Direct-to-consumer (DTC) sales of alcohol beverages have been a hot topic in the alcohol industry for the last two decades. The wine direct-shipping landscape has changed greatly over the past 15 or so years, most dramatically by the US Supreme Court’s decision in Granholm v. Heald. Today nearly evert state—plus the District of Columbia—allows wineries to ship wine across state lines directly to in-state consumers. The same cannot be said for spirits.

There are, however, a few avenues distillers may consider to get their products delivered to consumers around the country. Further, an initiative is underway to pursue litigation to secure DTC rights for spirits. Although it is far too early to speculate about the outcome of any such litigation, the current effort suggests the potential for interstate distiller-to-consumer sales in the coming years. Of course, lingering ambivalence toward spirits (as opposed to wine) by the public, lawmakers, and alcohol regulators makes the prospect for any legal change uncertain.

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Originally published in Artisan Spirit, July 2017.

The Supreme Court of the United States’ 2005 decision in Granholm v. Heald, which required states allowing their own wineries to direct-ship to consumers to also grant such privileges to out-of-state wineries, marked the beginning of a new era of wine direct-shipping. With the relaxation of wine shipping laws around the country following Granholm—nearly every state now allows wineries to ship wine directly to in-state consumers—the wine direct-shipping landscape has changed greatly over the past decade. Indeed, wine shipments in 2016 saw double-digit growth in both volume and sales.

At the same time, growth in recent years in the online shopping industry has led to new innovations in the wine retail space: the existence of a multitude of internet wine retailers, wine-of-the-month clubs and mobile wine delivery apps offers consumers greater access to wine. Many states—and courts—though, are now grappling with the legalities surrounding direct shipping of wine by retailers, as well as the role of unlicensed third parties in such transactions. Some states prohibit retailers from directly shipping wine to consumers altogether, while many others give in-state retailers the right to ship wine directly to consumers while withholding the privilege from out-of-state retailers.

Most recently, in January 2017 Michigan enacted legislation allowing in-state retailers to ship wine to in-state consumers, but prohibiting out-of-state retailers from making such shipments. The new legislation, which amends Michigan’s existing statute addressing wine shipments, authorizes a retailer located in Michigan to obtain a “specially designated merchant license” in order to ship wine to in-state consumers. The specially designated merchant license is only available to in-state retailers, so retailers located outside Michigan remain prohibited from directly shipping wine to consumers in the state.

Unsurprisingly, given the requirements of Granholm (which, incidentally, concerned in part a Michigan law), the new legislation retains the right of both in-state and out-of-state wineries to ship wine directly to Michigan consumers upon obtaining a direct shipper license. In fact, the new statute even reduces the burden on wineries shipping to consumers; under the new law wineries will no longer be required to include their direct shipper license number and the order number on each shipping container, or the brand registration approval number for each shipped wine on the accompanying invoice (although label registration requirements will still apply).

The legislation does not go into effect until March 29, 2017, but already litigation involving the new law has commenced. In late January 2017, an Indiana retailer and several Michigan consumers sued Michigan’s governor and attorney general and the head of the Michigan Liquor Control Commission in federal court, alleging the statute violates the US Constitution’s Commerce Clause and Privileges and Immunities Clause. Similar lawsuits are pending in Illinois and Missouri.

Some courts have already interpreted the constitutionality of similar laws that treat in-state and out-of-state wine retailers differently. While the US Courts of Appeals for the Second and Eighth Circuits have interpreted Granholm to apply only to differential treatment of producers and products (and not to wholesalers and retailers), the Fifth Circuit Court of Appeals recently struck down as unconstitutional Texas residency requirements burdening out-of-state wholesalers and retailers. The Texas Package Stores Association appealed to the Supreme Court based on the apparent “circuit split” created by the Fifth Circuit’s decision. Although the Supreme Court denied certiorari in November 2016, differing outcomes in the currently pending suits could ultimately bring the issue of wine direct-shipping back to the Supreme Court, providing an opportunity for much-needed clarification of Granholm’s scope.

The Texas Package Stores Association has asked the US Supreme Court (via a “Petition of Certiorari”) to hear a case that could clarify the interaction between the 21st Amendment and the non-discrimination between states principle of the “dormant” Commerce Clause.

