[Senate Hearing 106-141]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 106-141


 
            INTERSTATE ALCOHOL SALES AND THE 21ST AMENDMENT

=======================================================================

                                HEARING

                               before the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                                   on

   EXAMINING ISSUES RELATING TO INTERSTATE ALCOHOL SALES, INCLUDING 
  LABELING, QUALITY CONTROL STANDARDS, CONSUMER FRAUD, AND ACCESS OF 
ALCOHOL BY MINORS AS WELL AS PROPOSED LEGISLATION THAT WILL PERMIT THE 
 ATTORNEY GENERAL OF A STATE TO FILE AN ACTION IN FEDERAL COURT FOR AN 
             INJUNCTION TO STOP ILLEGAL SHIPMENT OF ALCOHOL

                               __________

                             MARCH 9, 1999

                               __________

                           Serial No. J-106-6

                               __________

         Printed for the use of the Committee on the Judiciary


                                


                      U.S. GOVERNMENT PRINTING OFFICE
 58-610 CC                   WASHINGTON : 1999



                       COMMITTEE ON THE JUDICIARY

                     ORRIN G. HATCH, Utah, Chairman

STROM THURMOND, South Carolina       PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa            EDWARD M. KENNEDY, Massachusetts
ARLEN SPECTER, Pennsylvania          JOSEPH R. BIDEN, Jr., Delaware
JON KYL, Arizona                     HERBERT KOHL, Wisconsin
MIKE DeWINE, Ohio                    DIANNE FEINSTEIN, California
JOHN ASHCROFT, Missouri              RUSSELL D. FEINGOLD, Wisconsin
SPENCER ABRAHAM, Michigan            ROBERT G. TORRICELLI, New Jersey
JEFF SESSIONS, Alabama               CHARLES E. SCHUMER, New York
BOB SMITH, New Hampshire

             Manus Cooney, Chief Counsel and Staff Director
                 Bruce A. Cohen, Minority Chief Counsel

                                  (ii)



                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Hatch, Hon. Orrin G., U.S. Senator from the State of Utah........     1
Feinstein, Hon. Dianne, U.S. Senator from the State of California     3
DeWine, Hon. Mike, U.S. Senator from the State of Ohio...........     5

                    CHRONOLOGICAL LIST OF WITNESSES

Statement of Hon. Robert L. Ehrlich, Jr., U.S. Representative in 
  Congress from the State of Maryland............................     7
Statement of Hon. Juanita Millender-McDonald, U.S. Representative 
  in Congress from the State of California.......................     9
Statement of Hon. George Radanovich, U.S. Representative in 
  Congress from the State of California..........................    12
Statement of Hon. Mike Thompson, U.S. Representative in Congress 
  from the State of California...................................    18
Panel consisting of Wayne Klein, Assistant Attorney General, 
  State of Utah, Salt Lake City, UT; Stephen Diamond, professor 
  of law, University of Miami School of Law, Coral Gables, FL; 
  Brendan Brogan, national board member, Mothers Against Drunk 
  Driving, Ridgewood, NJ; John A. DeLuca, president and chief 
  executive officer, Wine Institute, San Francisco, CA; and 
  Michael Ballard, president, Savannah-Chanel Vineyards, 
  Saratoga, CA...................................................    23

               ALPHABETICAL LIST AND MATERIALS SUBMITTED

Ballard, Michael:
    Testimony....................................................    54
    Articles:....................................................
        The Wall Street Journal, ``Booze Busters,'' dated Sept. 
          26, 1997...............................................    61
        USA Today, ``Wine by mail? Why not?'' dated Aug. 26, 1997    62
Brogan, Brendan:
    Testimony....................................................    39
    Prepared statement...........................................    41
DeLuca, John A.:
    Testimony....................................................    44
    Prepared statement...........................................    46
        Memorandum to DHL Airways, Inc. from Jerry Mead, wine 
          trader, dated Sept. 18, 1998...........................    50
Diamond, Stephen:
    Testimony....................................................    33
    Prepared statement...........................................    34
Ehrlich, Representative Robert L., Jr.:
    Testimony....................................................     7
    Prepared statement...........................................     8
Klein, Wayne:
    Testimony....................................................    23
    Prepared statement...........................................    25
Millender-McDonald, Representative Juanita:
    Testimony....................................................     9
    Prepared statement...........................................    10
Radanovich, Representative George:
    Testimony....................................................    12
    Letter to Senator Hatch from Representative Doc Hastings, 
      dated Mar. 8, 1999.........................................    12
    Prepared statement...........................................    14
        Letters to:..............................................
            Representatives Mike Thompson and George Radanovich 
              from Manuel R. Espinoza, chief deputy director, 
              State of California, Department of Alcoholic 
              Beverages Control, dated Mar. 3, 1999..............    16
            Senator Hatch from Jesse Choper, dated Mar. 4, 1999..    17
Thompson, Representative Mike:
    Testimony....................................................    18
    Prepared statement...........................................    20

                                APPENDIX
                         Questions and Answers

Responses of Wayne Klein to questions from Senators:
    Hatch........................................................    65
    Grassley.....................................................    67
        Industry Circular--Department of the Treasury, Bureau of 
          Alcohol, Tobacco and Firearms--No. 96-3, dated Feb. 11, 
          1997...................................................    70
Responses of Stephen Diamond to questions from Senators:
    Hatch........................................................    71
    Grassley.....................................................    72

                 Additional Submissions for the Record

Letters to:
    Senator Hatch from Jeremy Benson, executive director, 
      American Vintners Association, dated Mar. 5, 1999..........    73
    Senators Hatch and Leahy from Jesse H. Choper, Earl Warren 
      professor of public law, University of California, dated 
      Mar. 5, 1999...............................................    74
    Senators Hatch and Leahy from Jesse H. Choper, an addendum to 
      the letter of Mar. 5, 199, dated Mar. 9, 1999..............    75
    Senator Leahy from Jess S. Jackson, president, Kendall-
      Jackson, dated Mar. 2, 1999................................    75
    M. Craig Wolf, counsel, Senate Judiciary Committee, from John 
      A. Lynch, Jr., professor of law, University of Baltimore, 
      School of Law, dated Mar. 8, 1999..........................    78
Prepared statements of:
    Ron. Sarasin, president, National Beer Wholesalers 
      Association................................................    82
    Simon Siegl, president, American Vintners Association........    83



            INTERSTATE ALCOHOL SALES AND THE 21ST AMENDMENT

                              ----------                              


                         TUESDAY, MARCH 9, 1999

                                       U.S. Senate,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10 a.m., in room 
SD-226, Dirksen Senate Office Building, Hon. Orrin G. Hatch 
(chairman of the committee) presiding.
    Also present: Senators Grassley, Specter, Kyl, DeWine, and 
Feinstein.

 OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM 
                       THE STATE OF UTAH

    The Chairman. Good morning. Today, the Judiciary Committee 
will hear testimony concerning the growing business of 
interstate shipments of alcohol. Unfortunately, along with that 
growing business, problems associated with that trade are also 
growing. While I certainly believe that interstate commerce 
should be encouraged, and I do not want small businesses 
stifled by unnecessary or overly burdensome and complex 
regulations, I do not subscribe to the notion that purveyors of 
alcohol are free to avoid State laws which are consistent with 
the power bestowed upon them by the 21st amendment.
    All States, including the State of Utah, need to be sure 
that the liquor that is brought into their State is labeled 
properly and subject to certain quality control standards. 
States need to protect their citizens from consumer fraud and 
have a claim to the tax revenue generated by the sale of such 
goods. And of the utmost importance, States need to ensure that 
minors are not provided with unfettered access to alcohol. 
Unfortunately, indiscriminate direct sales of alcohol have 
opened a sophisticated generation of minors to the perils of 
alcohol abuse.
    I can tell you that my own home State of Utah, which has 
some of the strictest controls in the Nation on the 
distribution of alcohol, is not immune from the dangers of 
direct sales. Take a look at this story which ran on KUTV in 
Salt Lake City last Tuesday. If we can take time, we will put 
this story on.
    [Videotape shown.]
    The Chairman. If that story doesn't bother you, it should. 
If a 13-year-old is capable of ordering beer and having it 
delivered merely by, ``borrowing,'' a credit card and making a 
few clicks with their mouse, there is something wrong with the 
level of control that is being exercised over these sales. Of 
course, the Utah case is not just an isolated example. Stings 
set up by authorities in New York and Maryland have also shown 
how easy it is for minors to obtain alcohol.
    The 21st amendment was ratified in 1933. That amendment 
ceded to the States the right to regulate the importation and 
transportation of alcoholic beverages across their respective 
borders. By virtue of that grant of authority, each State 
created its own unique regulatory scheme to control the flow of 
alcohol. Some set up, ``State stores,'' to effectuate control 
of the shipment into and dissemination of alcohol within their 
States. Others refrained from direct control of the product, 
but set up other systems designed to monitor the shipments and 
ensure compliance with their laws. But whatever the type of 
State system enacted, the purpose was much the same, and that 
is to protect its citizens and ensure that its laws were 
obeyed.
    Although not perfect, the systems set up by the States 
worked reasonably well for many years. However, it is apparent 
that modern technology has opened the door for abuse and 
created the need for further governmental action to address 
those abuses. No longer must a State prosecute just an errant 
neighborhood retailer for selling to a minor. Now, the ones 
selling to minors and others, in violation of a State's 
regulatory laws, are a continent away.
    A small winery can create its own web page and accept 
orders over the Internet. A large retailer can advertise 
nationally in the New York Times and accept orders over the 
phone. An ad can be placed in a magazine with a national 
circulation offering sales through an 800 number. Let me 
emphasize that there are many companies engaged in the direct 
interstate shipment of alcohol who do not violate State laws, 
and that needs to be emphasized. In fact, many of these 
concerns look beyond their own interests and make diligent 
efforts to disseminate information to others to ensure that 
State laws are understood and complied with by all within the 
interstate industry.
    I should note that I am certainly sympathetic to the small 
wineries and the specialty micro-breweries who feel that the 
requirement that they operate through a three-tier system--that 
is, producer-wholesaler-retailer--which does not embrace them 
may, in effect, shut them out of the marketplace. They make the 
argument that if wholesalers do not carry their product, they 
have no other avenue to the consumer other than through direct 
sales. However, if there is a problem with the system, we need 
to fix the system, not break the laws.
    Later today, I will introduce a bill entitled the Twenty-
First Amendment Enforcement Act. Federal law already prohibits 
the interstate shipment of alcohol in violation of State law. 
Unfortunately, that general prohibition lacks any enforcement 
mechanism. The bill I am introducing simply provides that 
mechanism by permitting the attorney general of a State, who 
believes that his or her State laws regulating the importation 
and transportation of alcohol are being violated, to file an 
action in Federal court for an injunction to stop these illegal 
shipments. The bill is balanced to ensure due process and 
fairness to both the State bringing the action and the company 
or individual alleged to have violated the State's laws.
    The bill, No. 1, permits the chief law enforcement officer 
of a State to seek an injunction in Federal court to prevent 
the violation of its laws regulating the importation or 
transportation of alcohol. No. 2, it allows for venue for the 
suit where the defendant resides and where the violations 
occur.
    No. 3, it does not permit an injunction without notice to 
the opposing party. No. 4, it requires that any injunction be 
specific as to the parties, the conduct, and the rationale 
underlying that injunction.
    No. 5, it allows for quick consideration of the application 
for an injunction and conserves court resources by avoiding 
redundant proceedings. No. 6, it mandates a bench trial. And, 
No. 7, it does not preclude other remedies allowed by law.
    Now, some will make the argument that State courts are 
capable of handling this issue. Unfortunately, States have had 
mixed success in enforcing their laws through State court 
actions. Companies and individuals have raised jurisdictional, 
procedural and legal defenses that have stalled these efforts, 
and that continue to hamper effective law enforcement. It is, 
in part, because of those inconsistent rulings that Federal 
leadership is needed in this area.
    Moreover, the scope and limitations of a State's ability to 
effectively enact laws under the 21st amendment are essentially 
Federal questions that need to be decided by a Federal court, 
and perhaps ultimately by the Supreme Court. Only through such 
rulings can both the States and companies seeking to conduct 
interstate shipments be assured of consistency in 
interpretation and enforcement of the laws.
    Of course, the hearing today will help us understand the 
issues involved, and I am sure the individuals providing 
testimony will greatly enlighten us and give us guidance in 
passing effective legislation to deal with these problems. It 
is my hope that at the end of the day we can reach an agreement 
on how best to balance legitimate commercial interests with the 
constitutional rights of the States as ceded to them by the 
21st amendment.
    So with that, let me just say that Senator Leahy regrets 
that he cannot be here to help open this hearing. He is at an 
Appropriations hearing with the Attorney General, where 
certainly I would want him to be, and he asks that the hearing 
proceed so as not to inconvenience the witnesses who traveled 
here to testify this morning, and, of course, our 
Representatives who are here with us today who we appreciate 
taking time from their busy schedules to come over and be with 
us.
    So we will begin today.
    Senator Feinstein. Mr. Chairman, may I enter a statement 
into the record, being the one who represents California, which 
has 90 percent of the winemaking business in America?
    The Chairman. We will enter all statements in the record, 
certainly yours.
    [The prepared statement of Senator Feinstein follows:]

 Prepared Statement of Hon. Dianne Feinstein, a U.S. Senator From the 
                          State of California

    I share the concerns of members of this committee regarding 
underage drinking. However, we must be careful to address this problem 
directly, and not by legislation which purports to target underage 
drinking, but instead would do little to address that problem and much 
to harm legitimate businesses in the wine industry, stifle the growth 
of electronic commerce, and diminish consumer choice.
    I am proud to say that California is the home of more than 800 
wineries, which produce over 90 percent of our nation's wine. The vast 
majority of these wineries are small, family farms. The wine industry 
is a vital sector of California's economy. Winegrapes are grown in 45 
of California's 58 counties. The industry accounts for 112,000 
permanent jobs and another 40-50,000 seasonal jobs in my state, and 
generates an estimated $10.9 billion in economic activity in 
California. This results in more than $335 million annually in state 
and local tax revenues in California. More than 10 million citizens 
from across the country visit California's wineries each year.
    I'd like to welcome two representatives of California's wine 
industry to the committee today. John DeLuca has been the President and 
Chief Executive Officer of the Wine Institute for more than 20 years. 
Before, that, he served for seven years as Deputy Mayor of San 
Francisco, to Mayor Joseph Alioto. In addition to his service to 
California's wine industry, John also serves as Co-Chairman of 
California's Advocating Responsible Education.
    Michael Ballard is the owner of one of California's small, family 
wineries, Savannah-Chanel Vineyards in Saratoga, California, and a 
leader in the high-tech industry in California. It's a pleasure to 
welcome both of you to the committee today.
    Nationally, there are over 1,600 wineries in the U.S. Indeed, wine 
is America's third-largest horticultural export. Most of these wineries 
produce several different varieties--cabernet, chardonnay, etc. Sheer 
arithmetic tells you that a retail store cannot possibly have even the 
shelf space to offer more than a mere sample of this multitude of 
American wines.
    Direct shipment of wine, therefore, is vital to the hundreds of 
small wineries who cannot fit on the shelf of the local store. By the 
same token, consumers and wine connoisseurs who appreciate hard-to-find 
wines also rely on direct shipment of wine, whether over the phone, by 
mail or through the Internet.
    Indeed, the Internet presents a tremendous opportunity for small 
wineries to grow their business and for wine consumers to dramatically 
increase the wine selection to which they have ready access. Congress 
should be working to promote and encourage electronic commerce, not 
taking steps which could stifle and chill its growth.
    At the same time, the growth of electronic commerce presents an 
economic threat to those who profit from the existing commercial 
structure. in many states, alcohol sales are controlled through a very 
limited number of wholesalers and distributors, who, of course, take a 
profit on every wine sale made through them, through the so-called 
``three tier system.'' Direct shipments threaten their business, and 
many winery owners believe that it is these middlemen who are behind 
this legislation, and who are funding organizations who promote its 
passage. I also note that a coalition supporting this legislation 
contains national alcohol wholesalers and retailer organizations.
    While there is a risk that youths can use the Internet to obtain 
alcohol, I am not convinced that the magnitude of the danger is 
sufficient to justify stifling small wineries and electronic commerce. 
Virtually all the examples of youths using the Internet to obtain 
alcohol involve youths who were  prompted to do so, usually by a local 
news organization. I have seen precious few examples of youths on their 
own initiative deciding to obtain their alcohol by ordering it over the 
Internet, waiting days or weeks for shipment, and managing to be home 
without their parents at just the crucial time when it arrives. Indeed, 
it seems quite unlikely that youths will be ordering thirty dollar 
bottles of wine over the Internet in sufficient scale to present a 
national problem.
    In contrast, an operation by Virginia's Alcoholic Beverage Control 
found 37 percent of retailers sold alcohol illegally to minors--in half 
the cases even after checking IDs. This would seem to be where the real 
problem is.
    Indeed, it is important to take real-world experience into account. 
Congressman Mike Thompson, who I am pleased to have here today along 
with my other Golden State colleagues George Radanovich and Juanita 
Millender-McDonald, will testify in greater detail about this, but I 
hope he will not mind if I preview this testimony by mentioning that 
California allowed direct shipments of wine in-state for more than 30 
years, and California's Alcoholic Beverage Control Department has 
stated that, quote, ``the sale-to-minor issue is overblown,'' end 
quote, and that, with more than 10,000 complaints investigated 
annually, they have received but one complaint about minors obtaining 
alcohol by direct shipment--the minor son of a Kentucky package store 
owner who ordered beer from California, and whose mother signed for the 
package when it was delivered.
    One justification offered for this legislation was a Utah court 
decision that Utah could not enforce its alcoholic beverage control 
laws against an out-of-state beer-of-the-month club, which shipped 
directly into Utah. However, this decision turns out to have been 
wrong, at least according to the Utah Court of Appeals. In a decision 
announced after this hearing was noticed, just last Thursday, the Utah 
Court of Appeals reversed the lower court's decision, and reinstated 
the state's case. This obviously raises questions about the necessity 
for federal legislation on the subject.
    Others argue that federal legislation is needed to enforce state 
tax laws. However, the annual sales of Dell Computers, which relies 
entirely upon shipment, are greater than those of the entire California 
wine industry, which relies primarily upon retail sales. And yet I 
don't hear anybody offering federal legislation for states to use 
federal courts to enforce their tax laws against interstate computer 
shipments.
    Indeed, the entire subject of laws governing the taxation of 
electronic commerce is slated to be studied by the Advisory Commission 
on Electronic Commerce, which was established under the Internet Tax 
Freedom Act which the Congress passed--by an overwhelming majority--
just last year. Prudence would dictate that we give the commission the 
opportunity to study and report on this issue before singling out one 
industry for special treatment.
    There also is concern that states could use this legislation to 
enforce in federal court state laws whose intent is to discriminate 
against out-of-state commerce. In Bacchus Imports v. Dias, the Supreme 
Court struck down a Hawaii alcohol tax for just this reason, holding 
that the 21st Amendment did not justify discriminating against 
interstate commerce to provide a commercial advantage to local 
business. I would like to ask unanimous consent that a letter from the 
noted constitutional scholar, Professor Jesse Choper, former Dean of 
Boalt Hall School of Law, raising this concern, be placed in the 
record.
    Professor Choper states in his letter that this bill:

          goes far beyond simply providing a remedy for a violation of 
        Webb-Kenyon. Instead it makes fundamental changes in current 
        law and in doing so affects serious constitutional and public 
        policy issues * * * Most significantly, it would run counter to 
        the spirit of Bacchus and remove the protection that the 
        Commerce Clause grants the alcoholic beverage industry, along 
        with all others, from state erection of barriers to free trade.

    So I think it is important that we proceed cautiously, Mr. 
Chairman, and not enhance the economic interests of some industry 
sectors against small family farms, while chilling electronic commerce.

    Senator Kyl. Mr. Chairman, I would like to do the same, and 
also just note the fact that while the Internet is just 
exploding new opportunities for commerce, including those of 
the wine industry and many others, the problem you identify is 
very similar to the problem we identified last year with 
Internet gambling.
    The same kind of click-on technology that you displayed in 
that TV story was enough for all 50 State attorneys general to 
come to the Congress and actually ask us to pass a Federal law 
creating the same kind of injunctive, or similar injunctive 
relief that you have in your legislation to permit them to stop 
that kind of illegal activity. And I will certainly be looking 
forward to working with you on this legislation to achieve the 
same kind of objective. Incidentally, we are going to be 
reintroducing that Internet gambling bill next week.
    The Chairman. Well, thank you, Senator, and we will move 
ahead on that basis.
    At this point, I would like to enter into the record a 
statement submitted by Senator DeWine.
    [The prepared statement of Senator DeWine follows:]

 Prepared Statement of Hon. Mike DeWine, a U.S. Senator From the State 
                                of Ohio

    I would like to commend Chairman Hatch for holding this hearing 
today on interstate alcohol sales. This is a very important topic, and 
it will become increasingly important in the future, as the Internet 
becomes a conduit for more and more alcohol sales. Today's hearing will 
be a good opportunity to explore some of the issues raised by this 
popular form of interstate commerce.
    I am especially concerned about one particular aspect of this 
industry--sales of alcohol to minors. Often minors are able to order 
alcohol from out-of-state suppliers, without providing proof of age, 
and have alcohol delivered right to their doorsteps. This practice is a 
threat to the safety and welfare of our children, and we need to find a 
way to eliminate it. I look forward to working with the other members 
of this Committee to address this very important issue.

