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Prepared Witness Testimony The House Committee on Energy and Commerce
E-Commerce: The Case of Online Wine Sales and Direct Shipment
Subcommittee on Commerce, Trade, and Consumer Protection
Ms. Juanita D. Duggan
Mr. Chairman: Thank you for the opportunity to submit testimony to your Subcommittee for this important hearing. I represent the Wine and Spirits Wholesalers of America, Inc. (WSWA), a national trade organization and the voice of the wholesale tier of the wine and spirits industry. Founded in 1943, WSWA represents more than 370 privately held, family-owned and operated companies in 44 States, the District of Columbia and Puerto Rico that hold state-issued licenses to act as wine and/or spirits wholesalers. Our companies are licensed entities because they distribute alcohol-a product that our society has deemed a controlled substance and therefore subject to the highest possible regulations determined by each state. Alcohol is a unique product with a long regulatory tradition. First, let's all agree that wine is alcohol. And this issue isn't just about wine, it's about all forms of alcohol-beer, liquor and wine. And alcohol is not like other food products, books or compact discs. This issue is about kids, communities and common sense. It's also about deregulating the alcohol industry and the consequences of doing so. Because that's what we're talking about-deregulating alcohol, which includes loosening our restrictions on the control of alcohol products, including access to minors. That should be a very real concern to all of us. The FTC commissioned its staff report as part of an examination of products and industries across America. They looked a number of other industries, including auto dealerships, funeral home operations, and the contact lens market, among others. These businesses are all regulated primarily at the state level. The first flaw in the FTC study is the failure not to recognize that all forms of alcohol are not like cars, caskets or contact lenses. Alcohol is one of the few products that has its own constitutional amendment defining how it should be regulated and by whom. Simply put, wine is not like the other thousands of consumer products that sit on shelves in retail outlets across the country. To fail to recognize this uniqueness is to make a fundamental mistake when assessing the role the federal, state and local governments play in the alcohol industry. America has complicated views about alcohol. The long history America has had with beer, wine and spirits is a contributing factor to the uniqueness of the alcohol industry and its system of distribution. Some of this historical background has resulted in significant tradition-Thomas Jefferson writing the Declaration of Independence with a mug of beer on the table. Wine and distilled spirits have had positive effects on the country as George Washington himself built a distillery at Mt. Vernon and created his own whiskey recipe. Unfortunately, some of America's history with alcohol has not been positive. The use of federal troops in putting down the so-called "Whiskey Rebellion," the chronic abuse of alcohol by new immigrants and those living during America's industrial revolution when there was a so-called "unrestricted market" for all alcohol products. That turbulent time gave America some of our most familiar sayings - "lock, stock, and barrel" and "skid row." Then came a fifteen-year social experiment called Prohibition. America thought the answer to alcohol abuse and a free market for alcohol products was to move in the absolute opposite direction and make alcohol illegal. Every serious academic and legal authority recognized, and continues to recognize, that Prohibition was a serious and disastrous mistake. It made average Americans criminals, encouraged and strengthened organized crime and did little to reduce abuse. Out of the repeal of Prohibition came what might be called a middle position for America, resulting in the 21st Amendment to the U.S. Constitution; the separation of the manufacturing, wholesaling and retailing tier of the alcohol system; and aggressive state oversight to encourage the goals of temperance, control and revenue collection. This regulatory system has served this country well. And we need those safeguards perhaps even more today than we did before. Why is that? A new National Academy of Sciences report confirms that kids are buying alcohol online and through the mail today. A new WirthlinWorldwide survey also confirms that the overwhelming majority of the public is against allowing alcohol sales via the Internet. The question I hope this Subcommittee will be asking is: If we know kids are getting alcohol online, and we know the public is opposed to online sales in general, why on earth should we deregulate alcohol sales to create a shadow trade that is both unchecked and unaccountable? Such a move defies common sense and is wholly irresponsible. To demonstrate just how dangerous uncontrolled direct sales of alcohol are, WSWA recently conducted a series of tests. Bottles of alcohol were ordered online and the alcohol providers made no attempt to verify the consumer's age or even notify the consumer that he or she must be 21 years of age. The results: · Bottles of liquor were sent to consumers in several states where such shipments are prohibited by law (regardless of age). · In one case, a 15-year-old, using his own credit card, ordered bottles of tequila (delivered to a state that prohibits such shipments