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Caught Between Two Amendments November 20, 2002
Caught Between Two Amendments

ALMOST 70 years after the repeal of Prohibition, the country may finally be moving toward more consumer-friendly laws that will make it easier to buy wine.
In United States District Court in Manhattan last week, a federal judge ruled that a New York State law that bars out-of-state wineries from shipping wine directly to New York consumers while allowing New York wineries to do so was unconstitutional. (Out-of-staters are required to sell their wine in New York only through wholesalers.) In his ruling, Judge Richard M. Berman went to the heart of a constitutional controversy that has been raging in the wine industry for more than 20 years: which should prevail, the 21st Amendment, which ended Prohibition and gave all alcohol regulation to the states, or the Sixth Amendment's commerce clause, which bans all barriers to interstate trade?


Many states, heavily supported by the powerful wine and spirits wholesale distributors, insist that the 21st Amendment prevails. They fear a big loss of excise taxes, and the distributors fear a major loss of income if wineries can bypass them and ship directly to consumers' homes. The winemakers and many consumer groups, angered by what they see as a confusing array of state-imposed barriers to the free flow of wine shipments, insist that the commerce clause of the Sixth Amendment is unequivocal.
A number of recent judgments in state and federal courts have, like Judge Berman's, favored the commerce clause. Earlier this year, bans on direct interstate wine shipments were ruled unconstitutional in North Carolina and Virginia; a similar ruling was made this month in Florida. But enough rulings in recent years have gone the other way to almost ensure that the issue will eventually find its way to the Supreme Court.Even so, the reaction to the New York ruling among retailers and consumer advocates was upbeat.

James Trezise, president of the New York Wine and Grape Foundation, the promotional arm of the state's wine business, said the ruling "crystallizes the choices for the state government and the Legislature."
"Either there will be no direct shipping from any winery or there will be equal opportunity for wineries everywhere to ship into New York," Mr. Trezise said. Under the first outcome, he said, "New York wineries would lose current business and jobs and sales taxes during the current budget crisis." Under the second, the wineries "would gain new markets, New York consumers would have more choice and the state would get new tax revenues."
Michael Aaron, chairman of Sherry-Lehmann, said, "This is a major, major victory for the wine consumer," even though interstate shipments would inevitably cut into his business. "My share of the pie might get smaller," he said, but "the pie will get immeasurably bigger."News of the ruling was hailed by small wineries who claim that they are ignored by the large distributors. "None of them want to take on wines like my Charbono or my Critique of Pure Riesling," said Randall Grahm, president of Bonny Doon Vineyards in Santa Cruz, Calif.
Stu Smith, a partner in the Smith-Madrone Winery in the Napa Valley, said that distributors had it all wrong. "Direct shipping is an adjunct to the classic distribution system," he said, "not a competitor." On Nov. 2, President Bush signed legislation allowing people visiting wineries to ship their purchases home. Although the measure grew from efforts to reduce the volume of baggage at airports, Mr. Smith cited it as another victory for wineries.
At the heart of the matter is the three-tiered system sacred to the powerful wine and spirits distributors. Under this system, a winery must sell to a licensed wholesaler - the distributor - who may in turn sell only to a licensed retailer. The distributors, who control 90 percent of all wine and spirits shipments, see direct shipment as a serious threat. Direct shipping opponents contend, too, that bypassing the three-tiered system makes it easier for under-age people to obtain alcohol.
Direct shipping has grown rapidly in the Internet age. "What began as a cottage industry catering to collectors has become a coast-to-coast $1-billion-a-year enterprise," the Wine and Spirits Wholesalers of America, an industry group, said in a statement. State taxes on alcoholic products are estimated at nearly $10 billion a year.
Judge Berman set Dec. 5 to hear proposals for a solution in New York. Whatever he decides, his ruling will almost certainly be appealed.
Craig Wolf, general counsel for the wholesalers' group, said he was confident that Judge Berman's decision would be reversed on appeal. "He was absolutely incorrect in his ruling," Mr. Wolf said. "From a legal standpoint, he ignored every bit of evidence" supporting state control. To Mr. Wolf, the 21st Amendment is sacrosanct and will always supersede the commerce clause.
More and more, however, the "evidence" seems to support the direct-shipper advocates, like the Wine Institute, the promotional arm of the California wine industry, which has long favored legislation to end the shipping dispute."The 21st Amendment has its limitations," the institute said in a recent report to the Federal Trade Commission. "The central purpose of the provision was not to empower the states to favor local liquor industries by erecting barriers to competition."
John DeLuca, the Wine Institute's president, criticized the wholesalers for successfully pressing several states to make direct shipping a felony but added that he too believed the whole issue would be settled by the Supreme Court. "The New York decision should be seen as added incentive to work this out at the highest judicial level," Mr. DeLuca said. In any event, while it may seem that the tide is turning in favor of direct shipping, the battle is far from over. Too much money is at stake. It will be a long time before your friendly wine merchant is replaced entirely by your computer mouse.

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