At issue was whether a state permitting its local retail licensees to ship directly to consumers might constitutionally deny out-of-state retail licensees equivalent access. The Court of Appeals reached the less than crystalline conclusion that discrimination against interstate sellers is permissible under the 21st Amendment “insofar as it requires that all liquor sold within the State of New York pass through New York’s three-tier regulatory system.”

Judge Wesley, writing for an essentially undivided three-member panel, asserts that the locals-only licensing system “allows the state to oversee” (1) financial relationships among manufacturers, wholesalers, and retailers,” which relate to state tied-house statutes limiting vertical integration, and (2) the prices and other terms of sale, which the state purports to regulate with the objective of averting overconsumption and disorderly marketing. He also notes that New York claims the system allows the state to collect taxes more efficiently than with alternative systems and to prevent sales to minors.

One cannot accurately maintain that the challenged licensing system “allows” those regulatory objectives in the sense of being necessary to achieve them. It is even less defensible to assert that location discrimination in applying a licensing system is necessary to oversee financial relationships and sales terms, to collect taxes with acceptable efficiency, or to prevent underage purchases. Thus, the court cannot escape the question whether less discriminatory means exist –unless it takes the discrimination entirely out of Granholm’s analysis of discriminatory laws. Most of the opinion is an attempt to do just that.

To circumvent the nondiscriminatory means issue, Judge Wesley articulates the “narrow Granholm” 21st Amendment-Commerce Clause theory: “It is only where states create discriminatory exceptions to the three-tier system, allowing in-state, but not out-of-state, liquor to bypass the three regulatory tiers, that their laws are subject to invalidation based on the Commerce Clause.” His opinion recognizes (or carves) an exception to the equal access principle, based on the famous North Dakota statement that the 21st Amendment “empowers [a state] to require that all liquor sold for use in the State be purchased from a licensed in-state wholesaler (emphasis supplied),” even though that text appears in Granholm only as a “see also” citation that is not part of the Granholm holding and is also dictum in North Dakota itself. He does not overtly consider whether Granholm’s undoubted assertion of the legitimacy of three-tier systems includes the qualification (arguably inherent in the Granholm holding) that such systems may not employ location discrimination unless it is necessity-justified by some purpose other than perpetuation of the system itself. Without inclusion of that qualifier, it is easy to stop analyzing the Granholm opinion for effects on tiered distribution when one reaches its quotation from North Dakota.

Thus, Arnold’s Wines puts us squarely into the fundamental uncertainty about Granholm: Are only what the majority calls “valid” or “generally applicable” (i.e., location-nondiscriminatory) restrictions permissible, even in areas of traditional state’s rights under the 21st Amendment, as Justice Thomas says disapprovingly in his dissent, or is there something special about passage of title through a wholesaler that provides ipso facto legitimacy to location discrimination between in-state and out-of-state resellers of the product?

Clearly in the second camp, the Arnold’s Wines majority opinion advances two propositions as rationales for its decision:

1. The “three-tier system” means goods physically moving through all three tiers, the lower two of which are located in the same state as the consumer who purchases the goods. A ruling requiring equal access to the same consumers by out-of-state retailers is therefore an attack on the three-tier system, which would not be consistent with Granholm, because the majority in that case said the three-tier system is unquestionably legitimate.

2. New York’s law “treats in-state and out-of-state liquor evenhandedly” once it is in the state’s three-tier system, and “thus complies with Granholm’s nondiscrimination principle.” Equal treatment of products by allowing them all, regardless of original site of manufacture, to pass through the three-tier system, satisfies Commerce Clause requirements, even if the law prohibits interstate sellers to reach the same consumers as local sellers. The dormant Commerce Clause protects goods, not merchants.

In a concurring opinion, Judge Calabresi agrees with his colleagues’ reasoning, but adds an eloquent originalist plea for judicial caution in “updating” constitutional provisions that (unlike, e.g., due process of law) are not drafted loosely with an implied invitation to reinterpret them as society changes. One has the impression he wishes he could have restrained the impetuosity of the Granholm majority. He was, in any event, determined not to extend that opinion’s 2005 update of the 21st Amendment beyond his panel’s delimited reading.

