Amicus Curiae Brief — Granholm v. Heald

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Nos. 03-1116 SEP 22.904

Beer: a

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FICE OF THE CLE

IN THE SUPREME COURT OF- )

THE UNITED STATES

JENNIFER M. GRANHOLM, GOVERNOR, ET AL..,

Petitioners,

Vv.

ELEANOR HEALD, ET AL.,

Respondents.

ON WRIT OF CERTIORARI

To THE UNITED STATES COURT OF APPEALS

For THE SIXTH CIRCUIT

BRIEF OF AMICI CURLAE STATES OF CALIFORNIA,

WASHINGTON, NEW MEXICO, OREGON, AND

WEST VIRGINIA IN SUPPORT OF RESPONDENTS

BILL LOCKYER

California Attorney General

MANUEL M. MEDEIROS

California Solicitor General

Counsel Of Record

CHRISTINE O. GREGOIRE

Washington Attorney General

NARDA PIERCE

Washington Solicitor General

1300 I Street

Sacramento, CA 94244-2550

916-323-1996

Bill Lockver

C;.lifornia Attorney General

1300 I Street :

Sacramento. CA 94244-2550

916-323-1996

Christine O. Gregoire

Washington Attorney General

1125 Washington Street SE

Olympia. WA 98504-0100

206-753-6200

Patricia A. Madrid

New Mexico Attorney General

PO Drawer 1508

Sante Fe. NM 87504-1508

505-827-6000

Hardy. Mvers

Oregon Attorney General

1162 Court Street NE

Salem.OR 97301

503-378-4402

Darrell V. McGraw, Jr.

West Virginia Attorney General

State Capitol Room 26-E

Charleston. WV 25305

304-558-2021

TABLE OF CONTENTS

INTEREST OF THE AMICI CURIAE....................... 1

SUMMARY OF ARGUMENT ................:cccccceesesreeeeees 1

nT itacestctatenecninnseesccnscesescocenscceocccccscecece 4

A. States’ Interests Are Not Single-Faceted

And Include Both Twenty-First

Amendment Authorities And The

Nondiscrimination Principle Of The

Dormant Commerce Clause .....................cc.0e0eeee00 4

1. States’ Interests Protected By The

Twenty-First Amendment .......................c0..0005 5

2. States’ Have Strong Interests In

Nonprotectionism In Commerce...................... 6

a. Product Protectionism Has

Negative Impacts On The Interests

DD ss ccccccennsecsssscsscseccosse 6

b. Protectionism Would Return In

Several Forms If Bacchus Imports,

eI cnsesssneoooces 8

B. Michigan’s Asserted Regulatory Interests

In Discriminating Between In-State

And Out-Of-State Wineries In The

Context Of Direct Wine Shipments

I 9

1. Restrictions On Out-Of-State Direct

Wine Shipments Are Not Necessary

To Prevent Tax Evasion Because The

Analysis Of Quill Corp. Is Inapplicable

i cunees 10

2. The Asserted Need For An In-State

Presence To Prevent Sales To Minors

By Wineries Is Not Substantiated .................

a. While Protecting Minors Is A

Matter Of Serious Concern, A

Threshold Question Is Whether

A Ban On Out-Of-State Shipments

I Te I iccnniatectinicntinntanisinimnins

b. Michigan And Its Amici Under-

state The Deterrence Value Of

State Regulations Regarding The

Direct Sale Of Wine To Consumers

By Out-Of-State Wineries .........................

(1) The In-State Or Out-Of-State

Origin Of Direct Wine

Shipments Does Not Make A

Difference In The Efficacy Of

Regulatory Efforts To Limit

Underage Access To Alcohol................

(2) A Shipper’s License That Allows

Access To Markets In Other

States Is A Significant Benefit

To Small Wineries And

Potential Loss Of The License Is

A Strong Deterrent To

TTD aE =

(3) Michigan's Outright Ban

Unreasonably Discounts The

Collateral Consequences An

Out-of-State Winery Could

Suffer For Violation Of

ID ID cccinntnsibumnincinninnnbteniai

GCE IO cosccsnccsesinseienaseeninnsunnnaninnnitiiintiaamatiiel

TABLE OF AUTHORITIES

Cases

324 Liquor Corp. v. Duffy

Fe ceitncrnccsncaneinnnstnninnintnnsidiniiintitinn 15

Bacchus Imports, Ltd. v. Dias

een 2, 7-9, 12

Bainbridge v. Turner

311 F.3d 1104 (llth Cir. 2002)................ccccccccceees 11

Baldwin v. G.A.F. Seelig, Inc.

Se ns ii ceri ciinciniiidiiiieinttedidiiiael 6

Bolick v. Roberts

199 F. Supp. 2d 397 (E.D. Va. 2002),

order vacated by Bolick v. Danielson

330 F.3d 274 (4th Cir. 20038).............ccccccccccceseesees 10

Dickerson v. Bailey

212 F. Supp. 2d 673 (S.D. Tex. (2002), affd,

336 F.3d 388 (Gth Cir. 200S).........ccccccccccccrsscscerseeees 5

Fueston v. City of Colorado Springs |;

713 P.2d 1323 (Colo. Ct. App. 1985)..................... 24

Hostetter v. Idlewild Bon Voyage

Liquor Corp.

re ee Se ierctientinhininititnititgenenpainnaptaiiteinaniniag 22

North Dakota v. United States

Sa , Ga Qa cccnnesnnnesnssencsnimsamenmennmnsnsienn 6

IV

Quill Corp. v. North Dakota

ES AP IT icnincinnnineniendeeninetmeninionins 2, 3, 10-12

State Bd. of Equalization v. Young’s

Market Co. :

