June 2, 2005, 12:00 AM

Supreme Court opens the winery door to online sales

States that restrict direct-to-consumer wine sales must now treat out-of-state retailers (read: online wine sellers) the same as in-state merchants, according to a recent ruling by the U.S. Supreme Court that experts say could impact direct sales of beer, liquor and other restricted products

States that restrict direct-to-consumer wine sales must now treat out-of-state retailers (read: online wine sellers) the same as in-state merchants, according to a recent ruling by the U.S. Supreme Court that experts say could impact direct sales of beer, liquor and other restricted products.

By overturning long-standing policies that several states have used to restrict direct-to-consumer wine sales, the court ruling is expected to open the door to interstate sales for thousands of wine retailers that have been blocked by rules the Supreme Court says are unfair. “This decision enables wineries, especially smaller ones, to ship direct to consumers in more situations than they could before,” says George Garrick, president and CEO of Wine.com.

The Supreme Court, in a 5-4 decision, said that Michigan and New York cannot discriminate against some retailers through a dual policy of allowing direct-to-consumer wine sales by in-state retailers but not by out-of-state retailers. Several states have justified that policy by citing the 21st Amendment to the Constitution, which granted states the right to regulate alcohol sales following the repeal of Prohibition. “The majority on the court said the amendment never intended to let states discriminate in violation of the Commerce Clause,” says attorney Sarah Hewitt, who specializes in legal issues for online retailers and is a partner in the New York law firm Brown Raysman Millstein Felder & Steiner LLP.

States have also argued that restricting direct wine sales would give them more control over alcohol sales to minors and prevent the loss of sale tax revenues. But the court wasn’t swayed by those arguments.

Mike Sykuta, assistant professor of agricultural economics at University of Missouri-Columbia, whose research on wine sales was cited by the Supreme Court in its ruling, says states have tailored their policies on direct wine sales to benefit their individual economic interests. States with large wine industries have been more likely to adopt some form of direct shipment, while states with well-established wholesaler-distributor industries have been less likely, Sykuta says.

Direct shipments of wine to consumers started to grow in 1986, when California devised a plan to promote cross-border sales by its own wine retailers, he adds. But California allowed direct sales only from states that would reciprocate by allowing imports of wine from California retailers, a policy that other states started to also implement.

Direct-to-consumer sales now account for only 1-2% of wine sales, according to the Wine Institute, a California wine industry trade group. One of the reasons that percentage is so low, experts say, is because only 13 states have no restrictions on direct-to-consumer sales. The others either prohibit all direct sales or restrict them.

Sixteen states now prohibit all direct wine sales; eight states, including New York and Michigan, allow direct sales only by in-state retailers; and 13 states allow cross-border wine sales only from retailers in other states that offer a reciprocal arrangement, according to Hewitt.

The 21 states that allow direct wine sales under restricted policies will now have to modify their laws to make them consistently for or against all direct wine sales, Hewitt says. She adds that she believes it will be politically easier for most of these states to increase rather than decrease consumers’ access to wine sales by terminating restrictions on direct commerce.

The eight states that allow direct sales only by in-state retailers are New York, Michigan, Connecticut, Massachusetts, Florida, Ohio, Indiana and Vermont.

The Supreme Court ruling doesn’t force the 16 states that prohibit all direct wine sales to begin to allow such sales. And though it remains to be seen how the 21 states with inconsistent laws will amend them, some appear likely to allow interstate sales. Gov. George Pataki of New York, for instance, has said he’s in favor of allowing d2c sales by both in-state and out-of-state wine retailers and that such a move would reap the state significant tax revenue.

Meantime, the way that states amend their laws is being watched closely by other beverage industries, including beer and liquor, that are also restricted from direct sales through the Internet. “They’ve been waiting to see what would happen with wine,” Sykuta says.

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