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Trading Grapes
by Mark Brnovich, Director of Constitutional Studies, The Goldwater Institute
18 November 2003

Did you know in many states, including Arizona, you cannot order wine directly from an out-of-state winery? This article discusses a new report from the Goldwater Institute's Mark Brnovich, entitled Trading Grapes: The Case for Direct Wine Shipments in Arizona, which reveals how Arizona’s ban violates the Commerce Clause of the U.S. Constitution, raises prices, and hurts Arizona’s domestic wine industry. As IJ's Clint Bolick says, "Free the Grapes!"

Seventy years after the end of Prohibition, it is illegal for Arizona consumers to purchase wine directly from out-of-state wineries.

Arizona is one of two dozen states that prohibit the direct shipment of out-of-state wines to in-state consumers. Although the number of nationwide wineries and available wines has increased by over 500 percent over the past 30 years, wholesalers continue to dictate the availability of out-of-state wines to Arizona consumers.

This is because of an antiquated “three-tiered” distribution system which unnecessarily and unconstitutionally discriminates against out-of-state commerce.

The distribution system, a vestige of the Prohibition era, requires that out-of-state producers sell their wines to licensed wholesalers (tier 1), who sell to retailers (tier 2), who then make a selection of beverages available for sale to consumers (tier 3). Under Arizona law, an out-of-state producer’s failure to use a licensed wholesaler is illegal. Arizona wineries, however, are not prohibited from directly selling and shipping to consumers.

Last year, Sen. Barbara Leff (R-Paradise Valley) introduced legislation to allow out-of-state wineries to ship directly to consumers in Arizona. But the final version of the bill authorized only consumers who are physically present at an out-of-state winery to purchase up to two cases of wine and have them shipped to their homes. While a step in the right direction, that reform falls far short of allowing for the free movement of interstate commerce in wine.

A 2003 report by the Federal Trade Commission concluded that bans on interstate direct shipping represent the single largest barrier to expanded e-commerce in wine. The report also concluded that consumers would reap significant benefits if they had the option of purchasing wines online from out-of-state sources. The benefits include a much greater variety of wine, lower costs, and the convenience of home delivery.

The irony is that this protectionism may be harming Arizona’s wine industry. Because of Arizona’s current prohibition on direct shipping, the following states prohibit their residents from ordering Arizona wines: California, Colorado, Hawaii, Idaho, Illinois, Iowa, Minnesota, Missouri, New Mexico, Oregon, Washington, West Virginia and Wisconsin.

The U.S. Supreme Court has held that protecting in-state interests at the expense of out-of-state parties violates the U.S. Constitution. Recently, advocates for the free flow of commerce between states have achieved significant victories. Statutes in Michigan, North Carolina, Texas and New York have been struck down as violations of the Commerce Clause, and the Institute for Justice has recently filed a challenge to Arizona’s distribution system. Given the state’s on-going budget difficulties, it is clear that defending a law of suspect constitutionality is a waste of resources.

Meanwhile, Arizona legislators should not sit on their hands. Judicial decisions frequently leave matters unresolved. For example, in declaring a North Carolina shipping statute unconstitutional, the Fourth Circuit remedied the situation by prohibiting all direct shipments, including those by in-state wineries.

Although the ruling leveled the commercial playing field, in-state wineries lost the ability to ship directly to consumers. To prevent such calamities, legislators should work to repeal Arizona’s three-tiered distribution system.

Arizona consumers and wineries will continue to suffer if changes are not implemented concerning the three-tiered distribution system. As the Federal Trade Commission concluded, enacting direct shipment legislation will benefit consumers by providing a wider selection of wines at lower prices. It will also serve as a good starting point to address other anticompetitive state statutes and put Arizona on the road to being a national leader in e-commerce trade.

Mark Brnovich is director of the Goldwater Institute's Center for Constitutional Government. His full report on Trading Grapes: The Case for Direct Wine Shipments in Arizona, can be found here.

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