Supreme Court opens door for direct wine sales across state lines

Food & Drink Weekly, May 23, 2005

State laws in Michigan and New York barring out-of-state wineries from selling directly to consumers but allowing such sales by in-state wineries were invalidated May 16 by a sharply divided U.S. Supreme Court as an unconstitutional discrimination against interstate commerce in violation of the Commerce Clause.

In his opinion for the five-member majority, Justice Anthony M. Kennedy rejected the states' contention that the laws are within their Twenty-First Amendment authority to regulate the sale of liquor within their borders. While the states "have broad power to regulate liquor," the court acknowledged, the Twenty-First Amendment protects only even- handed state regulation that treats out-of-state liquor the same as in-state liquor. State liquor laws that offend other parts of the U.S. Constitution, such as the Commerce Clause, are not saved by the Twenty-First Amendment.

State regulations that discriminate against interstate commerce are upheld only when there is concrete evidence that nondiscriminatory alternatives are not workable, the court maintained. Here, Michigan and New York did not show that their discriminatory laws were needed to guard against Internet sales of wine to minors. Some 26 states now allow direct sales of wine from out-of-state, and they do not report any such problem.

The court also rejected a tax evasion justification proffered by the states. Michigan does not rely on instate wholesalers to collect taxes from out-of-state sellers, and New York has nondiscriminatory alternatives. Moreover, both states benefit from federal laws providing incentives to wineries to comply with state regulations.

The court's decision affirms a Sixth Circuit judgment invalidating the Michigan law and overturns a Second Circuit decision upholding the New York scheme and remanding for further proceedings consistent with its opinion. In his opinion, Justice Kennedy noted that direct wine sales constitute a growth industry. There has been an explosion in the number of small wineries, and, for these entities, direct sales are the only viable method of distribution. The small wineries cannot distribute through the usual channel in the states--the three-tier distribution system of licensed producers, wholesalers, and retailers. The number of wholesalers is declining, and a small winery is not likely to make enough wine to make it economical for a wholesaler to distribute it. Justice Kennedy was joined by Justices Antonin Scalia, David Souter, Ruth Bader Ginsburg, and Stephen G. Breyer.