EEE oe See 7

Constitutional Provisions

U.S. Const. amend. XX1..................... 1-6, 9, 12, 13, 15

es Ch CI, Fis Ot i tiinisicerctenteriintennintnniiadninintins 5

i § § § § | Se eeneee 2-5, 7, 12, 13, 15

Statutes

Federal Alcohol Administration Act

le SE tle Gs Gi isicreninesnscnrenimmennnsnesmsicmnnies 25

Be es Be ED setictiensennsicnitnteenncssmncinnnmenetente 25

ee es ee icccntentiecnnennitinsniinninnsiions 25

Cal. Bus. & Prof. Code § 23661.2(b)......................... 23

Cal. Food & Agric. Code § 74802.....................cccceeeeeees 8

Colo. Rev. Stat. Ann. § 12-47-104(1)........................ 23

OE ee 24

Del. Code Ann. tit. 4, § 104(b) ............... cee eeeeeeeeeeeees 24

ge ee 23

235 Ill. Comp. Stat. 5/6-29(D) ................ccccsscessesesseees 23

La. Rev. Stat. Ann. § 26:359(G)............c.ccccccccceceeeeee 25

Mich. Comp. Laws Ann. § 436.1203(2)(f)................. 19

es SU, CE, Fy A ccciitinertitticceinnsinnicnconcccnsviniis 23

N.H. Rev. Stat. Ann. § 178:27(V) .............cccccccceeeseees 13

N.H. Rev. Stat. Ann. § 178:27(VIII)........0...000000000002. 24

N.M. Stat. Ann. § 60-7A-3(E) ..............cccccceeseeeseeeeees 23

N.C. Gen. Stat. § 105-113.83(b)........................000000. 13

ae CRW. GRR, B GPE ID ccccccccsccescccnccenenscctecsonntons 23

S.C. Code Ann. § 61-4-747(C)(4).........cccccccccsceeseeeeees 13

Wash. Rev. Code § 15.88.010(2) ...............cccccccccceeeeeees 8

Wash. Rev. Code § 66.12.200................ccccccccccceeeeeeees 23

ae es Ge TE sicccnsiiccenicsinsinensnetcenniiinnnnensniuituins 24

Wyo. Stat. Ann. § 12-2-204(d)(v) ............... eee eee eee 13

Treatises

Laurence H. Tribe, American Constitutional

ESSER Se cL REE ae 7

Other Authorities

ATF Industry Circular No. 96-3,

Direct Shipment Sales Of Alcohol

Beverages (Feb. 11, 1997), found at

http://www.atf.gov/pub/ind_

I I iii iniainaeiiniiain ik diene 26

Eric L. Martin,

A Toast To The Dignity Of States: What

Eleventh Amendment Jurisprudence

Portends For Direct Shipment Of Wine,

31 Hofstra L. Rev. 1303 (Summer 2003)........ 20, 22

Federal Trade Commission, Staff Report,

Possible Anticompetitive Barriers To

E-Commerce: Wine (July 2003), found

at www.ftc.gov/os/2003/

i ccccecsccsscnssecnemessesenssssens 14, 18, 26

Lloyd C. Anderson,

Direct Shipment Of Wine, The

Commerce Clause And The

Twenty-First Amendment: A Call

For Legislative Reform,

fF SSS ee 11

Note,

Economic Localism In State Alcoholic

Beverage Laws—Experience Under The

Twenty-First Amendment,

Fe ee ip ee I ee ccictinsenciesicnscncnsesnecsetets 9

Op. Att’y Gen. 161, 1992 WL 573160

a a) 9

Prepared Statement Of The Federal

Trade Commission Before The

Subcommittee On Commerce, Trade,

And Consumer Protection Committee

On Energy And Commerce United

States House Of Representatives,

October 30, 2003, found at

http://www. ftc.gov/os/2003/

10/031030ecommercewine.htm.......................

Stuart M. Maxey,

Sour Grapes: Reflections On The

Circuit Split On Direct Shipment Of

Wine, The Commerce Clause, And The

21st Amendment, State Tax Notes 45

I a

Timothy F. Malloy,

Regulation, Compliance And the Firm,

76 Temp. L. Rev. 451 (Fall 2008)............0....00..

Vijay Shanker,

Alcohol Direct Shipment Laws, The

Commerce Clause, And The

Twenty-First Amendment,

85 Va. L. Rev. 353 (Mar. 1999)...........000...0000..

vil

This page intentionally left blank.

INTEREST OF THE AMICI CURIAE

This amici curiae brief is submitted on behalf

of the states of California, Washington, New Mexico,

Oregon, and West Virginia. The amici states have

each determined that they will allow direct

shipments of limited quantities of wine to consumers

for personal use and that their interests in revenue

collection and preventing underage access to wine

can be met through regulatory controls rather than

barring direct sales by all out-of-state wineries. The

amici states have adopted reciprocity laws, allowing

direct wine shipments from states which do not close

their markets to interstate wine shipments and

applying the same regulatory provisions as are

applied to their in-state wineries. Additionally,

wineries in some of the amici states ship their

product to other states that allow direct shipments

under permitting laws that address tax collection

and verification of the age of the recipient of the

product.

The amici states are all sovereign states that

regulate the sale of alcohol pursuant to their

authority under the Twenty-first Amendment to the

United States Constitution. These states have

strong interests in collecting tax revenues associated

with alcohol sales and in preventing the access of

minors to alcohol. The amici states also have a

strong interest in avoiding economic protectionism

that discriminates against the products of their

residents.

SUMMARY OF ARGUMENT

The Twenty-first Amendment enables states

to regulate importation of alcohol to a degree that

would otherwise be impermissible under the

dormant Commerce Clause and allows states to

structure systems of alcohol regulation, including the

three-tier distribution system adopted in many

states. However, in Bacchus Imports, Ltd. v. Dias,

468 U.S. 263, 276 (1984), the Court held the

Twenty-first Amendment does not allow state laws

that constitute “mere economic protectionism”. This

holding protects important state interests in the free

flow of commerce and should not be overruled as

urged by Michigan and its amici. Otherwise, as

historical laws illustrate, protectionism would return

in many forms and would have the negative impacts

that accompany such barriers.

