The number of wineries in the United States has exploded in the past 25 years, rising from approximately 800 in 1975 to over 2,700 today.  Indeed, as an article in USA Today recently observed, wineries are now a part of the rural farm economy in all 50 states.  A large percentage of this growth has occurred in just the past twelve years.  Since 1990, the industry has roughly doubled from 1,400 wineries to its current number.   

While California remains the premier winegrowing state - comprising roughly half the nation's wineries and over 90% of the production - there are high concentrations of wineries (in rank order) in Washington, Oregon, New York, Ohio, Virginia, Pennsylvania, Texas, Missouri, Colorado, New Mexico, Illinois and Michigan.  These states have a minimum of 30 wineries each, and the top three - Washington, Oregon and New York - have more than 150 apiece.   

States have played a major role in encouraging this remarkable growth because wineries bring much-needed investment capital, stable employment, and significant tourism to depressed rural economies.  In fact, for every bottle of wine sold at a farm winery, there is an investment of approximately $50 in land, development, equipment and working capital.  Suffice it to say, farm wineries are a living embodiment of the American ideal of entrepreneurial craft spirit.   

Mandatory Three-Tier Distribution System

Unfortunately, America's wineries are also "poster children" for state impediments to e-commerce - laws in this case - which do more to protect the economic interests of in-state wholesalers than to further legitimate policy purposes, such as preventing underage access or collecting taxes.   

Following the repeal of Prohibition in 1933, most states adopted a mandatory three-tier system of distribution, requiring producers to sell only through wholesalers, who in turn sell to retailers.  This system worked reasonably well until the 1980s, when consumer demand for "boutique" wines began to gather momentum.  Despite changing consumer tastes, wholesalers have generally been unwilling to take on, and properly service, smaller wineries with limited production capacity - preferring to stick with national brands that generate substantial sales volume.  

This requirement to sell through wholesalers flies in the face of an obvious reality: Wholesalers do not sell, or properly service, the products of smaller wineries.  There are too many labels nationwide - some 25,000 in total.  Even in a large and vigorous market like Illinois, only about 525 American brands are available - about 2 percent of the brands produced by U.S. wineries.  The three-tier system just does not work for small wineries. 

As the number of brands and labels has proliferated, the challenge of securing wholesaler representation has become a crisis for small, and even medium-sized, wineries.  This "market access" crisis is further exacerbated by the massive consolidation that has occurred within the wholesale tier.  By some estimates, the number of wine and spirits wholesalers has declined from a high of 5,000 in the 1950s to less than 400 today.  

The Direct Shipping Alternative

To remedy the problem, wineries have aggressively lobbied state legislatures to permit the interstate shipment of wine to consumers - an alternative market mechanism that has gained currency with the advent of e-commerce.  The most functional form of direct shipment legislation has been the "reciprocal" shipment concept, which permits consumers to receive a small quantity of wine each month from wineries in other states affording the same reciprocal privilege to consumers within their own state.   

Thirteen states have enacted reciprocal shipment laws.  Another nine states have enacted "permit" laws, which, to varying degrees, also facilitate the interstate shipment of wine to consumers.  However, it is worth noting that several of these laws - whether because of permitting fees, burdensome paperwork requirements, or unwieldy purchasing mechanisms - have not been utilized.  Indeed, a few such laws were drafted by wholesaler interests to placate state legislatures that were being pressured by consumers to do something.  Additionally, a few states, and the District of Columbia, have made regulatory allowances for small wine shipments. 

Economic Protectionism

While wholesalers have been unwilling to represent small wineries, they have been more than willing to exercise their considerable economic and political clout in state capitals across the country to oppose direct shipment, and to make it a crime.  Under the guise of "protecting citizens against the evils of alcohol," they have won enactment of felony statutes in five states (Florida, Georgia, Kentucky, Maryland and Tennessee), and misdemeanor statutes in another 18 states.   

Indeed, as a direct consequence of wholesaler lobby campaigns, more than half of the states - including several with large populations - have effectively shut all but the top 100 wineries out of their markets by insisting that all products go through the mandatory three-tier system. 

