then accept delivery when the wine is released. Before UPS and FedEx began rejecting shipments, a customer outside D.C. bought a large amount of wine en primeur from Calvert Woodley. A year later, the wines are in, but the store cannot ship the wines to him.
While Posner declined to disclose how much of his business came from out-of-state shipping, or where his major markets were, he said that he's had to eliminate states from his shipping roster over the years because of state crackdowns. "To the point where, over some undetermined amount of time, I'm not sure whether we will be out of the shipping business entirely," he added.
Ed Sands, owner of Calvert Woodley, shares these concerns. He estimates that out-of-state shipping once accounted for about 10 percent of his business; New York and Connecticut, which have recently become problematic, are two of his biggest markets. He also mentions that as a D.C. retailer, he has many customers in Maryland and Virginia he can no longer ship to.
Posner also described an atmosphere of confusion at the liquor authorities over the past five years. He reported receiving cease-and-desist orders from states that have told him he simply needs to apply for a permit, and then being told at a later date that he cannot get said permit. "They don't even know the laws that they're enforcing," said Posner.
Many retailers suspect that wholesalers are behind these new crackdowns, with the help of their lobbying arm. If retailers are shipping to consumers in other states, it means the wine is not going through a wholesaler in that state. According to a study conducted by NAWR, alcohol wholesalers have spent more than $107 million on state political campaigns in the past five election cycles.
"We certainly will report to states what we think are weaknesses in their enforcement authority," said Craig Wolf, president and CEO of the Wine and Spirits Wholesalers of America (WSWA). "And we will certainly report to the states illegal actions when we come across them."
Wolf adds that he is not concerned that retailer direct shipping undercuts wholesalers' business, because every wine that a retailer sells was purchased from a wholesaler originally. "Any sale that goes through them whether it be in the state or out [of] the state, legally or illegally, would come through a wholesaler," he said. "So we're not losing any money as far as I'm concerned."
The trade association opposes direct shipping of all kinds. In an unregulated market, Wolf says, there is no way to control whether or not products are safe, and not counterfeit, that underage people are not getting their hands on alcohol, and that taxes are being paid.
"At least [wineries] are federally licensed and have something at stake," Wolf said. "The retailers are state-licensed in their own states, not anywhere else." As for the states that have allowed out-of-state retailer shipping? "They're losing local tax revenue, they're losing local jobs, and there's no way to account for the product," argued Wolf.
Posner disagrees. "No local retailer is going out of business because of shipping," he said. He argues that a consumer's first stop for wine will be their local store, typically for everyday wine. If they can't get what they're looking for there, that's when they will start looking elsewhere.
Sands observes the same at Calvert Woodley: "Generally the wines that we would ship would be the higher-price, harder-to-get, rare wines."
There's also no evidence to support the claim that legal direct shipping results in lost tax revenue or jobs. When Maryland legalized winery direct shipping in 2011, the state tasked its comptroller with monitoring its impact on the state’s coffers and businesses. His report, issued in January 2013, found that in its first year permitting direct shipping, the state had collected more than $125,000 in permit fees and more than $550,000 in tax revenue, yielding a more than half-million dollar profit for the state while having "minimal to no impact on Maryland wholesalers" and "a measurable positive impact for product availability and consumer choice."
The Internet has increased the availability of fine wines to consumers. Posner believes the current shipping system has not kept up with that: "These laws are old and out of touch and very anti-consumer, anti-business, anti–21st century."
That may be true, but that doesn't mean retailers can ignore the laws. Instead some of them, through NAWR, are trying to change them—in state legislatures and courthouses.
Advocates of direct shipping look to Granholm v. Heald as a model. Many believe this sets a precedent for allowing retailer direct shipping, arguing that the only reason the decision did not apply to retailers is because there was no retailer plaintiff.
Opponents cite that the Granholm decision explicitly stated that its ruling did not extend to retailers. "Granholm was a very limited decision, and what the retailers are trying to do is expand upon that decision," said Wolf. He also does not think courts should decide the issue. "You have one judge seeking to impose their will on a state when it comes to alcohol policy."
Currently, there are legal challenges to the ban in Michigan, Illinois and Missouri.
Posner recognized that even if the federal courts step in, retailers will have to go to the states next. After Granholm, wineries needed to convince states that allowing shipping was good for commerce and for residents. Retailers will need to make that same argument, that states would be better served allowing both in-state and out-of-state retailers to ship to residents, and benefit from increase commerce and tax revenues.
Since he's been president of NAWR, Posner has been trying to focus more on lobbying the state legislatures. One of his top priorities? His home state, New York. "This sends a good strong message to others that we're not hypocrites and that we welcome the competition," he said. "New York would represent a great state to flip the script on."
For more on the court cases challenging the bans on retailer shipping, and on lobbying efforts to change the laws in multiple states, check out part 2 of this series.
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