State of the Union, Wine Shipping Edition
The preamble to the United States Constitution is short and sweet:
"We the People of the United States, in Order to form a more perfect Union, establish Justice,
insure domestic Tranquility, provide for the common defence, promote the general Welfare, and
secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this
Constitution for the United States of America."
As we look forward to tonight's 226th State of the Union address, I am struck by the "more
perfect union" reference in the preamble, as well as the wisdom of the founding fathers and
generations of Supreme Court justices in prioritizing the Commerce Clause, which protects the
federal government's exclusive role in regulating interstate commerce. The 21st Amendment,
which repealed Prohibition in 1933 and as a side-effect sheltered states from the Commerce
Clause's requirement to maintain an open, fair market for all players, provides a glimpse into
what a world absent the Commerce Clause might look like. We should all be thankful that most
products we might want to buy don't have to face a similar regulatory nightmare.
So, in honor of the State of the Union, here is a summary of what the world of wine shipping
looks like, from a winery's perspective, as we enter 2015, with states broken down into tiers
based on the cost and ease of doing business there:
Shipping map courtesy of the great free tools at ShipCompliant
Tier I: The no-brainers (AK, DC, MN, MO)
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Right now, there are three states (and one district) that have neither permit fees nor
significant reporting requirements. Thank goodness for them! But, 4 of 51 isn't a great
percentage. All of the others make it more difficult or expensive to ship wine to
customers who want it.
Total percentage of US population: 4.05%
Total number of reports required annually: 1
Total permit fees: $0
Tier II: Inexpensive and/or fairly easy (CA, CO, FL, IA, IL, MI, ND, NH, NV, VT)
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There are an additional ten states with permit fees of $330/year or less and modest
reporting requirements (6-16 times per year). These states include some big ones like
our home state of California, Florida, Illinois, Michigan and Colorado, but even for the
smaller ones, the number of orders that a winery would need to fill in order to pay for
the annual investment is very reasonable.
Total percentage of US population: 29.95%
Total number of reports required annually: 110 (11/state avg.)
Total permit fees: $1275 ($127.5/state avg.)
Tier III: Moderate expense or requirements (GA, KS, MD, ME, MT, NC, NM, NY, OH, OR, TN,
WA, WI, WY)
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Once you get to the next tier of fourteen, a small winery would be excused for starting
to run cost-benefit analyses before springing for the permits. Some permits start to get
expensive in this tier, like Tennessee's $450/year, Wisconsin's $400/year, or Maryland's
$380/year. Others are less expensive, or even free, but have difficult reporting
requirements, like North Carolina (28 reports/year) or Georgia, New Mexico, Oregon,
Wyoming and Washington (24 reports/year each). Still, there are some pretty largepopulation states in this tier, and most wineries choose to ship to all or nearly all of
them.
Total percentage of US population: 27.79%
Total number of reports required annually: 267 (19.1/state avg.)
Total permit fees: $3126 ($223/state avg.)
Tier IV: Difficult/expensive but worth the cost (TX, VA)
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This is a tier with just two states. Both are expensive (Texas's permit costs $526/year
and requires 20 reports annually, while Virginia's permit is only $160/year but requires
the submission of 36 reports) but both are also big enough to justify the cost.
Total percentage of US population: 11.06%
Total number of reports required annually: 56 (28/state avg.)
Total permit fees: $686 ($343/state avg.)
Tier V: Difficult/expensive and maybe not worth the cost (HI, ID, NE, SC, WV)
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The main difference between this tier and the one above it is in the potential reward,
rather than the expense. Its five states are all small, and all expensive: as much as
$600/year for the permit (South Carolina) and as many as 36 reports per year (West
Virginia). While nearly every winery ships to Texas and Virginia, there are many who
don't ship to these five smaller states with often disproportionate costs and reporting
requirements.
Total percentage of the US population: 3.65%
Total number of reports required annually: 112 (22.4/state avg.)
Total permit fees: $1766 ($353/state avg.)
Every winery has a different breaking point. For us, it comes here. We've decided that the 35
states above all warrant the expense of the annual permits and the reporting, though it's a
close call on some in that last tier. The 16 states below we either can't ship to, or have found
that the requirements to do are unreasonable. But before I look at those, it's worth doing the
math on what shipping to the 35 "shipping" states costs in total: $6853 in permits plus the time
and expense of preparing and filing 546 reports each year. Figure an hour for each report, at
$25/hour ($13,650) for a total expense of $20,503. But for that cost, we can ship to 76.5% of
the US population. Available tools (like ShipCompliant, which we use and recommend highly)
provide a savings over the labor of preparing the many individual reports, but still come with a
cost.
