What the Tennessee Wine and Spirits Ruling Means for DtC Wine Shipping

Alex Koral
June 27, 2019

Supreme Court Rules Against Tennessee’s Discriminatory Residency Requirements

After months of waiting by the beverage alcohol industry, the United States Supreme Court published its ruling in Tennessee Wine & Spirits Retailers Ass’n v. Thomas on June 26, 2019. The 7-2 opinion, written by Justice Samuel Alito, clearly and definitively struck down a rule in Tennessee that required applicants for an off-premises retail liquor license to have been residents of the state for at least two years.

While in the moment this ruling is limited to the question of Tennessee’s residency requirement, by affirming the principle that states are limited in their ability to discriminate against out of state interests, it presents an opening to loosen other restrictive rules imposed by states.

What Was Tennessee Wine & Spirits About?

The issue first arose a few years ago, when national retailer Total Wine Beer Spirits & More (Total Wine) asked the Tennessee Attorney General to opine on the constitutionality of the state’s two-year residency requirement for all applicants for in-state retail package stores. (Tennessee law also required a 10-year residency requirement for renewal applications, and required that all officers, directors, and owners of corporate entities meet the residency requirements; both of these provisions were overturned by lower courts, and were not at issue in the case before the Supreme Court.)

The Tennessee Attorney General found that the residency requirements were not enforceable, and Total Wine proceeded to apply for a retail package license; at the same time, a couple who had recently moved to Tennessee from Utah also applied for a retail package license relying on the same assurance that the residency requirement was invalid. However, the Tennessee Wine & Spirits Retailers Association threatened to sue the state’s liquor authority if it granted these licenses, leading to this case, which was designed to determine once and for all the constitutionality of the residency requirement.

The United States District Court for the Middle District of Tennessee, following the Supreme Court’s 2005 Granholm v. Heald ruling, found the residency requirement to be unconstitutional. This ruling was upheld on appeal at the 6th Circuit Court, leading to the challenge before the Supreme court.

The argument presented by Tennessee Wine & Spirits Association relied heavily on Section 2 of the 21st Amendment. This section provides great power to individual states to regulate their alcohol markets, and prohibits the transportation, importation, or possession of alcohol in a state that contravenes the state’s laws.

The opposing argument was based on what is called the “Dormant Commerce Clause,” which limits the ability of states to impose laws that limit interstate commerce or that set out discriminatory treatment of out-of-state interests in favor of in-state interests. (The doctrine is called the “Dormant” Commerce Clause, as it is not explicitly stated in the Constitution, but comes from the Commerce Clause, as set out in Article I, Section 8 of the Constitution, which enables Congress to regulate all interstate commerce. The implication, then, as worked out over nearly two centuries of Supreme Court rulings, is that states are prohibited from interfering in interstate commerce, unless explicitly permitted by Congress.)

The crux of the decision, then, fell on which provision of the Constitution had greater bearing: the 21st Amendment’s expansive grant of rights to the states to regulate their internal beverage alcohol market, or the Dormant Commerce Clause’s restriction on states’ ability to enforce discriminatory laws.

What Does Alito’s Ruling Say?

In his opinion, Justice Alito clearly sets out the position that Tennessee’s residency requirement is an improper discrimination against out-of-state interests, which is not saved by the powers granted to Tennessee under the 21st Amendment. As such it is unconstitutional, and fails on its face.

Alito justifies this reading by noting that Section 2 of the 21st Amendment has for decades — and increasingly so in more recent decades — been limited by other provisions of the Constitution. In various other cases, it has been found that limits on alcohol advertising improperly violate the First Amendment, or that discriminatory taxes that apply only to liquors produced out of state violate the Equal Protection Doctrine. As such, it is not at all improper to find that the Dormant Commerce Clause similarly can preempt a 21st Amendment claim.

Alito does not defang the 21st Amendment. He acknowledges that it does still provide states with the power to regulate their internal alcohol markets. However, he affirms the position that state laws that rely on the 21st Amendment must be based on the principles that the 21st Amendment was originally designed to enable: that states can “address the public health and safety effects of alcohol use and to serve other legitimate interests.” (Tennessee Wine & Spirits Retailers Ass’n v. Thomas, page 32.)

But the corollary then, is that purely protectionist measures that fail to show a connection to those interests must fail. Because Tennessee’s residency requirements are facially all about blocking the entry into the Tennessee market by out of state interests, and are not justified by concerns of public health and safety, they must fail.