These protectionist laws hurt wineries, to say nothing of consumers, in many ways.  For example, they prevent wineries from selling and shipping wine to visiting tourists from states that prohibit interstate shipment; from including such consumers in their wine club offerings; and, from fulfilling gift orders to consumers from such states. 

Preventing underage access and collecting taxes are the primary justifications for state prohibitions against interstate wine sales.  However, experience in the 23 states that do permit interstate wine sales to consumers reveals the transparency of these arguments.  In fact, with the exception of wholesaler-orchestrated stings, we are not aware of any prosecutions involving the sale of wine to minors via the Internet.  Of course, the same cannot be said of the three-tier system, where millions of sales to minors are consummated every year. 

With respect to tax collection, states which allow the interstate shipment of wine to consumers report no appreciable decrease in excise tax revenues from lost wine sales.  In fact, a model law has been developed which protects both excise and sales taxes by licensing out-of-state shippers, and requiring them to collect and forward these taxes.  

State statutes banning the direct shipment of wine protect the pecuniary interests of politically powerful in-state wholesalers, and raise an insurmountable barrier to the consummation of commerce between willing consumers and out-of-state sellers.  This strange confluence is a product of raw local political power of precisely the sort that the Constitution seeks to discourage:  "[Each State] would pursue a system of commercial policy peculiar to itself. . States might endeavor to secure exclusive benefits to their own citizens." (Federalist VII). 

The contention that these protectionist laws serve some legitimate policy purpose is merely a ruse, designed to mask blatant local favoritism. Virtually every Federal judge that has examined this conflict has concluded that less extensive and intrusive mechanisms than the mandatory three-tier system could accomplish legitimate state interests.  

There is a need for a safety valve, and that safety valve is to allow the limited direct shipment of wine to consumers.  The Supreme Court has commented on the importance of a national marketplace for farmers and craftsmen: "Our system, fostered by the Commerce Clause, is that every farmer and every craftsman shall be encouraged to produce by the certainty that he will have free access to every market in the Nation..  Likewise, every consumer may look to the free competition from every producing area in the Nation to protect him from exploitation by any.  Such was the vision of the Founders; such has been the doctrine of this Court which has given it reality."  H. P. Hood & Sons, Inc. v. Du Mond, 336 U. S. 525 (1949) [Cited favorably in 1994 West Lynn Creamery]. 

 Members of the American Vintners Association are both farmers and craftsmen.   

Congress Can and Should Act

Congress has a clear constitutional role to play in developing ground rules and boundaries for when and how states may interfere with interstate commerce - and because the Internet greatly enhances the potential of remote commerce, it is imperative that Congress act soon.  State barriers to online wine sales, and rigid adherence to the three-tier system are impeding the successful development of the American wine industry, and the significance of that economic activity for depressed rural economies.  In addition, these laws are raising the ire of consumers, who fail to comprehend why they cannot order and take delivery of wine from their favorite winery.  

By statute, the Congress can and should balance the public policy needs of the states with the basic and fundamental right to a national marketplace embodied in the Commerce Clause.  In doing so, it can also provide important guidance to the courts.   

In Central Hudson Gas and Electric v. Public Service Commission, 447 U.S. 557 (1980), the Supreme Court developed an excellent balancing test for a very similar purpose that the Congress should consider as it looks to develop legislation to eliminate unnecessary barriers to e-commerce.  The Central Hudson test requires: 1) the demonstration of a substantial state interest; 2) a showing that the regulation or law in question directly advances the governmental interest; and, 3) that the regulation or law is not more extensive than necessary to serve the stated interest.  

It can be argued that every commercial regulation serves some legitimate policy concern or another.  To mitigate the special interest political power of local businesses and to ensure that the concept of a national marketplace is not subverted or unreasonably attenuated, Congress should provide clear statutory guidance.  Parochial state interests should not be allowed to supercede the national interest of free and unfettered commerce among the states.  

On behalf of America's small "craft" wineries, I urge this Subcommittee to advance legislation to require states to meet such a standard so that these businesses can be freed to serve consumers without undue and unreasonable impediments.  Thank you.