States with statutory schemes that permit

in-state wineries to directly ship alcohol to

consumers but restrict similar shipments by out-of-

state wineries commonly argue these laws are

justified by the limits of their regulatory reach.

Michigan and its amici states assert two such bases

for its outright ban on out-of-state direct shipments.

First, they argue an in-state presence is needed to

require out-of-state wineries to collect their sales or

use taxes. Second, they argue an in-state presence

provides the only effective regulatory hammer if

there are illegal sales of alcohol to minors.

With regard to collection of taxes, the Court

should dispel the mistaken assumption that a state

would not be able to collect taxes on sales of wine by -

out-of-state shippers. The Court’s holding in Quill

Corp. v. North Dakota, 504 U.S. 298 (1992), that a

state cannot tax a vendor whose only contacts are by

mail or common carrier did not address the interplay

of the Twenty-first Amendment and the Commerce

Clause. If the choice posed by the interplay of the

Twenty-first Amendment and the Commerce Clause

is allowing states to impose tax collection

responsibilities on out-of-state wineries, or

alternatively allowing them to ban direct shipments

from these wineries altogether, the value of both

provisions obviously is better served by the first

alternative. It would bo ironic indeed if the Quill

Corp. holding, based on avoiding undue burdens in

interstate commerce, stood as justification for state

laws that preclude such commerce altogether.

Indeed, several states have adopted laws that

require out-of-state shippers to collect and remit

state taxes. Dispelling the mistaken assumption

that Quill Corp. governs wine shipments also

removes any doubt about the enforceability of

these laws.

With regard to underage access to alcohol,

Michigan and its amici suggest that unless a state

bans direct shipments from out-of-state wineries

such sales will be “virtually unregulated”.! This

claim is countered by the fact a number of states

allow direct shipments under successful regulatory

programs. Additionally, the claim that only in-state

wineries can be deterred from providing wine to

minors ignores the circumstances of the direct wine

shipment market. Wineries have a significant

economic interest in being allowed to sell wine to

consumers of other states. There is little risk they

would put such direct shipping licenses in peril in

order to make incidental sales on those rare

occasions when minors would seek to obtain access to

! Br. Amici Curiae Ohio, et al. at 14.

wine through such sales. And in-state controls on

deliveries are the same whether the product is from

in-state or out-of-state wineries. Further, violations

of Michigan laws could have collateral consequences

for non-Michigan wineries, since such violations

could be a basis for license actions in other states,

including a winery's home state. The claim that

effective regulation requires an in-state presence is

not substantiated in the context of direct wine

shipments to consumers for personal use.

ARGUMENT

A. States’ Interests Are Not Single-Faceted And

Include Both Twenty-First Amendment

Authorities And The Nondiscrimination

Principle Of The Dormant Commerce Clause

States have an interest in_ controlling

importation of alcohol into the state under the

Twenty-first Amendment and also have an interest

in the flow of commerce among the states.

Consideration of the effect of the Twenty-first

Amendment on the operation of the

nondiscrimination principle of the dormant

Commerce Clause is not a single-faceted “states’

rights” issue as some have suggested.2 Rather, the

2 See Eric L. Martin, A Toast To The Dignity Of States:

What Eleventh Amendment Jurisprudence Portends For Direct

Shipment Of Wine, 31 Hofstra L. Rev. 1303, 1305 (Summer

2003) (concluding that states’ prerogatives under the Twenty-

first Amendment should not overcome the Commerce Clause’s

purpose of eliminating economic protectionism in the direct

shipment of wine, but observing the Court may view the

Twenty-first Amendment as being preeminent because it

“implicates the sovereignty of the states”).

states have interests that are implicated by each of

these provisions and by their interplay.

1. States’ Interests Protected By The

Twenty-First Amendment

The Twenty-first Amendment enables states

to regulate importation of alcohol to a degree that

might otherwise be impermissible under the dormant

Commerce Clause. Section 2 provides:

“The transportation or importation into

any State, Territory, or possession of the

United States for delivery or use therein of

intoxicating liquors, in violation of the laws

thereof, is hereby prohibited.” U.S. Const.

amend. XXI, § 2.

Many states have used their authority under

the Twenty-first Amendment to establish a three-

tiered system to control the distribution of alcoholic

beverages. Under a three-tiered distribution system,

alcohol producers ,provide their product to

wholesalers and distributors, who in turn may

provide alcohol to retailers, who then sell to

consumers. The three-tiered distribution system is

generally a way to structure the liquor industry in an

orderly market system that serves state interests in

preventing alcohol abuse or evasion of taxation. The

three-tiered system addresses a concern that if these

various tiers wefe to collapse and be controlled by

the same entities, the system would foster organized

crime and create incentives to encourage alcohol

abuse. See Dickerson v. Bailey, 212 F. Supp. 2d 673,

679-80 & n.11 (S.D. Tex. (2002), affd, 336 F.3d 388

(5th Cir. 2003). A state has broad authority to

regulate alcohol under the Twenty-first Amendment,

and nobody seriously questions that the three-tiered

system is constitutional regardless of any incidental

burden on interstate commerce. Cf. North Dakota v.

United States, 495 U.S. 423, 431-33 (1990)

(plurality opinion). The three-tiered system is not at

issue here.

This dispute is over a regulatory exception

from a state’s three-tiered system. Many states have

recognized that they can meet their regulatory

concerns and allow direct shipments of wine to

consumers, in limited quantities for their personal

use. While many states do so without discriminating

against out-of-state wineries, Michigan has chosen to

except only its own wineries and open Michigan's

slice of the personal use wine market to them in a

manner that it forbids to out-of-state wineries.

Michigan's discriminatory exception for its

own wineries implicates another state interest: the

interest in nonprotectionism in commerce.