Why don't states make the cut? The reasons vary, and you'll notice that some of the "no-ship"
states fall into more than one category. But in most cases, you'll see some effort toward
protecting distributors from competition, at the expense of both consumers and wineries.
On-site purchase requirements (AZ, IN, RI, SD)
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There are states that will allow a winery to ship (typically with few or no hurdles) if
someone purchases wine at the winery, but won't allow the same customer to order
wine by phone or email from home. The logic written into the laws is typically couched
in the guise of ensuring that only of-age buyers can purchase, but given that common
carriers routinely check ID's in the 30+ states that allow direct shipping, it doesn't pass
critical muster.
Distributor exclusivity (IN, LA)
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There are two states that explicitly say that wineries can ship only if they don't have a
relationship with a distributor in that state. While this does protect distributors from
competition from the suppliers they represent, I wonder if it discourages many smaller
wineries from signing up with a distributor from those states. The two states (Indiana
and Louisiana) are both just large enough markets (2% and 1.5% of the US population,
respectively) and just far enough away from California that we've decided that it's not
worth foregoing the wholesale business we do for an uncertain amount of direct
business.
Capacity caps (AZ, NJ)
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The capacity cap is the distributor lobby's wedge issue of choice at the moment. It
writes into law that wineries below a certain size may ship direct to consumers, while
wineries at or above that size must use the 3-tier system and sell their wine through
traditional channels. Typically, this capacity cap is set just above the size of the state's
largest winery, protecting all the local wineries' business models while shielding
distributors from as much competition as possible. In the recent case of Massachusetts,
the link was made so explicit (it was promoted on the floor of the legislature) that a
federal appeals court declared it in violation of the Granholm v. Heald decision that
established the primacy of the Commerce Clause in the interstate shipment of wine.
But in other cases it has withstood legal challenge, and with New Jersey's recent
capacity cap bill and a push last year to add one in Florida, it seems likely we'll see more
in the future. The capacity caps have been set as low as 25,000 gallons (roughly 10,000
cases) in places like Arizona (which we don't fall under), and as high as 250,000 gallons
in New Jersey and Ohio (which we do).
Label registration (CT)
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Connecticut is a shipping state for many wineries, but it's not without its expenses and
challenges. First, it's the third-most-expensive permit, at $595/year, and requires 28
reports to be filed annually. Second, you must register each label you propose to sell in
the state at a cost of $200/label, renewable every 3 years. At Tablas Creek, we sold 28
different wines direct last year (different wines, not different vintages). That would
require a $5600 investment, adding $1866 to the already-considerable annual $1295
cost of permit and reporting.
Death by 1000 Cuts (NJ)
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New Jersey grudgingly entered the ranks of direct shipping wineries with the passage of
a bill in 2012. So far, only a tiny fraction of the nearly 10,000 American wineries have
done so. Why would only 237 wineries have received a permit, in the country's fifthlargest wine market? Let us count the ways:
o The permit (a sliding scale, but for us $938) is the country's most expensive and
the are 24 reports to submit annually
o There is a significant bond wineries have to post
o There are registration fees of $150 per partner per year, an issue for a winery
like ours owned by two families, each with several owners
o Receiving a permit means that we have established a nexus with the state of NJ
and are liable for paying an annual corporate income tax of at least $500
o There's a capacity cap to ship that we fall under, but many wineries don't
o
And the coup de grace is that anyone who owns at least 10% of the winery must
satisfy the same laws that govern the ownership of a liquor store or liquor
wholesaler in the state, which precludes foreign residency.
About to join tier II (MA)
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If you're discouraged by the news on New Jersey, enjoy this counter-example:
Massachusetts, the country's 14th-largest state and 6th-largest wine market, is about to
become a reasonable state to which to ship wine. Thank you, Drew Bledsoe. And thank
you, Family Winemakers of California!
Absolute prohibition (AL, AR, KY, MS, OK, PA, UT)
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The good: most of the states that don't allow the shipping of wine in any situation are
among the smallest wine markets in the country. Other than Pennsylvania, the six
prohibition states combine to make up just 3.3% of the American wine market.
The bad: Pennsylvania is the country's 6th-largest state and 10th-largest wine market
The good: it seems like there is momentum building to finally get Pennsylvania's direct
shipping laws changed. Given the challenges now (you can technically ship, but only to a
state store, and only if no other vintage of that wine is in the state store system, and the
recipient has to come to the state store to pick up and pay all the taxes) welcoming
Pennsylvania to the post-Granholm world would be a huge boon for all wineries in 2015.
This piece originally appeared on January 20, 2015 on the Tablas Creek Blog (http://tablascreek.typepad.com)