Unconstitutional Wine Laws

by Elliott Morss, Morss Global Finance

Introduction

A recent report found that more wine is consumed per capita in Massachusetts than in any other US state. That might lead you to expect that Massachusetts wine laws would accommodate its wine drinkers. They don’t. In fact, a recent study[1] found that Massachusetts is one of 16 states with the most severe trade restrictions: these states do not allow its citizens, liquor stores, or other retail outlets to buy wine from outside its borders – a practice that was recently ruled to be in direct violation of the Interstate Commerce Clause of the US Constitution.

There are 15 other states in the same “most restrictive” category as MA: Alabama, Arkansas, Delaware, Kansas, Kentucky, Maine, Maryland, Mississippi, New Jersey, Oklahoma, Pennsylvania, Rhode Island, South Dakota, Tennessee, and Utah.

Robert Parker, the wine guru and a Maryland resident, said

“I have a temper, and I lost it. Here it’s easier to get a gun than have a bottle of Chardonnay shipped to your house.”[2]

What do the restrictive laws mean for an MA resident such as me?

1. I have to buy from a retail store with a state license to sell wine. That store in turn has to buy from a wholesaler/distributor.

2. Suppose I want to buy a wine directly from a California winery not carried by a MA wholesaler? Not possible: no winery can ship directly to me. If this is not a restriction of trade in violation of the Interstate Commerce Clause in the US Constitution, I don’t know what is.

In what follows, I detail my frustrations and analyze how these restrictions benefit or hurt “stakeholders”.

The Lenox Wine Club

I founded the Lenox Wine Club along with 14 other members last year. We meet regularly to taste and rate wines followed by dinner at a local restaurant. I make the wine selections with another member. For every tasting, we choose a wine category, e.g., “heavy reds” and then select wines up and down the price range. In our first 3 tastings, box wines costing the equivalent of $4/750ML (normal wine bottle size) have won.

To select the higher price wines, I normally access the Wine Spectator database for wines with a high rating to price ratio. Wine Spectator only estimates the retail price so I then go to wine-searcher to check on wine availability and actual wine prices. Once I know the wines are available in the US, I take my selections to the restaurant where we will be having our tasting/dinner. And that is where the problems start.

It does not matter that the wines I have chosen are available online, our restaurant must buy through its distributors: if its distributors do not carry the wine, we can’t get it. Our restaurant has 5 distributors and they rarely have my first, second, or third choices. So we have to settle for second rate wines, even though the wines we want are readily available for sale in the US!

US Laws – Post Prohibition

Following the repeal of Prohibition in 1933, states adopted a three-tier system to regulate US alcohol sales. It encompassed producers, distributors, and retailers. Wineries had sell wine to distributors licensed by each state who in turn sold to licensed retailers. Since 1933, state laws have evolved in different ways. In MA and the 15 other “most restrictive states, there has been very little evolution.

MA Laws – Today

To understand MA laws, it is useful to consider separately each affected group and how they are treated. These include the distributors, licensed retail stores, wine producers (both in MA and outside), and consumers. MA distributors have things just the way they want them. According to Gokcekus and Nottebaum, op. cit., New England is great for distributors, with 3 of the most restrictive states (Maine, MA, and Rhode Island), one “highly restrictive” (Connecticut) and two “moderately restrictive” (New Hampshire and Vermont). Martignetti is the largest distributor in New England and the 7th largest in the US.  MA laws effectively give Martignetti and the other distributors complete control over the MA wine market.

Consider next retailers. In many states, wine can be purchased in liquor stores, supermarkets, drug stores and convenience stores. In MA, sales are limited to liquor stores and a “few” supermarkets: each supermarket chain can sell in only 3 of their stores. That means, for example, that the Stop and Shop supermarket chain, with more than 120 markets in MA, can sell wine in only three.

When it comes to producers, there are local MA producers and out-of-state producers. The latter can only sell in MA via a licensed MA distributor. Liquor stores cannot order from the out-of-state producers directly, nor can individuals. They have to buy via MA distributors. MA wines producers are facing an even more severe problem: it is costly for distributors to market and distribute wines from small local producers. But fortunately for these small distributors, they can sell their wines directly in MA.

Finally, there are the consumers. As mentioned above, we can buy directly from small MA wine producers. But beyond that, we can only buy through retail stores – no online purchasing. In other words, if you live in MA, wines cannot be shipped to you from out-of-state.

Laws Violate US Constitution

And then there is this troubling issue: MA laws violate the US Constitution. Here are the details. In 2005, Governor Romney tried to pass a bill allowing direct shipments to MA consumers. He said

“It’s time we end the monopoly that wholesalers have over wine sales…”

The Legislature blocked the bill’s enactment. In 2010, a Federal District Court ruled that the MA law banning direct shipments from an out-of-state winery to a MA consumer was illegal. That decision was later upheld by the U.S. 1st Circuit Court of Appeals. In essence, the Constitution says states should take no action to interfere with the free flow of commerce among states. Banning shipments of wine from other states clearly violates that rule.