2. States’ Have Strong Interests

Nonprotectionism In Commerce

a. Product Protectionism Has Nega-

tive Impacts On The Interests Of

The Source States

When the dormant Commerce Clause

addresses laws that block the flow of commerce into

a state, the affected interests are not just one of state

versus federal power, but also of “one state in its

dealings with another”. Baldwin v. G.A.F. Seelig,

Inc., 294 U.S. 511, 527 (1935). The exercise of state

authority under the Twenty-first Amendment

demonstrates the different state interests involved.

Early Twenty-first Amendment jurisprudence

provided states with virtually unlimited power to

prevent imported liquors from competing with

domestic liquors on equal terms. See State Bd. of

Equalization v. Young’s Market Co., 299 U.S. 59

(1936). The opposite side of this coin was that states

were virtually powerless to prevent economic

protectionism that discriminated against their

own breweries or wineries. As summarized by

Professor Tribe: “It was long unclear whether the

amendment empowered states to regulate

importation beyond the degree reasonably necessary

to control the level of liquor consumption within the

state’s boundaries. Some early cases suggested that

the state’s power extends well beyond such control,

even authorizing political trade wars among the

states”. Laurence H. Tribe, American Constitutional

Law § 6-24 (3d ed. 2000).

However, in Bacchus Imports, Ltd., the Court

held that “[s]tate laws that constitute mere economic

protectionism” can violate the Commerce Clause.

Bacchus Imports, Ltd., 468 U.S. at 276. A contrary

holding, “would revive the spectre of balkanized

commerce which haunted the framers and motivated

the commerce clause itself”. Tribe, § 6-24.

The spectre of protectionism that forecloses

some wineries from participating in the national

economy presents this concern for wine-producing

states. Wine exports contribute substantial economic

benefits to these states, particularly in providing

employment »ad a stable economy in rural and

agricultural communities. The legislatures of these

states have clearly recognized the substantial

benefits provided to their residents by wine grape

growing and wine production, including sales for

export to other states.’ Thus, these states have a

strong interest in ensuring that laws that

prevent the direct shipment of wine to consumers in

other states do not constitute “mere economic

protectionism”. See Bacchus Imports, Ltd., 468 U.S.

at 276.

b. Protectionism Would Return In

Several Forms If Bacchus Imports,

Ltd. Were Overruled

Michigar and its amici ask the Court to

overrule Bacchss Imports, Ltd. Pet’rs Br. at 28-29;

Br. Amici Curiae Ohio, et al. 10. They offer no

evidence to dispute the Bacchus Imports, Ltd. Court’s

conclusion that “one thing is certain: The central

purpose of the provision was not to empower States

to favor local liquor industries by erecting barriers to

competition.” Bacchus Imports, Ltd., 468 U.S. at

276. But if Bacchus Imports, Ltd. were overruled,

such protectionism would blossom.

History illustrates this point. In the past, a

number of states have imposed differential excise

taxes on locally produced and imported wines, or

3 For example, in Wash. Rev. Code § 15.88.010(2), the

Washington Legislature declares: “The sale in the state and

export to other states and abroad of wine made in the state

contribute substantial benefits to the economy of the state,

provide a large number of jobs and sizeable tax revenues, and

have an important stabilizing effect on prices received by

agricultural producers.” In Cal. Food & Agric. Code § 74802,

the California Legislature finds: “The maintenance and

expansion of the winegrape industry of California and of its

local, national, and foreign markets is necessary to assure the

consuming public of a continuous supply of these products and

needed levels of income for those engaged in the winegrape

industry in this state.”

have provided lower license fees for wineries using

domestic agricultural products. See Note, Economic

Localism In State Alcoholic Beverage Laws—

Experience Under The Twenty-First Amendment,

72 Harv. L. Rev. 1145, 1151 nn.51-52, 1153 n.69

(1959) (citing statutes that provided preferential

excise tax rates for domestic wines, different state-

controlled price markups, or lower license fees for

wineries using domestic agricultural products). The

central principle of Bacchus Imports, Ltd. has

resulted in the repeal of many of these provisions.

For example, a provision of the Michigan Liquor

Control Act subjected wines manufactured from

grapes or fruits not grown in Michigan to a higher

tax rate than that imposed on “all wines

manufactured in Michigan from grapes grown in

Michigan”. Op. Att'y Gen. 161, 1992 WL 573160 *1

(Mich. 1991-1992). In 1992, a Michigan Attorney

General Opinion concluded this tax preference

discriminated against interstate commerce in

violation of the Commerce Clause, citing Bacchus

Imports, Ltd. Id. at *1-*2.

The holding of Bacchus Imports, Ltd. is-sound

and protects the free flow of commerce without

undercutting any of the purposes of the Twenty-first

Amendment. If a state law is upheld on the basis of

the Twenty-first Amendment, it should be based on

regulatory needs rather than protectionism.

B. Michigan’s Asserted Regulatory Interests In

Discriminating Between In-State And Out-

Of-State Wineries In The Context Of Direct

Wine Shipments Are Not Substantiated

Michigan asserts two regulatory interests in

support of its ban on out-of-state direct wine

10

shipments: revenue collection and preventing

underage access to alcohol by requiring an in-state

presence. However, its central concern with regard

to revenue collection is based on a misassumption

that a state lacks the authority to require out-of-

state wineries to collect its taxes on wine sales.

Further, its assertion that only in-state wineries can

be prevented from providing wine to minors is

unsubstantiated.

1. Restrictions On Out-Of-State Direct

Wine Shipments Are Not Necessary To

Prevent Tax Evasion Because The

Analysis Of Quill Corp. Is Inapplicable

To Alcohol Sales

Michigan claims that the ban on direct

shipment by out-of-state wineries to consumers in

that state is necessary to accomplish that state’s

legitimate concern of tax collection. Similarly, its

amici Ohio suggests that “in a direct-shipping world,

the State may have no way to collect a sales tax from

the winery at all. See Quill Corp. v. North Dakota,

504 U.S. 298, 315-18 (1992)."* Br. Amici Curiae

4 Others have made this same assumption. See Bolick

v.-Roberts, 199 F. Supp. 2d 397 (E.D. Va. 2002) (citing Quill

Corp. for proposition that Virginia had no right to collect sales

taxes from out-of-state entities for delivery of wine directly to

Virginia consumers), order vacated as moot by Bolick uv.

