Viewpoint

 

The Downside of Granholm v. Heald

October 2008
 
by Jason Haas
 
 
The Granholm v. Heald decision in 2005 sparked impromptu consumer celebrations around the country, stories in national media about how the Supreme Court had sided with wine lovers and struck down restrictions on interstate wine shipment, and general euphoria among small and medium-sized wineries that rely on direct shipping. Slightly more than three years later, more people in more places can receive wines direct from wineries, but the impacts have been far from uniformly positive for wineries and their customers.

Three years post-Granholm, most shipping maps show 36 legal shipping states (up from 13 in 2005), yet most wineries ship to far fewer. At Tablas Creek, we ship to 27 states. The discrepancy between these two numbers comes because of the varying levels of restriction and cost that states impose on wineries. Some (like Arizona and Massachusetts) restrict us from shipping because we're too large. Some (like Louisiana and Indiana) prohibit us from shipping because we have a relationship with a distributor in the state. Some (like Kansas and Rhode Island) allow us to ship only orders placed while a customer was on-site. Others (like Hawaii and Connecticut) have such onerous reporting requirements that the business we could do does not justify the expense. Finally, the District of Columbia has such a low monthly limit (one quart per month) that shipping there is not practical. Still, the 27 states to which we ship comprise nearly 70% of the U.S. population, and most of the rest share a border with at least one state to which we can ship wine.

This variability by state is a large part of the downside of the proliferation of states' direct shipping laws post-Granholm. Each new state shipping law imposes different requirements on wineries to collect state, county and local taxes, and to report their sales to state governments. At Tablas Creek, one person in our office specializes in direct shipping compliance. She spends about one-third of her time calculating state, county and city taxes on the wines we sell direct, preparing and filing the necessary reports, and integrating this reporting with our accounting software. With additional contributions from our controller, our costs (in salaries and benefits) probably approached $20,000 last year.

Some small wineries have simply confined their shipping to the shrinking roster of reciprocal states, and therefore seen their market contract rather than expand in the last three years. Still, recently things have gotten easier. A handful of new companies specializing in compliance help wineries navigate the compliance maze (see "Curing Compliance Headaches," September 2008). For a fee of a few hundred dollars per month, we filter our sales through one company's software and have state and local compliance documents generated automatically. Of course, we have incurred costs in setting up and integrating this system with both our online front-end and our accounting back-end systems.

The main cost to consumers is that states have taken full advantage of the portion of the Supreme Court decision that allows them to recoup the taxes they would otherwise have collected from an in-state sale of the same wine. Wine is treated differently than most other products. Customers of Amazon.com, for example, do not pay sales tax unless they live in Amazon's home state of Washington. Yet, when the states' attorneys general argued in Granholm that they had a "legitimate local purpose" in collecting taxes on the sales of wine within their borders (as a justification for prohibiting untaxed out-of-state sales), Justice Anthony Kennedy specifically rebutted their concerns by suggesting that wineries remit taxes. This imposition of formerly uncollected taxes amounts to a surcharge of between 6% and 10%.

Another hidden cost to consumers has been the erosion of rights to receive out-of-state shipments from wine retailers. The Granholm decision specifically addresses wineries, and many states have taken the (in my mind, constitutionally indefensible) position that it does not apply to other sellers of wine. The courts have not yet ruled on this issue; meanwhile, several states, notably Texas and Illinois, have stripped their consumers of the right to order wine from out-of-state retailers.

It's clear that, given a sliver of opportunity, states find justifications for imposing taxes and for favoring businesses licensed by and in that state. One can see how discouraging it would be for business if every product had to navigate the same patchwork of regulations that wine producers face.

Jason Haas is partner and general manager at Tablas Creek Vineyard in Paso Robles, Calif., where he is a member of the winemaking committee, manages wholesale distribution of Tablas Creek, and directs local and national marketing efforts. He also writes Blog Tablas Creek (tablascreek.typepad.com), which was named "Best Winery Blog" at the 2008 American Wine Blog Awards. To comment on this Viewpoint, e-mail edit@winesandvines.com.

We welcome comments from readers on issues of current interest in the wine industry. Send your topic idea to edit@winesandvines.com, and we'll contact you.
 
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