Alcohol sales online: Wine not?

Seventy-five years ago this month, the US junked Prohibition. However, a remarkable number of states still fight bottle battles in one of the Web's longest-running e-commerce controversies -- one that pre-dates e-commerce.

About one-fifth of the US is substantially restricted from buying wine or other spirits online. Fifteen states, according to the Free the Grapes! site, prohibit consumers from doing business directly with wineries in other states; it's a felony in Kentucky, Tennessee and Utah.

The patchwork of state laws is daunting, requiring wine sellers to keep track of a maze of regulations that leave very little time for activities such as grape-harvesting, grape-stomping, and grape-bottling. Often, consumers are restricted as to which wines they can buy and even how they're shipped. And wineries, for their part, may find that different rules apply depending on how much they've sold to buyers in a particular state -- not an easy situation to plan for or build a business model around.

Weirdness with winery direct shipments is no accident -- it's a legacy of, and to some extent a protection for, a very old business model.

The Twenty-First Amendment to the US Constitution ended the federal ban and sent authority over alcohol sales back to state jurisdiction -- exempting liquor from Constitutional rules governing interstate commerce. (That's why some counties are still legally dry.) A spokesperson for the Wine Institute, an industry body that navigates these waters, describes the legal muddle as "like doing business in 50 different countries."

After Prohibition, many states went to systems of "alcoholic beverage control" that put states in charge of decisions about liquor distribution. Some, like Pennsylvania, exert an immense amount of control, leading to the peculiar experience of being able to browse a catalog of available hooch on an official state site.

Some states use a "three-tier" system of distribution, in which a winery must sell to a distributor, which must sell to a retailer, which then sells to customers. The wholesalers control which wines are available in a given state, and each state has just a few wholesalers operating there. If a wholesaler doesn't care to work with one of the nation's 5,000-odd wineries, too bad for you if you want that winery's offerings.

During the decade-plus debate over direct Internet sales of wine, it's proponents of that three-tier system that have been most resistant to change and most vocal in opposition to online wine purchases.

Industry groups representing the wholesalers have a tendency to argue that online wine sales encourage under-21 drinking, and claim that their presence in the mix is required to keep everything both legal and profitable. Others say the wholesalers and distributors are actually responding to threats to their place in the business model. (So far, direct online sales account for just 1-2% of all wine sales; on the other hand, the total number of known and confirmed prosecutions for minors buying online is lower, at a nice round zero.)

E-commerce convenience is part of the puzzle, but discussion forums and Web-based reviews have fueled demands for change too. Wine aficionados have been loud and proud online for years, and as more people joined in those conversations, word began to spread of lovely regional offerings. But getting one's hands on a particular obscure syrah wasn't as simple as asking at the local package store, thanks in large part to the wholesale system.

An August editorial in the Pennsylvania-based Citizen's Voice describes a broken system in that state: "The Wine Institute says that 40,000 to 50,000 domestic labels, and another 40,000 to 50,000 imported labels, are available for sale in the United States each year. Well, the United States excluding Pennsylvania, where the state monopoly has 3,024 listed varieties and about 22,000 others that can be ordered through the state system -- about 25 percent of the variety available to other Americans, often at better prices."

Expect change, but not abruptly. In 2005, the Supreme Court ruled that it's unconstitutional for states to allow in-state wineries but not out-of-state wineries to direct-ship. Since then, the effort is mainly state-by-state. Since then, wine distribution laws have changed more quickly than they have at any point since 1933. Many states are eyeing the Model Direct Shipping Bill, first proposed at the dawn of net wine sales in the mid-90s, as a possible template.

Some wine-selling sites get around the problem -- at least for buyers in states where one may buy directly from wineries -- by acting as brokers for the sale. That's how it's done at wine.woot.com; the winery is the seller of record, not the site. (The system does lead to odd inconsistencies in who can buy which wine offerings from day to day, since different wineries have different arrangements between states.)

States and even individual cities keep making compliance adjustments, some positive and some not.

Earlier this month a federal judge ruled that a Massachusetts law forcing larger out-of-state wineries to choose between direct net sales and wholesale was discriminatory. Last week, Landaff, N.H. (population 1587 -- sal-ute!) voted to end its "dry" status immediately and allow direct-to-consumer shipping.

On the other hand, Indiana regulators ruled earlier this month that consumers can't buy directly from a winery unless they actually go to the winery and fill out an age verification form in person (a "face-to-face transaction" requirement). And Michigan's House of Representatives last week voted 97-9 to ban all retailers (in-state or out) from direct shipments to state residents (PDF available here). In any case, says the Wine Institute, efforts to figure out a national solution are most likely at an end.

Most historians say that Prohibition inflicted critical injury on the American wine industry; US production between 1919 and 1925 dropped 94%. (It also condemned us to a culture where lager is considered potable beer, but that's another article.) It's entirely possible that a clampdown on another "social" vice -- smoking -- could improve wine's online fortunes. As tobacco-growing states such as Maryland see demand drop, they're looking to move the land into other crops, and grapes are a good bet...if the buzz and the market are there.