Avalara > Blog > Battles brew in Michigan and Ohio over DTC wine shipments by out-of-state sellers

Battles brew in Michigan and Ohio over DTC wine shipments by out-of-state sellers

  • Oct 21, 2020 | Gail Cole

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Can a state use the 21st Amendment Enforcement Act to prevent out-of-state wineries or wine retailers from shipping directly to consumers in the state? Attorneys general in Michigan and Ohio are arguing that they can. Out-of-state wineries and wine retailers insist doing so is discriminatory.

Battles brewing in Michigan and Ohio come on the heels of a seminal decision by the Supreme Court of the United States in Tennessee Wine and Spirits Retailers Assn. v. Russell F. Thomas (June 2019). The high court ruled Tennessee’s 2-year durational residency requirement for retail liquor store license applicants “violates the Commerce Clause and is not saved by the 21st Amendment.” Essentially, it clarified that states cannot discriminate against out-of-state businesses for protectionist reasons

Though the Tennessee ruling was answering the narrow question of residency requirements, Wine Spectator suspects the decision could “have larger consequences for the wine market, including opening the door to challenges to laws that ban wine retailers from shipping to customers in other states.” The events unfolding in Michigan and Ohio could bear that out. Or not.

Ohio leads the charge, waiving the 21st Amendment flag

One battle is brewing in Ohio, where the liquor law prohibits direct-to-consumer (DTC) wine shipments by out-of-state wine retailers and some out-of-state wineries (some remote wineries can make DTC shipments into the state). After an investigation initiated by Ohio Attorney General Dave Yost revealed multiple out-of-state wine providers were making DTC sales into the state, Yost filed for a preliminary injunction in federal court to “immediately stop the flow of illegal liquor shipments into the state.” 

When announcing the case in July, Yost said it was “one of the first-ever lawsuits centering on the 21st Amendment,” which repealed prohibition and prohibits the “transportation or importation into any State, Territory, or Possession of the United States for delivery or use therein of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.” 

According to the complaint filed by Yost, “Ohio will suffer irreparable harm” because the “continued violations will threaten Ohio’s ability to effectively monitor and regulate the importation of intoxicating liquor into the State.” The attorney general also insists DTC sales into Ohio “hinder the State’s ability to assess and collect excise and sales taxes on the wine sold.” 

Yost emphasizes the lost tax revenue is “something Ohio can ill-afford … particularly in these challenging economic times.” Yet Tom Wark, executive director of the National Association of Wine Retailers (NAWR), points out that Ohio could “create a legal path for out-of-state retailers to ship wine to Ohioans that also requires the remittance of sales taxes.” Instead, the attorney general is hoping the 21st Amendment can fortify Ohio’s laws preventing out-of-state DTC wine shipments.

Michigan goes another few rounds

Meanwhile, Michigan is fighting to prevent DTC wine shipments by out-of-state retailers. This isn’t Michigan’s first time in the ring.

In 2005, the Supreme Court of the United States held that Michigan and New York were “explicitly” discriminating against out-of-state wineries because they allowed in-state wineries to make direct sales to consumers but prohibited out-of-state wineries from doing the same (Granholm v. Heald). The Supreme Court decided the 21st Amendment “does not allow States to regulate direct shipment of wine on terms that discriminate in favor of in-state producers.”

Today, both in-state and out-of-state wineries are permitted to make DTC wine shipments in Michigan. Yet out-of-state wine retailers, breweries, or distilleries cannot ship directly to consumers in the state. According to the Michigan Liquor Control Commission (MLCC), “An Outstate Seller of Wine (OSSW) license … may sell and deliver only to Michigan wholesalers.”

In 2018, a district court ruled Michigan’s law preventing DTC sales by out-of-state wine sellers was unconstitutional in Lebamoff Enterprises, Inc. v. Whitmer. The district court opinion referenced the Supreme Court’s decision in Granholm v. Heald, finding the ruling to invalidate “state laws that discriminate against interstate commerce.”

However, the United States Court of Appeals for the Sixth Circuit overturned the district court’s decision on appeal in April 2020. This seemed to go against the precedent set by the Supreme Court’s 2019 Tennessee wine ruling — a decision many believed had put the issue to rest.

Lebamoff is currently appealing the Appeals Court decision to the Supreme Court of the United States. It would be unusual for the Supreme Court to accept another case on interstate wine sales so soon after issuing a ruling on the matter. Yet, in an amicus brief urging the Supreme Court to take the case, the National Association of Wine Retailers (NAWR) argues that allowing the Lebamoff decision to stand “will create such chaos and uncertainty in the legal system that wine retailers will be unable to make reasonable business plans.” 

NAWR says allowing Michigan to prohibit out-of-state DTC wine shipments would be particularly damaging now because many retailers are relying on online sales to survive during the COVID-19 pandemic.

Michigan’s newest effort to block DTC wine shipments

Against this backdrop, Michigan Attorney General Dana Nessel recently filed lawsuits against two California-based retailers for making DTC shipments into Michigan. Both businesses had been sent cease and desist notices from Michigan, which they allegedly ignored. According to the MLCC, neither company applied for or received the license needed to make DTC shipments in the state.

Attorney General Nessel says the suits are necessary in order to “restrain” the companies “from engaging or continuing to engage in the violations alleged, to enforce compliance with Michigan law, to enforce Michigan’s authority over the transportation and importation of alcoholic liquor into Michigan, and to protect the health, safety, and welfare of its citizens.”

In both instances, Nessel is seeking preliminary and permanent injunctive relief under our old friend the 21st Amendment Enforcement Act, as well as the Michigan Consumer Protection Act. If the companies are found to be in violation of Michigan’s Consumer Protection Act, they could face fines of up to $25,000 per violation.

Michigan lawmakers roll up their sleeves

As if all this isn’t confusing enough, the Michigan Legislature is considering several bills related to DTC sales.

Companion bills Senate Bill 819/House Bill 5579, introduced March 2020, would make it legal for out-of-state wine retailers to ship wine directly to consumers in Michigan. If enacted, out-of-state wine retailers would have the same privileges as out-of-state wineries. It’s a big “if,” as both have been stuck in committee for months. However, another bill would prohibit certain out-of-state wineries from shipping DTC.

Uncertainty reigns

Even as the pandemic underscores the value of direct sales, Michigan and Ohio are working to limit or outright prevent them. And Michigan and Ohio aren’t alone. The Tennessee Alcoholic Beverage Commission (ABC) is actively enforcing direct shipping laws; in September, it sent a cease and desist letter to a spirits marketplace that’s been shipping spirits into the Volunteer State. In addition, Texas is currently auditing all 1,600 wineries licensed to ship DTC into the Lone Star State. 

Learn more about states where breweries, retailers, and wineries can ship directly to consumers

To find out how Avalara for Beverage Alcohol can help solve your compliance challenges, contact us.

 


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Avalara Author
Gail Cole
Avalara Author Gail Cole
Gail Cole is a Senior Writer at Avalara. She’s on a mission to uncover unusual tax facts and make complex laws and legislation more digestible for accounting and business professionals.