Alito does address the claims by the petitioners that these rules are in fact tied to public health and safety concerns, but dismisses them as “implausible on its face” (page 33). Basically, the claim that the state needs to limit retail package store licenses to only parties that have resided in the state for at least two years cannot stand because the state can still require that there be an instate agent to be liable for any instate claim, or can require the out-of-state party to accept jurisdictional authority by Tennessee. (Alito also references the border town of Bristol, Tennessee, noting that it’s ridiculous to believe that a person in Memphis — 500 miles away — has more interest in the health and safety of the local community than a person residing across the street in Bristol, Virginia.)

As such, a state cannot merely claim that its laws relate to public health and safety, it must demonstrably prove that in court. However, left unsaid (and therefore likely ripe for future litigation), is what exactly are “other legitimate interests.” Seemingly, these should relate to public health and safety, and other principles of temperance, but there perhaps lies an opening for states to argue for the validity of other laws in the future.

Justice Alito was joined in his opinion by Chief Justice Roberts, and Justices Kagan, Ginsberg, Kavanaugh, Sotomayor, and Breyer. Justice Gorsuch wrote a dissent, which was joined by Justice Thomas.

Gorsuch’s dissent rebukes Alito’s opinion, stating that this ruling misinterprets the history of the pre-Prohibition era and the genesis of the 21st Amendment. Whereas Alito, and the majority of the Court, sees that history as limited to asserting the principles of public health and safety, Gorsuch takes a broader stance, finding that those principles enable states to impose all manner of laws (including residency requirements, which he notes themselves have a 150-year history). Essentially, this argument follows what many who support restrictive state rules claim: that states can impose any rules they want, “because alcohol”. They assert that since this is a dangerous and fraught product, states have free reign and it is improper for a court to second guess a state’s assertion that their laws are valid. (It should also be noted that Gorsuch and Thomas are notoriously critical of the Dormant Commerce Clause, and are apt to rule against any argument that relies on it.)

What Does the Tennessee Wine & Spirits Ruling Mean Going Forward?

Presently, this ruling only applies to Tennessee’s durational residency requirements, meaning that, indeed, Total Wine and other people who have not lived in the state for two years can receive a license to operate a retail package store.

However, Alito’s ruling does seem to open the door for a more expansive view of 21st Amendment doctrine that requires a showing by states that their laws demonstrably address a concern related to public health and safety or other legitimate state interests. The Court has reaffirmed the stance it has taken in more recent beverage alcohol cases (such as Granholm, Bacchus Imports v. Dias (1984), or North Dakota v. United States (1990)) that the basic argument of “because alcohol” will not carry the day.

Implications of the Tennessee Wine & Spirits Ruling on DtC alcohol shipping

This has broad implications on the direct-to-consumer (DtC) shipping of alcohol by retailers. Producers have benefited greatly from the 2005 Granholm decision that determined that when states enable in-state wineries to make DtC shipments of wine, they must grant out-of-state wineries the same permission (by implication this would also apply to other producers, such as brewers and distillers). However, retailers have not been extended the same rights.

Currently, about a dozen states permit the DtC shipping of alcohol by retailers, for both instate and out-of-state retailers (Connecticut recently passed such a provision, coming into effect July 1, 2019). However, a few states have recently passed laws that would prohibit out-of-state retailers from making DtC shipments of alcohol, while enabling it for instate retailers (namely Michigan, Missouri, and Illinois).

The states claim that this is permitted, as Granholm should be limited solely to producers, and did not address the rights of retailers. But Alito’s opinion seems to shift the landscape for these arguments, requiring that states put forth a clear argument that such facially discriminatory rules are based on the principle of upholding public health and safety. Following that direction, it is likely that the courts will have to rule against the states in the active court cases. And going forward, as more states move to expand DtC permissions for retailers, they will have to grant the same permissions to out-of-state retailers.

As Alito notes in his opinion (citing Granholm), “[i]n this age of split-second communications by means of computer networks . . . there is no shortage of less burdensome, yet still suitable, options” for states to monitor and control their beverage alcohol markets. By checking licenses, tracking orders, and providing tax calculation and reporting for the DtC wine shipping market, ShipCompliant by Sovos has been on the leading edge of this market, enabling our users to comply with the various states’ DtC regulations. Through our services, our users have been able to stay in good standing with state agencies, and states have received tens of millions in tax revenue.

We are therefore heartened to see the Court expand on the principle that states are limited in their ability to discriminate against out of state interests, despite the seemingly expansive nature of the 21st Amendment. By expanding the market, and not relying on discriminatory rules, states can enable greater consumer choice and empower businesses to succeed, and they can do so while ensuring the safety and health of the people they aim to protect.

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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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