Danielson, 330 F.3d 274 (4th Cir. 2003); Stuart M. Maxey, Sour

Grapes: Reflections On The Circuit Split On Direct Shipment

Of Wine, The Commerce Clause, And The 21st Amendment,

State Tax Notes 45, 51 (July 5, 2004) (arguing the state would

not be able to tax an out-of-state direct shipper of alcohol if

Quill Corp. applies, and therefore “the discriminatory ban

would seem to implicate the core concern of revenue raising and

would be saved under the Bacchus . . . approach”). Some have

adopted a different assumption—that out-of-state shippers

11

Ohio, et ai. at 25. These arguments are based on the

flawed assumption that Michigan lacks the authority

to require out-of-state wineries to collect its sales or

use taxes.

In Quill Corp., the Court adopted a bright-line

rule that the Commerce Clause required a business

to have a substantial nexus with a state beyond

contacts by mail or common carrier before the state

could require the business to collect its sales or use

taxes. Quill Corp., 504 U.S. at 313-16. On its face,

Quill Corp. did not apply to interstate shipment of

alcohol and its application is manifestly dubious in

that context.

The rule of Quill Corp. was established for the

explicit purpose of removing impediments to

interstate commerce. The Court observed that

“[uJndue burdens on interstate commerce may be

avoided not only by a case-by-case evaluation of the

could be required to collect taxes. See Bainbridge v. Turner,

311 F.3d 1104, 1115 (11th Cir. 2002) (“Why, exactly, must

Florida engage in this discriminatory scheme to effectuate its

desire to raise revenue? What is so unique about the

geographic location of out-of-state wineries that makes taxing

them so difficult that they are forced (unlike their in-state

counterparts) into the three-tier distribution system? After all,

in-state wineries are taxed directly, and this alternative

therefore appears to be a viable substitute to the three-tier

taxation scheme. So why can't out-of-state firms be taxed

directly, just like in-state wineries?” (Footnote omitted.)); Lloyd

C. Anderson, Direct Shipment Of Wine, The Commerce Clause

And The Twenty-First Amendment: A Call For Legislative

Reform, 37 Akron L. Rev. 1, 36 (2004) (out-of-state vendors as a

condition of direct shipping could, as an additional condition, be

required to collect and remit state taxes now collected by

wholesalers and retailers).

12

actual burdens imposed by particular regulations or

taxes, but also, in some situations, by the

demarcation of a discrete realm of commercial

activity that is free from interstate taxation.”

Quill Corp., 504 U.S. at 314-15. Such a bright-line

rule is appropriate under the Commerce Clause

because it “fosters investment by businesses and

individuals”. Id. at 316. The Court noted: “Indeed,

it is not unlikely that the mail-order industry’s

dramatic growth over the last quarter century is due

in part to the bright-line exemption from state

taxation created in Bellas Hess.” Id.

Given the rule’s underpinnings, it would be

illogical and ironic were the rule used to justify

protectionism. Instead of fostering interstate

commerce, the inability to tax would justify limits on

such commerce.® Furthermore, Quill Corp.’s

rationale is substantively undermined in this

context by the fact that the Twenty-first

Amendment uniquely empowers a state to “burden”

the importation of alcohol into the state to some

degree, so long as that “burden” is not “mere

economic protectionism”. Bacchus Imports Ltd., 468

U.S. at 276.

In this case, permitting Michigan to impose its

taxes on out-of-state wineries fulfills the values of

both the Twenty-first Amendment and _ the

5 One commentator has suggested that a state would

use Quill Corp. to justify a ban on direct shipping. “Under the

Bacchus two-step approach, a state should argue that its core

concern is revenue raising, and that under Quill, it cannot tax

an out-of-state direct shipper; therefore, the state’s only

reasonable alternative is to ban direct shipping.” Maxey, at 51.

13

Commerce Clause. Allowing tax collection meets

Michigan’s legitimate concerns about state revenue.

It also fulfills the values of the Commerce Clause by

increasing the flow of interstate commerce. It makes

little sense to conclude that limits on extraterritorial

tax collection implicates the Twenty-first

Amendment and empowers a state to ban all direct

interstate shipping—a ban that would otherwise

violate the Commerce Clause—on the grounds the

Commerce Clause does not authorize a state to

impose a tax collection responsibility on an out-of-

state seller.

Indeed, a number of states have imposed tax

collection or payment responsibilities on out-of-state

shipper licensees. See N.H. Rev. Stat. Ann.

§ 178:27(V) (“Direct shippers shall file invoices for

each shipment with the liquor commission showing

the retail price of the product, and shall pay a fee of

8 percent of the retail price for shipments of liquor,

wine, beer, or beverage to the commission.”);

N.C. Gen. Stat. § 105-113.83(b) (“The excise taxes

levied under G.S. 105-113.80(b) on wine shipped

directly to consumers pursuant to G.S. 18B-1001.1

must be paid by the wine shipper permittee.”);

Wyo. Stat. Ann. § 12-2-204(d)(v) (out-of-state

shippers of manufactured wine must remit a tax of

twelve percent of the retail price for each shipment of

manufactured wine to the liquor division); S.C. Code

Ann. § 61-4-747(C)(4) (out-of-state shipper must pay

all sales taxes and excise taxes due on sales to

residents of the state, with the taxes to be calculated

as if the sale were made in the state at the location

where delivery is made). States that require out-of-

state permittees to collect and remit taxes on direct

14

shipments reported few or no problems with tax

collection when asked about their experiences in an

FTC survey. FTC staff summarized some of the

responses:

“Nebraska, for example, reports that they

‘have also not, as yet, had any problems with

the collection of excise taxes.’ North Dakota

reports that ‘Taxes are collected. No problems

to date that we are aware of.” Prepared

Statement Of The Federal Trade Commission

Before The Subcommittee On Commerce,

Trade, And Consumer Protection Committee

On Energy And Commerce United States

House Of Representatives, October 30, 2003

(footnote omitted), found at http://www.ftc.gov/

os/2003/10/031030ecommercewine.htm.

