Last Straw for Direct Shipping Holdouts?

March 2011
by Jeff Carroll
Direct shipping will almost certainly come to Maryland consumers in 2011. However, the bigger story out of the Old Line State is the Direct Wine Shipment Report released by the comptroller Dec. 31, 2010. Peter Franchot’s comprehensive 257-page report will have a lasting (and for wineries, favorable) impact on the industry for years to come.

After failing to pass new legislation to allow direct shipping in 2010, the Maryland General Assembly passed Senate Bill 858, which charged the comptroller with submitting an independent report about “the viability and efficacy of instituting in Maryland the policy of permitting direct shipment of wine to consumers in the state.” The result is a thorough and interesting paper that analyzes a broad set of data, investigates the effects of direct shipping in the 37 states that have adopted it, explores the legislative history of the three-tier distribution system and carefully considers the constitutional jurisprudence that preceded the landmark ruling in the U.S. Supreme Court case Granholm v. Heald.

In the Direct Wine Shipment Report, Franchot comes to two important conclusions. First, he makes a determination “that direct wine shipment will benefit wine connoisseurs motivated more by brand than price, and who would purchase wine directly if it was unavailable from a local retailer.” Second, and more significantly, he finds that there “is no evidence that underage drinking has increased or decreased as a result of direct wine shipment.”

A 2003 report titled Possible Anticompetitive Barriers to E-Commerce: Wine from the Federal Trade Commission (FTC) came to similar conclusions, finding that ¬e-commerce “offers consumers lower prices and more choices in the wine market” and that “states that permit interstate direct shipping generally report few or no problems with shipments to minors.” In the nearly eight years between the FTC report and the comptroller report, 12 of the 13 “reciprocal” states have adopted permit systems, as did 11 of the 24 states that prohibited direct shipment. This provided Franchot with a broader base of experience from states that have adopted direct shipping. Further, because the comptroller is directly responsible for administering alcoholic beverage laws (including direct shipping, if passed) in Maryland, the Direct Wine Shipment Report carries an additional level of relevance in direct shipping debates.

Following Franchot’s recommendation, companion bills (HB 234 and SB 248) were introduced in the Maryland General Assembly on Jan. 28 that would establish a direct-shipping permit system. Despite the fact that similar bills ended up being killed in committee during the past few years, majorities in the state House and Senate have signed on as co-sponsors, and key industry groups have provided endorsements. Because the comptroller report debunks nearly all the arguments direct shipping opponents have put forth in Maryland, including claims it would hurt Maryland wineries, hinder tax collection and increase access for minors, it seems almost certain the bills will pass this time.

While the comptroller’s report is viewed positively by wineries, it presents a mixed bag for retailers. Franchot concludes that direct shipments by out-of-state licensees would have a negative effect on in-state businesses “because purchases from retailers are primarily motivated by price.”

Just as the FTC report was absolutely integral in Justice Kennedy’s majority opinion in Granholm (search for the term “FTC” in the opinion, and you’ll find the report referenced nine different times), the comptroller report will certainly be used during direct shipping legislative debates and litigation in the foreseeable future.

Of course, it may take decades for a few of the holdout states such as Utah to adopt direct-shipping laws for wine. However, the comptroller’s Direct Wine Shipment Report will play an immediate role not only in debates about pending bills in Maryland (at the time of this writing, the bills have just been introduced into committee) and New Jersey, but also in several other states that will likely consider direct shipping legislation in 2011, including Massachusetts, Florida, New Mexico and Indiana. Similarly, it will play an important role in the ongoing debate about the Comprehensive Alcohol Regulatory Effectiveness (CARE) Act in the 112th Congress, as many of the same arguments against direct shipping surface in CARE Act discussions.

Jeff Carroll is vice president of compliance and strategy at ShipCompliant. In his role, Carroll identifies needs and designs innovative software to solve industry problems relating to compliance and distribution. He also manages a team of compliance research specialists and is the editor and publisher of Wine Direct Shipping Compliance, a public blog at about wine shipping news, issues and analysis.

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