regardless of consumer age), and the package was left on his doorstep. The package was not marked as containing alcohol. · In most cases, the liquor boxes concealed their true content: they came in plain brown paper boxes, did not note their contents and had vague return addresses like "Dave" or "John," clearly attempting to hide the fact they were shipped from alcohol purveyors. · In one instance, a bottle of wine arrived in a box clearly marked "wine" and requesting an adult signature, yet an 11-year-old boy accepted the delivery unchallenged by the carrier. We were not surprised by these results. In fact, we encourage Subcommittee members to conduct tests of your own. We have no doubt you will find similar results. While advocates of deregulating alcohol will tell you truck drivers are carding people when they deliver alcohol, that the boxes are clearly marked, and that the alcohol is not left on doorsteps-such claims are pure fabrication and easily debunked. We'd be happy to provide you a list of online providers, or you can search them out for yourselves. Moreover, if you were to ask anyone in your local communities across this country-a parent, teacher, or police officer-whether it is a good idea to deregulate the sale of alcohol, the answer would be a resounding "No!" Overwhelmingly, people understand that alcohol is different from unregulated consumer products and that the rules governing its distribution must reflect that reality. Reasonable people understand that when you are dealing with the potentially deadly combination of teenagers and alcohol, it is unthinkable to support laws that allow kids to order intoxicating liquor from "virtual vending machines." Most people understand that when you already are dealing with the troubling and widespread problem of underage alcohol abuse, you don't make it worse by proposing that teens be given yet one more way to buy their buzz. As noted earlier, when it comes to beer, wine and liquor, our society recognizes its unique nature and the need for a unique system to control its distribution. After all, to reiterate, sales of beer, liquor and wine are not the same as those for cars, books or CDs. But those legitimate concerns do not seem to resonate with the handful of wealthy oenophiles who are leading the battle to have limited edition chardonnay shipped directly to their homes. These self-proclaimed connoisseurs appear to have their blinders firmly in place and want to ignore the fact that their actions would also open the door for a 15-year-old to buy tequila or grain alcohol over the Internet and have it delivered without question to his door. As Nobel prize-winning economist, grape grower and proponent of unregulated alcohol sales Daniel McFadden admits in his testimony before the FTC, the subject of direct sales is an elitist issue that caters to only a tiny percentage of the consuming public. Unfortunately, that elitist minority is endangering the very system of control that we as an industry, in partnership with the government, parents and others, are working to strengthen in order to protect the public. Thus, when the FTC announced in the fall of 2002 that it would be conducting a "Public Workshop" on the subject of "Possible Anti-Competitive Efforts to Restrict Commerce on the Internet,"-and included within its purview the subject of wine sales-WSWA and many in the regulatory community viewed it as a great opportunity to showcase the dangers of uncontrolled distribution of alcohol. We noted that the FTC was apparently so alarmed with the danger to kids of online gambling that it had set up an exclusive web page to warn parents about that problem. Surely, we thought, and the FTC felt it necessary, to warn parents about the dangers to kids of Internet gambling would need little prompting to come to the same conclusion about Internet sales of alcohol. Voluminous evidence was produced through testimony at the Workshop and through information later submitted to the FTC during the comment period demonstrating the dangers of uncontrolled direct shipping and explaining the inability of the states to monitor and hold accountable companies that shipped directly. It was hoped that the FTC would fairly evaluate that information. That was not the case. The final FTC report is a study in preordained conclusions. It is the triumph of rhetoric over reason. It is intellectually dishonest and scientifically specious. The report ignores evidence contrary to its suppositions, manufactures evidence out of whole cloth, and misapplies the findings of a geographically limited, inconclusive economic study. In other words, the final FTC report is a one-sided propaganda piece of little substance that this Subcommittee should not only ignore, but also wholly discredit. The Truth About Sales to Minors - In the report, the FTC concludes that sales to minors are not a significant problem-despite the fact that in its press release it notes that it has no evidence concerning the effectiveness of adult signature requirements. To support that conclusion, the FTC notes the results of a survey it sent to eleven different states to determine if there was a problem. The report contains a chart highlighting the results of that survey which they characterize as demonstrating that "[i]n general, these state officials report that they have experienced few, if any, problems with interstate direct shipment of wine to minors. Most of them do not believe that interstate direct shipment of wine to minors is currently a serious problem, although several