Elliot Ness may have missed out on the Internet, but Prohibition is alive and well, as 28 states greatly restrict or forbid direct shipments of wine and other alcoholic beverages from out-of-state sellers to in-state customers.
Things may be changing, however, as three recent court decisions have supported interstate Internet wine sales. The decisions could affect e-commerce in other products as well.
On July 17th, a U.S. District Court in Texas struck down that state’s restrictions on direct shipments as a violation of the Constitutional rights of both the out of state wineries and their prospective Texas customers. This decision comes only months after federal district courts rejected similar laws in Virginia and North Carolina. Several other cases are pending, including a challenge to New York’s direct shipping ban, so 2002 could be the year of decision in the battle to legalize Internet wine sales.
This legal debate has its roots in the 21st Amendment, which repealed the Noble Experiment in Prohibition while granting the states special power over commerce in alcoholic beverages. Today, each state has a strictly regulated system through which all alcohol sales must be channeled. The regulations are, supposedly, to guard against alcohol abuse but seem mostly designed to deliver monopoly profits to favored purveyors.
The Internet is challenging this status quo, as winery websites and online wine merchants generate a growing demand for mail order wine transactions. Direct shipping offers considerable advantages for both buyer and seller. Consumers can save a bundle by bypassing their state-mandated distribution monopoly and its exorbitant markups. Product choice is expanded, as small-volume vintages, mostly ignored by large distributors, are made available. Many struggling small wineries see Internet sales as their last best hope of survival.
But the big distributors aren’t ready to give up their government-protected monopolies. Led by the Wine & Spirits Wholesalers of America, they use their lobbying clout to crack down on interstate competition.
Debate over the legality of these bans centers around clashing Constitutional provisions. While the 21st Amendment grants states authority to regulate alcoholic beverages, the Commerce Clause prohibits states from enacting measures designed to favor in-state interests against out-of-state competitors. When laws against direct shipping drift away from legitimate state regulation of alcoholic beverages and towards protectionism, they are more likely to be found unconstitutional.
The end of Internet prohibition is not certain. Earlier challenges to direct shipping laws in Florida, Indiana, and Michigan failed. And, as the Texas judge noted, “this is a gray area of law,” so the state will likely appeal, and the case could become the first wine sales case to be heard by the Supreme Court.
The outcome of this dispute has broader implications for e-commerce. The Federal Trade Commission has expressed general concerns that old economy middlemen are using state laws to protect themselves against Internet competition. In addition to wine, the FTC mentioned automobiles, real estate, and pharmaceuticals. A Progressive Policy Institute study estimates that such restrictions cost consumers $15 billion a year.
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