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Luczy: why US winelovers can’t buy the bottles they want

The controversial three-tier system of wine shipping and distribution in the US means that millions of state-side winelovers can’t buy the bottles they want. Matthew Luczy demystifies the complex and contradictory laws, arguing that, in today’s era of ecommerce, it’s time to reform this outdated system.

Imagine you are on your honeymoon in California wine country. You have multiple appointments every day at beautiful properties, tasting one memorable wine after another.

Naturally, you want to revisit these memories once back home, so you ask to have your favourite bottles sent there. But the wineries cannot ship to your state.

You return home from your trip empty handed. When attempting to source those honeymoon wines at local retailers across your state, you find that they are not available. Frustrated, you think: ‘Surely the internet will help. I can order anything under the sun online. Why not wine?’

You successfully track down the wines at a store in the neighbouring state – they even include shipping! You get to the checkout stage only to be told the retailer cannot ship to your state…

For millions of people in the US, this is not an unfortunate hypothetical, but already a reality. Hundreds of thousands of wines that should be legally available are out of reach.

A legal minefield

Wine shipping and distribution in the US is complicated at best, confounding at worst. The issue falls along two parallel paths: winery-direct shipping and retailer shipping. Currently, 42 of the 50 US states allow a direct-to-consumer service from wineries, while retailers can only reach 14.

For retailers, it is not even an issue of red tape; out-of-state shipping is often barred altogether. For wineries, 42 states may seem like a lot, but the reality is different.

Even when legal, shipping can be so complicated or expensive that it is not worth attempting. Every state functions differently, with varying degrees of permits, fees and bizarre hoops to jump through.

US three-tier system - retailer-to-consumer map

Credit: https://nawr.org/

For example, Utah and Mississippi allow purchasing through online wine clubs, but the shipment must go through a state-run store before a consumer can collect it. On top of initial permit fees, Connecticut requires separate annual registrations and fees for each label the winery wishes to sell – and the filing of 36 reports per year. New Jersey is similar, and even more pricey. At least there are only 29 reports a year.

Rhode Island and Delaware allow shipping if the consumer purchased the wine in person at the winery, but do not allow online ordering of the same wines. Many states impose limits on the number of bottles a consumer can have delivered monthly or annually – a mere 24 per year in Minnesota.

Two federal laws are at the crux of this situation, both dating from times long before the modern era of ecommerce.

Contradictory laws

The US Constitution’s Commerce Clause and the 21st Amendment are in a perpetual, contradictory power struggle. The former guarantees a free market at the federal level, the latter allows states to restrict it.

The Commerce Clause mandates that states cannot discriminate against out-of-state commerce. The impetus of this law predates the US itself; trade barriers within the Thirteen Colonies pushed the founders to write the Constitution in the first place. They felt that if states could not trade freely, the United States would not be ‘United’ at all.

The 21st Amendment was approved in 1933. Section 1 ended Prohibition, but Section 2 is where the inconsistency we see today stems from. It gave each state the power to regulate alcohol sales as they see fit. The purpose was to provide an official structure to the alcohol distribution – ie, not let organised crime run the show, like during Prohibition.

For decades, this system did not cause the problems it does now, as we live in a drastically more interconnected world. In the 1930s, West Coast wine not being available on-demand on the East Coast was not only inconsequential but inconceivable.

Two landmark Supreme Court cases in 2005 and 2019 ruled that the Commerce Clause supersedes the 21st Amendment. In short: discrimination of both winery-direct and retail shipping from out-of-state businesses is unconstitutional. Despite this, several states still have constricting laws that defy these intentions.

The three-tier system

Why are cases regarding this continually brought into courts throughout the country? Why does a supposedly open and free market appear to be neither?

The answer appears to be one of influence, power and suppressing the competition. If wine cannot flow freely throughout the US, distributors have a stranglehold on what’s available in their local market.

John Winthrop, founder and CEO of California’s Veritas Imports, sums it up. ‘Complicated laws entrench the people that are already dominating that business. They want the legislature to pass more laws, and more complex laws, that put the little people out of business.’

The centre of this morass is the controversial core of the US wine world: the three-tier system:

1. Producers/wineries
2. Wholesalers/distributors
3. Retailers/restaurants

Another byproduct of Prohibition, the three-tier system was created to regulate alcohol and prevent cross-ownership – a winery can’t also own a wine bar, for example. Mark-ups and taxes add up along the way: a $10 wholesale wine becomes $20 from the distributor, $30 from a retailer and $60 at a restaurant.