of them believe that it is possible for minors to buy wine online." From the survey information, most readers would be led to believe that the states have studied the matter and have determined based upon that study that there is no problem. However, if you actually look at the surveys (contained in the Appendix) you note that, without exception, not one of those states conducted any compliance checks or stings to determine the dangers of such uncontrolled shipments to minors. Not one went online to investigate the ease with which alcohol can be ordered and delivered without any age verification or control. There is no excuse for such an oversight. And in fact, several states in the survey noted their belief that there was a problem with such sales and one even went so far as to identify direct sales as having the potential to become a major problem. One state reported that there was no system available to assure that minors did not obtain alcohol online since many had credit cards and they were not face-to-face transactions. Another reported that compliance checks on the far more secure face-to-face transactions even revealed sales to minors at a rate of 30%. Still another reported that 67% of high school seniors said they have purchased alcohol in face-to-face transactions alone. Even in states that reported having laws on the books requiring carriers to report alcohol shipments, some do not, and no actions have been taken against them. Absent such empirical evidence, any conclusion by the FTC to the effect that sales to minors are not occurring online is devoid of any real basis in fact. The survey merely records the opinions of various state control functionaries who apparently base their beliefs on the fact that no kids have self-reported their criminal misconduct, telling them they ordered and received a box of pure grain alcohol at their doorstep, for example. What makes the FTC findings even more problematic is the additional evidence they omit beyond their skewing of the state survey. For instance, you can look in vain for the testimony of Michigan Assistant Attorney General Irene Mead who recounted an enforcement action conducted by that state which ensnared scores of wineries and retailers shipping illegally to minors in that state, including shipments of such rare and hard to find vintages as "Eye of Newt" wine and blackberry wine. She also told a frightening story-omitted in the report-of a teen in a rehabilitation facility who actually succeeded in having a case of bourbon delivered to the facility-straight to him via the Internet. When he finished that case he contacted the Internet site and said all the bottles were broken on delivery. A free case was promptly shipped to him, again without detection. Moreover, you don't see reference to the testimony of former White House counsel C. Boyden Gray reciting the experience of South Dakota Governor Bill Janklow, who vetoed pro-direct shipment legislation when an underage staff member in his office was able to order and have shipped to him - in the State House - a bottle of wine. And you certainly don't see reference to my comments submitted to the FTC in which I catalogued the sale and delivery of beer to a 17-year-old in Alabama from a company in Illinois, the shipment of beer to a minor in the Missouri Attorney General's Office, or the unsolicited report of recurring attempts by minors to buy online by the owner of the Internet company "877 Spirits." The National Academies - The conclusion of the FTC, with respect to sales to minors, is finally and completely discredited by the recent study by the National Academies of Sciences report studying the marketing of alcohol to minors. In section two of the report entitled "The Strategy," the NAS focuses on the issue of underage access, in particular, Internet Sales and Home Delivery. The report states that underage purchase of alcohol over the Internet or through home delivery is a method of illegal access to alcohol used by 10% of underage drinkers. That figure, however, is based on data reported in the 2000 Journal of Studies on Alcohol, and the report correctly concludes that increasing utilization of the Internet likely has increased that percentage greatly over the last three years. Finally, the NAS report goes so far as to suggest that the significance of these illegal underage sales is so great that: ".an argument can be made for banning Internet and home delivery sales altogether in light of the likelihood that these methods will be used by underage purchasers." (Page 176) Controlled Delivery Protects Our Kids, and That's What the Public Wants - As noted earlier, the overwhelming majority of Americans oppose allowing beer, liquor and wine to be sold directly to consumers over the Internet or through the mail, according to a new poll by WirthlinWorldwide conducted on behalf of the Wine and Spirits Wholesalers of America, Inc. and released just last week. The poll expressed what everyone from parents of teenagers to alcohol consumers understand - that Internet and mail purchases of beer, liquor and wine will result in less control in local communities. The survey reveals that: · 83% of respondents agree that sales over the Internet should not be allowed because they would give minors easier access to alcohol products. · 80% of respondents believe that Internet commerce is generally a good thing for both businesses and consumers; however, alcohol is a socially sensitive product and should be treated differently from other products. · 63% of respondents