Internet sales still snagged by Prohibition-era marketing structure

One year after the U.S. Supreme Court decision in Granholm v. Heald, the legacy of Prohibition remains in the form of restrictions on Internet wine sales in many states. But new legal challenges maintain the momentum for a national wine market.

In a 5-4 decision, the high court ruled last May that the states' power to regulate liquor does not allow them to ban the direct shipment of out-of-state wine while simultaneously authorizing direct shipment from within the state. Michigan and New York had engaged in that practice, which disadvantaged out-of-state producers.

Many of those winemakers are in California, the fourth-largest wine producer in the world, where Gov. Arnold Schwarzenegger last year signed a bill bringing California into compliance with the high court ruling.

"Wine making is a vital part of California's economy," Schwarzenegger said. "With the signing of this law, California wineries will gain greater access to more markets and California consumers will enjoy new choices and convenience."

The California legislation allows consumers over age 21 to buy directly from wineries in all 50 states. Licensed wineries in California may sell and ship an unrestricted amount of wine, for personal use, not resale, directly to adult residents in those states that allow receipt of such shipments.

California is one of 13 such "reciprocity" states, up from four a decade ago. A majority of states have created some regulatory structure for directly shipping wine to consumers. But a truly national wine market remains elusive. Last year's Granholm ruling did not stop states from banning direct sales by wineries both inside and outside the state. According to the Free the Grapes coalition, such bans remain in 17 states.

Some states' post-Granholm laws are truly bizarre. Kansas, for example, had previously allowed in-state shipments but restricted those from outside. Starting next month, residents will be able to order wine by phone or over the Internet, with a catch. Kansas' new law demands that the wine first be shipped to a liquor store, where the purchaser must pay a $5 fee to pick it up.

This measure was intended to keep wine out of the hands of juveniles, the major argument of quasi-monopoly interests intent on stopping Internet sales and direct shipping. The same interests want to maintain the restrictive three-tier system involving the producer, wholesaler and retailer.

Juveniles bent on binge drinking don't order premium wine over the Internet and wait three days for UPS delivery. A Federal Trade Commission study from July 2003 found no evidence that direct shipping of wine promotes underage drinking. The FTC study also noted that e-commerce in wine offers consumers lower prices and more choices.

The three-tier system, a legacy of Prohibition, cannot possibly keep up with thousands of new vintages from wineries nationwide. The massive distributorships have little incentive to offer new products but much incentive to preserve the status quo. That leaves consumers with fewer choices and vintners with fewer ways to market their product, at a time when wine consumption is increasing and Internet commerce is booming.

Enter big-box retailer Costco, which ships wine to addresses in California, Idaho, Illinois, New Mexico, Oregon and West Virginia. Costco believes Washington state's rigid three-tier system violates the Sherman Antitrust Act. Last month, a judge agreed with Costco.

The case, now on appeal, deals with sales from producers to retailers, rather than directly to consumers. But as UCLA law professor Steve Bainbridge notes, consumers now have some deep-pocket players on their side. Meanwhile, the issue proceeds the same way wine is shipped, on a case-by-case basis.

Kansas state senator Karin Brownlee, a Republican who does not drink, told the Wichita Eagle that her state's new wine law was "utter nonsense," stifling free enterprise and consumer rights.

Legislators who want to make sense will pass laws that allow Internet sales and direct shipping to move us toward a truly national wine market. That would help producers, benefit consumers, and end the legacy of Prohibition.

K. Lloyd Billingsley is editorial director at Pacific Research Institute, a free-market think tank in San Francisco and Sacramento.