May 30, 2008, 12:00 AM

Patchwork of Laws

(Page 2 of 2)

A 2005 ruling by the U.S. Supreme Court has added new fuel to advocates’ efforts to open up interstate online wine sales. That ruling, in the case of Granholm v. Heald, determined that states can’t prohibit direct-to-consumer shipments of wine from out-of-state wine producers if they permit direct-to-consumer shipments of wine from producers within the state.

“States may not enact laws that burden out-of-state producers …. to give competitive advantage to in-state businesses,” the ruling stated in part. The net effect of the ruling is that 36 states now permit shipments of wine directly to consumers. But because the ruling refers to shipments rather than to wineries or retailers specifically, it’s been open to interpretation on whether the ruling applies to both.

Wine retailers and their advocates have argued before a number of state courts that the Supreme Court ruling should apply to retailers as well as to wine producers. In January, they won a victory in the U.S. District Court of Northern Texas, which ruled that Texas may not prohibit consumers from having wine shipped to them from out-of-state wine merchants if the state allows the shipment of wine from in-state wine merchants. The ruling rejected claims by the state of Texas, wine wholesalers and others that Granholm v. Heald does not apply to wine retailers as it does to wine producers.

Opening warehouses

The question also is being tested in other states. Suits similar to the Texas challenge have been filed in New York and Michigan. In the state of Washington, Senate Bill 6384, which specifically allows out of state retailers to apply for a permit to ship wine directly to consumers within that state, reached the Committee on Labor, Commerce Research and Development with the active support of, among others, retailer, although it was eventually scuttled under opposition from local retailers and wineries, Bergsund says.

“We are trying to do our part,” Bergsund says. “ wants to be able to provide consumers in every state with the maximum product selection at the best prices. The state laws are anti-consumer-they shrink the selection and in many cases result in higher prices for consumers.” also is covering its bases with warehouses in several states that provide local nexus and allow it to sidestep the question of how state rules affect in-state versus out-of-state wine shippers. That still fails to satisfy the requirements of some states. For example, Maryland law allows consumers to order wine only from a retailer located in the same county.

“So we don’t sell in Maryland because even if we put a warehouse in Maryland, we could only ship to the county it was in,” Bergsund says. Nevertheless, between its nine warehouses that provide local nexus and the states that allow direct-to-consumer shipments from wine retailers, Bergsund estimates is reaching about 75% of the U.S. wine-drinking public.

Like, K & L Wine Merchants, with three California stores and an online store, participates in challenges to state laws limiting interstate direct-to-consumer shipping of wine; for instance, by sending staff to testify in the Texas case and by its ongoing financial support of the Specialty Wine Retailers Association.

“We sell a lot of rare wines that typically aren’t available everywhere, and the Internet is perfect for that,” says co-owner and chief technology officer Brian Zucker. Zucker would welcome the opportunity to sell into some major markets that he currently can’t ship to, such as Massachusetts and Florida.

Status quo momentum

Despite the opposition from wholesalers, Zucker and Bergsund argue that wholesalers, as well as retailers, would benefit from a more open wine market online.

“We buy from wholesalers. All retailers do. They provide access to a lot of products it would be hard to get directly,” Bergsund says. In fact, he argues, no parties would lose out if state laws limiting or banning shipments to wine to consumers were to change along controlled lines: Consumers win by gaining more choice and wholesalers win because the retailers they supply have more places to sell. Most out of state retailers would willingly register for a license to sell in a state, giving the state the ability to collect the appropriate taxes, he adds.

“The biggest issue is that state laws have been in place for a long time and there is a lot of momentum to keep them that way,” he says. “You’ve got 50 different situations with local retailers and local wholesalers, and not everybody is for free trade. It’s a state-by-state thing, and it would be nice to see a couple of them, like Texas and Washington, help build momentum for the others.”

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