Granholm: 15 Years of Shipping Wine…and More

Alex Koral
June 4, 2020

How much can change in fifteen years? 

It was May 2005 when the U.S. Supreme Court issued a ruling in Granholm v. Heald, one of the most consequential beverage alcohol-related cases the Court has heard. The case challenged laws in Michigan and New York that permitted in-state wineries to make direct-to-consumer (DtC) shipments to their residents, while prohibiting that right for out-of-state wineries. 

This arrangement was very clearly discriminatory against out-of-state interests, which is normally unquestionably unconstitutional. However, this being beverage alcohol, there was an open debate whether it might still be allowable.

And the decision was close. By a slim 5 to 4 majority, the Court determined that a state’s power under the 21st Amendment to set up its internal alcohol market was not a carte blanche right to trample over other constitutional provisions. After all, the 21st Amendment was focused on enabling states to manage the health and safety of their residents in relation to alcohol consumption. Unless a law was tailored to those ends, it was otherwise subject to normal constitutional scrutiny.

Per the Court, if Michigan and New York wanted to allow their residents to receive DtC shipments of wine, they had to enable equal access to that market for both in-state and out-of-state wineries. A state was, of course, still free to entirely restrict such sales, it just could not establish a discriminatory set of rules.

In the fifteen years since that decision, a lot has changed.

For one, the DtC wine shipping market has blossomed. Spurred by the Granholm ruling, industry groups and grassroots organizations engaged in intensive lobbying efforts to spread DtC wine shipping laws across the country. Currently 46 states allow such shipments (or at least will soon, once Kentucky’s laws take effect), and annual DtC wine shipping revenue is currently at just north of $3 billion. 

But as good as the DtC shipping market has been for wineries, other members of the beverage alcohol industry—retailers, breweries, distillers—have struggled to get anywhere near the same boon. There has been increased interest and efforts—including another Supreme Court case—to extend DtC permissions, but the rules remain closed.

In the meantime, though, the current COVID-19 crisis has created much more immediate focus on alternative means of selling and distributing alcohol.

So, as we look back on fifteen years of Granholm, there is a lot to unpack and examine about what the case has meant, how it helps shape current policy discussions, and where it might take us in the years to come.

The current state of shipping alcohol DtC: wine, beer, spirits and cider

Despite being heavily regulated and relatively nascent, DtC shipping of wine has developed into a robust and effective means for small and medium wineries to get a national footprint and for wine connoisseurs to access wines that aren’t widely distributed.

However, the success that wineries have seen from DtC shipping is not widely shared among other members of the broader alcohol industry. 

Beer producers are limited to just about 10 states: Nebraska, Nevada, New Hampshire, North Dakota, Ohio, Oregon (but only from states that themselves permit DtC shipping of beer), Vermont, Virginia, the District of Columbia, and, effective later this summer, Kentucky. 

Spirits producers face an even more truncated map. Only Nebraska, Nevada, New Hampshire, North Dakota, the District of Columbia, and, effective later this summer, Kentucky, permit distillers to ship DtC. Arizona does permit licensed microdistillers to make DtC shipments; however, they cap the annual production size of such distilleries at 1,189 gallons.

A few states seem to allow in-state producers to make DtC shipments of both beer and spirits as an extension of those businesses’ tasting room sales. However, these permissions are not widely advertised, likely because they would be readily subject to a Granholm challenge.

Cider is an interesting product type, as it straddles the boundaries of wine and beer. As an agricultural product (i.e., when the cider is actually produced from apples, and isn’t merely apple-flavored), cider is generally regulated as a wine. However, many agencies see cider, with its lower ABV and beer-like packaging, as more resembling a beer. This adds a lot of confusion to when and where cider may be shipped DtC.

Generally, where cider meets the definition of wine in a state, it should be allowed under the state’s DtC shipping laws. However, several states put ABV thresholds on the cider they will allow to be shipped, generally requiring it to have an ABV of at least 6% or 7%. Cider producers, therefore, would do well to not presume that they will inherently be able to ship their product DtC under a state’s wine shipping laws. While most states have told us that, where a cider meets the federal definition of a wine it can be currently shipped under their DtC wine laws, the multifaceted view that states take to cider makes it difficult to create a clear picture of where in fact it may be shipped DtC.

Retailers have managed to get access to about 15 states’ DtC markets: Alaska, Connecticut, Florida, Louisiana, Nebraska, Nevada, New Hampshire, North Dakota, Virginia, West Virginia, Wyoming and the District of Columbia; and then California, New Mexico, and Idaho operate on a reciprocity basis, permitting each other’s retailers to ship to their residents. Where permitted, retailers are limited to the same product limitations as producers.