Relatively short in comparison to the complexity of the issues, the majority opinion does not address a number of questions raised by its stated rationales.

In the first place, it is not at all clear that Judge Wesley’s three-tier system is the same thing as the three-tier system declared legitimate in Granholm. The Granholm majority unmistakably implies there are such things as constitutional systems funneling all wine sales through local wholesalers, but is silent (to the exasperation of Justice Thomas) on how they would operate without producing impermissible favoritism toward local versus interstate commerce. One court has already attempted to resolve the conundrum by preserving a state requirement that sales go through a locally licensed wholesaler, but requiring the state to process retail license applications without location discrimination. If one adds drop shipment to that scenario, it becomes possible to run all sales through an in-state distributor (who would presumably also be responsible for tax and price reporting) and avoid location discrimination in access to local consumers.

Ultimately, the first rationale rests on the court’s pronouncement that unequal access to customers by retailers is “part of the three-tier licensing structure” (vice distribution system) established in New York. When the court concludes that exemption of unequal access from Commerce Clause scrutiny is established by that proposition, it is committing what a logician would call a mereological fallacy. That is, assuming the state’s licensing structure could be part of a three-tier system, it does not follow that special exempted status accorded three-tier systems applies to each part of it. That logical gap would exist even if the North Dakota dictum were established law, and even if one further assumed that all members of the class “three-tier systems” were exempt from the dormant Commerce Clause.

With respect to the second rationale, the Court of Appeals may have made a bold departure from the conceptual underpinnings of Commerce Clause jurisprudence in its attempt to diminish Granholm’s scope. Most judges and commentators have assumed that the Commerce Clause is intended to protect commerce, not merely choice of manufacturing site. It is, of course, entirely proper for a court to attempt to limit a disliked precedent to its specific facts, but drawing the line at products, excluding protection of downstream merchants, seems extreme.

Judge Wesley may have been forced to an extreme position to support his assertion that the facts before him were in “stark contrast” to those of Granholm. Viewed from another angle, the distance between the cases does not appear so great. Mrs. Swedenburg’s wines and those of the other Granholm plaintiffs had equal rights with New York wines to direct delivery to New York consumers from bricks-and-mortar locations within New York. That may not be so easy to distinguish from the Arnold’s Wines plaintiffs’ equal right to sell to New York consumers through bricks-and-mortar wholesalers and retailers within New York. One need not read Granholm very broadly to conclude that if the former was invalid, the validity of the latter is at least questionable.

Because the court seems to believe no nondiscriminatory means inquiry is necessary, its reference to state purposes may be only a makeweight. However, it is worth noting that the listed objectives themselves are not all necessarily legitimate. If the purpose of tied-house laws is to prevent supplier interests in New York retailers, regulation of sales by those retailers within New York is sufficient. Only if New York’s objective is to prevent such interests in retailers located in other states is it necessary to “oversee” the financial relationships of those sellers. That objective, however, raises significant issues of extraterritoriality. In a 1989 beer pricing case, the Supreme Court enunciated limits on state legislation, 21st Amendment notwithstanding, short of regulating conduct that occurs entirely outside the state (which would appear to include financial relationships among entities in another state, whether or not one of them sells into the state) or causing a patchwork of different requirements for businesses engaged in interstate commerce (as seems the case, given the widely differing requirements of state tied-house laws). Those limitations suggest that tied-house oversight of out-of-state sellers is a not legitimate purpose that can be advanced to justify discrimination. Worse, extraterritorial effect of state laws is ordinarily considered not merely discrimination against, but direct state regulation of, interstate commerce –an unconstitutional invasion of the federal sphere that cannot be rendered legal by laudable purpose.

In sum, Arnold’s Wines is a forceful formulation of the narrow Granholm position, with a forthright end run around less-discriminatory-means analysis. Its clarity emphasizes the developing differences among federal circuits in understanding that landmark case. While it is doubtful the Supreme Court has much appetite for revisiting Granholm, divergent interpretations at the intermediate level slowly increase the probability of high court review.

by R. Corbin Houchins, CorbinCounsel.com

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As of today, Kansas residents have direct access to up to twelve cases of wine per address from licensed wineries per year. Kansas special order direct shipping license applications are available online. After registering with the Secretary of State for $36, wineries must submit proof of business tax registration, a $50 license fee, a $50 application fee with their license application as well as post a $750 bond.

