Uncorking Freedom in Arizona:
Federal Lawsuit Seeks to End Arizona’s Prohibition On Direct Interstate Wine Sales
WEB RELEASE: October 7, 2003
CONTACT:
John Kramer
Lisa Knepper
(703) 682-9320
[Economic Liberty]
Washington, D.C.–Arizonans can order wine from anywhere in the United States and have it shipped directly to their home—so long as that wine comes from Arizona.
Arizona is one of 24 states that bans the interstate direct shipment of wine to consumers, but allows such direct shipments from in-state wineries. A federal lawsuit filed today in the U.S. District Court for the District of Arizona by the Washington, D.C.-based Institute for Justice seeks to overturn that ban so wine enthusiasts from Arizona can enjoy the wide array of choices available over the Internet, by telephone or by mail. The lawsuit was filed on behalf of Arizona consumers and a Virginia winery. Among states with discriminatory bans on direct interstate wine shipments, all have been sued except Arizona—until now.
Out-of-state wineries shipping into Arizona may obtain a “direct shipment license,” which is in fact a serious misnomer: although the consumer orders the wine from the winery, the winery must ship it first to a liquor distributor, which delivers it to a retailer, which delivers it to the consumer. The role of the middleman remains intact. Additionally, as a result of legislation sponsored by State Sen. Barbara Leff and enacted in 2003, an out-of-state winery also may ship directly to a consumer in Arizona who is physically present at the winery when the order is placed, but the volume is limited to two cases per purchaser per winery. In-state wineries face no such restrictions on shipping in Arizona.
The direct shipping ban primarily aids liquor distributors, who extract sizeable profit while adding nothing of value. “State laws are not supposed to purposefully favor in-state businesses over out-of-state ones,” said Clint Bolick, the Institute for Justice’s vice president and national director of state chapters. “Our Founders intended for America to be one big free trade zone. The conflicting maze of state regulations that limit free commerce in wine creates precisely the Balkanized market the U.S. Constitution was written to prevent.”
The Institute for Justice represents Lewis Parker, sole proprietor of Willowcroft Farm Vineyards, a small winery in Leesburg, Va., and wine enthusiast John R. Norton, a former deputy secretary for the U.S. Department of Agriculture who lives in Arizona, along with six other Arizona consumers. In September, Norton faxed to Parker an order for one case of Willowcroft Traminette, an award-winning wine available only from the winery. Norton affixed a copy of his driver’s license to show that he was an adult purchaser. Parker regretfully declined the order because of Arizona’s direct shipment ban.
Liquor distributors are the sole beneficiaries of the so-called “three-tier” system of alcohol distribution: producers may only sell lawfully to liquor distributors, who sell to retailers, who sell to consumers. A 2003 Federal Trade Commission (FTC) study reported, “State bans on interstate direct shipping represent the largest regulatory barrier to expanded e-commerce in wine.” The report found that laws like Arizona’s reduce consumer choices and convenience, and inflate the price of wine. Based on data from states that allow direct shipping, the FTC debunked the two main arguments against direct shipping, finding that “states that permit direct shipping generally report few or no problems with shipments to minors,” and that “[s]everal states that allow interstate direct shipping also collect taxes from those shipments.”
In five states (Florida, Kentucky, Maryland, Tennessee and Utah) direct shipment of wine is a felony. Thanks to legislative action and court decisions, more states now allow direct shipping, including North Carolina, Texas, Georgia and Virginia. Among those that permit direct shipping, some are “reciprocity” states, which allow direct shipping only from wineries in states that also permit direct shipping. Laws in direct shipping states vary in applicable conditions, such as obtaining a license, maximum volume, collecting taxes and so on.
The number of American wineries has increased in recent decades, with approximately 2,500 in 49 states. Together they produce many thousand different wines, no two of which are alike. While the nation’s top 25 wineries produce 82.7 percent of all American wine, the remainder is produced by mostly family-owned, very small wineries. Meanwhile, the liquor distribution industry has consolidated. It is not economically viable for liquor distributors to represent all (or even most) wineries, much less the full spectrum of wines they produce; and shelf space in retail stores is even more limited. For the vast majority of wineries, the main sources of sales are winery visitors and direct shipments.
The Miami-based Southern Wine & Spirits—the single largest distributor of wine, spirits, beer and other non-alcoholic beverages in the United States with annual sales of $2.8 billion—oversees most of the wine sales in Arizona.
Arizona’s discriminatory wine laws violate two provisions of the U.S. Constitution. The Commerce Clause of Article 1, Section 8 preserves free trade among the states. A state law may not discriminate on its face against interstate commerce. Direct shipment opponents claim states have complete authority to do so under the 21st Amendment, which gives states broad authority to regulate alcohol importation and distribution. However, the U.S. Supreme Court has ruled that the 21st Amendment does not “empower States to favor local industries by erecting barriers to competition.”
Likewise, the prohibition violates the Privileges and Immunities Clause of Article IV, Section 2, which guarantees to citizens of other states the same rights a state’s own citizens possess, including the right to pursue businesses and occupations. Here, Arizona has created two sets of direct shipping rules—one for its own businesses, and another for out-of-state businesses. The prohibition therefore impinges upon the rights of out-of-state winemakers.
“This is part of a continuing struggle to gain the right to ship our products to consumers in a way that enhances a free and open marketplace,” said Parker. “Arizona’s current laws make it economically impossible for me to ship to consumers there who want to buy my wine.”
“As a consumer, I’m outraged that the State of Arizona is tying up my right to conduct interstate commerce with all this red tape,” said Norton. “America is an economic powerhouse because its citizens can trade freely from one state to the next. There is no reason Arizona should hamper my ability to purchase a case of wine from Virginia and have it shipped to me in Phoenix. Because the wine I want is only available from that winery, the State is essentially prohibiting me from engaging in interstate commerce for no reason but to protect the wholesalers.”
Joining Bolick as co-counsel are Indianapolis attorney Robert Epstein and Indiana University law professor J. Alex Tanford. Epstein and Tanford have litigated direct shipment challenges in Indiana, North Carolina, Michigan and Florida.
The Phoenix-based Goldwater Institute will issue a study raising constitutional concerns with the direct shipping ban and will host a forum on the issue in mid-November.
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