There is no real reason why non-winery members of the alcohol industry could not enjoy the same DtC shipping privileges of wineries. Indeed, the success of DtC wine shipping, which is by and large compliant with state regulations and remits millions of dollars in tax revenue annually to the states, signals that, if made available, these other industry members could also create effective and compliant DtC shipping programs.

However, to reach the level of availability that wine producers have, these other industry members will need to engage in widespread lobbying efforts—including gathering grassroots support—to change laws across the nation.

What the moment brings

In recent years, there has been increased interest among retailers, breweries and distilleries in entering the DtC market. They have seen the success of DtC wine shipping and fairly want to share in the bounty. Despite this interest, their options for available markets are still diminished.

Nevertheless, this moment, 15 years after Granholm, brings new opportunities and action.

Last June, the Supreme Court issued a ruling in Tennessee Wine and Spirits Retailer’s Association v. Thomas (TWSRA), the first beverage alcohol case the Court had heard since Granholm. While this case was limited to the specific issue of whether Tennessee’s two-year residency requirement for applying for a package store license was valid, there was hope that it could spur further liberalization of the alcohol industry. That is because the ruling, in invalidating the residency requirement, determined that the anti-discriminatory principles of Granholm should extend beyond the producer-tier, to retailers and distributors. 

Almost immediately after the ruling came down, retailers began challenging seemingly discriminatory laws prohibiting out of state retailers from making DtC shipments across the nation. A few cases that predated TWSRA were amended to take into account the Supreme Court’s new jurisprudence. However, the hopes of such efforts may have been premature. 

Just a few weeks ago, the 6th Circuit Court of Appeals ruled in Lebamoff v. Snyder that a Michigan law permitting in-state retailers, but not out-of-state retailers, to ship wine DtC to its residents was valid. The ruling largely overlooked the anti-discriminatory provision that the Supreme Court set down in TWSRA and Granholm, instead focusing on the potential harmful impact on the state’s three-tier system that interstate shipping would bring. Claiming that interstate DtC shipping of alcohol would lead to a heavy loss of tax revenue (despite the possibility of requiring all DtC shippers to pay destination-state taxes) and abuse by underage drinkers (even though this is a much more common problem for in-person retailers), the court upheld Michigan’s law.

What this decision means for court cases in other states remains to be seen. But it does severely diminish hopes that retailers could find regulatory relief from discriminatory laws in the courts.

Changes under COVID-19

Ultimately, it is a global emergency that is more likely to spur changes to the alcohol industry and bring greater allowances for DtC shipping of alcohol.

Almost every state, facing a catastrophic curtailment of day-to-day business, has enabled emergency rules vastly expanding the rights of alcohol sellers to engage with consumers. Restaurants and craft producers across the country are able to sell wine, beer and even mixed cocktails to go; many are even able to fulfill remote orders through common carriers, paralleling the DtC wine shipping market. 

These rules are a patchwork, varying wildly from state to state. And it must also be said that these are emergency relaxation of otherwise valid prohibitions—states are not changing their laws, they are instead merely not enforcing a number of restrictions. These provisions are also largely focused on local, small businesses, which state governments want to buoy in times of social distancing.

But we have seen that, as in so many cases, it’s impossible to put the genie back in the bottle. Consumers are flocking to online sales and fulfillment through common carriers. Forced by an emergency (and one we all hope ends soon with a minimum of loss of life and other suffering), consumers are discovering the benefits of DtC shipping of alcohol. And they will demand more of it going forward.

Indeed, several states have already introduced legislation making some of their emergency provisions permanent. To-go cocktails seem like a new happy hour. And consumers are certain to question the validity of prohibitions on shipping of alcoholic beverages going forward. 

Again, the COVID-19 crisis is an unmitigated tragedy, but those looking to gain new footholds for DtC shipping of alcohol would do well to build on the increased attention that this tragedy has brought to remote sales of alcohol and fulfillment through common carriers.

The fifteen years after Granholm have seen constant efforts by the wine industry to expand their DtC permissions and build out a market and infrastructure capable of handling the demand. And the success is ready to see, with a $3+ billion dollar annual market that largely meets the particular compliance requirements imposed by the individual states.

What the next fifteen years will bring remains to be seen. But there are many reasons to believe that DtC shipping of all alcoholic products by more industry members will continue to expand. There is the desire among consumers, and the interest and ability to comply with laws among sellers. All we need is to build on our past success.

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Author

Alex Koral

Alex Koral is Senior Regulatory Counsel for Sovos ShipCompliant in the company’s Boulder, Colorado office. He actively researches beverage alcohol regulations and market developments to inform development of Sovos’ ShipCompliant product and help educate the industry on compliance issues. Alex has been in the beverage alcohol arena since 2015, after receiving his J.D. from the University of Colorado Law School.
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