    The Chairman. The first panel today is comprised of four 
distinguished Representatives from the House.
    Congressman Robert Ehrlich is a third-term Congressman from 
the Second District of Maryland. He serves on the Budget and 
Banking Committees in the House. Congressman Ehrlich is as 
concerned as I am with the ability of States to be able to 
enforce their laws regulating the importation and shipment of 
alcohol. And in the 105th Congress, Congressman Ehrlich 
sponsored a measure similar to the one I have now introduced in 
the Senate.
    Congresswoman Juanita Millender-McDonald is now in her 
second term from California's 37th District in the U.S. House 
of Representatives. As I recall, you serve on the Committee on 
Transportation and Infrastructure and the Committee on Small 
Business, where you are the ranking member of the Subcommittee 
on Tax, Finance, and Exports.
    Congressman George Radanovich is now in his third term from 
California's 19th District. He serves on the House Budget and 
Resources Committees. Before coming to Congress, his public 
service included elective office as a county supervisor, as 
well as being a member and chairing the Mariposa County 
Planning Commission.
    However, Congressman Radanovich is first and foremost a 
farmer. In fact, Congressman Radanovich is the first full-time 
winemaker to serve in Congress. The Radanovich Winery produces 
some 4,000 cases annually and, as I understand, pretty high-
quality wine, at that.
    Representative Radanovich. Thank you.
    The Chairman. Of course, how would I know? [Laughter.]
    I wouldn't.
    Finally, on the first panel we have with us first-term 
Congressman Mike Thompson, from the First District of 
California, which is one of the premier wine-growing regions of 
this country. We are really honored to have you with us as 
well. In the House, Congressman Thompson serves on the 
Agriculture and Armed Services Committees. He is a decorated 
Vietnam veteran, and I might add that Congressman Thompson is 
also a former small vineyard owner.
    So I think we have a pretty balanced panel here and I am 
really looking forward to hearing what you have to say. We 
would like you to keep your remarks short, if you can, because 
we have a rather long hearing. We will start with you, 
Representative Ehrlich, and then we will go on right across the 
table.

STATEMENT OF HON. ROBERT L. EHRLICH, JR., A U.S. REPRESENTATIVE 
             IN CONGRESS FROM THE STATE OF MARYLAND

    Representative Ehrlich. Thank you, Mr. Chairman. In the 
interest of time, I have a statement I would like to submit for 
the record.
    The Chairman. Without objection, we will put all statements 
of all witnesses in the record as though fully delivered. And, 
of course, we hope you can summarize.
    Representative Ehrlich. Thank you. It is great to be here 
with you in this great committee, as well as with my friends 
here. Congresswoman Millender-McDonald has been a leader on 
this issue and I really appreciate her cosponsorship of the 
bill that you are sponsoring on the Senate side and I am 
sponsoring on the House side.
    I welcome Congressman Thompson to the debate. Congressman 
Radanovich is one of my best friends in the Congress, and we 
have had many, many discussions on this issue and he has worked 
with me in a very cooperative manner and I appreciate that from 
the bottom of my heart. And I am sure he will say nice things 
about me today, too, I hope.
    Representative Radanovich. Yes, sir.
    Representative Ehrlich. Mr. Chairman, real briefly, this 
issue was originally brought to me by a group of State 
comptrollers with respect to the tax issue, which I know you 
are very familiar with. The problem concerns the direct 
shipments that bypass the three-tier system set up in this 
country since Prohibition.
    Under present law, as the chairman eloquently stated, 
States do not have an adequate remedy. They are simply unable 
to enforce their State statutes in the Federal court. They are 
unable to go to Federal court to secure the type of remedy they 
need. As a result, the States lose a legitimate source of tax 
revenue.
    Second, and of equal importance, is the clip you ran today. 
It is interesting, Mr. Chairman. Last year, Parkville High 
School, in Baltimore County--I attended a rally where one of 
the students at Parkville went online and did the same thing as 
you just saw in the clip you ran from Utah TV. Yesterday, in 
Maryland, in fact, we had testimony along similar lines in the 
Maryland General Assembly. Mr. Chairman, the law is the law and 
it is pretty clear.
    Because of my friendship with Congressman Radanovich and 
because of the access issue, I have attempted over the last 
year-and-a-half to work with him and various groups involved in 
the industry to remedy what I see as a legitimate problem, the 
problem you alluded to in your statement, the problem of market 
access. I will continue to do that.
    We have made great strides with respect to an 800 number 
and we are going to hear more about, an Internet solution. The 
WSWA, the wholesalers, and all groups involved in the stream of 
commerce have been quite cooperative with George and myself 
over the past year-and-a-half in trying to come to a resolution 
of that collateral and legitimate issue that certainly impacts 
the political viability of our bills. So I will let Mr. 
Radanovich talk more about that issue.
    I thank you for the time today. This is an important issue. 
This is happening everyday in our towns and cities across this 
country, and I appreciate the opportunity this committee is 
giving me and all of our cosponsors in trying to get the bill 
passed, the same bill that we submitted in the 105th Congress, 
and signed into law in the 106th Congress.
    I thank you very much.
    The Chairman. Thank you, Congressman Ehrlich.
    [The prepared statement of Representative Ehrlich follows:]

           Prepared Statement of Hon. Robert L. Ehrlich, Jr.

    Good morning, Mr. Chairman and members of the Committee. Thank you 
for the opportunity to speak in support of legislation that will help 
all states interested in preventing underage access to alcohol and in 
enforcing their laws regarding the shipment of wine, beer, and liquor 
within their borders.
    Alcohol products have an unique place in American history; they are 
specifically identified in the U.S. Constitution in the form of the 
Twenty-First Amendment. Section 2 of the Twenty-First Amendment states 
specifically: ``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.'' This Amendment and related federal laws regulating 
the interstate shipment of alcohol beverages result from a bygone era 
of ``bootlegging'' and prohibition. A key-statute, the Webb-Kenyon Act, 
was enacted in 1935 (for the second time) and prohibits the interstate 
shipment of alcohol beverages in violation of applicable state law. The 
Twenty-First Amendment and the Webb-Kenyon Act clearly give states the 
right to pass laws restricting or prohibiting the importation of 
alcohol beverages.
    Unfortunately, recent interpretations of federal law do not protect 
states nor provide states an adequate judicial remedy in the 
enforcement of their laws. Furthermore, the Bureau of Alcohol, Tobacco, 
and Firearms (BATF), the federal agency charged with protecting against 
illegal alcohol shipments, has cited statutory ambiguity and to date 
has failed to aid states in the enforcement of these laws.
    State laws vary widely with respect to interstate shipment of 
alcohol beverages. Approximately twenty states prohibit direct 
shipment. In some of these states (Florida, Kentucky and Georgia), it 
is a felony for anyone other than a licensed distributor to import 
alcohol beverages. In approximately twenty other states, direct 
shipments of alcohol are limited, under controlled conditions. The 
remaining states allow direct shipments of limited quantities of 
alcohol provided the states involved have reciprocal laws in effect.
    Regardless of any particular law regulating shipment of alcohol 
into a state, and adequate enforcement mechanism must be made available 
to all states. This mechanism would allow states to address two common 
elements of state law: the assessment of taxes on the manufacture, 
shipment, and sale of alcohol; and the public interest in prohibiting 
underage drinking.
    Unfortunately, what began as occasional sales of light alcohol 
beverages over the Internet has become a billion-dollar-a-year market 
in illegal liquor, wine, and beer sales that affects many states. 
Illegal interstate shipping of alcohol not only violates a state's 
ability to regulate incoming alcohol beverages, it also deprives states 
of excise and sales tax revenue. It is estimated that revenue lost due 
to illegal shipments is between $200 and $600 million a year.
    Further, unlike the checks and balances in the current excise tax 
collection system, made possible by requiring all liquor to be shipped 
through licensed parties, any effort to tax a shipment that takes place 
outside the licensed three-tier system--distributor, wholesaler, and 
retailer--results in a ``trust me'' situation. The shipper simply tells 
the state what taxes he owes, leaving the state with no independent way 
to verify that amount.
    The rapid development and popularity of the Internet and mail-order 
catalogs have given consumers easier access to a wide variety of beers 
and wines. At a time when many of us are concerned about the rise in 
drinking, smoking, and drug use among teenagers, illegal shippers are 
asking us to treat a shipment of beer or wine like the purchase of an 
L.L. Bean sweater or a book from ``Amazon.com.'' Further, some will 
have us believe that state laws are to be disregarded or ignored.
    We are here today to simply provide a forum for states who have not 
been able to enforce their laws prohibiting the direct shipment of 
alcohol beverages. For example, on October 24, 1997, the U.S. Court of 
Appeals for the 11th Circuit upheld the Northern District of Florida's 
decision to dismiss Florida's attempt to enjoin four out-of-state 
direct shippers, holding that neither the 21st Amendment nor the Webb-
Kenyon Act  supplied a federal right of action for failure to comply 
with state liquor laws. Florida Department of Business Regulation v. 
Zachy's Wine and Liquor, Inc. et al.
    States, with no other recourse, are doing their best to combat 
these illegal sales. In the last two years, seven state legislatures 
have passed laws making illegal direct shipments punishable as a 
felony. Five more states expect to toughen their laws this year. 
Efforts to stop illegal shipping, however, will remain severely 
hampered until state attorneys general receive the necessary support 
from Congress.
    The practice of illegal direct shipping has generated much press 
across the country, fueled in part by the debate during the 105th 
Congress over my bill, HR 1063. Industry groups have shown good faith 
in resolving the issue of market access for small wineries by creating 
both a telecommunication and Internet solution to product location and 
sales. Some, however, will continue to avoid state tax and regulatory 
laws. Accordingly, I plan to introduce this legislation again, and I am 
encouraged to know that you, Mr. Chairman, share my interest in this 
issue and intend to introduce similar legislation.
    With your permission, Mr. Chairman, I would like to show you a 
short news segment from KUTV, a television station located in your 
state of Utah.
    Additionally, I would like to enter into the record a series of 
newscasts which capture 29 deliveries to minors in 21 states, including 
California and Utah. Most states have laws against such shipments, but 
these efforts carry little weight unless states gain access to the 
federal courts. I will leave the tape with the committee.
    In conclusion, I want to emphasize that this issue is not about 
restricting or regulating the Internet, nor is it about interfering 
with legitimate, legal shipments of alcohol. It is about enforcing 
current law, protecting state's rights, and restoring peace of mind to 
parents of today's high-tech teens. In my view, adult consumers in 
Maryland and elsewhere should be able to take advantage of the 
convenience of ordering of wine, liquor, and beer over the Internet. 
The delivery of any alcohol beverages, however, must be made in 
compliance with state law. If not, the states must be given an 
enforcement mechanism to protect themselves against such illegal 
interstate shipments.

    The Chairman. Representative Millender-McDonald.

     STATEMENT OF HON. JUANITA MILLENDER-McDONALD, A U.S. 
    REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA

    Representative Millender-McDonald. Good morning, Chairman 
Hatch, and to all of the other members of this committee, 
especially our very own Senator Dianne Feinstein. I would like 
to thank you, Mr. Chairman, for holding this hearing and 
commend you for bringing this very important subject before 
this committee.
    The issue of Internet alcohol sales to minors is an 
important issue worthy of discussion on its face. One would say 
such a direct delivery would never happen, as we are restricted 
from selling alcoholic beverages to minors. But direct shipment 
of alcohol is impacting our most vulnerable constituents, our 
children, who are surfing the Internet and getting direct 
access to alcohol.
    Currently, an estimated 10 million of our Nation's children 
have access to the Internet, a 444-percent increase from 1995. 
As the new millennium approaches, with more computers in the 
classroom and more children using the Internet at progressively 
younger ages, teenagers and adolescents will have significantly 
more access to beer and wine sold over the Internet made more 
available to them.
    The 21st amendment to the Constitution grants States 
jurisdiction over the shipment and delivery of alcoholic 
beverages, and the direct shipment of alcohol ordered through 
the Internet is illegal in more than 30 States. Alcoholic 
beverages are held to a regulatory system that distinguishes 
them from other products, such as food or clothing. Yet, 
everyday alcoholic beverages are delivered to consumers who 
have ordered them through the Internet, telephone, or a catalog 
from direct shippers who operate outside of regular shipping 
companies.
    These packages are shipped not only in violation of the 
laws in more than 30 States, but also through a system that 
circumvents the Nation's tax structure. Because there is no way 
to determine the age or identity of the consumer ordering over 
the Internet, anyone, regardless of age, with access to a major 
credit card can order these products and have them delivered to 
his or her home, as we saw in your clip. This opens the door to 
what I call cyber booze for minors, the direct shipment of 
alcoholic beverages to adolescents who often do not understand 
the dangers involved in consuming excessive alcoholic 
beverages.
    According to the Centers for Disease Control, 80.4 percent 
of the Nation's high school students have had at least one 
drink in their lifetime. 51.6 percent have had at least one 
drink in a 30-day period, and 32.6 percent qualify as a binge 
drinker, having had 5 or more drinks on at least one occasion 
during a 30-day period.
    A recent survey of 4,390 high school seniors and dropouts 
found that within the preceding year approximately 80 percent 
reported either getting drunk, binge drinking, or drinking and 
driving. More than half say drinking has caused them to feel 
sick, miss school or work, get arrested, or have a car 
accident. In addition, an estimated 88 percent of college 
students, including those between the ages of 17 and 20, have 
used alcohol or engaged in binge drinking.
    Despite the 21 minimum drinking age and laws prohibiting 
underage drinkers from driving to another State to pursue 
alcohol, this is not enough to curb the disturbing trend I have 
just mentioned. The direct shipment of alcohol through the 
Internet, telephone, or catalog creates a new means of underage 
drinkers to avoid all law enforcement barriers. America's 
children and teenagers need our help in preventing the harmful 
and often destructive use of alcohol when they are at such 
young ages.
    Stopping the purchase over the Internet and delivery of 
alcoholic beverages to their homes is a powerful step in this 
effort to prevent teenagers from driving under the influence, 
missing school and work, experiencing health problems, getting 
arrested, or becoming another DUI fatality.
    Mr. Chairman, I thank you so much for bringing this very 
important issue to this committee and for my having the 
opportunity to testify in its regard.
    The Chairman. Thank you so much.
    [The prepared statement of Hon. Millender-McDonald 
follows:]

         Prepared Statement of Hon. Juanita Millender-McDonald

    Good morning Chairman Hatch, Senator Biden, Senator Feinstein, and 
Members of the Judiciary Committee. I would like to thank you Mr. 
Chairman for holding this hearing and commend you for bringing this 
very important subject before the Committee. This issue of Internet 
alcohol sales to minors is an important issue worthy of discussion on 
its face. One would say such a direct delivery would never happen as we 
are restricted to selling alcoholic beverages to minors. But direct 
shipment of alcohol is impacting our most vulnerable constituents--our 
children, who are surfing the Internet and getting direct access to 
alcohol.
    This hearing comes at a time when American families need it most. 
Currently, an estimated 10 million of our nation's children have access 
to the Internet--a 444 percent increase from 1995. As the new 
millennium approaches with more computers in the classrooms and more 
children using the Internet at progressively younger ages, teenagers 
and adolescents will have significantly more access to beer and wine 
sold over the Internet than ever before.
    The 21st Amendment to the Constitution grants States jurisdiction 
over the shipment and delivery of alcoholic beverages and the direct 
shipment of alcohol ordered through the Internet is illegal in more 
than 30 states. Since Prohibition, Congress has recognized the unique 
nature of alcoholic beverages and the ramifications for the abuse of 
this product. Thus, alcoholic beverages are held to a regulatory system 
that distinguishes them from other products, such as food or clothing 
directly to consumers. Yet, every day packages filled with beer, wine, 
liquor or other vinous or malted products are delivered to consumers 
who have ordered them through the Internet, telephone or mail order 
catalog from direct shippers, who operate outside of regular shipping 
companies. These packages are shipped not only in violation of the laws 
of more than 30 states, but also through a system that circumvents the 
nation's tax structure. Because there is no way to determine the age or 
identity of the consumer ordering over the Internet, anyone, regardless 
of age, with access to a major credit card can order these products and 
have them delivered to his or her home. This opens the door to what I 
call ``cyberbooze for minors'', the direct shipment of alcoholic 
beverages to adolescents, who often do not understand the dangers 
involved in consuming excessive alcoholic beverages.
    According to the Center for Disease Control, 80.4 percent of the 
nation's high school students have had at least one drink in their 
lifetime; 51.6 percent have had at least one drink in a 30-day period; 
and 32.6 percent qualify as a binge drinker, having had five or more 
drinks on at least one occasion during a 30-day period.
    A recent survey focusing on the alcohol-related problems 
experienced by 4,390 high school seniors and dropouts found that within 
the preceding year, approximately 80 percent reported either getting 
``drunk,'' binge drinking, or drinking and driving. More than half said 
that drinking had caused them to feel sick, miss school or work, get 
arrested, or have a car accident.
    This problem does not end when students matriculate from high 
school to college. In fact, the access to alcohol by underage drinkers 
increases once they arrive on college campuses, where the Internet 
serves a stronger role in their education. An estimated 88 percent of 
college students, including those freshmen and sophomores between the 
ages of 17 and 20, have used alcohol or engaged in binge drinking. In 
1994, 67.5 percent of college students had used alcohol within the past 
30 days. By comparison, 61.7 percent of young people not in college 
reported monthly alcohol use in 1994.
    Despite the fact that every state has set 21 as the minimum 
drinking age to prohibit teenagers from purchasing alcoholic beverages, 
this is not enough to curb the disturbing trend I have just mentioned. 
With additional laws prohibiting underage drinkers from driving to 
another state to purchase alcohol, the direct shipment of alcohol 
through the Internet, telephone or catalog creates a new means for 
underage drinkers to avoid all law enforcement barriers and have it 
delivered right to their home.
    You may recall the story that aired on Friday, December 12, 1997, 
by an NBC affiliate in which an underage youth in New York ordered 
alcohol from a direct shipper in my state of Claifornia via the 
Internet and accepted delivery from a commercial freight carrier. Since 
then several television stations including KEYT, an ABC affiliate in 
Santa Barbara, California and WSPA, a CBS affiliate in Spartanburg, 
South Carolina, have aired stories on the problems associated with the 
direct shipment of alcoholic beverages. Recently, WUSA, another CBS 
affiliate in our nation's capitol aired a story shedding light on this 
growing problem.
    Alcohol is the number one drug of choice by minors and alcohol-
related accidents are the biggest killers of our nation's teenagers. If 
we fail to implement a stricter system for limiting the accessibility 
of alcohol to our nation's youth, we will ultimately reverse all of the 
progress we have made over the past decade in highway safety and 
alcohol awareness. Further, we will allow yet another venue for the 
illegal distribution of alcoholic beverages to minors accelerate the 
binge drinking, driving under the influence, missing school and work, 
causing both long and short-term health problems, getting arrested or 
becoming another DUI fatality.
    Currently, law enforcement officers bust vendors who sell alcohol 
to minors, as well as those underage persons who are caught purchasing 
alcohol. However, we currently have no means by which to police the 
Internet or regulate the direct shipment of alcohol. Direct shippers 
operate outside of the licensed distribution system. The licensed 
beverage disribution system is an essential part of the alcohol control 
process and contributes billions in federal and state taxes each year. 
Direct shipments circumvent these laws and rob states of tax revenues. 
Florida, Tennessee, Kentucky, Georgia and North Carolina have recently 
upgraded their laws to make ``direct shipment'' a felony. At least 26 
other states have sent ``cease and desist'' letters to wineries and 
retailers urging them to stop illegal direct shipments of alcohol. With 
direct shipments there is no regulatory system to guard against 
underage access or to collect alcohol beverage taxes.
    Over the past decade, the proliferation of micro-breweries and 
small wineries, and the aggressive marketing techniques used by them 
via the Internet, have resulted in a dramatic increase in the number of 
direct shipments of alcoholic beverages to homes across this country. 
What started many years ago as a cottage industry to sell rare wines 
and micro brewed beer to connoisseurs has burgeoned into a billion 
dollar business.
    Mr. Chairman, what was once considered a ``boutique'' issue is 
finding its way into the mainstream, which is raising the eyebrows and 
concerns of many American families. In fact, a recent poll conducted by 
Americans for Responsible Alcohol Access found that 69 percent of 
Americans oppose the direct shipment of alcohol to minors; 85 percent 
agree that the sale of alcoholic beverages over the Internet would give 
minors easier access to alcohol and could result in more abuse; and 70 
percent of Americans don't trust delivery to ensure that the recipient 
of alcoholic beverages via common carrier is at least 21 years of age.
    These facts demonstrate the need to enact legislation that 
prohibits the direct shipment of alcoholic beverages and related 
products to our nation's children. I am sure that my colleague from 
Maryland, Congressman Ehrlich, will agree with me as I urge you to join 
us in the fight to eliminate this problem. The enactment of legislation 
in this area will provide states the ability to better enforce the laws 
that prohibit the sale of alcoholic beverages to minors as well as 
properly collect sales and excise taxes. More important, it will help 
us keep our children safe from the scourge od underage drinking.
    As a mother, grandmother, and former teacher, protecting our 
nation's children and working to produce a generation of educated, 
capable, responsible adults is one of my top priorities in Congress. 
America's children and teenagers need our help in preventing the 
harmful and often destructive use of alcohol when they are at such 
young ages. Stopping the purchase over the Internet and delivery of 
alcoholic beverages to their homes is a powerful step in this effort.
    Mr. Chairman, thank you for the opportunity to testify before this 
distinguished Committee and address this critical issue. As you know, I 
have introduced legislation in the past to close the door to cyberbooze 
and will re-introduce legislation in the 106th Congress. o look forward 
to working with you and my colleagues in the House in a bipartisan 
effort to regulate the sale and direct shipment of alcohol to minors.
    Thank you.

