TCS Daily

The Grapes of Protectionist Wrath

By Stephen Bainbridge - December 10, 2004 12:00 AM

U.S. oenophiles held their breath this week as the Supreme Court heard argument in cases challenging the constitutionality of New York and Michigan laws prohibiting their residents from importing wine from other states. According to Free The, New York, Michigan, and 22 other states prohibit consumers from purchasing wines directly from out-of-state wineries and having the wine shipped to their home or office.

The justifications advanced in defense of these laws are, put bluntly, ludicrous. The State of Michigan's brief to the Supreme Court argued that its law is necessary to prevent minors from getting access to alcohol and to ensure that Michigan collects alcohol taxes.

To be sure, when a Michigan consumer goes on line to order wine from a winery in California, which is then shipped directly to the consumer's home, it may be difficult for Michigan to collect taxes on that sale. Yet, it is no more difficult for Michigan to collect taxes on that transaction than it would be for Michigan to collect sales taxes on books one of its resident orders from Amazon. In other words, taxation of wine is not a unique problem; it is part of the broader question of taxing the on line economy.

As for protecting minors, does Michigan really believe that a 16 year-old is going to swipe his Dad's credit card and order a case of Opus One on line? In any event, it's critical to note that Michigan and New York both permit in-state wineries to ship directly to consumers. So their laws do nothing to prevent a minor from ordering wine from in-state producers. This distinction reveals the utter disingenuousness of Michigan's purported justification for its laws.

So what is going on here? New York and Michigan are happy to permit in-state wineries to sell wine on-line and ship it directly to their residents; they just don't want their residents to be able to buy from out-of-state wineries. This discrimination not only protects in-state wineries, it also protects the interests of alcohol wholesalers and distributors, who are insulated from competition from on-line merchants.

It's plain and simple protectionism. Michigan, New York, and 22 other states are discriminating against their own consumers so as to protect entrenched local interests. This discrimination has a definite impact on oenophiles: A study of Virginia's direct-to-consumer sales ban by Alan Wiseman and Jerry Ellig found that "Virginia's direct shipment ban reduces the varieties of wine available to consumers and prevents consumers from purchasing some premium wines at lower prices online."

Of course, the mere fact that these state laws are bad public policy doesn't mean that they're unconstitutional (or some one hopes). The legal issue here is the conflict between the 21st Amendment to the US Constitution, which repealed Prohibition and broadly authorized liquor regulation by states, and the dormant Commerce Clause, which forbids states from doing precisely what New York and Michigan are trying to do -- i.e., discriminate against out-of-state producers.

In a 1984 case, Bacchus Imports, Ltd., v. Dias, 468 U.S. 263 (1984), the Supreme Court made clear that the 21st does not "remove state regulation of alcoholic beverages from the ambit of the Commerce Clause." Discriminatory state laws thus can and should fall, despite the 21st Amendment.

Press reports on the oral argument suggest that at least a plurality of the Supreme Court "gets it." Justice Ginsburg, for example, reportedly quoted a passage from the Bacchus Imports case in which the Court held that "one thing is certain: the central purpose of the 21st Amendment was not to empower states to favor local liquor industries by erecting barriers to competition." Justice Kennedy, likewise, is reported to have said that the New York and Michigan laws go "to the core of the Commerce Clause." Justice Scalia reportedly opined that New York needs a "good reason" to justify these laws and apparently indicated that he didn't see one.

Oenophiles should not get too excited, however. Although it now appears likely that the Supreme Court will strike down the New York and Michigan laws, the Court likely will do so solely on the narrow grounds that their discriminatory effect violates the dormant Commerce Clause. If the states chose to change their laws so as to ban direct-to-consumer sales by both out-of-state and in-state wineries, those laws almost certainly would be upheld as within the states' powers under the 21st Amendment.

What should a thirsty New York or Michigan oenophile do? It might not hurt to invite your state legislator over for a nice glass of California wine.

Steve Bainbridge is a professor of law at UCLA. He writes about wine on his blog Professor Bainbridge on Wine.


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