The New Hampshire Liquor Commission reported

that it collects an eight percent fee and that “[w]hen

the NH Liquor Commission discovers an improper

shipment we contact the company and inform them

of the laws in NH. Once the company learns of NH

laws they normally get a permit or stop shipping into

NH.” Federal Trade Commission, Staff Report,

Possible Anticompetitive Barriers To E-Commerce:

Wine 38 (July 2003), found at www-.ftc.gov/os/

2003/07/winereport2.pdf (FTC Report). In fiscal year

2002, $91,716 was collected for shipments for

personal use into New Hampshire. FTC Report,

App. B, FTC Questionnaire To States, New

Hampshire Letter.

15

2. The Asserted Need For An In-State

Presence To Prevent Sales To Minors

By Wineries Is Not Substantiated

a. While Protecting Minors Is A

Matter Of Serious Concern, A

Threshold Question Is Whether

A Ban On Out-Of-State Shipments

Serves That Interest

Underage access to alcohol is a matter of

serious concern. Michigan does indeed have an

interest in protecting minors, as all states do, and

this interest falls within the Twenty-First

Amendment. A threshold question, however, is

whether Michigan’s discriminatory bar against out-

of-state wineries, but not its own, serves that

interest. On this record, Michigan’s interests are

unsubstantiated and, thus, fail even to present a

conflict between the Twenty-First Amendment and

the dormant Commerce Clause. Cf. 324 Liquor Corp.

vu. Duffy, 479 U.S. 335, 349-51 (1987) (scrutinizing

the record to determine whether state’s alleged

interest under Twenty-First Amendment was

substantiated).§

b. Michigan And Its Amici Understate

The Deterrence Value Of State

Regulations Regarding The Direct

Sale Of Wine To Consumers By Out-

Of-State Wineries

Michigan and its amici contend that states

have inadequate means to enforce their liquor

6 This is not to say there would not be situations in

which the regulatory purposes served by an in-state presence

requirement could be supported, such as a substantiated need

to hold or inspect the product in-state.

16

regulations against out-of-state wineries. Pet’rs

Br. at 33; Br. Amici Curiae Ohio, et al. at 10. Amici

Ohio, et al., go so far as to state:

“States have only two choices: restrict direct

shipments by out-of-state wineries or leave

this potentially dangerous product virtually

unregulated as long as it is shipped directly to

a consumer from out of state.” Br. Amici

Curiae Ohio, et al. at 14.

Of course, this statement is belied by the fact a

number of states allow direct shipments under

regulations that have proved to be components of

a successful regulatory program.

Recent studies of the direct wine shipments

and underage access reflect some of the reasons such

regulatory programs are _ successful. The

effectiveness of deterrence for commercial activity is

derived from examining the costs of noncompliance

as compared to the _ potential benefits of

noncompliance. See Timothy F. Malloy, Regulation,

Compliance And the Firm, 76 Temp. L. Rev. 451,

453-54 (Fall 2003).’ Commercial entities are

effectively deterred from engaging in activity where

the costs exceed the benefits. Wineries have much to

lose and little to gain from noncompliance with

regulations concerning sales to minors. Wineries

need a market for their product, and direct shipment

* Some scholars have noted that a firm’s compliance

decisions can also be influenced by the firm’s drive to obey the

law, sometimes called the “compliance norm”, and that

expanded outreach and education efforts are methods

that appeal to the regulated community's law abiding nature.

Malloy, 76 Temp. L. Rev. 451 at 455.

17

to consumers is the only meaningful access for small

wineries. The risk of losing access to that market

through the loss of a shippers’ license to out-of-state

markets far outweighs any benefit they would

receive by selling wine to minors. Further, violations

of one state’s laws regarding sales to minors could

have collateral consequences for licenses in other

states, adding a further measure of disincentive to

violate a direct shipper’s license.

Certainly, deterrence of future violations is an

important function of a state regulatory scheme. But

a claim of inadequate deterrent regulatory reach

must be examined in the concrete context of the

particular interests and penalties faced by the

potential violators. Here, that context involves

wineries that make direct shipments, in limited

quantities, to consumers for their personal use.

Michigan’s categorical ban as a means of securing

compliance with its alcohol shipping laws

unreasonably discounts (1) the limited potential

benefit to a winery from engaging in conduct that

would result in shipments to minors; (2) the

importance of out-of-state markets to the small

winery, and thus the severity of the consequence of

losing a shippers’ license; and (3) the range of legal

consequences that suspension or discipl.ae of a

Michigan shipper’s license could have for a non-

Michigan winery.

18

(1) The In-State Or Out-Of-State Origin

Of Direct Wine Shipments Does Not

Make A Difference In The Efficacy

Of Regulatory Efforts To Limit

Underage Access To Alcohol

Several features of direct wine shipments

make them an unlikely source for minors seeking to

evade laws limiting their access to alcohol.’ Direct

shipment of wine to consumers generally involves

“high-end, expensive wines”. FTC Report at 27. The

product of small vineyards and wineries is

necessarily more expensive to produce, and

shipments of bottles or individual cases is

necessarily a more expensive shipping method. Such

purchases also involve a waiting period while the

product is shipped, rather than instant access to the

wine. As noted in the FTC Report, “[m]Jinors would

have to pay a hefty premium, from 33-83%, to

purchase a bottle of wine costing less than $20 online

and have it delivered to them via 2nd Day Air.”

FTC Report at 33. One commentator observed that

the expense and delay in delivery associated with

direct wine shipments make this an unattractive

avenue for underage access.

“Moreover, it seems disingenuous to claim that

a minor who wishes to obtain alcohol would

order expensive wine or beer and wait several

8 In 1997 testimony before the California Legislature,

the Chief Deputy Director of the California Department of

Alcoholic Beverage Control stated that, in the preceding

20-year period, the Department had never received a complaint

about an underage person receiving wine by direct shipment.