say that the sale of beer, liquor or wine over the Internet will result in less control over alcohol sales in their community. These poll results are in line with similar findings from a WSWA poll conducted just prior to the FTC Workshop, which found that 75% of the respondents did not believe that online sales could be controlled to prevent sales to minors. Once again, these results are not surprising given the nature of such sales. Shadow sales made via telephone or through the Internet, since they are not face-to-face, cannot establish the age of the purchaser. There is no guarantee that the person ordering the alcohol is of age. Most young people between the ages of 18 and 21 years of age-and many who are even younger-possess credit cards allowing them to order online-still others have the use of their parents' cards and there is no way for the online seller to verify the age of the person ordering. Moreover, there is no way to ensure that a minor does not ultimately receive a shipment of alcohol. The sellers wash their hands of the alcohol once it leaves their premises, and there is no guarantee that the delivery service will require an I.D. upon delivery-or that they will not simply drop the box off at the door unattended. That is exactly what happened when scores of media outlets conducted stings over the past several years to determine the safety of direct sales. Those stings showed how easy it was for minors to order alcohol online-and how sloppy the carriers were who delivered the alcohol, often without checking I.D. or often just leaving the alcohol on the front doorstep. After all, it is not the job of truck drivers to card people-especially if boxes of liquor are being shipped in plain brown boxes with no indication alcohol is inside. That's why face-to-face transactions with licensees are so important. Anything less simply does not work. Junk Science: McLean, Virginia is Not Representative of Anywhere But McLean, Virginia- A report that attempts to speak to the nature of the availability of certain wines nationwide is hardly authoritative when it tries to extrapolate the findings of a study from one small corner of a state across the entire country. It is self-evident that the ability to obtain different varieties of wines in Chicago, New York, New Orleans, Albuquerque or even the Washington, D.C. Metropolitan Area is not comparable to what can be obtained in the small suburb of McLean, Virginia. For instance, in New York, a retailer has access to over 20,000 different brands or SKUs of wine alone. The selection is so great because of the wholesalers in that market. Our companies bring selection and competition to a highly competitive marketplace. If the FTC had conducted its economic study there, you can be sure that the findings with respect to variety and availability would be quite different than that represented in the final report. The same holds true for price. Price differentials from market to market are not insubstantial. In many markets, the prices for high-end wines are much cheaper when purchased through the licensed system than if purchased online. It should be noted that testimony at the FTC hearing itself established that wineries selling online often do not pass the savings on to the consumers-they sell at retail price keeping the additional profits for themselves. If you add in the cost of shipping to that bill, consumers often end up spending more for online purchases than at local retail establishments for the same product. The FTC is Treading on State Turf, and Encouraging Disruption of Local Control - The 21st Amendment, ratified in 1933, is unambiguous in its enumeration of power to the states to regulate the importation and controlled distribution of alcohol within its borders. This is the specific language contained in the 21st Amendment: 21st Amendment Section 1: The eighteenth article of amendment to the Constitution of the United States is hereby repealed. 21st Amendment Section 2: The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited. No Supreme Court decision interpreting that amendment over the past 70 years has ever diminished that authority. The simple fact is, as noted by respected jurist Frank Easterbrook in a compelling 7th Circuit opinion upholding Indiana's right to determine and control the channels of distribution, alcohol is not cheese and its sale and distribution should be treated specially. As prohibition ended, state lawmakers were determined to learn from the mistakes made prior to 1918. Principal among the reasons that the licensed system was established was consumer protection. It was determined that there should be an intermediary separating the supply and retail tiers to ensure that large suppliers with market power did not dominate individual retailers by establishing "tied-houses." These pre-prohibition tied-house retailers made their profits not by-the-glass, or by-the-bottle, but rather through winning incentives for moving large quantities of alcohol. In other words, the imposition of a mandatory wholesale tier served to end many unhealthy and unsafe practices that prevailed prior to Prohibition. The wholesale tier functions as a partner with state regulatory systems that are designed to promote the core 21st Amendment concerns-ensuring orderly market conditions, promoting temperance, including keeping alcohol out of the hands of minors and collecting tax revenue. By requiring that every drop of alcohol passes through the licensed system, states are assured that every bottle of alcohol is