The Wine Is in the Mail: The Twenty-First Amendment and State Laws against the Direct Shipment of Alcoholic Beverages

I. INTRODUCTION The Internet has revolutionized commerce by providing an easy way for businesses to reach vast numbers of customers, and by allowing consumers to attain products of all sorts with the mere click of a mouse. Some wine consumers, however, feel left behind by the Internet revolution. State laws against the direct shipment of alcohol leave them frustrated because they cannot purchase wine online and have it shipped to their homes.1 These laws against direct shipment have attracted a significant amount of attention in the news media,2 and they have recently been challenged in a number of federal courts.3 To understand the direct shipment issue fully, it is necessary to understand the purpose of direct shipment laws and the role they play in states' alcohol regulation schemes. All fifty states regulate the importation and distribution of alcohol in some way.4 Some states, like Pennsylvania, have state run monopolies whereby all IMAGE FORMULA5IMAGE FORMULA6 alcohol is sold and distributed through state owned stores.5 Most states, however, allow private wholesalers and retailers to sell and distribute alcohol pursuant to state-issued licenses.6 States that allow private, licensed sales and distribution have a three-tier system of distribution.7 Under these three-tier systems, alcohol suppliers (tier one) are permitted to sell their products only to licensed wholesalers (tier two). The wholesalers collect excise taxes from the suppliers and provide the state with information about the suppliers -and the alcohol that they import.8 The wholesalers then sell the alcohol to licensed retail outlets within the state (tier three), and make a profit by charging a higher price than they paid to the suppliers.9 The retailers then sell the alcohol to consumers.10 State laws prohibiting the direct shipment of alcohol protect the integrity of these state distribution systems by prohibiting alcohol suppliers from shipping alcohol directly to in-state consumers without going through the three-tier system.ll Consequently, under most state alcohol regulation schemes, there are only two ways in which in-state or out-of-state sellers of alcoholic beverages may sell alcohol to in-state consumers: (1) by obtaining a license from the state to do so,12 or (2) by shipping the beverages through the threetier system. Many states restrict licenses to in-state residents,13 leaving out-of-state suppliers with the only option of sending their products through the three-tier system. There are three basic types of direct shipment laws.14 Twenty-nine states have "express prohibition" statutes that entirely prohibit direct shipment to consumers by any supplier without a permit.15 Nine states and the District of Columbia allow "limited direct shipment," which generally permits direct shipment to consumers in small quantities.16 Twelve states have "reciprocals" with other states, which authorize direct shipment from suppliers in states that reciprocate the direct shipment privilege to its state suppliers. 17 Groups on both sides of the direct shipment debate have very strong interests in this issue. If alcohol suppliers could circumvent the three-tier system of distribution, they could sell directly to customers without having to pay excise taxes or have their products subjected to wholesaler and retailer price markups.18 On the other IMAGE FORMULA9IMAGE FORMULA10 hand, wholesalers and retailers have an equally strong interest in preventing the direct shipment of alcohol. Laws forbidding the direct shipment of alcohol ensure that licensed wholesalers and retailers will not face competition from other distributors.19 Finally, states have a significant interest in forbidding the direct shipment of alcohol.20 The three-tier system facilitates tax collection2l by ensuring that every drop of alcohol sold to state residents is taxed. …