    The Chairman. Representative Radanovich.

 STATEMENT OF HON. GEORGE RADANOVICH, A U.S. REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Representative Radanovich. Thank you, Mr. Hatch, and thank 
you for the introduction and the opportunity to be here. I am 
somewhat encouraged by the fact that another member of your 
committee has the name ``DeWine,'' so I feel that there is some 
good representation up on the committee. [Laughter.]
    But I also want to ask that my full fellow Congressman, Doc 
Hastings, comments that he sent over with me would also be 
submitted into the record.
    The Chairman. Without objection, we will put them in the 
record.
    [The letter of Mr. Hastings follows:]

                     Congress of the United States,
                                  House of Representatives,
                                                     March 8, 1999.
The Hon. Orrin G. Hatch,
Committee on the Judiciary,
Dirksen Office Building, Washington, DC.
    Dear Mr. Chairman: I represent Washington State's 4th Congressional 
District, which includes the tremendously productive agricultural area 
of the Cascade Mountains. Within my district are the Yakima Valley and 
much of the Columbia Valley Viticultural Areas, recognized by the 
federal government as distinct, high quality wine grape growing 
regions.
    There are more than 15,000 acres of vineyards in my district, with 
more being planted each season. There are over 50 wineries in the 
district, including the state's largest and oldest wineries as well as 
some of the youngest and smallest.
    In addition to producing some of the finest vintages in the world, 
these wineries also serve as a tourism magnet for eastern Washington. 
Because of the unique experiences visitors enjoy at our wineries, they 
generate many repeat requests for wines once they return to their home 
states. While Washington has ``reciprocal'' legislation that allows our 
wines to be shipped to consumers in twelve other states, it is 
impossible for consumers who live in non-reciprocal states to obtain 
Washington state wines not distributed through conventional outlets in 
their local markets. The conventional distribution outlets typically 
favor high volume producers. Most wineries in my district are 
relatively small-producing less than 10,000 cases per year--and 
therefore do not have distribution in many states. Washington State 
wineries need an opportunity to respond to their customers who are 
ready, willing, but unfortunately unable to buy these quality wines 
other than traveling great distances to the wineries themselves.
    The bill being considered by the Senate Judiciary Committee, to 
enforce the Webb-Kenyon Act more aggressively, will do serious damage 
to the state by state effort to open avenues for consumers to purchase 
hard-to-find wines such as those produced in my district. I urge the 
Committee to reject this legislation.
            Sincerely,
                                              Doc Hastings,
                                                Member of Congress.

    Representative Radanovich. Thank you, sir, and I do 
appreciate being here with my Senator from California and also 
the members of this committee, and especially my good friend, 
Bob Ehrlich.
    Mr. Chairman, in 1982 I established a small vineyard and 
winery in the Sierra foothills community of Mariposa, my 
hometown. The Radanovich Winery produces about 4,000 cases 
annually, and we are located at the boundary of Yosemite 
National Park, which receives about 3.4 million visitors 
throughout the world every year. We have the opportunity to 
present our wines to these tourists, who in many cases don't 
want to carry wine home with them and ask that we send it to 
them, or wish to purchase wines. They come from every State in 
the Union, and frankly all over the world. So this issue is 
near and dear to my heart.
    Like most wineries, mine is small. Of the 1,600 wineries in 
this country, only 50 are available in a typical retail 
marketplace. Sales of regional or limited availability wine, of 
which there are perhaps over 10,000 labels, have grown 
dramatically in recent years. Unfortunately, traditional 
distribution avenues are insufficient for the shipment and 
delivery of wines from these numerous small producers. Direct 
mail, the Internet, and other alternative forms of distribution 
have helped these small wineries stay afloat, while at the same 
time helping to satisfy the growing consumer demand for small 
or lesser wines.
    And let me say right off the bat, too, I want to reiterate 
that as a member of the wine industry the last thing that we 
want is minors purchasing alcohol. That is not the intent or 
the purpose of being in business and making and growing and 
producing and selling wines.
    And, second, the other issue is that in many cases the 
argument is brought forward in this that the wine industry is 
avoiding paying taxes within the States that they are selling 
wines. And that is not the issue here. The wine industry is 
perfectly willing to pay a tax in any sales, anywhere across 
the country. However, small wineries are at a disadvantage in 
what my friend, Bob, had mentioned in the three-tier system 
that was created after Prohibition. It is an antiquated system 
that shuts out small wineries from being able to sell their 
fine wines and good products all across the country.
    And I think that the real issue is the fear that the 
national wholesalers have in increased demand--or it is about 
national wholesalers concerned about increased competition 
brought on by new Internet technology and the desire for market 
access for small wineries. This is the concern that I think the 
wineries have in this country, is that we have access under the 
Commerce Clause, due access, as would anybody else. And I would 
hope that during the discussions on these bills that access by 
small wineries in States would not be shut out.
    Again, I reiterate that the advent of Internet technology 
could bring problems in the future, but California has been 
operating under mail order, direct mail, for many, many years, 
and it has not been a problem ordering wine through 
distribution channels such as UPS or anybody else.
    I would like to draw attention to the progress the States 
have been experiencing in reciprocal agreements in Louisiana 
and New Hampshire, where they are allowed under their State 
laws the ability to ship wine into those States, pay the taxes, 
and guarantee that those wines do not go to minors by the 
willingness of transportation companies to obtain adult 
signatures and even adult proof of I.D. when it is delivered at 
the door.
    These are issues that should be decided by the State. I 
think each State ought to be given the opportunity to regulate 
commerce without limiting access by small wineries. They are 
proving to do it and they need the encouragement from the 
Federal Government to make sure that those agreements are, in 
fact, implemented within their own States.
    So I look forward to working with this issue, and hope that 
we might, out of all of this thing, solve the access for small 
wineries because it is critical to--as Mrs. Feinstein pointed 
out, 90 percent of the wine production in the United States is 
in our State of California and it is very important to small 
business there.
    Thank you very much.
    [The prepared statement of Representative Radanovich 
follows:]

              Prepared Statement of Hon. George Radanovich

    I am a California farmer. In 1982, I established a small vineyard 
and winery in the Sierra foothill community of Mariposa, my hometown. 
The Radanovich Winery, which produces Sauvignon blanc, Chardonnay, 
Merlot, Zinfandel and Cabernet Sauvignon, has grown to over 4,000 cases 
annually.
    Like most wineries, mine is small. Of the 1,600 wineries in this 
country, only 50 are available in a typical retail marketplace. More 
specifically, about 20 wineries produce 90 percent of all the wine 
produced. Despite this, sales of regional or limited availability 
wine--of which there are perhaps over ten thousand labels--have grown. 
Unfortunately, traditional distribution avenues are insufficient for 
the shipment and delivery of wines from these numerous small producers. 
Direct mail, the Internet and other alternative forms of distribution 
have helped these small wineries stay afloat, while at the same time 
helping to satisfy the growing consumer demand for smaller, lesser 
known wines produced in this country.
    Grape growing is a very important agricultural crop, the largest 
crop in California and the sixth largest crop in the nation. Over 60 
percent of the grape crop is used in the production of wine. The 
resulting wine industry in total annually contributes over $45 billion 
to the American economy; provides 556,000 jobs, accounting for $12.8 
billion in wages; and pays $3.3 billion in state and local tax 
revenues. In addition, wine is our third largest horticultural export. 
Wine is commercially produced in 47 states.
    Consumers in every state should be able to obtain access to a wide 
variety of wines, especially the wines of small producers who lack the 
distribution channels of the major wine producers in this nation. To 
meet these consumer needs, I point to the 12 states which have chosen 
to enact variations of a ``reciprocal shipment'' law, waiving local 
taxes and allowing consumers to directly order a limited number of 
cases of wine. I also direct your attention to recently passed 
``shipper permit'' legislation in New Hampshire and Louisiana and to 
the special order system developed and implemented by the Pennsylvania 
state liquor monopoly. I am concerned that passage of the proposed 
legislation would have a chilling effect on efforts underway to craft 
creative state-by-state solutions such as these.
    Legislation to allow states to bring to Federal court an action to 
enjoin shipment or transportation of liquor in violation of the laws of 
a particular state would have the unintended consequence of crippling 
small wineries in this country. The proposed legislation does much more 
than simply providing a remedy for a violation of the Webb-Kenyon 
statute which governs interstate shipments. I fear that it will 
authorize a state to erect discriminatory barriers to interstate 
commerce which will be used to favored in-state commercial interests to 
the detriment of out-of-state wine producers. The Commerce Clause 
protects against state imposed barriers to free trade. That protection 
should apply to wineries as well as all other businesses.
    Further, existing remedies are available for violations of liquor 
laws. In the case of wine (as with harder liquors) there is an 
underlying federal permit which is required to operate a winery. That 
permit is subject to oversight by the Bureau of Alcohol, Tobacco and 
Firearms, and requires conformance to applicable laws. There have been 
successful compliance actions through this mechanism. An additional 
mechanism is not necessary.
    Professor Jesse H. Choper, a distinguished scholar in the field of 
constitutional law from University of California has written the 
Committee to express his concerns about the possible consequences of 
Federal legislation in this arena and I ask that this letter be 
included in the record of this hearing. Professor Choper concludes that 
the proposed legislation would violate the Commerce Clause protection 
against barriers to free trade among the states, by allowing states, 
rather than the Congress, to establish those barriers.
    I am also concerned that the thrust of this legislation is to allow 
states to use the Federal courts to obtain direct jurisdiction over 
small businesses located in other states in a manner which invites 
abuse of the court system and a trampling of the rights of out-of-state 
citizens in order to satisfy the demands of politically powerful local 
interests. Allowing the federal courts to be used as enforcement 
machinery for state actions seems to me a huge expansion of federalism 
and a very dangerous precedent.
    Proponents of this legislation claim it is necessary to curb the 
delivery of alcohol product to underage purchasers. I believe that 
there are few more important causes than to stem the tide of underage 
drinking in this country. A Health and Human Services survey reflects 
that more than half of 18-20 year olds were drinking alcohol in the 
past month and an astonishing quarter of that age group have engaged in 
binge drinking during the same period. However, I am convinced that 
direct shipment of wine, beer or spirits does not significantly 
contribute to the problem. The two states with the highest consumption 
of wines--California and New York--have long permitted intrastate 
shipments ordered by phone or mail. Surely, if such mechanisms were 
inherently open to abuse the authorities in those states would have 
discovered that by now. But they have not. Manuel Espinoza, Chief 
Deputy Director of the California Alcoholic Beverage Control agency has 
written to Congressman Thompson and myself that as a result of remote 
sales of alcohol in California, a practice which has been legal for 
almost fifty years, the state has experienced no enforcement problems 
or impediments in its ability to enforce laws related to sales to 
minors. California has only received one complaint about the delivery 
of alcohol to underage recipients via interstate mail orders. That 
complaint originated from a privately organized ``sting'' and 
investigation ascertained that the actual delivery, though left at the 
door, was accepted by the minor's mother. I have included Mr. 
Espinoza's letter as an attachment to my remarks.
    Another concern raised by proponents is the avoidance of state 
excise taxes by interstate shippers. There is no indication that taxes 
avoided by shippers constitute a significant loss of revenue to any 
state. It is estimated that interstate direct shipments consist 
primarily of ultra premium wine and never constitute more than one-half 
of one percent of a state's total wine volume. For the entire country, 
a tax loss of that magnitude would be $2 million annually. For the 
State of Maryland, even if it was to allow direct shipment of wine, 
annual tax losses at full volume would be less than $20,000 per year. 
For New York only $50,000. Other states: Missouri $13,000, Arizona 
$40,000, Iowa $20,000, Ohio $30,000 and Michigan $40,000.
    To address even this minuscule problem, forty-three members of 
California's Congressional delegation have written to the Advisory 
Commission on Electronic Commerce requesting that the Commission 
address this problem when it examines means to ensure the fair 
imposition of consumption, sales and use taxes arising from remote 
sales of all products, a far more significant revenue problem estimated 
to involve many billions of dollars in lost revenue. Legislation which 
preempts the Advisory Commission on Electronic Commerce regarding wine 
will have the affect of setting a precedent in regulation of the 
Internet before the Commission has done its' work. We are moving into 
an arena that all of us have not had the opportunity to think through, 
and our narrow attempts with wine may end up with far-reaching impacts 
on the sale of anything through the Internet.
    Mr. Chairman, I am not convinced there is an urgent national 
problem which needs to be solved by allowing virtually unprecedented 
use of federal courts to solve state problems which can be addressed by 
state legislative and judicial means. States can make it a crime for an 
person under 21 to attempt to purchase alcohol. What fool in such a 
state would dare to leave an evidentiary trail of credit card and 
delivery records?
    Rather than the proposed legislation, alternatives include 
legislation which would encourage the development of open markets so 
that consumers can have access to the products which they wish to 
purchase.
    I close by quoting for you a letter by Florida Attorney General 
Robert Butterworth urging the veto of a bill making direct interstate 
shipment of wine to a Florida consumer a felony: ``[The bill] is the 
perfect tool for the vested interests who seek additional control over 
the marketplace, at the expense of competition and consumer choice.''
    The federal government should not empower states to engage in 
anticompetitive actions favoring their in-state businesses. The federal 
government should not use the power of the courts to suppress 
competition. The federal government should not expand its reach into 
the private purchases of consumers, or the activities of the small 
businesses which make up the largest part of the wine business.
    Thank you for the opportunity to address this distinguished 
Committee.
                                 ______
                                 
                               State of California,
                 Department of Alcoholic Beverages Control,
                                     Sacramento, CA, March 3, 1999.
The Hon. Mike Thompson,
The Hon. George Radanovich,
U.S. House of Representatives,
Cannon Building, Washington, DC.
    Dear Representatives: This is in reply to your letter of March 1, 
1999, requesting information about the Department's experience with 
direct shipments of wine or other alcoholic beverages to California 
consumers via the Internet, telephone or mail. We have responded to 
your questions in the same order as they are presented in your letter.

    Question 1. Have direct shipments of wine or other alcohol 
beverages to California consumers resulted in an enforcement problem 
for your department?
    Answer. No. California has permitted direct wine shipments to 
consumers since 1963. From 1963 to 1995 California law permitted an 
adult resident to receive a case of wine per month from a source 
outside of California but within the United States. The statute 
established a no cost permit process administered by the Department. In 
addition to requiring the name and address of the sender as well as the 
California recipient, the permit process required that the shipment be 
transported into California via common carrier (no guarantee a paper 
trail) and an affirmation under penalty of perjury that the person 
requesting permission to receive delivery was an adult. The statute in 
question, Section 23661.2 of the California Business and Professions 
Code, was repealed in 1995 and replaced with the current wine 
reciprocity statute.
    During those thirty-five years the Department authorized thousands 
of those permits. At no time was a complaint received indicating the 
wine was used for illegal purposes, i.e., re-sale by a retailer or 
purchase and consumption by an underage person.
    The Legislature has not extended the shipping privilege to beer or 
distilled spirits. Consequently, our experience relates only to wine 
products.

    Question 2. Do remote sales of wine or other alcohol beverages in 
California jeopardize the department's ability to enforce laws relating 
to sales to minors?
    Answer. While we have no data indicating just how widespread mail 
order alcohol sales are in California, we have none the less 
experienced no enforcement problems or impediments to our ability to 
enforce laws relating to sales to minors as a result of this practice.

    Question 3. What experience if any has the department had with 
intrastate and interstate remote sales of wine or other alcohol 
beverages to minors via the Internet telephone or mail?
    Answer. While the subject of interstate sales of alcoholic 
beverages has been the subject of considerable debate throughout the 
country including California, we have to date witnessed no measurable 
adverse effects on public welfare or safety that could be attributable 
to interstate mail order alcohol sales.
    Intrastate sales of alcoholic beverages from California retailers 
to California consumers has been authorized by statute for almost fifty 
years.
    The number of complaints received by the Department involving 
purchases by underage persons via this method have been minimal when 
compared to all other complaints involving minors and alcohol. of the 
more than ten thousand complaint investigations conducted by the 
Department each year, we estimate that less than one half of one 
percent have involved illegal sales to minors via home delivery.

    Question 4. Have there been any complaints about the delivery of 
wine or other alcohol beverages to minors which have been investigated 
by your department? How many complaints? What was the outcome of the 
investigation(s)?
    Answer. To date we have received one complaint about the delivery 
of alcohol to minors via interstate mail order. The complaint was from 
a package store owner in Kentucky whose underage son placed an order 
for beer with a California retailer and received delivery in Kentucky. 
The son placed the order using the father's credit card with the 
father's permission.
    After conducting an investigation, it was ascertained that the 
son's mother accepted delivery of the package that had been left at the 
door by the parcel service who transported the shipment.
    The Department took no disciplinary action against the California 
retail licensee.

    We trust this has been responsive to your request. If you have any 
questions, please feel free to call on us.
            Sincerely,
                                        Manuel R. Espinoza,
                                             Chief Deputy Director.
                                 ______
                                 
                                                     March 4, 1999.
The Hon. Orrin G. Hatch, Chairman,
Senate Judiciary Committee, U.S. Senate, Washington, DC.
    Dear Senator Hatch: I write about Senator Hatch's Bill, currently 
before the Judiciary Committee, that has been said to ``add 
enforcement'' to the Webb-Kenyon Act passed by Congress in 1913. I am a 
Professor specializing in Constitutional Law (and the former Dean) at 
the School of Law of the University of California at Berkeley (Boalt 
Hall) I attach a copy of my curriculum vitae.
    I believe it is most important to underline that the Bill goes far 
beyond simply providing a remedy for a violation of Webb-Kenyon. 
Instead, it makes fundamental changes in current law and in doing so 
affects serious constitutional and public policy issues. Webb-Kenyon 
prohibits the importation of alcoholic beverages into a state in 
violation of that state's laws. It is generally understood that 
Congress' intent in passing the statute in 1913 was to give federal 
sanction to a state's decision to ``go dry,'' an authority that had 
been denied to the states by the Supreme Court in Leisy v. Hardin, 135 
U.S. 100 (1890).
    Webb-Kenyon does not authorize a state to erect discriminatory 
barriers to interstate commerce. Indeed, in the absence of an express 
federal enactment, any attempt by a state to do so--by conferring 
different rights on in-state and out-of-state producers of alcoholic 
beverages--would violate the core principle underlying the Commerce 
Clause of the U.S. Constitution that forbids state discrimination 
against interstate commerce. Only Congress can so regulate trade 
between the states.
    Nor does the 21st Amendment, which confers special powers on the 
states regarding alcoholic beverages, affect that conclusion. In 
Bacchus Imports, Ltd. v. Dias, 468 U.S. 263 (1984), the Supreme court 
held that the 21st Amendment did not permit state regulations of the 
local sale or use of liquor to discriminate against interstate 
commerce. To do so, the Court reasoned, would be inconsistent with a 
central tenet of the Commerce Clause: forbidding economic 
protectionism.
    I believe that the Bill, rather than simply creating a federal 
remedy for a violation of Webb-Kenyon in its current form, would 
dramatically expand the powers of the states to regulate alcoholic 
beverages. Most significantly, it would run counter to the spirit of 
Bacchus and remove the protection that the Commerce Clause grants the 
alcoholic beverage industry, along with all others, from state erection 
of barriers to free trade.
    I would be happy to provide any further information you may find 
helpful.
Sincerely,
                                              Jesse Choper.

    The Chairman. I don't want to get on the wrong side of 
Senator Feinstein is all I can say.
    Senator Feinstein. That is a good spirit, Mr. Chairman.
    The Chairman. A good spirit.
    Congressman Thompson.

