Maryland Study Okays Direct Shipment by Wineries, But Nixes Shipments by Out-of-State Retailers

Direct shipment of wine by out-of-state wineries to Maryland consumers would be okay, the state’s Comptroller told the legislature in a report yesterday.

But the report opposed shipments by out-of-state retailers, finding they would hurt in-state licensees.

The report cited with approval a Fifth U.S. Circuit Court of Appeals decision that distinguished “out-of=-state wineries” from “out-of-state retailers.”

Out-of-state wineries are “an ‘exception’ to the three-tier distribution system, while retailers are an integral part of the three-tier system itself. In-state retailers, as the third tier, are subject to state power under the Twenty-first Amendment.”

In-state retailers “are physically located in the state and proximate to consumers. By contrast, an out-of-state winery or producer, while acting as a first tier manufacturer, is by definition not located in the state creating a different relationship to state regulatory authority.

‘Because of this, the court in Wine Country held that treating in-state retailers differently than out-of-state retailers was not Granholm discrimination. Under the Twenty-first Amendment, a state is not required to provide equal treatment between out-of-state retailers and in-state retailers.

“Wine Country provides the insight that out-of-state wineries and out-of-state retailers cannot be merged together. They are separate and distinct in how they operate within the three-tiers, and in their unique relationship to state regulatory power,” the report says. It adds:

Wine Country is not the only case that has been decided in the post-Granholm world; but, it is one that makes the type of distinctions crucial to lawmaking and public policy analysis.

‘As a matter of logical inference, since direct wine shipment by out-of-state wineries is an “exception” to the three-tier distribution system, and direct wine shipment by out-of-state retailers relates to an integral part of the three-tiers itself, allowing direct wine shipment from out-of-state retailers is incompatible with existing alcoholic beverage laws in Maryland. ‘ the report says.

The report examines a number of arguments in the direct-shipping debate, and also addresses directly the extent to which direct shipment would harm in-state interests.

It noted that the majority of wine brands and varietals are available for consumers to purchase in Maryland, and said “direct wine shipment will benefit wine connoisseurs motivated more by brand than price, who would purchase wine directly if it was unavailable from a local retailer.”

The report said direct wine shipment could make economic sense if quantities exceeding one bottle were purchased because of savings in shipping costs resulting from economies of scale.

The report concluded that direct shipment by out-of-state wineries to Maryland consumers wouldn’t have an overall negative effect on in-state licensees becauses purchases from wineries are primarily motivated by “availability.”

But the report warned that direct shipment by out-of-state retailers would have an overall negative effect on in-state licensees “because purchases from retailers are primarily motivated by “price’.”

It recommended a number of actions if direct shipping by wineries was to become legal in Maryland.  These include:

  • a $100-a-year “Direct Wine Shipper’s Permit” for wineries, but not for retailers;
  • a limit of 12 9-liter cases per consumer a year;
  • requiring a permit for a common carrier to deliver wine directly shipped to a consumer.
  • Requiring quarterly tax returns from direct wine shippers and quarterly reports by common carrier permittees.
  • Requiring a minimum $1,000 tax bond from direct shippers.

As for the argument that direct shipment of wine could lead to increased underage drinking, the study found “there is no evidence that underage drinking has increased or decreased as a result of direct wine shipment.  The reasons for this may be that ‘wine’ is not the drink of choice for you (and) direct shipment of wine is costly and time consuming.”

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