Each state has its own version of this layout, but the system is largely mandatory. Depending on state laws, producers must sell to a distributor – who takes a cut of the profits – rather than direct to the consumer. Additionally, wineries must have different distributors in each state, wherein differing taxes, permits, rules and reports add further complications.

Wholesalers/distributors control which wines go where. This restricts consumer options, preventing small producers and retailers from entering markets. Each state only has access to between 20% and 30% of all wines available in the US.

These structures and restrictions also have massive implications for imported wines. Only retailers and auction houses can sell non-US wines, making them available to a limited number of customers at ever-increasing prices.

How the three-tier system plays out in reality

The requirement of a middle-tier creates a perfect platform for large distributors to push large brands and control the market. Tom Wark, executive director of the National Association of Wine Retailers, paints the picture.

‘The wholesalers are extraordinarily good at distributing brands like Constellation, Treasury and Gallo. That is their bread and butter. The extent to which they can deal with fewer and fewer brands, the greater and greater is their profit.’

US three-tier system - campaign contributions

Credit: https://nawr.org

Profit is what this all comes down to. The largest wholesalers use their deep pockets to fund officials who will keep or enact laws benefiting them. In the two election cycles between 2017-2020, wholesalers alone contributed $56 million to state and federal campaigns.

Wark illuminates the scale of these donations. ‘In every state, wholesalers contribute twice as much as the other tiers combined. Campaign contributors talk to lawmakers, explain how vital the three-tier system is, and how – unless a mandate is used – all hell will break loose.

‘There is an incentive for the lawmaker to buy into that and advance those principles; they’re getting large amounts of campaign contributions from the wholesalers. They’ve been doing this for a long, long time.’

Who is really at risk?

Michael Bilello, senior vice-president of communications and marketing for the Wine & Spirits Wholesalers of America, lays out the wholesaler’s viewpoint. ‘We are opposed to direct-to-consumer shipping from producers. Direct shipping creates an enforcement nightmare for regulators who ensure tax compliance by producers nationwide.’

Bilello adds: ‘Local licensed retailers ensure the consumer is of legal drinking age, state and local taxes are collected and remitted, and only licensed product is transacted. Interstate shipping usurps the state’s rights to regulate alcohol as set forth by the 21st Amendment and places consumers at risk, needlessly.’

Direct-shipping allegedly placing consumers ‘at risk’ is a common retort, as is that the existing three-tier system ‘defends public health and safety’.

Chicago-based liquor lawyer Sean O’Leary challenges this. ‘What are the distributors doing to protect health and safety? We don’t know, because no one has ever said what they are doing. “Health and safety” is a codeword for protectionism.’

The restrictions placed on wine distribution in the US have far-reaching effects. Increasingly more small businesses close every day – in no small part due to the Covid-19 pandemic. If those still standing are denied a chance to operate freely now, few will remain if minds ever change.

Jim Knight, co-owner of Los Angeles retailer The Wine House gives the perspective of a family-run wine shop. ‘We’ve been building relationships for 42 years, so there are wines we get that others don’t. I want them to go into the hands of as many different people as possible. State laws are taking away access to the national market, shrinking my demographic daily.’

Knight continues: ‘It hurts us from a revenue point of view, but it also hurts the consumer. They’re being forced to buy only the world’s most popular brands. That’s the issue the wine community should be upset with.’

More wine to more people

Consumers are locked into paying more for less. Reforming these systems would bring greater access to higher-quality wines, both domestic and imported.

‘The number one thing that would unlock innovation in the alcohol industry, and increase selection for consumers, retailers and restaurants, would be eliminating the mandate that a wholesaler be used,’ explains Wark. ‘That would end the three-tier system altogether.’

Citizens have a strong say in this active fight. When they demand their legislators change laws, the needle moves, allowing people like O’Leary and Wark to take the battle into court.

‘We have lawsuits pending in numerous states,’ says Wark. ‘I suspect we’ll win in at least one, and hope that state appeals the case to the Supreme Court. Because I think we will win.’

Based on the Commerce Clause and Supreme Court rulings, wine should be freely available to anyone of legal age that wants to purchase it, wherever they live in the US.

Those who can afford it will keep cases tied up in court and manipulate outdated systems, causing their competition to either give up or go bankrupt. Laws established to prevent a powerful few from controlling the rest are currently being bent to do exactly that.

To see where your US state stands on receiving out-of state wines, visit freethegrapes.org/

For more information, visit winefreedom.org/

What do you think about the three-tier system in the US? How has it affected you? Write to us at editor@decanter.com


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