   STATEMENT OF HON. MIKE THOMPSON, A U.S. REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Representative Thompson. Thank you, Mr. Chairman and 
Senators. It is a pleasure to be before you this morning and I 
appreciate the opportunity to be here. I represent the north 
coast and the northern portion of California. In my district, 
we have about 350 wineries. I think it is the largest 
concentration anyplace, in any region of the United States. And 
I represent the premier wine-growing region--or one of the 
premier wine-growing regions of the United States----
    Representative Radanovich. Watch it. [Laughter.]
    Representative Thompson [continuing]. Which would be Napa, 
Sonoma, Lake and Mendocino counties. And I just want to 
emphasize the importance of the industry. This industry brings 
about tremendous economic benefit not only to my district, but 
to the entire United States. The industry is directly 
responsible for over 200,000 jobs, and they pay about $3.2 
billion in wages and $1.6 billion in State and local taxes. And 
they contribute $12.4 billion to the gross domestic product. If 
you take into account normal multipliers, this increases 
markedly.
    Notwithstanding those impressive numbers, it is important 
to note, as has already been said today, that the majority of 
the wineries are small wineries, small, family-owned mom-and-
pop-type wineries. And there are less than 100 wineries of the 
1,800 across the Nation that produce 95 percent of the wine. So 
as was pointed out, most of the wine in our country is produced 
by the larger wineries. The small wineries produce a very small 
part. Yet, they contribute a tremendous amount to our economy 
and to our society.
    But through some of the problems in this three-tiered 
system that has been referenced today, specifically the 
consolidation of distributors, these small wineries are at a 
very distinct disadvantage in being able to get the product 
that they produce to consumers across these United States that 
want to buy this product.
    I have one vintner in my district who told me this week 
that he loses, they figure, $32,000 per month on tourist-
generated orders. These are people who come to California, 
visit the winery, and say this is great wine, will you send a 
case to my home. And they can't; they can't do that, nor can 
the consumer do that. So they lose $32,000 per month, and for a 
small business that is a tremendous amount of money.
    I also want to point out that winery owners and vintners 
are responsible citizens. They don't want wine or any other 
alcoholic beverage to be sold or to be distributed to minors, 
nor do they want to avoid paying their fair share of taxes. And 
I want to suggest that there are, in fact, ample safeguards 
either in place or the opportunity to put ample safeguards in 
place that would make it impossible to either avoid taxes or to 
sell to minors or to sell within dry jurisdictions. I think any 
examples to the contrary are orchestrated.
    Even in the video we saw today, we saw a young woman, with 
adult supervision, accessing her computer and using someone 
else's credit card. So not only in a situation like this is the 
minor in violation of State liquor laws, but also in violation 
of credit card laws as well.
    Manuel Espinoza is deputy director of the California 
Department of Alcoholic Beverage Control, and in a letter that 
he sent to Mr. Radanovich and myself--and I would like, Mr. 
Chairman, to ask that this be entered into the record.
    The Chairman. Without objection, we will do that.
    [The letter referred to is attached to the prepared 
statement of Representative Radanovich.]
    Representative Thompson. He stated that he does not believe 
that this is, in fact, a problem. Last year, when I was in the 
State legislature, I held hearings on this very issue and Mr. 
Espinoza came forward and stated the same thing, and he stated 
it based on 20 years of experience in California. In 
California, for the last 20 years we have been able to sell 
alcoholic beverages direct within our State jurisdiction and 
there has been no problem.
    And I would like to read from his statement to that 
committee. He said, ``I do believe the sale to minor issue is 
overblown, and I say that because we have got experience here 
in California with a piece of legislation that was on the books 
for at least 20 years. It would allow a person to receive a 
case of wine a month from any part or from any State, 
regardless of the source. And it was a very simple permit 
process. There was no charge. The consumer who wanted to 
purchase or wanted to receive a case of wine a month could 
merely send in a form. They would name the shipper, they would 
describe the contents of the shipment, and it would have the 
name and address of the person that was going to receive the 
shipment. We would review the form and sign it and send it 
back, and the form was permission for the shipper to bring it 
in. Our experience with that--you know, like I said, for the 
last 20 years there was never a problem.''
    I believe, Mr. Chairman, that passage of this legislation, 
absent any Federal allowance for direct marketing or for entry 
and access into the direct market, would, in fact, set back our 
efforts that Mr. Radanovich had outlined earlier in regard to 
working on this issue in a State-by-State manner.
    I thank you very much for the time to present.
    [The prepared statement of Representative Thompson 
follows:]

                Prepared Statement of Hon. Mike Thompson

    Mr. Chairman, Members of the Committee, thank you for allowing me 
the opportunity to discuss the important matter of direct interstate 
shipments of wine and the issue of underage access to alcohol.
    I represent the north coast of California from the top of the San 
Francisco Bay to the Oregon border, a district which includes America's 
premier winegrowing region: the Napa Valley, Sonoma, Mendocino and Lake 
Counties. I represent over 350 wineries and can safely say that all of 
them would like to be able to service their customers, all want to pay 
their fair share of taxes, and none wants minors to purchase their 
product.
    This is an important industry to our national economy. It directly 
creates 207,000 jobs, accounting for $3.2 billion in wages. In 1997, 
the industry directly added $12.4 billion to the gross domestic product 
and paid $1.6 billion in taxes to state and local economies. The total 
net contribution is larger when economic multipliers are used to 
calculate the indirect effects of industry activity. When direct and 
indirect figures are totaled, the industry provides 556,000 jobs that 
pay $12.8 billion in wages, generate $45.6 billion to the U.S. economy, 
and pay $3.3 billion in state and local taxes.
    Many of America's wineries are small, mom-and-pop businesses that 
make between a few hundred to a few thousand cases of wine per year. 
The economic lifeblood of the typical family winery combines the 
selling of wine to tourists and limited off-site wine sales. Like most 
small businesses, the winery hopes to be able to compete on a level 
playing field and to sell wine to customers who request it.
    In many states, however, the only means to sell wine is through a 
distributor and many wineries depend upon distributors to get their 
product to the market. Unfortunately, for the majority of wineries, 
that option is unavailable and direct shipping is the only viable means 
to fill customer orders.
    The reason is that the distributorship industry has experienced 
considerable consolidation over the past decade. There are fewer wine 
distributors and fewer people to adequately market the 7,000-10,000 
American wines currently for sale. In addition, many distributors have 
no financial incentive to represent the small, family-owned and 
operated wineries.
    And it's these businesses, the wineries which need to satisfy 
tourism-generated demand for small production wines, that suffer the 
most. Since these wineries can't get their product to customers using 
the normal distribution network, their only alternative is to sell to 
the consumer by direct mail or the Internet.
    Such sales are a considerable source of revenue for these small 
businesses. States enacting anti-direct shipping laws restricting this 
market can significantly affect a winery's business. One Sonoma winery 
estimates it loses $32,000 a month in revenues because it is not 
permitted to fill orders requested by out of state tourists and wine 
consumers.
    Opponents of direct shipping raise two patently false arguments 
that must be dismissed. Some claim that wineries are unwilling to live 
up to their tax obligations and that wineries want to ship to dry 
counties and to minors. Please know that nothing could be further from 
the truth.
    Despite the rhetoric from direct shipping opponents, winery owners 
are responsible citizens and generous members of our communities. 
American wineries all want to pay their fair share of taxes and no 
winery in any state wants to send wine into dry counties or supply 
minors with wine.
    Despite a very few orchestrated incidents, there is no evidence to 
support the claim that minors are purchasing wine over the Internet or 
through the mail. As a California state Senator, I conducted a 1997 
committee hearing specifically on the subject of direct shipping. At 
that hearing, California Alcoholic Beverage Control Deputy Director 
Manuel Mendoza testified as follows:

          I do believe the sale-to-minor issue is overblown, and I say 
        that because we've got experience here in California with a 
        piece of legislation that was on the books for at least 20 
        years * * *
          * * * * *
          Our experience with that * * * for at least 20 years there 
        was never a problem that was brought to our attention with 
        regard to sales to minors or the importation of a product that 
        was harmful.
          * * * * *
          * * * we've got studies that show that 87 percent of our high 
        school seniors have reported that they consume alcohol. About 
        67 percent of those say that they can buy it. So as to the 
        issue of minors purchasing these products and having it shipped 
        in, I don't think that's going to happen in California because 
        the kids, unfortunately, can find ways to buy it here far, far 
        to easy.

    In his recent letter to Mr. Radanovich and me, Mr. Espinoza 
reiterated the fact that the Department of Alcoholic Beverage Control 
in California has not experienced an enforcement problem or impediments 
to its ability to enforce laws relating to direct shipping sales to 
minors. He said that there are ``no measurable adverse effects on 
public welfare or safety that could be attributable to interstate mail 
order alcohol sales.''
    Moreover, shipping companies such as DHL Worldwide Express have 
implemented effective safeguards to prevent the delivery of alcohol to 
minors and intoxicated persons:

  DHL's protocol requires every recipient's ID to be visually checked;

  The ID information is logged on a DHL tracking document;

  Every package containing wine must be labeled on the outside as 
    containing alcohol, delivery to minors prohibited; identification 
    required.

    Over the past 20 years, at least 15 states including California 
have adopted legislation allowing consumers to purchase a limited 
amount of wine from their homes. These are balanced statutes which 
place a cap on the quantity of wine sold to an individual addressee and 
which prohibit wine sales to minors.
    As such, I question the reasons some states are using to enact 
anti-direct shipping laws--laws which in my view are unreasonable 
barriers to competition erected to favor local liquor industries and 
distributors. In fact, the U.S. Supreme Court has said:

          State laws that constitute mere economic protectionism are 
        therefore not entitled to the same deference as laws enacted to 
        combat the perceived evils of an unrestricted traffic in 
        liquor.

(Bacchus Imports, Ltd. v. Dias, 468 U.S. 263 [1984].)

    There is no legal justification for states to be granted access to 
federal court. The legislative proposal before you would dramatically 
expand the powers of the states to regulate alcoholic beverages and 
would run counter to the Supreme Court's decision that the 21st 
Amendment does not permit states to discriminate against interstate 
commerce.
    Furthermore, the proposal is unnecessary and unduly burdensome 
since there is already a remedy at law to address this problem. The 
Bureau of Alcohol, Tobacco and Firearms can currently revoke a winery's 
basic permit to operate if they violate state law restrictions on sales 
to minors.
    Finally, this proposal will hamper efforts by the interested 
parties to resolve this issue at the state level.
    America's family wineries simply wish to be able to respond to 
requests from adult customers wanting to purchase premium wine. I 
strongly urge this Committee to carefully consider the legitimate needs 
of consumers and the companies that sell to those customers. Any 
legislation should be balanced to ensure that both consumers and 
wineries are able to transact a legal business in a reasonable manner 
and on grounds no more stringent than those that apply to in-state 
manufacturers and distributors.
    Mr. Chairman, again, thank you for the opportunity to present our 
views. I am pleased to respond to any question you might have.

    The Chairman. Well, I want to thank each of you for coming 
and for taking time from what I know are busy schedules to come 
over here and help this committee to at least look at this in 
the best possible way we can, and we will try to do that, 
taking into consideration everybody's needs. I just want to 
thank you for coming. We appreciate it.
    Representative Millender-McDonald. Thank you, Mr. Chairman.
    Representative Thompson. Thank you, Mr. Chairman.
    The Chairman. Leading off the second panel today is Utah 
Assistant General Wayne Klein. Mr. Klein is currently leading 
the battle in the Utah Office of Attorney General to prosecute 
companies and individuals who are alleged to be illegally 
shipping alcohol into that State. Although an important case he 
is prosecuting was initially dismissed on procedural and 
constitutional grounds, he recently persuaded the Utah Court of 
Appeals to reinstate that case and allow him to bring the 
charges before a jury. However, as I believe he will testify, 
further appeals are expected. Prior to his current position, 
Mr. Klein was the Idaho Securities Bureau Chief and an adjunct 
professor at Boise State University. We are happy to have you 
here, Wayne.
    Our second witness on panel two is Prof. Stephen Diamond, 
from the University of Miami School of Law. Professor Diamond 
specializes in American legal history and teaches courses in 
that subject, as well as in State and local government law, 
tort law, property law, and most importantly for our purposes, 
liquor law.
    Now, how a person who has devoted his life to a study of 
liquor law ever managed to pass the bar is beyond me. 
[Laughter.]
    Professor Diamond is a member of the Committee on Beverage 
Alcohol of the American Bar Association, and is also a member 
of the International Wine Lawyers Association. He received his 
B.A. from Swarthmore College, a certificate in social 
anthropology from Cambridge University, and an A.M., a Ph.D. in 
history and a J.D. from Harvard University. Prior to his 
current position at the University of Miami, Professor Diamond 
was a professor of law on the faculty at the Cardozo School of 
Law of Yeshiva University. So we are pleased to have you here, 
Mr. Diamond.
    I am very pleased to have with us today Brendan Brogan. At 
18 years of age, Brendan is already quite an accomplished young 
man. He is the first youth member of Mothers Against Drunk 
Driving's National Board of Directors. He was selected for that 
position after serving in 1998 as a New Jersey delegate to 
MADD's National Youth Summit to Prevent Underage Drinking in 
Washington. Brendan is also a member of a MADD Youth in Action 
Team, a community group dedicated to changing a societal 
environment which condones underage drinking. He is also 
president of a DEA, Drug Enforcement Administration-sponsored 
Boy Scout explorer post, a group whose purpose is to organize 
and enjoy high adventure in a drug-free environment. Brendan 
became an Eagle Scout at age 13, one of the youngest ever to 
receive that honor. So we are proud to have you here, Brendan.
    The fourth member of the panel is John DeLuca, president of 
the Wine Institute. The Wine Institute is the public policy 
advocacy association of California wineries. It brings together 
the resources of 450 wineries and affiliated businesses to 
support legislative and regulatory advocacy, international 
market development, media relations, scientific research, and 
education programs that benefit the California wine industry. 
It is great to have you here, Mr. DeLuca.
    Finally, filling out the panel is Mike Ballard, the 
President of Savannah-Chanel Vineyards, located in California's 
Santa Cruz Mountains. Established by a French immigrant in 
1892, Savannah-Chanel Vineyards still makes wines from some of 
the original plantings.
    So we are honored to have all of you here. Each of you 
brings a special expertise to this committee today and we will 
look forward to hearing each of your testimonies. Now, we are 
going to limit you to 5 minutes each. We hope that you will 
abide by that and then we will have some questions for you.
    Mr. Klein.

 PANEL CONSISTING OF WAYNE KLEIN, ASSISTANT ATTORNEY GENERAL, 
 STATE OF UTAH, SALT LAKE CITY, UT; STEPHEN DIAMOND, PROFESSOR 
 OF LAW, UNIVERSITY OF MIAMI SCHOOL OF LAW, CORAL GABLES, FL; 
 BRENDAN BROGAN, NATIONAL BOARD MEMBER, MOTHERS AGAINST DRUNK 
  DRIVING, RIDGEWOOD, NJ; JOHN A. DeLUCA, PRESIDENT AND CHIEF 
   EXECUTIVE OFFICER, WINE INSTITUTE, SAN FRANCISCO, CA; AND 
    MICHAEL BALLARD, PRESIDENT, SAVANNAH-CHANEL VINEYARDS, 
                          SARATOGA, CA

                    STATEMENT OF WAYNE KLEIN

    Mr. Klein. Thank you, Mr. Chairman, members of the 
committee. As assistant attorney general for the State of Utah, 
one of my responsibilities is white collar crime, including a 
case that I am prosecuting against an Illinois-based company, 
Beer Across America, which was shipping alcohol into Utah in 
violation of Utah criminal laws.
    I appreciate the opportunity to appear in support of 
legislation that would empower State enforcement officials to 
use the Federal courts in limited instances to halt illegal 
shipments of alcohol when the State enforcers otherwise would 
be unable to prevent the shipments. I confess to being somewhat 
surprised that events are necessitating new legislation and 
this hearing. States have always been permitted to exercise 
their police powers in ways that would protect their citizens.
    Beyond the significant police powers granted to States by 
the 10th amendment, alcohol long has held a special status. The 
21st amendment endowed the States with constitutionally-based 
authority to determine the conditions under which alcohol is 
sold in a State. The constitutional amendment process that 
repealed Prohibition guaranteed this control to the States. The 
Webb-Kenyon Act has long served as a legislative reaffirmation 
of this special status. My surprise derives from the depth and 
boldness by which alcohol marketers are contesting this special 
status.
    Beer Across America was warned that its shipments of 
alcohol to Utah were illegal. It responded by promising to halt 
any further shipments. Six months later, Utah investigators 
were seizing over 100 cases per month. These invoices from 
seized shipments demonstrate not only the defiant continuation 
of sales, but that in many cases customers were encouraged to 
list an out-of-State address for billing purposes, in the hopes 
that regulators would not find out that the alcohol was 
destined for Utah.
    The problem is not just beer. An estimated 5 million cases 
of wine are shipped to consumers illegally every year. And it 
is not just adults who are buying the alcohol. You saw the 
video piece about a 13-year-old Utah girl being able to order 
beer through the Internet. In our prosecution, we had a minor 
who purchased and was sent alcohol. A study cited in my written 
remarks indicates that up to 10 percent of alcohol being 
acquired by minors comes via delivery services. And of alcohol 
being sent to consumers, an estimated 59 percent is left out on 
porches or in car ports rather than being physically delivered 
to an adult.
    I spent much of my earlier career bringing civil and 
criminal enforcement actions against those committing 
securities fraud. I have filed suit and obtained literally 
hundreds of injunctions against fraud promoters located in 
other States. Just last summer, I obtained two felony 
convictions against a New York brokerage firm for fraudulently 
soliciting a Utah resident. In all of those cases, no one ever 
challenged the State's authority to obtain a civil injunction 
or a criminal conviction against an out-of-State defendant. No 
one claimed the State could not prosecute a crook engaged in 
interstate fraud via the telephone or mail. Everyone recognized 
it was beyond dispute that a New York firm had to comply with 
Utah law if it wanted to sell securities to Utah residents.
    It is paradoxical that the States with no special 
constitutional authority over investment transactions seem to 
have more authority over securities violators than shippers of 
alcohol. This result is truly unfortunate. There are very good 
reasons for States to decide to control the sale of alcohol in 
their States. These reasons range from preventing sales to 
minors, to quality control, to public safety.
    I am happy to report some good news. Last Thursday, the 
Utah Court of Appeals reversed the trial court's 1997 decision 
to dismiss our criminal charges against Beer Across America. 
That criminal trial now can proceed. It is a good first step, 
but it is still a long way from solving the national problem or 
from eliminating barriers to civil cases. Many States like 
Florida have been subject to a legal catch-22. The State courts 
may think they lack subject matter jurisdiction or personal 
jurisdiction over the out-of-State defendants. But the Federal 
courts, which may more easily assert jurisdiction, have denied 
the States a remedy because the Webb-Kenyon Act provides no 
Federal cause of action.
    We need legislation to solve this legal catch-22. The 
States need some artificial barriers removed, barriers that are 
being used to hide illegal activities of hundreds of companies 
shipping alcohol directly to consumers. I respectfully 
recommend this committee seriously consider the following 
three-point plan for giving the States more power to control 
their borders.
    First, Congress should move immediately to pass amendments 
to the Webb-Kenyon Act that will empower the States to use 
Federal courts to halt illegal shipments. This authority must 
be sufficient to grant effective relief to the States in, A, 
stopping the violations; B, punishing the perpetrators; and, C, 
deterring future wrongdoing. Venue and service of process 
limitations must not make the Federal court remedy illusory. 
Venue needs to be where the violation occurred. If a company 
ships its products into a State, it should be answerable in the 
location from whence its revenue was derived.
    Second, Congress should use the occasion to reaffirm the 
principles behind the 10th and 21st amendments that alcohol 
distributors must comply with the laws of each State in which 
they want to sell their products.
    And, third, the committee should consider legislation in 
this bill or another requiring that alcohol being shipped 
across State lines, whether or not in compliance with the laws 
of the receiving State, be clearly labeled as alcohol, identify 
the sending company, and require an adult signature before 
delivery. Packages of alcohol should not be left on doorsteps. 
Minors must be foreclosed from taking advantage of any new 
alcohol sources.
    Mr. Chairman, members of the committee, doing business in a 
State is a privilege. That privilege is fairly conditioned on 
compliance with the laws of that State. Alcohol more than any 
other product should demand adherence to this fundamental 
principle.
    Thank you for the opportunity to express my views and I am 
happy to answer any questions. Thank you.
    The Chairman. Thank you.
    [The prepared statement of Mr. Klein follows:]