Nearly one month ago on June 5, Tennessee Governor Phil Bredesen signed Senate Bill 166 into law to open Tennessee for direct shipping on July 1. Tennessee ranks in the top 25 wine consuming states.

Both state licenses are available for order with full concierge service through easywinelicensing.com.

North Dakota Excise Tax Decreases
Beginning today, sparkling wine will be taxed at $0.50/gallon, down from $1.00/gallon.

Nevada State-Wide Sales Tax Increase
Effective July 1, Nevada has increased its Local School Support Tax from 2.25% to 2.6%; a 0.35% increase in state-wide sales tax. This new tax will be collected at a local level. Also, the 0.25% Collection Allowance, scheduled to increase back to 0.50%, remains in effect for sales and use taxes collected.

Local Tax Increases
The following local tax rates are effective today:

• In Arizona, the city of Kearny has increased its retail and use tax rates from 2.5% to 3.0%
• In California, voters in Los Angeles County approved a new 0.50% district tax increasing their tax rate to 9.75% (including the 8.25% state tax rate). Also, the City Council of Laguna Beach located in Orange County voted to repeal the 0.50% Temporary Transactions and Use Tax prior to its scheduled end date, lowering their tax rate to 8.75%
• In Georgia, the counties of Camden, McIntosh and Wayne will increase their local tax rates by 1%, making the total local option tax 3.0%
• In Washington, sales and use tax within all of Wahkiakum County will increase one-tenth of one percent. The new rate will be 7.6%

Ohio Electronic Filing
For Ohio Sales and Use tax semi-annual filers, the January – June return is the first return that is required to be filed online. There are two filing methods available to direct shippers to report Ohio sales taxes electronically:

1. Express Data Entry - Upload a .CSV to the Ohio Business Gateway (OBG), and make any final adjustments on the OBG’s website
2. eForms - Enter tax calculations step-by-step into Ohio’s web application

If you can’t decide which filing option is right for you, view a comparison of the different filing options (please note that TeleFile is not available for direct shippers). If you have any questions about the requirement, please visit Ohio’s Department of Taxation website, or call the Ohio DOT at 800-282-1784.

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The Kansas Special Order Shipping License Application and Instructions (Form ABC-800 rev.6/29/09) are posted on the Wine Institute website. In addition to the License application wineries are required to obtain a bond for $750, submit a Kansas Business Tax Application, and file form ABC-160 entitled “Irrevocable Consent to Jurisdiction” with the Kansas Secretary of State’s office. There is a $35 fee to file form ABC-160 and a $1 fee for each additional file stamped copy of the form. Wineries registered as a supplier in Kansas and doing business through the 3-tier system should have already filed form ABC-160 and will not need to file the form a second time. Wineries who have already filed ABC-160 can obtain a copy of their Irrevocable Consent to Jurisdiction letter on the Kansas Department of Revenue website. A copy of the Irrevocable Consent to Jurisdiction should be attached to the application or faxed to the Department of Revenue upon receipt. Special Order Shipping Licenses will not be issued until Alcohol Beverage Control has a copy of the document. The Kansas Business Tax Application should be completed by hand and mailed in with the Special Order Shipping License Application.

Wineries located outside of Kansas applying for the Special Order Shipping License are not required to complete Section 3- “Business Ownership Information,” Section 5– “Background Qualifications” or Section 9 “Management Services Disclosure” of the application. In Section 6, Part 2 and Section 8, Part 1 it is not necessary for out-of-state applicants to attach additional documentation.

Should you have any questions about the Special Order Shipping License Application process or forms please contact Annie Bones with the State Relations Department of Wine Institute at 415-356-7530.