properly labeled, taxed and sold only to adults of legal drinking age. In order to understand how the licensed system operates as a partner with the state and federal regulatory communities and serves the interests of consumer protection, I would ask you to follow a bottle as it flows through that licensed and accountable system. A supplier must obtain approval for the label from the Alcohol and Tobacco Tax and Trade Bureau (TTB) to ensure that it contains truthful and non-misleading information about the product's contents and that it contains mandatory health warnings. That bottle must then be sold to a state and federally licensed wholesaler who is responsible for maintaining and filing detailed records of each bottle brought into the state, pays the excise taxes due on the alcohol, and delivers the alcohol to a state licensed retail establishment. The retailer is responsible for paying over to the state the sales taxes generated by each sale, and is directly responsible for ensuring that alcohol does not fall into the hands of minors or other prohibited individuals. Since both the wholesaler and the retailer must be licensed by the state, they are fully accountable for any dereliction of their duties. They are subject to on-site inspections, auditing and compliance checks, and any violation can result in a loss of license, fines and other potentially more severe penalties. Wholesalers believe that the licensed system is our nation's premier safeguard against underage access to alcohol. States created this system and no court has every challenged the logic of this system or a state's right to establish such regulations. As an industry, we are not only committed to this system, but also to its philosophy. We work diligently to uphold the letter and spirit of the stringent laws of each state in which we do business. Congress has recently recognized the need for legislative action to support the safeguards and accountability mechanisms of the licensed system. "The 21st Amendment Enforcement Act," passed by the 106th Congress and signed into law in 2000, provides state Attorneys General with a powerful means by which to protect their citizens and prosecute illegal direct shippers. If You Destroy the System, You Destroy the Safeguards - However, the contributions of the wholesalers to the communities in which they live and work go far beyond protecting the licensed system of alcohol distribution. Our commitment as good corporate citizens is also unwavering. Last year, WSWA conducted the first-ever survey of our members' broader contributions to their communities. We found that our members donate more than $55 million a year to charitable causes throughout this country. They include: United Way, Boys and Girls Clubs of America, YMCA/YWCA, The Sober Ride Project, D.A.R.E. (Drug Abuse Resistance Education), Ronald McDonald House, MADD, Make a Wish Foundation, Project Graduation, Center for Women and Families, Crusade for Children, Sky Ranch, Big Brother Project, Camp Braveheart and many others. Our members not only contribute to organizations that confront the problems some people face with alcohol abuse and other risky behaviors, but to other organizations that contribute to the greater good of us all-artistic endeavors, environment enrichments and developmental teachings that exemplify responsible behavior. These efforts promote social connectedness and help dissuade inappropriate behavior such as alcohol abuse and underage consumption. For example, the youth groups I listed help disadvantaged kids make the right choices about drugs, alcohol and risky behavior in general. You cannot overlook our commitment to these organizations. Conclusion - The proponents of direct shipping are posing a growing threat to a time-tested system best suited to prevent underage alcohol access. Led by a handful of oenophiles, powerful retailers and elite wineries-who by the way got into the business fully aware that they were producing a controlled product-advocates of unregulated alcohol sales-want to dismantle the licensed system of safeguards and instead sell alcohol with little or no real controls in place-creating a free-wheeling, anything goes environment. These groups are suing in several states to deregulate alcohol sales. And the issue is headed straight for the Supreme Court. The bottom line issue that must be addressed is simply this: Should leaders in local communities control how alcohol is marketed and sold within their state, or will wineries and large international alcohol conglomerates make that decision? We think local communities should have more control, not less-and most Americans agree. Besides, this issue is squarely addressed in the 21st Amendment, which gives states that authority. In conclusion, Mr. Chairman, we as wholesalers of wine and spirits recognize-as did Judge Easterbrook-that our product is not cheese and must be treated specially. We recognize alcohol's unique consideration in our society and support-even defend-the regulation and control of its distribution. We also believe that we are good partners to the communities in which we live and work. As such, we are appreciative of the opportunity to provide testimony at this hearing and would hope that the Chairman will continue to consider Wine and Spirits Wholesalers of America a resource as you work to prevent underage consumption and access to alcohol. Thank you again for this opportunity to provide testimony today for this important hearing. # # #
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