                   Prepared Statement of Wayne Klein

    Mr. Chairman and Members of the Committee: My name is R. Wayne 
Klein. I am an Assistant Attorney General for the State of Utah. I am a 
prosecutor with responsibility for cases involving white collar crime, 
including a criminal case against an Illinois company that was selling 
and then shipping into Utah alcohol in a manner that violated Utah 
criminal laws. The Attorney General's office works closely with the 
Utah Department of Alcoholic Beverage Control and the Utah Criminal 
Investigation Bureau in enforcing Utah's alcohol control laws.
                       introduction and overview
    I am pleased to express strong support for amending the Webb-Kenyon 
Act in a way that empowers state enforcement officials to halt 
deliberate and blatant violations of state alcohol control laws. States 
need to be allowed to prevent out-of-state alcohol vendors from 
continuing to ship liquor in to the states in violation of state laws. 
An unfortunately high number of alcohol producers and shippers are 
defying state laws and challenging their authority to control the sale 
of liquor within their borders.
    Heretofore unchallenged notions that the Tenth Amendment and the 
Twenty-First Amendments vested the states with authority to control the 
sale and transportation of liquor within the states' borders are now 
under broad and determined attacks. What is unfortunate is that these 
violators are masquerading as legitimate businesses.
    If alcohol producers wish to be able to ship their products 
directly to consumers in other states, the producers must change the 
laws. Permitting the continuation of a massive, coordinated effort by 
these companies to defy state laws promotes neither the rule of law nor 
the sanctity of states rights.
     the direct shipping industry is defying state and federal laws
    In 1997 the Joint Committee of the States, a committee of state 
alcohol regulators, conducted a survey of direct shipping of alcohol in 
the United States. The survey identified 154 companies engaged in mail 
order and direct shipment of alcohol at that time. Many other companies 
have entered the market since then.
    This activity is in stark contrast with the laws of those states. 
Every state either prohibits or tightly regulates direct shipments of 
alcohol to consumers, in varying degrees.\1\ Twelve states are *so-
called* reciprocal states, permitting shipments of wine only (but not 
beer or distilled spirits) into their jurisdictions, but only from 
other reciprocal states. About nineteen jurisdictions (including the 
District of Columbia) permit some limited importation by consumers. In 
many cases, the consumer must obtain a permit before placing the order. 
It should be noted that the availability of limited importation for a 
consumer does not necessarily mean the shipper also is exempt from the 
law's requirements. Some twenty states allow no direct shipments. In at 
least five of these states direct shipment is expressly made a felony.
---------------------------------------------------------------------------
    \1\ The Wine Institute maintains a state by state breakdown of each 
state's laws on direct shipping of alcohol. See www.wineinstitute.org/
shipwine/analysis/state--analysis.htm. See also DeConti, New 
Legislation Increases Prohibition on Direct Selling, ``The Bar'' (ABA 
Committee on Beverage Alcohol Practice), Vol III, No. 3 (Jan. 1998).
---------------------------------------------------------------------------
    These alcohol marketers are not located only in ``reciprocal'' 
states. They are not limiting sales only to consumers in other 
reciprocal states. They are shipping directly to consumers in every 
state. The direct sales are in blatant violation of state alcohol 
control laws. Why?
    The reasons for selling and shipping alcohol in violation of state 
laws are explained only by greed and opportunism. We can rule out 
ignorance of the law as the reason for their conduct. Sales of alcohol 
are regulated by the home jurisdiction as well as by the federal Bureau 
of Alcohol, Tobacco and Firearms (BATF) at least to some degree. The 
existence of state laws and law enforcement efforts against direct 
shippers is well known within this industry.\2\ Indeed, when Utah 
criminally charged Illinois-based Beer Across America with illegally 
shipping beer to customers in Utah, it was only after investigators had 
warned the company and its lawyer that the sales were illegal--yet the 
sales continued.
---------------------------------------------------------------------------
    \2\ In addition to the Wine Institute web page, WFF Distributing in 
Healdsburg California publishes an annual Retail Wine Shipping Guide 
which clearly and succinctly provides state-by-state information on 
whether direct shipping is allowed and, if so, under what conditions.
---------------------------------------------------------------------------
    In any other legitimate industry, businesses first would ensure 
that laws were changed to permit activity before engaging in massive 
marketing and sales of their products. Not so here. There may be 
several explanations. It may be that alcohol marketers are (a) hoping 
not to get caught (and the large number of sellers certainly assists in 
the anonymity), (b) hoping to get the laws overturned (laws that have 
withstood challenges for sixty years), or (c) seeking sympathy from the 
public and the media, wishing that public pressure will result in 
changes in the law (after the violative conduct, rather than before).
    Regardless of the motivation, it must be emphasized that this 
industry was born--and is thriving--in manifest disregard of the law.
              are state alcohol control laws still valid?
    There are high stakes in this battle. The existence of the alcohol 
direct selling industry is a frontal challenge to the entire concept of 
states exercising their police powers. It is a defiance of states' 
rights and their ability to control alcohol sales within their states.
    By what authority do the states enact laws controlling the sale of 
alcohol within their borders?
    The Tenth Amendment to the Constitution provides: ``The powers not 
delegated to the United States by the Constitution nor prohibited to it 
by the States, are reserved to the States respectively, or to the 
people.''
    The Twenty-First Amendment repealed prohibition. The State of Utah 
cast the deciding vote for the repeal, in large part because state 
powers were preserved. The operative language of the 21st Amendment 
reads: ``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.'' Under this Constitutional provision, alcohol is given a 
special status. States have the constitutionally protected ability to 
determine the conditions under which alcohol is sold or shipped into 
their states.
    Congress has reaffirmed this special reservation of powers to the 
states. The Webb-Kenyon Act \3\ expressly prohibits the ``shipment or 
transportation'' of alcohol ``in violation of any law of [a] State, 
Territory, or District * * *.'' Again, the rights of the individual 
states to control the sale of alcohol within its borders has been 
recognized and preserved.
---------------------------------------------------------------------------
    \3\ 27 U.S.C. Sec. 122. The Webb-Kenyon Act and its predecessor the 
Wilson Act date back to 1890. This demonstrates long standing 
Congressional recognition of state authority in this area.
---------------------------------------------------------------------------
    It should not be surprising that lawmakers in most states have made 
violations of the alcoholic beverage control laws a predicate offense 
for racketeering laws. Utah has done so.\4\ In fact, Utah's charges 
against Beer Across America included one count alleging a violation of 
state racketeering laws.\5\
---------------------------------------------------------------------------
    \4\ Utah Code Ann. Sec. 76-10-1602 (4)(www) (1998).
    \5\ State v. Amoroso, Beer Across America, Case No's. 97 1002970 FS 
and 97 1002971 FS, First Amended Criminal Information, Utah Third 
District Court (Apr. 21, 1997) reversed Case No. 971712-CA (Utah Ct. 
App. Mar. 4, 1999).
---------------------------------------------------------------------------
                 why does alcohol have special status?
    The sale--or even transportation--of alcohol is accorded special 
status under the constitution, federal law, and state law because of 
the unique nature of alcohol. Control over the sale of the alcohol, its 
transportation, and its use reflect public policy determinations that 
limitations on the sale of alcohol serve the public interest. Examples 
are many:

   Sales to minors Restricting alcohol sales to minors is one 
        of the most fundamental justifications for state regulation of 
        alcohol. It is discussed in the next section.

   Restrictions on locations, types of sales States may decide 
        to prohibit the sales of alcohol on certain days of the week or 
        after certain hours at night.\6\ Establishments that sell 
        liquor might be restricted to locations away from schools and 
        churches.\7\ There may be prohibitions against selling to 
        intoxicated or interdicted personnel.\8\ Concerns about 
        restrictions on the availability of certain products are 
        largely unfounded.\9\
---------------------------------------------------------------------------
    \6\ Utah Code Ann. Sec. 32A-3-106 (10) (1998). And, in some cases, 
on election day. Id.
    \7\ Utah Code Ann. Sec. 32A-2-101 (3) (1998).
    \8\ Utah Code Ann. Sec. 32A-3-106 (9) (1998).
    \9\ While state policies may restrict the availability of certain 
products, this problem is largely a myth. The beers shipped to Utah 
consumers by Beer Across America were all available in state liquor 
stores and at a price lower than charged by Beer Across America. Most 
state alcohol regulators make a great effort to provide a wide variety 
of products at state stores.

   Control consumption Requiring alcohol to be sold at state 
        liquor stores may reduce the amount of consumption. This 
        reflects a valid policy choice of the state.\10\ If lawmakers 
        choose to limit beer sales to products having a low alcoholic 
        content, it may be endeavoring to reduce some of the ill 
        effects of consumption.\11\
---------------------------------------------------------------------------
    \10\ Utah's alcoholic beverage laws are explicit on this point. 
``This title is an exercise of the police powers of the state for the 
protection of the public health, peace, safety, welfare, and morals and 
regulates the sale, service, storage, manufacture, distribution, and 
consumption of alcoholic products.'' Utah Code Ann. Sec. 32A-1-103 
(1998).
    \11\ Utah Code Ann. Sec. 32A-1-105 (4) (1998).

   Public safety Alcohol is the largest single cause of 
        automobile fatalities. Control by the state can ameliorate this 
        travesty. ``Because of Utah's stringent laws, only 20.6 percent 
        of all Utah traffic fatalities in 1997 were related to alcohol, 
        compared to 38.6 nationwide.\12\
---------------------------------------------------------------------------
    \12\ Editorial Opinion, Don't Contaminate Liquor Laws, Deseret 
News, Feb. 1, 1999.

   Product quality State alcohol regulators have responsibility 
        to ensure the purity of the products being sold for 
        consumption. The State has a great interest in preventing the 
        sale of any adulterated alcohol products.\13\
---------------------------------------------------------------------------
    \13\ Utah Code Ann.
---------------------------------------------------------------------------
   32A-12-219 (1998) (adulteration); Utah Code Ann. Sec. 32A-
        13-109 (1998) (inspections).

   Labeling The labels and packaging for alcohol products must 
        be approved prior to use. This prevents untruthful and 
        misleading statements and reduces the likelihood that labeling 
        and packaging will overtly entice underage consumers.\14\
---------------------------------------------------------------------------
    \14\ See Utah Administrative Code, (DABC Rule) R81-1-3 (3), R81-1-
17(3)(a) (1998)./

   Taxation Alcohol is taxed at a heavy rate. This is intended 
        both as a source of revenue\15\ and as a disincentive to high 
        consumption. If sales taxes or alcohol-specific taxes are not 
        paid to the state treasury, all taxpayers suffer and the 
        policies behind such taxes are unmet. In Utah's criminal case 
        against Beer Across America, the company collected sales taxes 
        from Utah residents and claimed to be paying it to another 
        state. We were unable to verify whether the amounts collected 
        were remitted to another state. If not, the company 
        fraudulently collected--and converted to its own use--increased 
        amounts from its customers. Even if taxes were paid to another 
        state, Utah residents still are obligated to pay Utah use taxes 
        for the purchases. In such cases, citizens paid taxes twice. If 
        the vendor is not licensed to collect sales taxes, how can a 
        state know whether taxes have been collected or remitted. 
        Businesses that are obeying the law and pay the required fees 
        and taxes should be commended.
---------------------------------------------------------------------------
    \15\ This revenue is far below the well-known societal costs of 
dealing with the effects of alcohol consumption as reflected by 
increased rates of domestic abuse, workplace absenteeism, and health 
care costs.

   Licensing The licensing of producers and vendors of alcohol 
        gives the state a means of preventing unqualified or 
        undesirable persons from participating in this business.\16\ 
        Persons with criminal records or with ties to illicit 
        organizations can be excluded. Insurance coverage may be 
        required of the licensee.\17\ The licensing process also can 
        require that licensees be knowledgeable in the law. The threat 
        of revoking a license is an incentive for the holder to insist 
        on compliance with the law by his firm. Licensing also gives 
        states the ability to impose pro-consumer requirements such as 
        a mandate for all licensees to undergo server training to 
        prevent sales to minors or to the already intoxicated.
---------------------------------------------------------------------------
    \16\ Utah Code Ann. Sec. 32A-4-103 (1) (1998).
    \17\ Utah Code Ann. Sec. 32A-4-102 (1) (1998).
---------------------------------------------------------------------------
                       sales of alcohol to minors
    One of the strongest--and most universally accepted--justifications 
for controlling the sale of alcohol is to prevent consumption by 
minors. The reasons for this paternalism are beyond cavil.
    Nationally, 26 percent of 8th graders, 40 percent of 10th graders, 
and 51 percent of 12th graders report drinking alcohol in the prior 
month.\18\ Although rates are lower in Utah, there are nevertheless 
22,000 underage binge drinkers in the state of Utah.\19\
---------------------------------------------------------------------------
    \18\ Youth Drinking: Risk Factors and Consequences, Alcohol Alert, 
No. 37, July 1997.
    \19\ Anne Wilson, Study Links Ads, Teen Drinking, Salt Lake 
Tribune, Sep. 11, 1996 at C1.
---------------------------------------------------------------------------
    Across the country, about 84 percent of all college students drink, 
\20\ and about 44 percent are binge drinkers.\21\ College students 
under 21 binge drink at rates equal to or greater than those of legal 
drinking age.\22\ Rates of college drinking are lower in Utah. In 1994, 
80 percent of Utah college students reported that they did not 
drink.\23\ Binge drinking, although not as prevalent in Utah as 
elsewhere, is still a major problem. A survey conducted by the Utah 
Alcohol Policy Commission indicates that 12 percent of first-year 
(underage) Utah college students binge drink. When statistics from 
Brigham Young University (a church-sponsored institution) are factored 
out, the number jumps to 18 percent.\24\
---------------------------------------------------------------------------
    \20\ Henry Weschler et al, Too Many Colleges are Still in Denial 
About Alcohol Abuse, The Chronicle of Higher Education, Apr. 14, 1995.
    \21\ Henry Weschler et al, Health and Behavioral Consequences of 
Binge Drinking in College: A National Survey of Students at 140 
Campuses, JAMA, Dec. 7, 1994.
    \22\ Ralph W. Hingson, College-Age Drinking Problems, Public Health 
Reports, Jan/Feb, 1998, at 52; Donna E. Shalala, Message from Secretary 
of Health and Human Services, Alcohol Alert, July 1995.
    \23\ Joan O'Brian, More Students Aren't Drinking to Their Health, 
Salt Lake Tribune, May 24, 1994, at D1.
    \24\ Dan Egan, Study: Binge Drinking Low at Utah Colleges, Salt 
Lake Tribune, Nov. 7, 1997 at B1.
---------------------------------------------------------------------------
    What is clear is that governmental control policies, such as 
raising the drinking age and increasing taxation of alcohol, have been 
shown to reduce alcohol consumption and alcohol-related problems among 
young adults.\25\
---------------------------------------------------------------------------
    \25\ Barbara L. Braun et al, Civic Participation by 18- to 20-Year-
Olds as a Predictor of Support for Alcohol Control Policies: The 
Communities Mobilizing for Change Project, Contemporary Drug Problems, 
Mar. 1, 1997.
---------------------------------------------------------------------------
    Firms engaged in direct shipping of alcohol are making it 
significantly easier for minors to gain access to alcohol--and in some 
ways that may not be anticipated. Unlike the traditional sales 
transaction involving alcohol, direct shipping eliminates the face-to-
face contact between the buyer and seller. Whether the traditional 
seller is a state liquor store or a private storefront, a cashier is 
present to verify the age of the buyer. Not so with direct sales. There 
is no means of determining the true identity of the buyer. While the 
telephone order takers or the Internet order forms may ask the buyer 
whether he or she is over 21, no steps are taken to verify this crucial 
piece of information. If a minor is willing to violate the law by 
purchasing and consuming alcohol we are deluded if we think the youth 
will be dissuaded from doing so by having to lie about his or her age.
    Last week, a Salt Lake City television station ran a story about a 
13 year old girl who ordered alcohol over the Internet using her 
brother's credit card. This is outrageous. No one should condone 
business practices that permit this result. Our pending criminal case 
involving Beer Across America also included one criminal charge of a 
sale to a minor who was shipped beer by the company.
    One might think that delivery to minors can be prevented by 
requiring package delivery companies to require an adult signature for 
the alcohol being delivered. In fact, the Beer Across America home page 
states: ``An adult signature is required at time of delivery. Please 
make sure that someone will be present to sign for the package during 
regular business hours.'' \26\ In reality, this does not occur. Direct 
shipping companies rarely disclose on the package that the contents are 
alcohol--perhaps out of a fear that the package will be seized by law 
enforcement officials. As a result, the packages do not identify the 
contents, do not give the full name of the seller (ordinarily using the 
initials of the company and its address), and do not say that an adult 
signature is required.
---------------------------------------------------------------------------
    \26\ See www.beeramerica.com for the home page of this company. The 
order form with this language is found under the ``Join Our Club'' 
button. It also is found at: www.actonet.com/cgi-bin/BAA/
display?TEMPLATE=register.template
---------------------------------------------------------------------------
    Indeed, the package delivery companies do not want to have to 
obtain an adult signature for their deliveries. The delivery companies 
simply do not want to have to make multiple trips to a home hoping to 
find an adult present. The alarming truth is that most alcohol sent to 
homes via delivery companies are left on porches, in bushes, and behind 
fences--often with a note on the door. Our criminal investigation of 
Beer Across America revealed that of 558 cases of alcohol delivered to 
Utah residents during a three month period, 330 were left where someone 
else--including minors--could get access to it. This means that 59 
percent of the alcohol sent into my state by direct shippers is left 
out for anyone to pick up. Presumably the same is true everywhere. No 
signature is required. No adult must accept control of the package. It 
is a perfect situation for a minor who knows about the delivery. If he 
steals the package, no one may ever know he has the alcohol.
    The draft of a study in progress has revealed that: ``Underage 
youth use home deliveries as a source of alcohol. Ten percent of 12th 
graders and 7 percent of 18- to 20-year-olds in 15 midwestern 
communities reported that they obtained alcohol through delivery 
services in the last year.\27\
---------------------------------------------------------------------------
    \27\ Fletcher, L.A., Willenbring, M.L., Wagenaar, A.C., Alcohol 
Home Delivery Service: A Source of Alcohol for Underage Drinkers, 
Journal of Studies in Alcohol, in print.
---------------------------------------------------------------------------
                       the world has not changed
    Advocates for this new industry argue that the world is different 
now; that we cannot apply prohibition-era laws to Internet-era 
transactions. This seductive argument is not only wrong, but 
pernicious.
    While alcohol now can be ordered over the Internet, this new 
phenomenon is not much different than the way business was conducted by 
toll-free telephone or mail order. While a new method of advertising 
and ordering has been devised, it does not signal any fundamental 
change in the nature of alcohol regulation such that the laws should be 
scrapped. More importantly, it must be emphasized that while orders can 
be placed over the Internet, the products are not shipped via the 
Internet. Unlike some products that can be purchased and delivered over 
the Internet--such as music, software, or pornography--this product 
still is delivered the old fashioned way. Whether a product has been 
ordered over the Internet has no effect on the final activity: alcohol 
is delivered into a state by UPS, FedX, or other delivery companies in 
violation of the laws of that state. I see nothing in the creation or 
popularity of the Internet to undermine the state policies that led to 
regulation of alcohol.
    Last summer I took guilty pleas from a New York securities 
brokerage firm for two felony counts of securities fraud and sales by 
an unlicensed securities broker. The unlicensed broker had called into 
Utah pitching stocks to buy and doing so under a false name. In that 
case there were no challenges to our authority to require the out-of-
state seller to be licensed. No one doubted that the New York broker 
had to comply with Utah law when selling securities to Utah residents 
over the telephone. No one said that Utah lacked jurisdiction to 
prosecute the violators. And, the same licensing requirements apply 
also to the conduct of business by insurance agents, lawyers, 
physicians, and the dozens of professions regulated by states.
    It is illogical and bad public policy to permit a state to 
prosecute violators of securities, insurance, or other professional 
licensing laws, but not violators of the alcohol control laws.
    The legal arguments being made by defenders of this industry are 
troubling. If one accepts that it is within a state's police powers to 
determine that certain products are contraband, or at least regulated, 
then the state should have the ability to enforce compliance with those 
laws. If states cannot enforce their alcohol compliance laws, does this 
portend challenges to their ability to enforce securities or insurance 
laws--not to mention laws against child pornography or the illicit drug 
trade?
    A company should not be allowed, with impunity, to sit in one state 
and ship a contraband product to a buyer in another state. If a state 
is to have power to declare activities illegal, it is untenable to deny 
it the ability to enforce those laws. The only change occasioned by the 
Internet is to increase the availability of alcohol without changing 
the laws regulating its sale and use.
                        illegal conduct in utah
    Utah does not attempt to control what its residents do in other 
states. However, Utah must be able to control its borders when 
contraband products are destined for delivery into the state.
    During October and November 1996, state investigators intercepted 
244 cases of beer \28\ shipped to Utah residents by Beer Across 
America. We discovered that sales had been ongoing since at least 1992. 
This problem is not a recent phenomenon. Considering that Utah has less 
than one percent of the U.S. population, by extrapolation the number of 
shipments into Utah during those two months means that over 146,000 
bottles of beer are being shipped by this one company every month to 
citizens all over the country. And this is only one of the hundreds of 
companies engaged in this business. As noted below, one estimate is 
that five million cases of wine are sold and shipped illegally each 
year. This is a massive disregard for the rule of law.
---------------------------------------------------------------------------
    \28\ Each case had twelve bottles.
---------------------------------------------------------------------------
    It is instructive to note that all of the shipments into Utah by 
Beer Across America occurred six months after the company was informed 
that it was a violation to ship the product into Utah. These sales--and 
the resulting violations--were deliberate. Even more egregious, in 33 
of these cases, or 13.5 percent, the company urged the customers to 
list an out-of-state address for the sale, then an in-state address for 
delivery. A more manifest disregard of the law--by someone pretending 
to be legitimate--is hard to imagine.
   this problem affects all producers, not just out-of-state shippers
    If direct shipping is permitted in disregard of state laws, in-
state producers are harmed. If out-of-state producers do not have to 
pay taxes, local producers are placed at a competitive disadvantage. If 
out-of-state shippers do not have to be licensed, inspected, or have 
quality testing of their products, local producers will be incurring 
costs higher than the out-of-state shippers. The natural result of 
elimination of restrictions on out-of-state producers is a push to 
eliminate restrictions on in-state producers.
    Put another way, if regulation of in-state alcoholic producers, 
distributors, and vendors is to continue, the same restrictions must 
apply to out-of-state sellers. We cannot harm those who have complied 
with the law by giving preferential treatment to those who do not 
operate under the same constraints. If we did, it would drive all 
producers out of our state--and out of the reach of the police powers 
of the state. As indicated above, if out-of-state shippers are not 
forced to comply with the laws of the states in which their products 
are sold, state authority to regulate alcohol will cease. The effect of 
the 21st Amendment will cease. The Webb-Kenyon Act will be rendered 
meaningless.
                  policy choices, not legal questions
    Proponents of direct shipping make several superficially attractive 
arguments in support of their position. They argue that prohibitions on 
direct shipping are protecting state-sponsored monopolies. They decry 
restrictions on freedom of choice and the limited purchase 
opportunities. They accuse states of protecting large manufacturers or 
in-state distributors who are guarding their own turf. They even seek 
sympathy by pointing out that alcohol control laws are turning ordinary 
citizens into criminals.
    It is important to see these for what they are: policy arguments, 
not legal arguments. Each of these arguments is an expression of an 
opinion about what public policy should be. Out of frustration at their 
inability to change public policy in other states they are flouting the 
law's requirements.
    These arguments are being directed at the wrong targets. These 
policy choices should not be made to prosecutors or to courts. So long 
as the 21st Amendment is in effect, states will have constitutionally 
sanctioned authority to assert their police powers in a manner 
determined by the state legislature. Proponents of direct shipping 
should focus their attention on state legislatures. If they fail there, 
they can attempt a repeal of the 21st Amendment. Until that time, it is 
my sworn duty to enforce the laws legitimately passed by my 
legislature. And I serve notice at this time that the law will be 
enforced most aggressively against those who are deliberately violating 
the laws of my state.
                          enforcement problems
    State enforcement of alcohol laws are complicated by several 
factors:

   The number of direct shippers violating the law (and the 
        volume of shipments),

   The perennial shortage of enforcement resources,

   Statutes that have not been updated to reflect current 
        marketing practices through mail order, Internet, and direct 
        shipments,

   The difficulties of obtaining information from out-of-state 
        violators,

   The reluctance of some in-state customers to report the 
        violations or to cooperate with investigators,

   Problems establishing personal jurisdiction over defendants 
        in another state,

   Difficulties inherent in prosecuting an out-of-state 
        defendant, and

   The occasional reluctance of other states to extradite a 
        defendant for criminal charges. It is particularly regrettable 
        that some states are reluctant to extradite defendants, as a 
        means of protecting their domestic alcohol industries. This is 
        tantamount to aiding in the efforts of businesses that are 
        violating the law.