Application
http://www.ksrevenue.org/pdf/forms/abc800.pdf
Business Tax Registration
http://www.ksrevenue.org/pdf/forms/cr16.pdf
Escrow Bond Form
http://www.ksrevenue.org/pdf/forms/abc803.pdf
Surety Bond Form
http://www.ksrevenue.org/pdf/forms/abc804.pdf
ABC-160
http://www.ksrevenue.org/pdf/forms/abc160.pdf

-Annie Bones, State Relations - Wine Institute

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Kansas SB 212 was signed into law by Governor Kathleen Sebelius on April 10. Wineries interested in avoiding the hassle of the application process can purchase the license at www.easywinelicensing.com.

Licensed wineries will be able to ship up to 12 cases of wine per year to Kansas residents. To obtain a Kansas direct shipping license, wineries must pay a $50 license fee, a $50 registration fee, and post a $750 bond.

Tennessee will also open for direct shipping on July 1, although the paperwork has not yet been finalized.  Tennessee’s license is available for pre-order pending the state’s posting.

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You can view these notes anytime by visiting the ShipCompliant Blog, located under “Compliance Resources”, or by visiting CorbinCounsel.com and clicking on the home page link, “Notes on Wine Distribution.”

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After the Bureau of Liquor Enforcement adopts regulations and licensing procedures, the law will permit out-of-state and Maine farm wineries alike to ship wine (but not wine coolers!) directly to consumers by common carrier, subject to the same taxes as if sold locally. Meanwhile, the on-site provisions summarized in previous releases of Notes on Wine Distribution appear to remain available.

by R. Corbin Houchins, CorbinCounsel.com

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Activities Requiring Licenses: The Department describes when third party providers require a license. In CA a license is required when a business sells (transfers title), solicits a sale or delivers alcohol pursuant to an order. (B&P Code 23025) If interpreted according to its plain language, the definition of sale would require the following types of businesses to obtain licenses to sell wine: delivery companies, credit card companies that offer wine to certain cardholders, banks with loyalty programs, florists that offer wine through retail partners, airlines, and many more. To avoid opening Pandora’s box, ABC offers some exceptions. ABC allows a delivery company under the express direction of a licensee to operate without a license. The Advisory does not offer the same exception for a website that makes an offer to sell at the direction of a licensee. However, if a website merely publishes an offer made by a winery this would not be a solicitation by the web provider. If ABC were to hold otherwise, every media publication in California accepting winery advertisements would require a license. The Advisory does make clear that when selecting a marketing service provider, the winery or licensee must retain control of business decisions and core operations such as pricing, making offers, transferring title and directing delivery.

Tied House Risks: Beyond the cautions on unlicensed sales, ABC reminds wineries that they cannot pay retailers for advertising. Wineries cannot pay online storefronts licensed to sell as retailers for loading content, posting any material, or any advertising whatsoever. The retailer only can receive money from its markup and sale of the wine products. In some instances, the winery can pay for additional services such as age verification and compliance services.

Nothing is Free: ABC reminds industry that no free goods or premiums may be provided in connection with the marketing and sale of alcoholic beverages. This includes free shipping. Shipping may be included the price but it cannot be offered as free shipping.

Consignment Sales: Federal and state beverage alcohol laws prohibit consignment sales. Attempts to improve inventory management through just in time logistics can be problematic for innovative service companies. A licensee must sell alcoholic beverages to which they have title. Inventory cannot be returned if unsold. Any just in time delivery solutions should be carefully examined to ensure that the transaction is not a disguised consignment sale.

The web of federal and CA law is full of traps for the unwary. ABC’s advisory identifies many of the traps without offering solutions. Businesses must examine the totality of the circumstances and ensure that the essential elements of each transaction and control of these elements rest with licensees.

This analysis was authored by Susan Cagann, Special Counsel at Farella Braun + Martel LLP.  Susan will be speaking on the subject of marketing and retail agents at ShipCompliant’s Compliance Seminar and Users Conference June 11th in Napa, CA.

Re-posted with permission from Farella Braun + Martell

CABC - Advisory Third Party

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Although retailers will not be among those celebrating on July 1, the passage of SB 166 is a huge victory for many direct shippers. Governor Bredesen’s signature signals a radical change in the state’s stance on wine sold through the direct shipping channel: Tennessee is the first state to reverse its stance on direct shipments for wine since Vermont in 2006. The effective date of this legislation is less than a month away, however, there is no word, yet, on when all necessary forms will be available, so stay tuned.

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