See FTC Report at 32 tbl.3, App. B, FTC Questionnaire To

States, California Testimony at 54-55.

19

days for shipment. While ‘skipping the

middleman’ is usually equated with lower

prices, consumers who rely on_ direct

shipments do not do so to save money.

Directly-shipped wines tend to be more

expensive because the purchasers, usually

wine connoisseurs, rely on direct shipping to

obtain rare wines produced by small wineries.

The evidence simply does not bear out the

claims of the proponents of direct shipment

restrictions.” Vijay Shanker, Alcohol Direct

Shipment Laws, The Commerce Clause, And

The Twenty-First Amendment, 85 Va. L. Rev.

353, 359 (Mar. 1999) (footnotes omitted).

Despite the limited appeal to minors of direct

wine sales, regulation to prevent underage access is

important, and appropriate laws have been put in

place by all states that allow intrastate or interstate

shipments of wine to consumers. Michigan law

requires recorded verification from the individual

placing the order by obtaining from him or her an

affirmation that he or she is of legal age to purchase

alcoholic liquor and that the wine be shipped in a

container that “clearly establishes in a prominent

fashion that the package contains alcoholic liquor

and that the recipient at the time of the delivery is

required to provide identification verifying his or her

age along with a signature”. Mich. Comp. Laws Ann.

§ 436.1203(2)(f). Michigan considers such measures

sufficient to deter minors from ordering in-state wine

for direct shipment.

Out-of-state wineries can be required to follow

precisely the same procedures and_ shipping

requirements that Michigan requires of its own

20

producers and shippers. Certainly the in-state or

out-of-state origin of the direct shipments does not

make a difference to a minor intent on obtaining

alcohol, as noted by one commentator:

“If keeping children from ordering alcoholic

beverages online is the true reason for

prohibiting direct shipment of wine, then it

should not matter whether the wine is being

ordered from within or out of the state.

Certainly, one cannot imagine it mattering to

the children doing the ordering.” Susan Lorde

Martin, Wine Wars—Direct Shipment Of Wine:

The Twenty-First Amendment, The Commerce

Clause, And Consumers’ Rights, 38 Am. Bus.

L.J. 1, 7 (Fall 2000).

Whether in-state or out-of-state, Michigan has

the ability to require the shipper and delivery service

to determine if the purchaser or designated recipient

is of legal age and to require labeling on the shipping

boxes ensuring the delivery is not to a minor.

Michigan could impose such requirements on out-of-

state shipments and could take regulatory action

against either the out-of-state winery or the shipping

company, or both.

(2) A Shipper’s License That Allows

Access To Markets In Other States

Is A Significant Benefit To Small

Wineries And Potential Loss Of The

License Is A Strong Deterrent To

Violations

Michigan argues that an out-of-state winery

would not be sufficiently deterred by the possibility

of suspension of a Michigan license. It argues that

out-of-state suppliers have little incentive to prevent

21

sales to minors because it can threaten an out-of-

state winery with only the loss of a small part of its

market, not the loss of a license to produce wine.

But this assertion ignores the economic realities

faced by small wineries. These small wineries need

access to direct consumer markets in other states to

be viable.

“So-called boutique wineries with

relatively few cases of wine to sell cannot

have a regular network of distributors the

way that large producers of alcoholic

beverages do. They must rely on selling

directly to consumer aficionados. . . .

x eke

“Most of the wineries in this country, ninety

percent of which are located in California, can

be characterized as small family farms. They

have a small output, typically between a few

hundred to a few thousand cases of wine a

year; they do not have shelf space; they do not

have budgets for advertising or wholesale

distributors or even enough product to

warrant those things. Furthermore, from a

high of over 20,000, there are now fewer than

400 liquor distributors and wholesalers, and

their typical retail store customer has only

about fifty wines available out of the more

than 10,000 produced in this country. Of the

approximately 900 wineries in California, only

about 150 have national distributors. A wine

industry consultant has asserted that the old-

style, national distributorship system works

well for wineries selling 100,000 cases at

22

under seven dollars a bottle, but it does not

work for wineries selling 500 cases at thirty

dollars a bottle.” Susan Lorde Martin, 38 Am.

Bus. L.J. at 2-4 (footnotes omitted).9

If consideration of the interplay of the

Commerce Clause and the Twenty-first Amendment

occurs in the “context of the issues and interests at

stake in any concrete case”, Hostetter v. Idlewild Bon

Voyage Liquor Corp., 377 U.S. 324, 332 (1964), then

the importance of out-of-state markets to small

wineries must be considered in evaluating the

effectiveness of the regulatory measures available to

the states. From the perspective of the regulated

winery, access to out-of-state consumers is

important, and the threat of a license suspension is a

strong deterrent.

(3) Michigan’s Outright Ban Unreason-

ably Discounts The Collateral

Consequences An Out-of-State

Winery Could Suffer For Violation

Of Michigan’s Laws

Shipping wine in contravention of a state's

laws designed to prevent underage access to alcohol

could also put a non-resident winery’s license at risk

in its home state or affect its ability to obtain direct

® The geographic distribution of wineries has changed

since this article was written in 1999. California remains the

premier winegrowing state, but more recent publications

indicate that roughly half the nation’s wineries are located in

California, due to development of wineries in other states.

See Eric L. Martin A Toast To The Dignity Of States:

What Eleventh Amendment Jurisprudence Portends For

Direct Shipment Of Wine, 31 Hofstra L. Rev. 1303, 1305

(Summer 2003).

