In 2003, a change in North Carolina law allowed out-of-state wine producers to ship directly to their North Carolina customers. A recent Supreme Court ruling (Granholm v. Heald, 03-1116, Michigan Beer & Wine Wholesalers v. Heald, 03-1120, and Swedenburg v. Kelly, 03- 1274) that allows for the possibility of direct sales of wine in all 50 states, and the District of Columbia, will still affect North Carolina, however. The ruling represents a market win for wine consumers, as well as for the many wineries (in and out of the state) that are not represented by a wholesale distributor. Monopoly wholesale distributors, and in-state vintners who used to enjoy a sales advantage, however, stand to lose their privileged position.
Interstate commerce, and the right to regulate interstate trade, was the subject of the Supreme Court’s recent review. Prior to this decision, only 27 states allowed shipments from vintners to be delivered, from out-of-state, directly to consumers. In-state shipments were already legal in most locales. Now, states must treat direct sales and shipping from in-state and out-of-state wineries with an even hand. The state-level options are to prohibit all direct-to-consumer wine shipments, or to allow them equally.
Interstate commerce was explicitly protected even before the U.S. Constitution, in the Articles of Confederation. Article IV was written, in part, to prevent states from erecting trade barriers between each other, for fear that barriers would prove divisive and prejudicial, and weaken the states’ ability to collectively defend themselves against an external enemy (a.k.a. Britain, mainly). When the Constitution was adopted, the Commerce Clause centralized the decision making process and empowered Congress to regulate interstate commerce.
The Supreme Court Justices were divided 5-4 on the wine shipment question. Differences hinged, in part, on the interpretation of the 21st Amendment to the U.S. Constitution, enacted to repeal the 18th Amendment and Prohibition. Justice Kennedy expressed the majority opinion of the court, writing that state cannot enact laws that “burden out-of-state producers or shippers simply to give an advantage to in-state businesses.” What the Justices’ decision cannot prevent is a state law that would limit or prohibit all shipments of wine to consumers (WSJ Morning Brief archive, 5-17-05) directly from the winery, as long as in- and out-of-state producers are treated just the same.
Justice Clarence Thomas argued, in a dissenting opinion, that the 21st Amendment “took these [Commerce Clause] policy choices away from judges and returned them to the states.” Also at issue is the role of the Internet in the sale of goods that must cross state lines to be delivered. Objections to the universal-shipping decision cite the difficulty of collecting state tax from Internet sales. The Court rejected the tax collection argument, indicating that it is an issue that states must resolve, and not grounds for refusing greater freedom in interstate commerce.
There are market winners and losers as a consequence of the Supreme Court’s ruling. Small out-of-state wineries can try, if they wish, to compete with large producers who are already represented by distributors, and they can now compete with local producers. Whether small wineries will be able to ship at prices that still look competitive to consumers is not certain, but North Carolina consumers should reap the benefits of more competitive prices, and even wider choices. With more direct-ship markets in play, local wine producers can hope for an expanding out-of-state market themselves.
Even with shipping, the final consumer price of Internet sales and delivery could be significantly lower than the 3-tier—producer-wholesaler-retailer—regulated markup price structure that has been in place in some states (WSJ Personal Journal archive, 5-17-05).
Competitive forces are now set to bring lower prices, wider selection, and a higher volume of sales to wine producers. Wide distribution will also bring more sales-related jobs, as producers respond to shipment orders. For the market, this Supreme Court decision is a winner all around.