   The lack of cooperation by delivery services which generally 
        resist attempts by state investigators to gather information.

    In Utah's Beer Across America case, we were thwarted at the trial 
court level because the judge accepted the argument that defendants did 
not direct their efforts at Utah and that enforcement of state laws 
would improperly impair how the company conducted business in Illinois. 
We appealed this ruling because the implications of his decision would 
have taken the heart out of the legal basis for prosecutors to proceed 
against out-of-state defendants in any number of different crimes.
    I am happy to report that last Thursday, the Utah Court of Appeals 
issued its ruling in the Beer Across America case. The court reversed 
the trial court and reinstated the criminal charges. The appeals court 
made three significant rulings that apply to our criminal prosecution:

   First, the state has personal jurisdiction over a criminal 
        defendant if that defendant is present in court. Civil concepts 
        of minimum contacts are not applicable in criminal cases.

   Second, Beer Across America is subject to prosecution in 
        Utah for conduct committed in Illinois because its conduct 
        caused an unlawful result in Utah.

   Third, Utah's prosecution is valid under the 21st Amendment 
        and does not run afoul of the Constitution's Commerce Clause.

    This decision only clarifies Utah law and our criminal 
prosecutions. It is a good first step. However, attempts to enforce 
civil law and to remedy subject matter jurisdiction problems remain 
unsolved. Florida still is being thwarted in bringing a civil 
enforcement case. Legislation still is needed. We must also be mindful 
that further appeals of Utah's decision are possible. We cannot ask 
other states to continue to hold off on enforcement pending any further 
appeals in our case--especially since our case involves criminal 
proceedings, not civil ones.
    Florida alcohol regulators attempted to enforce their laws in a 
civil enforcement action. State courts said they lacked personal 
jurisdiction over the defendants in Florida and could not proceed.\29\ 
The state tried to solve this problem by using the Webb-Kenyon Act's 
proscriptions against violating state laws and suing in federal court--
where personal jurisdiction was not a problem. The federal court ruled 
that, as currently written, the Webb-Kenyon Act does not give the 
states a cause of action to file suit in federal court.\30\ Once again 
the direct shippers are flouting the law and finding ways to avoid 
accountability.
---------------------------------------------------------------------------
    \29\ State v. Sam's Wine and Liquors, Case No. 97-3828 (Fla 1st DCA 
1999). This is not a complete barrier to enforcement. It only means the 
state cannot act early to stop shipments and must wait until it has 
evidence of sufficient shipments for personal jurisdiction over the 
violators to attach.
    \30\ Florida Dep't of Business Regulation v. Zachy's Wine and 
Liquor, 125 F.3d 1399 (11th Cir. 1997) cert denied 18 S.Ct 1402, 140 
L.Ed.2d 660 (1998).
---------------------------------------------------------------------------
    If the Webb-Kenyon Act or the 21st Amendment or state laws 
regulating the sale of alcohol are to remain viable, there must be a 
means for states to enforce those laws. If the states continue to lack 
an effective enforcement method, there will be even more massive 
disregard of constitutionally permitted restrictions and states rights. 
But, the answer is not to federalize the crime or to have federal 
agencies prosecute the violators. This is a state law problem where 
enforcement actions represent the implementation of legislative policy 
decisions regarding state police powers. We are not seeking a 
federalization of this problem. We do, however, seek federal assistance 
in solving unique problems facing the states.
    State enforcers are making great efforts to solve this problem. It 
is getting larger by the day. More and more companies are thumbing 
their noses at state laws and state enforcement actions. We are asking 
Congress to remove the legal technicalities behind which some of these 
crooks are hiding. Enforcement must continue unless or until policy 
makers in the individual states alter their policies. What these 
shippers want is for the courts to overrule the policy decisions of the 
statehouses.
    While direct shippers may have a pipe dream that the U.S. Supreme 
Court may soon eviscerate the powers of states and the validity of the 
21st Amendment, they cannot be rewarded for that dream by getting free 
passes to violate the laws they now are challenging. They have chosen 
to flout the law instead of changing it. This is a law enforcement 
problem and it must be solved now.
                            recommendations
    We cannot emphasize enough the seriousness of our concern about the 
reprehensible conduct of these direct shippers who are deliberately 
violating state laws. They are seeking to be excluded from the ordinary 
obligations of businesses: paying taxes, submitting to quality control 
inspections of their products, and complying with statutory 
restrictions on their operations. Even worse, their conduct is directly 
contributing to the increased availability of alcohol to minors.
    To help us in solving this problem, I offer the following 
recommendations:

    Prompt passage of federal legislation with the following 
components:

   First, grant the states jurisdiction in federal courts to 
        halt violations of state law by out-of-state violators.

   Second, give the states effective relief against violators. 
        Ideally, the federal court action would halt the conduct, 
        punish the violator, and deter further violations by defendant 
        and other companies. At the least, legislation must enable 
        states to halt the illegal conduct and empower the courts to 
        impose contempt on recidivists.

   Third, make the federal court process effectual and 
        efficient. Allow venue where the illegal shipments are 
        received, in addition to general venue provisions. Permit 
        nationwide service of process. Provide for bench trials, not 
        jury trials. If the federal court actions will not permit the 
        state to enforce the full panoply of state enforcement powers, 
        make sure that the federal action is not the exclusive remedy 
        for the states.

    A Congressional reaffirmation of the powers of states to set their 
own alcohol control policies and a call to all liquor producers or 
distributors to comply with state laws. This can be done with the 
Senate Report to accompany this legislation or testimony before the 
Congress. At the same time, we would hope that state alcohol regulators 
will recognize the seriousness of this type of violation and use an 
injunction issued under this new statute as grounds to suspend or 
revoke the licenses of violators.
    Consider adopting requirements that any alcohol shipped across 
state lines by commercial carriers clearly identify the shipper, 
describe the contents of the package as alcohol, and require an adult 
signature. Packages containing alcohol should not be permitted to be 
left on porches or in bushes--even if a state permits direct shipments.
                               conclusion
    I appreciate the opportunity to present our views on this very 
important issue. We commend you for taking steps to assist states in 
their efforts to halt this burgeoning illegal practice. We respect the 
rights of direct shippers to ship their products in conformance with 
the law and respect their rights to petition state lawmakers to adopt 
new state alcohol policies.
    However, we categorically reject the current practice of violating 
the law and adopting a battle strategy of trying to overturn state 
control over this product--and in the process eviscerate both the 21st 
Amendment and the Webb-Kenyon Act.
    The terms of engagement for this battle were aptly described in a 
newspaper article in California:

          Cushioned from risk by the limited jurisdictions and 
        enforcement abilities of other states, the absence of any 
        meaningful punishment such as fines or loss of sales license, 
        and by their wine shippers--who are the primary target of most 
        enforcement--local wineries and other direct mail wine 
        operations have joined an underground industry where each year 
        an estimated five million cases of wine are sold and shipped 
        illegally.
          * * * * *
          I would say it's like being an accessory to the crime, 
        [industry consultant Sara] Schorske said.
          * * * * *
    The St. Helena winery owner who wished to remain anonymous 
estimates that selling his wines by direct mail brings in upwards of 
$150,000 a year. He said that approximately five percent of his direct 
wines sales are to reciprocal states.\31\ And, while he said he has 
wondered lately if an unusually high volume of out-of-state inquiries 
about his wines conceals a sting operation aimed at his business, he 
isn't going to stop. ``I said let's look at this from a business point 
of view. This business means $150,000 a year to us. We're not going to 
walk away from that,'' he said. ``And I'm not a gambler either.'' \32\ 
(Footnote added).
---------------------------------------------------------------------------
    \31\ This means that 95 percent of the sales and shipments are to 
non-reciprocal states--where the sales are illegal.
    \32\ Jeremy Jay, Special Report: On Wings of Wine, St. Helena Star, 
Jan. 12, 1995 at 1.

    The Chairman. Mr. Diamond, we will turn to you.

                  STATEMENT OF STEPHEN DIAMOND

    Mr. Diamond. Mr. Chairman and Senators, I have submitted a 
longer statement which I would like to summarize now. I am here 
to suggest that Federal help may well be necessary to preserve 
relative State autonomy in alcoholic beverage regulation, and 
that such help conforms with the spirit of the 21st amendment 
and that the 21st amendment is not and should not be read as a 
dead letter.
    My remarks will therefore focus on two topics. Are 
interstate sales more of a threat to State alcoholic beverage 
regulations now than they were in the past, and has the 21st 
amendment become so eviscerated that it no longer shields any 
significant State regulatory efforts and there is not deserving 
of congressional support?
    Circumstances have changed drastically in recent years. 
Volumes of shipments have unquestionably grown. Shipments of 
wine have increasingly come directly from the suppliers, and 
thus are asymmetric, with a few States being significant net 
exporters, while the other States are larger importers. The 
most dramatic difference between contemporary interstate sales 
and that of earlier decades is the growth of industry 
advertising, which in the past was usually limited or 
prohibited. Cheaper out-of-State products could not then be so 
easily identified. Now, the Internet is available.
    Ambivalence about marketing is revealed in the most 
sympathetic argument for interstate shipment, which is the 
story of a small winery whose product was tasted and admired by 
a tourist who was subsequently frustrated to discover that he 
or she could not purchase it back home. The demand was not 
stimulated by the seller, it is implied, but preexisted in the 
buyer. What was being sought was not price savings, including 
possible tax avoidance, but access to otherwise unavailable 
products.
    Many States are sympathetic to such a story and have passed 
regulations to permit such shipments of wine, in particular. 
More States are considering them. There must, however, be a way 
to prevent shipment into a State on such a scale as to 
challenge the State's fiscal system and three-tier regulatory 
regime. Both monopoly and license States often derive 
significant revenues from markups or excise taxes.
    Moreover, wholesalers and retailers need to be assured of 
sufficient sales returns to compensate them for the many 
regulatory restraints under which they operate, and to make it 
unlikely that they become so economically pressed as to turn in 
desperation to what used to be termed the classic liquor 
evils--pushing sales to the underaged, the intoxicated, selling 
after hours, et cetera.
    In spite of the recent decision in Utah, State court 
prosecutions are still problematic. Personal jurisdiction is 
uncertain, perhaps because judges are reluctant to permit 
criminal convictions in these matters. The proposed bill is 
less onerous in its consequences for shippers, since it only 
provides injunctive relief, and more efficient in 
administration, since the judgment, if granted, will 
automatically be enforceable in all Federal courts.
    I believe the State systems are still functioning and 
deserve protection from out-of-State challenges to their 
integrity. This is not to say that they cannot be improved. 
They have in the past, and continue to adjust. Their variety is 
the price we pay for federalism, and the price that was 
specifically paid to achieve repeal of the 21st amendment and 
to provide for a range of alcoholic beverage regulatory regimes 
which fairly reflect the fact that even now, as Judge Posner 
has observed, there is no consensus within the United States on 
how the sale and use of alcoholic beverages should be 
regulated.
    The 21st amendment has not been critically eroded by 
Supreme Court decisions. It is, of course, true that the broad 
reach of the amendment enunciated by Justice Brandeis in the 
1930's is no longer accepted in its entirety. With regard to 
economic regulation, the Court has rejected protectionist State 
taxes, price affirmation, fair trade legislation, and State 
limitation of factual alcoholic beverage advertising. This does 
not lead to the conclusion that the 21st amendment has ceased 
to protect State regulations from the challenge that they 
violate the dormant Commerce Clause, nor that State regulations 
necessarily are preempted by Federal legislation enacted under 
the Commerce Clause.
    In 324 Yorkshire v. Duffy, the Court did suggest that 
mandatory price markups were valid. In 44 Liquor Mart, Justice 
Stevens declared that the State could pursue its temperance 
aims by taxes or by establishing minimum prices. In Rice v. 
Norman Williams, Justice Stevens again concurring, observed 
that the State presumably could regulate the wine market by 
fixing retail prices itself. Such regulatory programs would be 
devastatingly undercut by uncontrolled interstate shipments.
    The limits which have been placed by the Supreme Court upon 
State action with regard to alcoholic beverages should actually 
give Congress greater confidence if it acts to facilitate 
enforcement by States of their importation rules. The 21st 
amendment does not have any requirement that Congress implement 
its terms. Congress has, in the FAA, passed legislation in part 
to support State regulation. To do so again would comport with 
the spirit, history, and present role of the 21st amendment.
    Thank you.
    The Chairman. Thank you, Mr. Diamond.
    [The prepared statement of Mr. Diamond follows:]

                 Prepared Statement of Stephen Diamond

    My name is Stephen Diamond. I am a Professor of Law at the 
University of Miami Law School where I have taught classes on the 
evolution of the Twenty-first Amendment and local, state and federal 
regulation of alcoholic beverage trade practices. I am also an Adjunct 
Professor of History there where I teach a course on the history of 
Prohibition and the early Repeal Regime.
    I am not here to speak about the specific merits and demerits of 
the proposed bill, but to trace how the problem of interstate sales has 
arisen and to suggest that Federal help is probably necessary to 
achieve a solution.
    I do think that federal intervention of some kind is desirable to 
preserve the realm of relative state autonomy in alcoholic beverage 
regulation and that such an intervention conforms with the spirit of 
the Twenty-first Amendment, and that the Twenty-first Amendment is not 
and should not be read as a dead letter.
    My remarks will therefore focus on two topics:

    1. Is there in practice a new set of circumstances with regard to 
interstate shipments that has emerged, for which the existing legal 
regime is inadequate to protect state authority to define its own 
importation and distribution regulations with regard to alcoholic 
beverages. The Supreme Court, on several occasions, even when finding 
particular state practices to be unconstitutional, has continued to 
describe importation and distribution as the ``core'' concerns of the 
Twenty-first Amendment.
    2. Has the Twenty-first Amendment become so attenuated as a shield 
for state autonomy, so ``eviscerated'', in Justice O'Connor's lamenting 
phrase in dissent in 324 Yorkshire v. Duffy, that it no longer protects 
any significant state regulatory efforts and therefore is not deserving 
of Congressional support?
    To evaluate the present threat posed by interstate shipment is 
problematic. As with any underground activity, figures are hard to come 
by and often offered for at least suspect motives. We were told several 
years ago, at a meeting in Chicago of the National Conference of State 
Liquor Administrators, that the value of such shipments was already one 
billion dollars, a figure probably chosen to imply that efforts to 
frustrate and impede such trade would be as ineffectual as King Canute 
ordering back the tide or the Prohibition Bureau stamping out the 
bootlegger.
    Conversely, when the State of Florida sued out-of-state shippers in 
both state and federal court, the defense suggested that the amount of 
shipments was greatly exaggerated--the state's estimate of lost tax 
revenues was, I believe, based upon the one billion dollar figure--and 
that the violations, if that was how to describe them, were de minimus.
    There have long been de minimus defenses--though controversial 
ones--to efforts to prohibit interstate shipments. It was on such 
grounds that the lower court, in the famous Idlewild case, based its 
conclusion that New York's efforts to prohibit sales at the airport 
duty free store violated the commerce clause. The low volume of sales, 
although not referred to by Justice Stewart in his opinion for the 
majority of the Supreme Court, was in effect an answer to Justice 
Black, who, in dissent, was concerned that permitting such sales might 
endanger the profitability of New York State retail stores.
    Interstate shipments by car, usually transported by the purchaser 
for importation into his own state, and usually in limited quantities, 
had been a topic of discussion at regional NCSLA meetings and a focus 
of intermittent enforcement efforts--in the states where they were not 
legal--since the early days of Repeal. The volumes involved only became 
a significant issue where large cities were located near the state 
border. State regulators were under pressure from colleagues in sister 
states; they were in effect mutually hostage to the consequences of 
price-cutting and tax-lowering wars.
    The circumstances, or at least the potential circumstances, of 
interstate shipment of alcoholic beverages have changed drastically in 
recent years. Volume has unquestionably grown. Techniques of efficient 
transportation over long distances have improved. The shipments of wine 
have increasingly come directly from the suppliers, and thus are 
asymmetric with a few states, California, of course, in particular, 
being significant net exporters while other states are largely 
importers. The states are not mutually vulnerable, in the sense that 
New York and New Jersey were. What is really reciprocal about 
California and Illinois agreeing to permit shipments purchased by 
residents of each state of the wine produced in the other? It should be 
added, however, that if interstate shipments are not re-regulated and 
controlled, U.S. wine producers may find themselves in competition with 
foreign producers who are presently considering exporting to one state 
and undertaking nation-wide internet sales from that site.
    The most dramatic difference between contemporary interstate sales 
and that of earlier decades is the growth of industry price 
advertising, limitations on which were recently prohibited as 
violations of the First Amendment in 44 Liquor Mart. In the past, such 
advertising was usually prohibited. Cheaper out of state products could 
not be so easily identified.
    This served to some extent to reduce the amount of interstate 
crossing to purchase cheaper goods in the neighboring state. The spirit 
of this older regime is still at least in part reflected in the fact 
that some states which have entered into reciprocal inter-state wine 
shipment agreements with California prohibit direct mail solicitation 
by the out-of-state wineries. What this means is the growing world of 
Internet marketing is unclear. The ambivalence about marketing is 
reflected in the most sympathetic argument for inter-state shipment 
outside of traditional channels which is the story of a small winery 
whose product was tasted and admired by a tourist to the winery region, 
who was subsequently frustrated to discover that he or she could not 
purchase more of the product in his or her own state, because 
wholesalers would not carry it. (We will leave unexplored the 
possibility that its unavailability was because it was an item which 
the winery preferred to ship on allocation to those who ordered 
directly from it so that it might retain the full retail price for 
itself or whether it feared that entering the traditional distribution 
system might lock it into a wholesaler who would not support the 
brand). The demand was not stimulated by the seller, but pre-existed 
with the buyer. What was being sought was not price savings, including 
possible tax avoidance, but access to otherwise unavailable products. 
Many states are sympathetic to such a story and have passed regulations 
to permit such shipments, of wine in particular. While the type, 
amount, and circumstances under which importation is permitted vary, a 
general pattern emerges: opportunities are being offered to in-state 
consumers to purchase unavailable products. I am told that, presumably 
responding to such pressures, the Wine and Spirits Wholesalers 
Association is supporting a program in all license states in which a 
buyer may special order any wine through the system upon payment of the 
appropriate state taxes. I am also informed by a National Alcoholic 
Beverage Control Association official that all of the states that 
wholesale wine also permit special ordering, although the effort is not 
always successful either because the state, Utah, for example, is not 
on the marketing horizon of the winery, the winery dislikes dealing 
with government officials, or it refuses to give up some of the full 
retail price to the lower tiers of distribution.
    To the extent that consumers simply want to purchase tax avoidance, 
the quest should not be facilitated, but indeed it should be 
frustrated. To the extent that what they seek is a choice, there will 
be pressure for states to respond positively, already indicated in a 
number of states which are attempting to permit some importation of 
limited quantities of specifically defined products for personal use. 
There must, however, be a way to prevent shipment into a state on such 
a scale as to challenge the state's fiscal system and three tier 
regulatory regime.
    The recent history of interstate shipment regulation in Louisiana 
is instructive. The legislature which had provided for limited 
interstate imports from pre-registered out-of-state sellers has just 
narrowed the scope of its permission to wineries which do not use 
wholesalers for additional distribution--whose product is therefore 
unavailable, as a result either of supplier or wholesaler decisions. In 
addition, beer and distilled spirits can no longer be similarly 
imported, and the supplier must now provide monthly rather than annual 
reports. Regulators in Louisiana have always been concerned about the 
capacity to assure tax compliance even with those who registered for 
shipment in the state but whose records and product are out of state. 
State administrators have talked of performing compliance stings, at 
least to establish confidence levels in the reporting. So far as I 
know, this has not yet been implemented.
    Before turning to a discussion of the Twenty-First Amendment, I 
would like briefly to address an issue often raised by supporters of 
such shipments; if a state is serious about prohibiting them, should it 
not pursue the buyers, the in-state residents? There has long been a 
belief in alcohol beverage regulation that it is more effective to 
regulate sellers, whose interest is profits, and who therefore can be 
constrained by a combination of incentives and fines, that to try to 
regulate buyers whose motives are much more complex and volatile, and 
who may respond with defiance. This traditional approach is buttressed 
by a concern in the state that its own citizens may have been 
stimulated by increased marketing efforts. When the importation was by 
a Maryland resident driving to Washington, D.C., for example, to 
purchase cheaper alcoholic beverages, the buyer was responsible and 
enforcement, if undertaken, focussed on him.
    While no one knows with any precision the extent of such shipments 
now, and while efforts are being made in a number of states to provide 
local consumers access to unavailable products, there is a realistic 
fear on the part of states, as reflected in NCSLA and NABCA 
resolutions, that failure to limit or control shipments, for the 
purpose of tax avoidance, for instance, will serve as a very slippery 
slope to the destruction of state alcoholic beverage regulation. This 
could well be a race to the bottom in which states lower their taxes, 
and thus abandon temperance regulation through price, for example, to 
discourage out-of-state purchases. The threat to the state regulatory 
system is real. Both monopoly states and license states often derive 
significant revenues from markups or excise taxes. Moreover, in license 
states, and in monopoly states which use private wholesalers to 
distribute beer or wine, the wholesalers and retailers need to be 
assured of sufficient sales returns to compensate them for the many 
regulatory restraints under which they operate and to make it unlikely 
that they become so economically pressed as to turn in desperation to 
what used to be termed the classic ``liquor evils'': pushing sales to 
the underaged, the intoxicated, selling after hours, even purchasing 
bootlegged liquor.
    In addition, it is not totally far-fetched to fear that the long-
term result of unregulated and unrestricted interstate shipments would 
be the rise of a small number of mega stores buying in large volume. 
These stores might well be the beneficiaries of state tax exemptions 
and subsidies. It is unlikely that consumer welfare in the long run 
would be maximized by this process.
    This is the problem. Now what are the solutions? Some states have 
attempted to prosecute or otherwise deter those engaging in 
unauthorized interstate shipments. This has proven difficult. In 
Florida, the state court found insufficient contacts to satisfy 
personal jurisdiction requirements for civil and injunctive relief. In 
Utah, the trial court did likewise in a criminal prosecution and also 
held that the restriction unconstitutionally restrained interstate 
commerce. That decision was just overturned. But state court 
prosecutions are still problematic, personal jurisdiction is uncertain, 
perhaps because judges are reluctant to permit criminal convictions in 
these matters. The proposed bill is less onerous in its consequences 
for shippers, since it only provides injunctive relief, and more 
efficient in administration since a judgment if granted will 
automatically be enforceable in all federal courts.
    The second question is whether the state regulatory system is worth 
protecting, or whether it is so old-fashioned and out of date and so 
stripped of power by Supreme Court decisions of the last several 
decades that it is incapable and undeserving of rescue. I believe the 
system is still viable, still functioning, and deserves protection from 
out-of-state challenges to its integrity. This is not to say that it 
cannot be improved. It is a very positive sign that the State of 
Washington, for instance, is undertaking a year-long re-evaluation of 
its three tier system regulations. Present laws are hardly perfect, but 
this is not a constitutional obligation. Their variety is the price we 
pay for federalism, and the price that was specifically paid to achieve 
repeal of the Eighteenth Amendment, and to provide for a variety of 
alcoholic beverage regulatory regimes which could fairly reflect the 
fact that even now, as Judge Posner has observed, there is no consensus 
within the United States on how the sale and use of alcoholic beverages 
should be regulated.
    The Twenty-first Amendment was accepted by Congress with the 
addition of the famous paragraph 2. This paraphrases though does not 
follow the precise language of the Webb-Kenyon act and was intended to 
constitutionalize it. The state was to be permitted to regulate the 
importation of alcohol beverages without fear that Congress might 
repeal the act and therefore subject state regulation again to the 
restrictions of the dormant Commerce Clause. Congressional debate over 
the Twenty-first Amendment and debate in the state ratifying 
conventions point in several directions. While sometimes it was 
suggested simply that the amendment was to protect dry states from 
interstate shipments, it was often asserted, and held by the Supreme 
Court in the famous Brandeis opinions, that the purpose was to give the 
states the authority to fashion their own alcoholic beverage regimes 
including monopoly of the wholesale and retail functions and, in the 
case of license states, the creation of the customary three tier 
system. These were the alternatives discussed in the famous Fosdick and 
Scott report commissioned just before repeal by John D. Rockefeller.
    Of the many lessons that were drawn from the failure of 
Prohibition, one of the most important, often repeated on the floor of 
Congress in the Twenty-first Amendment debates, was that the federal 
government ought not to attempt to regulate and enforce rules about 
alcoholic beverage sales and use. It was for this reason that paragraph 
3 of the proposed amendment, which would have given Congress concurrent 
power to regulate saloons, was withdrawn. This division between state 
and federal authority had been suggested even earlier, during 
Prohibition, by Emory Buckner, the U.S. Attorney from New York, who had 
proposed a division of enforcement responsibility: local officials to 
close down speakeasies; federal officials to deal with producers of 
interstate supply. In effect, this formulation was adapted to the 
regulation of legalized alcoholic beverages.
    States could remain dry, create monopoly systems, or regulate 
alcoholic beverages under what is called the license system which 
usually has meant the creation and support of a three-tier system in 
which supplier, wholesaler, and retailer usually are kept independent. 
The critical point is that the retailer is independent of supplier 
pressure and domination. The American system since Repeal has been to 
temper the pressures on retailers through the regulation of 
wholesalers, to give retailers the independence to pursue 
respectability and good standing in the neighborhood as well as profit, 
to limit sales venues to prevent over-competition, with resulting 
failures. The social consequences of aggressive competition in 
alcoholic beverages are seen to be deleterious. Those who lose because 
the market cannot support all the retailers, a circumstance which would 
be aggravated by direct mail shipping, do not necessarily fold up their 
tents and quietly disappear. While they struggle for survival, they may 
cut corners; state regulators have generally chosen to reduce the risks 
of this occurring.
    Tied-house evil regulation constitutes a parallel form of anti-
trust law, one which protects small retailers from discriminatory 
behavior on the part of those above them in the distribution chain.
    The theory of Repeal was one of compromise and moderation. 
Moderation in consumption, moderation in the pursuit of profit, 
somewhat analogous to the philosophy behind public utilities, and 
moderation in lawmaking: no longer would the law demand that which 
would not be obeyed and could not be enforced.
    Those who argue for free trade in wine ignore not just the 
Constitution, and the past history of this country but contemporary 
attitudes. Almost no one thinks the sale or use of alcoholic beverages 
should be unregulated. Alcoholic beverages provide a source of 
pleasure; abused, they create significant social dangers.
    Alcoholic beverages need regulation and most of the regulation must 
be at the state and local level. That is the intent of the Twenty-first 
Amendment. Even if it had the authority, the BATF presently has neither 
the interest nor the resources to regulate alcoholic beverages 
effectively. The Supreme Court still defines the ``core'' state powers 
protected by the Twenty-first Amendment to be the importation and 
distribution of alcoholic beverages.
    It has been suggested that the Twenty-first Amendment has been 
seriously eroded by Supreme Court decisions over the last several 
decades and no longer has enough force to justify a call for action by 
Congress to protect the states. This is not the case. It is of course 
true that the broad reach of the Twenty-first Amendment enunciated by 
Justice Brandeis in the 1930's is no longer accepted in its entirety. 
It was not accepted by everyone even at the time. Brandeis, for 
instance, declared that the Twenty-first Amendment was not limited by 
the Fourteenth Amendment, but no one argued for, or attempted to 
impose, a formal prohibition upon the sale of liquor to African-
Americans, for instance. His support of retaliatory protectionist 
legislation, which he called protective, was criticized but was 
probably a factor in persuading states to abandon most overt 
protectionist legislation by around 1940.
    The Supreme Court has declared that the Twenty-first Amendment does 
not shield state alcoholic beverage regulations from due process or 
equal protection challenges when regulations are attempting to limit 
sale of alcohol beverages to those identified by their families or 
public authorities as inebriates or to maintain a lower legal drinking 
age for young women than for young men.
    With regard to economic regulation, the Court has rejected 
protectionist state regulations, specifically an effort by Hawaii to 
exempt at least some locally produced alcoholic beverages from state 
taxes imposed on all imported products. (In Bacchus.) In Midcal, the 
Court rejected as preempted by federal antitrust law, fair trade 
legislation, in which the state delegated authority to suppliers who 
could fix the price at which their product was to be sold to retailers. 
This was not actually much of a restraint. Some states had already 
voluntarily withdrawn such laws and the California ABC did not appeal 
an adverse lower court decision in Midcal and clearly had abandoned 
support of its own rules.
    The Court has also prohibited price affirmations statutes--the same 
results can apparently still be imposed by contracting monopoly 
states--which required that a supplier affirm that the price being 
charged to its wholesalers was no higher than that charged to 
wholesalers in any other specified state. This was rejected on the 
ground of its extra-territorial impact. The Court asserted that extra-
territorial legislation was prohibited by the Commerce Clause, but I 
believe that it is better explained, as Professor Regan of Michigan has 
argued, as a limitation implicit in the very conception of a federal 
system.
    The Supreme Court has also rejected, at least in part, a tradition 
of state limitation of alcoholic beverage advertising, declaring that 
truthful factual advertising is protected by the First Amendment.
    This does not lead to the conclusion that the Twenty-first 
Amendment has ceased to protect state regulations from the challenge 
that they violate the dormant commerce clause, nor even that state 
regulations necessarily are preempted by federal legislation enacted 
under the Commerce Clause.
    In 324 Yorkshire v. Duffy, in which the Court rejected a New York 
rule which permitted wholesalers to post prices in such a way as to 
determine retailers' profit margins, the Court did suggest that 
mandatory price mark-ups were valid. In 44 Liquor Mart, in which a 
prohibition upon price advertising was struck down, Justice Stevens 
declared that the state could pursue its temperance aims by taxes or by 
establishing minimum prices. In Rice v. Norman Williams, upholding a 
primary source rule, Justice Stevens again, concurring, observed that 
``the State presumably could regulate the wine market by fixing retail 
prices itself. * * *'' Such regulatory programs would be devastatingly 
undercut by uncontrolled interstate shipments. In Midcal, even as it 
found fair trade legislation to be pre-empted, the Court stated: ``The 
Twenty-first Amendment grants the States virtually complete control 
over whether to permit importation or sale of liquor and how to 
structure the liquor distribution system.''
    As long ago as Idlewild, in which Justice Stewart insisted that the 
Twenty-first Amendment had to be read alongside of other Constitutional 
provisions, in a case where the state was found to have no authority to 
prohibit duty free sales of alcoholic beverages being shipped out of 
the country, Justice Stewart did assert that ``a State is totally 
unconfined by traditional Commerce Clause limitations when it restricts 
the importation of intoxicants destined for use, distribution, or 
consumption within its borders.'' It is worth remembering that the 
Twenty-first Amendment speaks of ``transportation and importation'' 
``for delivery or use.'' Regulation of importation for use is protected 
by the Constitutional shield. The state is not to be left with 
authority only to regulate sale, and if direct mail shipments continue 
to grow, potentially only of drinking on licensed premises.
    In spite of the Supreme Court opinions rejecting specific state 
laws or regulations, what has never been abandoned is the recognition 
that states have authority to establish the terms by which alcoholic 
beverages can be imported and distributed within their borders. Indeed, 
it is obvious that without control over importation, the state cannot 
effectively regulate distribution.
    These decisions do not eviscerate the Twenty-first Amendment even 
though the Twenty-first Amendment is no longer as broad a shield from 
federal preemption as it once was. The core powers of regulating the 
conditions of importation and distribution are still largely 
unconstrained. States can impose primary source rules that frustrate 
gray market sales. The three-tier system and state monopoly still 
function as institutions to permit access to yet constrain and regulate 
the methods of sale of products which society does not believe should 
be available without regulation. The fears that were asserted by some 
contemporaries simultaneously with Justice Brandeis's broad reading of 
the Twenty-first Amendment, that states might act to protect local 
industry and state regulation might be seized by private parties--a 
suspicion that of course can arise with regard to almost any 
legislation--are now significantly assuaged by the cases earlier 
described and by such lower court decisions as
     Pete's Brewing v. Whitehead, rejecting a Missouri beer 
labeling statute. The limits which have been placed by the Supreme 
Court upon state action with regard to alcohol beverages should 
actually give Congress greater confidence if it acts to facilitate 
enforcement by states of their importation rules.
    Even though the state might justify restrictions on importations 
simply by a formal reference to the Twenty-first Amendment, states are 
not making a formal claim alone. Uncontrolled importation from out of 
state without effective restrictions will threaten state tax revenues, 
the state fiscal system, and the three-tier system.
    While the Twenty-first Amendment does not have any requirement that 
Congress implement its terms, Congress has already in the FAA chosen to 
pass legislation whose purpose at least in part was to support state 
regulation enacted under the Amendment's protection. To do so again 
would comport with the spirit and history of the Twenty-first 
Amendment.

    The Chairman. We will now turn to you, Brendan.

                  STATEMENT OF BRENDAN BROGAN

    Mr. Brogan. Good morning. My name is Brendan Brogan and I 
am an 18-year-old senior at Ridgewood High School in Ridgewood, 
NJ. I also serve on the National Board of Directors of Mothers 
Against Drunk Driving. MADD is an organization that represents 
over 3 million Americans, and exists to end the senseless 
violent crime of drunk driving, to secure basic rights, to meet 
the needs of victims of drunk driving, and to prevent underage 
drinking. MADD members and supporters are not just mothers. 
They include mothers, fathers, brothers, sisters, victims, 
nonvictims, and a growing number of youth just like me.
    Although often viewed as an organization singularly focused 
on drunk driving, MADD since its inception has also been 
dedicated to preventing underage drinking in order to stop 
youth drinking and driving. MADD was instrumental in the 
passage of the Federal minimum drinking age law in 1984, which 
resulted in raising the legal drinking age to 21 across the 
Nation.
    MADD continues to advocate stringent enforcement of the 21 
law because it has proven to be the single most effective 
measure in reducing alcohol-related traffic fatalities among 
people between the ages of 16 and 20. In fact, minimum drinking 
age laws are estimated to have saved more than 17,000 lives 
since 1975. Between 1985 and 1995, the proportion of drivers 16 
to 20 years of age who are involved in fatal traffic crashes 
who were intoxicated dropped 47 percent, the largest decrease 
of any age group during this time period.
    In addition, MADD was also a strong supporter of, and 
played an active role in the passage of zero tolerance Federal 
legislation in 1995 that required all States to lower the 
illegal blood alcohol limit for drivers under the age of 21 to 
.02. Zero tolerance is now the law of the land, and more young 
lives are now being saved as a result of this initiative. Many 
young people around the country testified in support of these 
laws because they were tired of going to class reunions at the 
funerals of their classmates who had died in alcohol-related 
crashes or as a result of alcohol-related incidents.
    While tremendous progress has been made in reducing 
alcohol-related traffic fatalities among youth, alcohol 
continues to be the most frequently used and abused drug by 
high school seniors. Despite the fact that it is illegal to 
sell alcohol to underage youth and it is illegal for those 
under 21 to purchase alcohol, it remains readily available to 
youth and underage drinking still borders on epidemic 
proportion.
    In 1997, 2,309 young people ages 15 to 20 died in alcohol-
related traffic crashes. In the last 2 years, we have witnessed 
a growing number of tragic binge-drinking alcohol-related 
deaths of college students on campuses in Massachusetts and 
Louisiana. At the age of 14, I was almost one of those 
students.
    My friends and I had been stockpiling alcohol for weeks, 
and on the night in question I sneaked out of my house and went 
to a school playground with an assortment of booze and a 
backpack. This was not the first time my friends and I had 
drank, but I was now a high school freshman and I wanted to 
show my friends how I could really drink.
    We all proceeded to get drunk, and later that night my 
drinking buddies dragged me back to my house and dumped me on 
my head through the window. I drifted in and out of 
consciousness and was aspirating my vomit when my friend, Dan, 
finally woke my father, who rushed me to the ER. When I arrived 
at the hospital, I was comatose and had a blood alcohol level 
of .20. I was lucky. I could easily have died of alcohol 
poisoning just like those college students did.
    I am like a lot of high school students than and today who 
drink underage. At 14, I knew too well the problems associated 
with alcohol abuse and underage drinking. You see, many male 
members of my family for generations have died of alcoholism, 
and five out of six brothers, including my father, are 
recovering alcoholics. Underage drinking almost killed me, and 
the experience has brought me to where I am today.
    Underage alcohol use contributes to numerous health and 
social problems, including risky behavior, such as under-the-
influence driving without a seat belt or a motorcycle helmet or 
a bicycle helmet; traumatic injury and death due to motor 
vehicle crashes, falls, fires, and drowning; homicide and 
suicide; risk of overdose and death by alcohol poisoning; early 
onset of alcohol abuse and dependence, as previously stated; 
high-risk sexual behavior that may lead to unplanned 
pregnancies, HIV infection, or other sexually-transmitted 
diseases; other types of violence such as physical and sexual 
assault; and involvement in other criminal activities. 
Researchers estimate that alcohol use is involved in one to 
two-thirds of sexual assault and acquaintance or date rape 
cases among teens and college students.
    Accessibility and availability of alcohol are the main 
contributing factors to underage drinking. Alcohol is easy to 
get, and most kids in my school and my community know where to 
get alcohol if they want it. Based on a study, nearly 90 
percent of 10th graders and 75 percent of 8th graders think it 
is either fairly easy or very easy for them to get. These 
students ranked alcohol as a close second in perceived 
availability behind cigarettes. Almost two-thirds, or 6.9 
million, junior and senior high school students who consumed 
alcohol in 1991 purchased their own directly. Studies confirm 
that anywhere from 30 to 70 percent of retail outlets illegally 
sell alcohol to minors. One sweep by a Louisiana Department of 
Alcohol and Tobacco Control in 1996 found that 57 out of 60, or 
95 percent, illegally sold alcohol to underage youth.
    I mentioned earlier that the 21 minimum drinking age law 
has been the single most effective measure in reducing traffic-
related deaths in the 16- to 20-year-old age group. However, by 
making beer, wine and distilled spirits available to thousands 
of junior and senior high school and college students across 
the country through web sites and other direct access methods, 
these tools have virtually eliminated the 21 drinking age law.
    Enforcing the minimum drinking age laws in bars, 
restaurants, package stores and other licensed beverage outlets 
is difficult, to say the least. Enforcing the law on the 
Internet and web sites is virtually impossible. Allowing home, 
apartment, or dorm room delivery of alcohol to those under the 
age of 21 is turning Federal Express and UPS drivers into 
bartenders.
    Thank you, Senator.
    The Chairman. Well, thank you, Brendan. That was a pretty 
dramatic story. We appreciate having you here and appreciate 
your willingness to share that with us.
    [The prepared statement of Mr. Brogan follows:]