The Court case was narrowly defined. As I noted above, MA residents can buy from small producers (30,000 gallons/year or less). But we can’t buy directly from out-of-state producer of any side. It was this unequal treatment that was ruled unconstitutional. The legislature was expected to conform to the ruling by passing a model bill similar to those working successfully in the majority of U.S. states. It did not. Three years have passed.

Economic Analysis

Who benefits and who is hurt by MA wine laws? The obvious winners are the distributors: they control everything. On the other hand, local wine producers have difficulty getting distributors to carry their wines. But at least they can sell their wines directly in MA. Individuals are hurt because they are limited to wines carried by retail stores and small local producers. If direct wine shipping were allowed, individuals would benefit from more wines to choose from. In addition, there is evidence that wine prices in states that allow direct shipment are lower than in more restrictive states[3].

If direct shipping were allowed, how would liquor stores fare? Concerns on this question have been offered as an excuse for delaying legislation in MA. The Wellesley Wine Press reported:

“Rep. Theodore Speliotis (D-Danvers), who chairs the Consumer Protection Committee, said… that while he favors removing the buying restriction, the state needs to find a way to protect local sellers. The biggest fear is package stores will go by the wayside like hardware stores.”

In actual fact, what would happen to liquor stores depends on whether they are energetic enough to seize on the opportunity to expand their wine selections by purchasing directly from wineries not covered by MA distributors. And if they can buy directly, they should be able to get wine for less by removing the distributor middlemen. I quote again from the Wellesley Wine Press article:

“Next time you’re in a wine store ask the owner whether they’re concerned about the direct shipment of wine. The ones I’ve asked couldn’t care less. The primary concerns I’ve heard from in-state retailers are laws which prohibit them from shipping out of state, high markups from Massachusetts wholesalers relative to other states, and wine being sold at an increasing number of nearby grocery stores.”

What is the reality here? In the long run, liquor stores will lose market share, just as local grocery stores over the last 50 years lost market share to supermarkets. But the energetic wine shops will be able to keep their clients by embracing open markets and buying directly from wine producers not carried by MA distributors.

How about restaurants? All good for them: they could continue to use distributors and/or order directly from vineyards.

Tax Revenues

The US lobbying arm of the wine distributors, The US Wine and Spirit Wholesalers[4], along with state distributors claim that relaxing shipment restrictions would threaten state tax revenues from wine sales. This is nonsense. Under the model legislation passed in other states, vineyards wanting to sell in MA would have to register with the MA government and be required to collect taxes on any sales to MA retailers or final consumers. Maryland has recently passed legislation to allow direct wine shipments, and their wine tax revenues have increased accordingly.

Legislative Status

Freethegrapes, the organization working to end restrictive wine legislation in the US, reports that in 2011, HB 1029 was introduced but never got out of committee for two years. The bill was similar to laws in the majority of U.S. states. It requires wineries to purchase a state issued shipping license, to collect taxes, to mark boxes as requiring signature at delivery, and to

limit the quantity of wine shipped to individuals. The basis the bill, the model direct shipping bill, was cited by the U.S. Supreme Court and has been supported by the Federal Trade Commission. This year, a new bill, HB 294, has just been introduced. Its provisions reflect those in the model bill. If it passes, would apply to both in-state and out of state producers; both need to have a permit to direct ship, and it doesn’t matter if they have wholesaler representation or not. So you could buy from any in-state or out-of-state producer who has an inexpensive MA license ($100/year).

What are its prospects? Might the distributors try to limit new legislation to just correcting what the Courts found illegal by allowing small out-of-state producers to ship directly to MA residents? Jeremy Benson of Freethegrapes is more hopeful. I quote an e-mail from him:

“…the wholesalers have penned their own bill, very similar to the one that wine producers are putting forward (HB 294), but just with a lower limit on how much wine can be shipped per winery per consumer per year. HB 294 allows for 24 cases per year (that’s the total amount that, for example, Benson Vineyards could ship to Elliott Morss in the calendar year). I believe the wholesaler’s bill has a 2 case limit.”

Time will tell whether the distributors are just posturing and ultimately will try to again block direct shipments.

If you care about this issue and live in one of the 16 most restrictive states, you should contact your State Representative and explain why direct wine shipments to residents should be allowed.

Footnotes

[1] Omer Gokcekus and Dennis Nottebaum, “Public Finance, Special Interests, and Direct Wine Shipping Laws in the United States”, Journal of Wine Economics, vol. 7, no. 1, 2012.

[2] E. McCoy, The Emperor of Wine: The Rise of Robert M. Parker, Jr. and the Reign of American Taste, New York, Harper Perennial, 2005.

[3] A.E. Wiseman and J, Ellig, “The Politics of Wine, Trade Barriers, Interest Groups, and the Commerce Clause”, Journal of Politics, 69(3), 859-875.

[4] Open Secrets reports that the US Wine & Spirits Wholesales spends more than $1 million annually lobbying in DC.

© Elliott R. Morss All Rights Reserved March 2013