23

shipment licenses from other states. For example,

many states require licensed wineries to clearly

mark shipping packages to indicate that delivery will

not be made to a minor or to an intoxicated person,

whether the package is shipped in-state or out-of-

state.!° Violation of such a state law would be the

10 See, e.g., Cal. Bus. & Prof. Code § 23661.2(b) (“The

shipping container of any wine sent into or out of this state

under this section shall be clearly labeled to indicate that the

package cannot be delivered to a minor or to an intoxicated

person.”); Colo. Rev. Stat. Ann. § 12-47-104(1) (“The shipping

container of any vinous liquors sent into or out of this state

under this section shall be clearly labeled to indicate that the

package cannot be delivered to a minor.”); Idaho Code § 23-

1309A(3) (“The shipping container of any wine sent into or out

of this state under this section must be clearly labeled to

indicate that the container contains alcoholic beverages and

cannot be delivered to a person who is not at least twenty-one

(21) years of age.”); 235 Ill. Comp. Stat. 5/6-29(b) (“The shipping

container of any wine sent into or out of this State under this

Section shall be clearly labeled to indicate that the package

cannot be delivered to a person under the age of 21 years.”);

Mo. Rev. Stat. § 311.462(2) (“The shipping container of any

wine sent into or out of this state under this section shall be

clearly labeled to indicate that the package cannot be delivered

to a person under the age of twenty-one years or to an

intoxicated person.”); N.M. Stat. Ann. § 60-7A-3(E) (“The

shipping container of any wine sent into or out of this state

under this subsection shall be labeled clearly to indicate that

the package cannot be delivered to a minor or to an intoxicated

person.”); Or. Rev. Stat. § 471.229(3) (“The shipping container

of any wine or cider sent into or out of this state under this

section must be clearly labeled to indicate that the container

contains alcoholic beverages and cannot be delivered to a

person who is not at least 21 years of age or to a person who is

visibly intoxicated.”); Wash. Rev. Code § 66.12.200 (“The

shipping container of any wine sent into or out of this

state under RCW 66.12.190 shall be clearly labeled to indicate

that the package cannot be delivered to a person under twenty-

24

basis for action on the license issued by the home

state. Additionally, some states have explicit

provisions requiring licensees to comply with the

laws of other states.'!! Some states require licensees

to show their licensing, including relicensing, is in

the public interest.'!2 Violations of shipping laws of

other states designed to protect minors would be

relevant to licensing decisions based on this

standard. Actions in violation of a direct shippers’

license in one state may also put at risk the ability of

the winery to obtain a license to ship to another

one years of age or to an intoxicated person.”); W. Va. Code

§ 60-8-6(b) (“The shipping container of any wine sent into or out

of this state under this subsection shall be clearly labeled to

indicate that the package cannot be delivered to any person

under the age of twenty-one or to an intoxicated person.”).

11 Del. Code Ann. tit. 4, § 104(a), (6) (“No sale of

alcoholic liquor shall be made to a person in a state or a division

of a state where such sale is prohibited by law.”; “No shipment

of alcoholic liquor shall be made into a state or into a division of

a state where such shipment is prohibited by law.”); N.H. Rev.

Stat. Ann. § 178:27(VIII) (‘Upon notification by authorities in

another state which imposes a reciprocal enforcement policy, a

New Hampshire licensee proved to be making i!legal direct

shipments to consumers and licensees in said state shall be

subject to action by the liquor commission. Such actions may

include fines and suspension and revocation of New Hampshire

liquor licenses.”).

12 See, e.g., Fueston v. City of Colorado Springs, 713

P.2d 1323 (Colo. Ct. App. 1985) (documentation from

Washington State Liquor Control Board indicating that licensee

was associated with bar in that state whose license was

cancelled supported nonrenewal of Colorado license under

statute that prohibited anyone from holding a liquor license

unless his “character, record, and reputation” are satisfactory to

the licensing authority).

25

state.'3 Indeed, a state can ensure that violations of

its regulations will not go unnoticed by other

jurisdictions. !4

An additional deterrent is the Federal Alcohol

Administration Act, chapter 8 under U.S.C. Title 27.

Under this federal law, a basic permit is required to

engage in the business of distilling spirits or

producing wine. Basic permits are conditioned upon

compliance “with the twenty-first amendment and

laws relating to the enforcement thereof”. 27 U.S.C.

§ 204(d). Consequently, the Alcohol And Tobacco

Tax And Trade Bureau (formerly the Bureau Of

Alcohol, Tobacco And Firearms) could _ take

administrative action against a basic permit if a

13 Ariz. Rev. Stat. § 4-203.04(C) (“The director may

refuse to issue a direct shipment license for good cause. After a

hearing, the director may suspend or revoke a direct shipment

license for good cause. The director shall not issue a direct

shipment license to any person who: 1. Has had a direct

shipment license or any license to deal in spirituous liquor

revoked in this state or any other state within one year

preceding the application.”).

14 See La. Rev. Stat. Ann. § 26:359(G) (“Upon

determination by the secretary of the Department of Revenue

that an illegal sale or shipment of alcoholic beverages has been

made to a consumer in Louisiana by either a manufacturer or

retailer of such alcoholic beverages, the secretary shall notify

both the Bureau of Alcohol, Tobacco, and Firearms of the

United States Department of the Treasury and the licensing

authority for the state in which the manufacturer or retailer is

domiciled that a state law pertaining to the regulation of

alcoholic beverages has been violated and shall request those

agencies to take appropriate action.”).

26

winery were to ship products into a state in violation

of that state's laws.'5

CONCLUSION

The judgment of the Court of Appeals for the

S:xth Circuit should be affirmed.

Respectfully submitted,

BILL LOCKYER

California Attorney General

MANUEL M. MEDEIROS

California Solicitor General

Counsel Of Record

CHRISTINE O. GREGOIRE

Washington Attorney General

NARDA PIERCE

Washington Solicitor General

1300 I Street

Sacramento, CA 94244-2550

September 23,2004 916-323-1996

15 See ATF Industry Circular No. 96-3, Direct Shipment

Sales Of Alcohol Beverages (Feb. 11, 1997), found at

http://www.atf.gov/pub/ind_circulars/ic_96-3.htm, discussed in

the FTC Report at page 10.

us

GS