The case arose in Texas, where the Court of Appeals for the Fifth Circuit ultimately held that the Supreme Court’s Granholm v. Heald (2005) decision did not limit the reach of the Commerce Clause in alcohol cases to situations where a state discriminates against producers or products. Decisions by two other federal Court of Appeal’s Circuits (the Second and the Eight) have expressly limited Granholm’s reach to discrimination against producers and products. Thus, the Texas Package Stores Association would like the Supreme Court to reverse the Fifth Circuit and explicitly limit the non-discrimination principle of Granholm to cases involving alcohol products and producers.

The Supreme Court hears only a small fraction of the cases brought before it on a Petition of Certiorari, so the chances that the Supreme Court ultimately reviews the Fifth Circuit’s decision remain low. Nevertheless, the existence of a “split” of opinion between different federal Courts of Appeal increase the chances of Supreme Court review.

On December 8, 2014, the United States Supreme Court will hear oral argument in a case that could have significant implications for the ability to use the federal courts to challenge state attempts to tax remote sellers of goods.

In Direct Marketing Association v. Brohl, 735 F.3d 904 (10th Cir. 2013), the Tenth Circuit Court of Appeals found that the Direct Marketing Association’s (DMA) challenge to a Colorado revenue statute was barred by the federal Tax Injunction Act (TIA).  Current Commerce Clause precedent bans a state from requiring a retailer with no in-state presence from collecting sales or use taxes, see Quill Corp. v. North Dakota, 504 U.S. 298 (1992), an important shield against state taxation of remote online and catalogue sellers of goods.  This precedent, however, allows states to collect sales and use tax from the buyers of the goods (i.e., citizens) located within the state.

Seeking to reach this significant source of potential tax revenues, in 2010 the Colorado legislature enacted legislation requiring major out-of-state sellers to provide a series of notices and reports related to sales taxes.  First, the selling retailers must notify Colorado purchasers that tax is due on their purchases.  Second, these retailers must send annual notices to Colorado customers who purchased more than $500 in goods in the preceding year, “reminding” these purchasers of their obligation to pay sales tax to the state.  Third, the law requires these out-of-state retailers to report information on Colorado purchasers to the state’s tax authorities.  Not surprisingly, the law gives retailers the ability to avoid these obligations by simply collecting sales tax from Colorado consumers and providing those collections to the state.

The DMA filed suit, challenging the Colorado law on several Commerce Clause grounds.  The District Court granted summary judgment in favor of DMA, relying on Quill to hold that the law placed an impermissible burden on interstate commerce.

On appeal, the Tenth Circuit did not reach the merits of the Commerce Clause issue.  Instead, the Court held that the TIA barred DMA’s lawsuit and required dismissal.  The Tax Injunction Act prohibits federal courts from interfering with the collection of state taxes.  DMA argued that because it was not a taxpayer subject to the new reporting requirements, the TIA should not apply.  Moreover, TIA reasoned that the Colorado law in question only imposed notice and reporting obligations, and therefore was merely a tax collection method, not an actual tax.  The Tenth Circuit rejected both arguments, concluding that any suit that would hamper a state’s ability to collect a tax falls within the TIA’s jurisdictional bar.

The Supreme Court has agreed to review the Tenth Circuit’s decision.  Its ultimate decision about the reach of the TIA could have implications to operations involved in the direct shipping of wine.

Current state licensing systems for direct alcohol shippers already require the payment of state taxes as a condition of licensure.  Nevertheless, statutes like Colorado’s law, if left unchallenged due to operation of the TIA, could allow states to gain more control over the direct shipment of any number of products.  Indeed, by making it harder to challenge state laws seeking to regulate online sellers in general, a Supreme Court affirmance could alter the current political balance in which many states legislatures have authorized licensed direct shipping in exchange for securing a means to collect taxes on such wine sales.

A decision from the Supreme Court on the application of the TIA to DMA’s legal challenge will likely occur in the first half of 2015.  In the meantime, DMA refiled its Commerce Clause challenge in state court (where the TIA does not apply) and obtained a preliminary injunction barring enforcement of the Colorado statute while the case proceeds.