                  Prepared Statement of Brendan Brogan

    Good morning. My name is Brendan Brogan. I am an 18-year-old senior 
at Ridgewood High School in Ridgewood, New Jersey. I also serve on the 
National Board of Directors of Mothers Against Drunk Driving (MADD). 
MADD, is an organization that represents over three million Americans 
and exists to end the senseless violent crime of drunk driving, to 
secure basic rights and meet the needs of the victims of drunk driving 
and to prevent underage drinking. MADD members and supporters are not 
just mothers. They include mothers, fathers, brothers, sisters, 
victims, non-victims and a growing number of youth just like me.
    Although often viewed as an organization singularly focused on 
drunk driving, MADD, since its inception, has also been dedicated to 
preventing underage drinking in order to stop youth drinking and 
driving. MADD was instrumental in the passage of the federal Minimum 
Drinking Age Law in 1984, which resulted in raising the legal drinking 
age to 21 across the nation. MADD continues to advocate stringent 
enforcement of the ``21 law'' because it has proven to be the single 
most effective measure in reducing alcohol-related traffic fatalities 
among young people between the ages of 16 and 20. In fact, minimum 
drinking age laws are estimated to have saved more than 17,000 lives 
since 1975. Between 1985 and 1995, the proportion of drivers 16-to-20 
years of age who were involved in fatal crashes and were intoxicated 
dropped 47 percent--the largest decrease of any age group during this 
time period.
    In addition, MADD was a strong supporter of and played an active 
role in the passage of the ``zero tolerance'' federal legislation in 
1995 that required all states to lower the illegal blood alcohol limit 
for drivers under the age of 21 to .02 or less. Zero tolerance is now 
the law of the land and more young lives are being saved as a result of 
this initiative. Many young people around the country testified in 
support of these laws because they were tired of going to class 
reunions at the funerals of their classmates who had died in alcohol-
related crashes or as a result of other alcohol-related incidents.
    While tremendous progress has been made in reducing the alcohol-
related traffic fatalities among youth, alcohol continues to be the 
most frequently used and abused drug by high school seniors. Despite 
the fact that it is illegal to sell alcohol to underage youth and it is 
illegal for those under age 21 to purchase alcohol, it remains readily 
available to youth and underage drinking still borders on epidemic 
proportion. In 1997, 2,309 young people ages 15-20 died in alcohol-
related traffic crashes. In the last two years we have witnessed a 
growing number of tragic binge drinking alcohol-related deaths of 
college students on campuses in Massachusetts and Louisiana, just to 
mention a few. At the age of 14, I was almost one of those students.
    My friends and I had been stockpiling alcohol for weeks and on the 
night in question I sneaked out of my house and went to the school 
playground with an assortment of booze in a backpack. This was not the 
first time my friends and I drank but I was now a freshman in high 
school and I wanted to show my friends how I could really drink. We all 
proceeded to get drunk and later that night my ``drinking buddies'' 
dragged me back to my house and dumped me on my head through the 
window. I drifted in and out of consciousness and was aspirating on my 
vomit when my friend Dan finally awoke my father who rushed me to the 
ER. When I arrived at the hospital I was in a coma and had a blood 
alcohol level of .20. I was lucky. I could easily have died of alcohol 
poisoning just like those college students did. Unlike a lot of high 
school students then and today who drink underage, at age 14, I knew 
all too well the problems associated with alcohol abuse and underage 
drinking. You see, most of the male members of my family for 
generations had died of alcoholism and five out of six brothers, 
including my father are recovering alcoholics. Underage drinking almost 
killed me and that experience brought me to where I am today.
               problems associated with underage drinking
    Drunk driving deaths and injuries are only part of the problems 
associated with underage drinking. Studies reveal that people who start 
drinking at age 14 and younger are approximately four times as likely 
to become alcohol dependent as are those who begin drinking at age 20 
or older. The results of a Harvard School of Public Health College 
Alcohol Study published in 1998 revealed the following: Two of five 
students were binge drinkers and one in five was a frequent binge 
drinker. Four of five residents of fraternities or sororities were 
binge drinkers. Student binge drinking is by far the single most 
serious public health problem confronting American colleges. Half of 
all college students surveyed who drank alcohol were binge drinkers. Of 
the students who drank, 20 percent drank on 10 or more occasions in the 
past 30 days, 42 percent binge drink when they drink and 52 percent 
drink just to get drunk. Thirty-six percent of those who drank admitted 
they drove after drinking. A 1996 survey by the American Medical 
Association found that 33 percent of 19 and 20 year olds consume at 
least four alcoholic beverages on an average night, and 20 percent have 
six or more drinks (AMA, 1996). While drinking among college students 
is viewed by many as a ``rite of passage,'' this potentially deadly 
view also prevails at the high school level. The rate of drinking and 
binge drinking among high school and grade school students should serve 
as a wake-up call for parents, legislators and the public because a 
major determinant of college binge drinking is students who use alcohol 
in high school or at younger ages.
    Although it is illegal for all secondary students to purchase 
alcoholic beverages, 81 percent of twelfth graders have tried them at 
least once, along with 71 percent of tenth graders and 55 percent of 
eighth graders. (Johnson et al, 1996a) According to the 1995 Youth Risk 
Behavior Survey, 39 percent of twelfth graders and 30 percent of tenth 
graders reported they had consumed five or more drinks of alcohol on at 
least one occasion during the last 30 days. This figure was 33 percent 
for all high school students, 36 percent for male high school students, 
and 29 percent for female high school students (CDC, 1996). According 
to the Monitoring the Future Study, about 30 percent of the nation's 
twelfth graders, 24 percent of tenth graders, and 15 percent of eighth 
graders reported in 1995 that they had consumed five or more drinks of 
alcohol on at least one occasion in the last two weeks. In addition, 
about 33 percent of twelfth graders, 21 percent of tenth graders and 8 
percent of eighth graders reported that they had been drunk during the 
last 30 days (Johnson et al, 1996b).
    Underage alcohol use contributes to numerous health and social 
problems including:

   Risky behavior, such as driving under the influence and 
        driving without using a seat belt, motorcycle helmet or bicycle 
        helmet.

   Traumatic injury and death due to motor vehicle crashes, 
        falls, fires, and drowning.

   Homicide and suicide.

   Risk of overdose and death by alcohol poisoning.

   Early onset of alcohol abuse and dependence as previously 
        stated.

   High-risk sexual behavior that may lead to unplanned 
        pregnancies, HIV infection or other sexually transmitted 
        diseases.

   Other types of violence such as physical and sexual assault.

   Involvement in other criminal activities (NIAAA, 1997)

    Researchers estimate that alcohol use is involved in one-third to 
two-thirds of sexual assault and acquaintance or date rape cases among 
teens and college students (OIG. 1992)
    The federal and state governments spend billions of dollars each 
year in this country to address the problem of illicit drug use by 
young people. Sadly, however, they close their eyes and turn a deaf ear 
to the most dominant drug problem among young people--alcohol.
    As I have testified to, the extent of the underage drinking problem 
is evident and the problems associated with underage alcohol 
consumption are well documented despite being swept under the social 
rug. One of the questions that is the focus of this committee hearing 
is why we have this problem if it is illegal to sell alcohol to youth 
and illegal for them to purchase it. The answer to the question is 
simple;
           accessibility and availability of alcohol to youth
    Accessibility and availability of alcohol are the main contributing 
factors to underage drinking. Alcohol is easy to get. Most of the kids 
in my school and in my community know where they can get alcohol, if 
they want it. Based on a study, nearly 90 percent of tenth graders and 
75 percent of eighth graders think alcohol is either ``fairly easy'' or 
``very easy'' for them to get. These students ranked alcohol a close 
second in perceived availability behind cigarettes (Johnson et al 
1996a). Almost two-thirds or 6.9 million junior and high school 
students, who consumed alcohol in 1991, purchased their own directly. 
Studies confirm that anywhere from 30 percent to 70 percent of retail 
outlets illegally sell alcohol to minors. One sweep by the Louisiana 
Department of Alcohol Tobacco Control in 1996 found that 57 out of 60 
outlets or 95 percent sold alcohol illegally to underage youth.
    In the past, teenagers have primarily had three sources of alcohol: 
bars and other licensed establishments that do not check IDs; using a 
fake ID to buy alcohol; and alcohol provided by adults. We are now 
confronted with a new source for youth access to alcohol and that is 
Internet and other direct access venues.
    I mentioned earlier that the 21 minimum drinking age law has been 
the single most effective measure in reducing alcohol-related traffic 
deaths in the 16 to 20 year old age groups. However, by making beer, 
wine and distilled spirits available to thousands of junior and senior 
high school and college age students across the country through 
websites and other direct access methods, these tools have virtually 
eliminated the 21 minimum drinking age law. Enforcing the minimum 
drinking age law in bars, restaurants, package stores and other 
licensed beverage outlets is difficult to say the least. Enforcing the 
law on Internet web sites is virtually impossible. Allowing home or 
apartment or dorm room delivery of alcohol to those under the age of 21 
is turning Federal Express and UPS drivers into bartenders.
    A recent study of more than 300 World Wide Web sites finds that 25 
major alcohol beverage companies are using the Web to advertise and 
promote their products through a variety of marketing techniques-such 
as sponsorship of music and sports, interactive games and contests, and 
chat and message boards that capitalize on the Web's strong attraction 
for young people. Overall, there are now hundreds of Web sites that 
promote alcohol, drinking and specific products. Nearly five million 
youth ages 2 to 17 used the Internet or an on-line service from school 
or home in 1996 and more than nine million college students use the 
Internet regularly (Center for Media Education, 1997a1b/c). Over the 
last two years, the number of Internet users under the age of 21 has 
skyrocketed.
    My peers don't know about a society without the Internet. We've 
always had computers. Cyberspace is as much a part of our lives as is 
the television. In this very real dimension, there is currently no 
mechanism in that world to ensure that someone who purchases alcohol is 
of the legal drinking age. Enforcement of the 21 minimum drinking age 
law is critical to the effectiveness of this law and the local UPS 
driver should not have the responsibility for this enforcement. The key 
to enforcing laws against selling alcohol to minors is face to face 
confrontation between the seller and the buyer. You don't need to check 
an ID when the package is left at the doorstep.
    Those who oppose restricting sales of alcohol over the Internet or 
by other direct shipment means argue that most young people under the 
age of 21 don't have a credit card and therefore cannot place an order. 
This is simply not the case in today's world. I have had a check/debit 
card since I was 16. In addition, as a high school senior I receive 
offers for credit cards in the mail almost every week. Later this year 
when I enroll in college, I assure you that during the first week of 
orientation the credit card companies will be out in full force 
offering free T-shirts in exchange for applying for their ``college 
student'' credit card.
    We need to be finding solutions to the underage drinking epidemic 
and not creating new problems. We are spending millions of dollars a 
year on a taxpayer funded advertising campaign aimed at reducing 
illicit drug use among the youth of this country and not one dime of 
that money is being used to address the number one drug problem for 
youth and that is alcohol. Local and state agencies must be given the 
necessary tools to enforce the underage drinking laws and the federal 
government must lead in the fight to protect the future of all of us. 
The Internet is a fantastic key to the world. It should provide us 
unlimited information and knowledge. It should not however stock the 
bar for weekend underage parties.
    We are repeatedly told that we as youth represent our nation's 
future. If that is true, the time is long overdue for the leaders in 
this country to invest in that future and get serious about the war on 
drugs. Alcohol may be a legal product for those over the age of 21 but 
by ignoring the fact that alcohol is the principal drug abuse problem 
for youth, you are fighting that war with one hand tied behind your 
back. My father is a Vietnam veteran and the only thing I know about 
that war is what I have learned from him, the history books and TV 
documentaries. What I have learned is that the so-called war on drugs 
we are waging will be another Vietnam unless our leaders recognize that 
the real enemy in the drug war is the accessibility and availability of 
alcohol to the youth of this country.
    I want to thank the Chairman, Senator Hatch and the other members 
of the Committee for the opportunity to appear before you today. While 
my father was serving in Vietnam he bought a watch that was advertised 
as suitable for scuba diving or testifying before Congress. He gave me 
that watch a few months ago on my 18th birthday. Little did we know 
that the watch would be as advertised. I will be glad to answer any 
questions you may have.

    The Chairman. Mr. DeLuca, we will turn to you now.

                  STATEMENT OF JOHN A. DeLUCA

    Mr. DeLuca. Thank you, Senator. First of all, I commend you 
personally for drawing attention to this very important issue. 
We make common cause with you. We perhaps, unfortunately, will 
not agree with the remedy that you propose, but certainly the 
effort. I want to thank the members of your committee, and 
especially our Senator, Senator Dianne Feinstein.
    Having just heard Brendan and the others, I am going to 
depart from my prepared remarks and take a different course. 
But I would like to submit my prepared remarks which I think 
are appropriate.
    The Chairman. Without objection, we will put them in the 
record.
    Mr. DeLuca. I am the product of two worlds; culturally, 
European. My parents were Italian immigrants. I am a terrible 
statistic in this country. When I was 3 years old, I started 
drinking wine with my family, a little water. I didn't realize 
it at the time, but that was part of the several-thousand-year-
old heritage that came with my ethnic and religious background. 
My children were raised the same way, as was my wife, 
Josephine, where it was introduced as part of our culture, as 
part of our meals.
    I would offer to you that over the years I never felt that 
this was a forbidden fruit issue for me, I had to prove 
anything. There was no rite of passage. There was no need when 
I got to high school or college to prove anything. I feel great 
empathy for the comments that Brendan just remarked. Can you 
imagine what a terrible indictment of what is going on in this 
country that children, teenagers, young adults, feel that they 
have to prove their adulthood by blasting their brains by 
drinking to excess?
    We have a lot to learn from other cultures. I spent several 
years in the Soviet Union with our Government. They had every 
control over distribution, advertising, cost, prices. And yet 
there, culturally, the issue of alcohol abuse and alcoholism 
was rampant. So, personally, as an individual, I believe we are 
talking about issues that go deeply to cultural trends.
    On the other hand, I am a product of the United States. I 
have served in public policy positions and recognize that our 
industry, the wine industry, given the inheritance that we have 
in this society, cannot really progress unless it is a great 
example of social responsibility. In our State, when this issue 
first came to me, which was in 1985, and we talked of 
reciprocity and how would we adapt to wineries who didn't have 
access, I thought immediately in terms of trade agreements with 
our different States.
    And so California, in 1986, passed the first reciprocity 
law which has now been engaged over the last 15 years, and let 
me read the States that are involved in reciprocity 
transactions--California, Colorado, Idaho, Illinois, Iowa, 
Minnesota, Missouri, New Mexico, Oregon, Washington, West 
Virginia, and Wisconsin. Lately, we have entered into very 
creative State-by-State crafting with Louisiana and with New 
Hampshire to address many of the issues that have been 
discussed today.
    I think a very compelling argument can be made that we 
should support the model legislations and the draft 
legislations where you do have unsupervised shipments which 
occur in the States where it is illegal, but in the States 
where it is legal you have couriers who are trained. You have 
these stickers that I would like to enter into the record, 
where they are required on all wine shipments sent via Federal 
Express, where you must have a signature required and you must 
have identification when they are, in fact, delivered.
    These safeguards also exist in our State, in California, 
and direct shipments, even though we are talking about 
interstate commerce, are presently in 30 States intrastate. So 
there is a longer history than just the present requirements 
that we have.
    On the underage issue, it is a very serious question, but 
we have law enforcement agencies who are testifying in public 
that as far as that issue is concerned, where it is supervised, 
where there are these safeguards, where you have couriers that 
are trained, where you have official requirements, that, in 
fact, is minimal, not that it doesn't exist, but it is minimal. 
It is not as serious as it is in the States where we don't have 
these safeguards.
    So we are trying to craft State-by-State, creative 
solutions working with our wholesalers, with our retailers, who 
have been wonderful partners. We don't want to depart on that 
issue. However, the idea of a felony--and in 6 States this has 
now passed in the last few years--a felony that is enacted in a 
State for us sending directly to a consumer puts in basic, 
immediate jeopardy our permit, and that is--I want to conclude 
on that note. That has, in fact, led to a Federal remedy that 
doesn't require what you are proposing, and that is that the 
Bureau of Alcohol, Tobacco and Firearms which has jurisdiction 
over us has announced in a circular, 96-3, which was in 
February 1997, that, in fact, any case brought by the State 
that shows that there has been a violation of the State laws 
will cause that agency to immediately look into the issue, even 
to the point--and it is a death sentence for us--of suspending 
our basic permit.
    So already at the Federal level, without any new laws that 
you are contemplating, there is a mechanism in place that can 
police this across the country because they have control over 
our basic permits. At the same time, Congress last year, as you 
recall, passed the Internet Tax Freedom Act and created the 
Electronic Commerce Tax Commission. We have legislators who 
have asked that this matter be looked into by that particular 
commission, including the issue of taxes, including the issue 
of revenues, including the issue of discrimination.
    So my hope is that you will permit us, State by State, to 
work with wholesalers, retailers, as we respond to consumers--
this is a very consumer-driven issue; without the consumers 
asking for it, we wouldn't be in this position that we are 
talking about; it is consumer-driven--that we work State by 
State to craft creative solutions. I fear that what you are 
proposing will have a chilling effect on our ability, and there 
will not be the incentive to keep working as we are in these 
different States.
    Thank you very much.
    The Chairman. Thank you, Mr. DeLuca.
    [The prepared statement of Mr. DeLuca follows:]

                 Prepared Statement of John A. De Luca

    Mr. Chairman: I am John De Luca, President and Chief Executive 
Officer of the Wine Institute. Wine Institute is the association of 
over 450 California wineries which produce 80 percent of our nation's 
wine.
    California's wineries and winegrape growers, along with their 
counterparts in other states, comprise a significant agricultural 
industry that continues in the proud tradition of family-owned farms. 
Wine's rich heritage is an asset to our economy, culture and cuisine 
which should be supported.
    Our traditions, which began centuries ago in Europe, define us as 
agriculture, cuisine and tourism. As winemakers, we take great pride in 
the growth of our industry and with the fine quality of the wines which 
we are growing. These successes have been underscored by the 
astonishing growth of the premium wine industry over the past two 
decades, a time when nearly 1,000 new wineries have been founded across 
the country. With this success has also come media and critical acclaim 
for our wines. Yet today, small winery owners are cast as potential 
lawbreakers and even felons for simply responding to the requests from 
consumers across the country who want our fine products.
      i. our goal is to preserve the system while providing reform
    Since the repeal of Prohibition, the wine industry has utilized the 
``three-tier'' distribution system of producer to wholesaler to 
retailer mandated in many states to sell our wines. This is a system 
which served our industry well and we continue to value the 
partnerships we have developed with our colleagues over the years. When 
the number of wine producers was more limited, it was possible for 
wholesalers to handle the volume of brands and varietals offered for 
sale. However, the exponential growth in the number of wineries during 
the last two decades, coupled with the striking consolidation which has 
occurred within the wholesale tier, have created an environment which 
no longer allows for full service for all winegrowers and consumers.
    In 1963 there were 10,900 distributors and 377 wineries. Today, 
there are less than 300 distributors and more than 1700 wineries. There 
are currently over 800 wineries in California alone, each of which 
produces approximately five different labels each year. That, in 
itself, is over 4,000 labels per year from California. There is simply 
no way that wholesalers and retailers in all cities and states can 
carry all of these wines.
    Our attempts are directed at preserving the essentials of the 
system while providing necessary reforms. When reviewing wine industry 
statistics, it was found that the 50 largest wineries in the U.S. 
produce 90 percent of the wine. While the three-tier system is well 
suited to handle the wines made by these producers, it is not in a 
position to offer a similar distribution system for the more typical 
small, family-owned winery. Most wineries produce only a few thousand 
cases of wine each year (and some varietals in only a few hundred 
cases) and, therefore, simply do not have the quantities necessary to 
accommodate the needs of wholesalers.
    The desire of consumers throughout the states for these specialty 
wines has only increased over the years. In the last 20 years, the 
attention of the media on the remarkable successes of the American wine 
industry has increased dramatically, with the proliferation of wine and 
food magazines, wine columns in local and national newspapers, and 
programs on television and radio. It is now commonplace for consumers 
in other states to learn about and want to purchase wines that are not 
available to them in their own states.
    Our success has been further enhanced by the fact that the wine 
industry, in California and in many other states, has become a prime 
tourist attraction. Out-of-state visitors to our tasting rooms, as well 
as the tasting rooms in 46 other states, sample these small lots of 
wine, and want to purchase limited amounts to ship back to their homes, 
or else place phone orders for the wines upon their return home. Such 
basic transactions have now been elevated to the level of a felony in 
states such as Florida, Georgia, Indiana, Kentucky, North Carolina and 
Tennessee, primarily at the urging of the wholesalers in those states 
who fear losing possible market share. This year, 11 felony bills have 
been introduced in state capitals. Those who oppose direct shipments 
have a motto: ``Ship the Wine, Do the Time.''
     ii. some states have found ways to accommodate their consumers
    During the last ten years, 15 states have passed legislation which 
offer solutions allowing their citizens to have the wines they cannot 
readily find at home be shipped directly to them. These proposals were 
at first based on the concept of ``reciprocity'', which in effect 
created trade agreements between states allowing limited direct 
shipments between states enacting such legislation. Recently, Louisiana 
and New Hampshire enacted new, creative laws establishing a means of 
registering out-of-state shippers and collecting all tax revenues.
                    iii. underage access is limited
    The opponents of direct shipments continue to raise the issue of 
underage access. Underage drinking is a serious problem. The Department 
of Health and Human Services reports that more than one-half of 18-20 
year olds consume alcohol every month. However, minors are not 
purchasing any significant amounts of wine or alcohol by the relatively 
expensive and slow path of direct shipments, which leaves a clear trail 
of delivery records and credit card information.
    In California, where direct shipment has long been legal, virtually 
no complaints of underage/illegal deliveries have been made. 
Artificially created ``stings'' that garner media attention can 
illustrate that it is possible for underage persons to obtain alcohol 
by direct shipment, even in instances when the wholesaler has handled 
the product and it is subsequently shipped directly from the retailer 
to consumer. Thirty (30) states permit such intrastate shipments yet 
the wholesaler funded ``Americans for Responsible Alcohol Access'' does 
not emphasize the issue of underage access for this type of delivery.
    The fact is, there is no evidence direct shipment to minors, 
whether from producer to consumer or retailer to consumer, is a serious 
problem. State enforcement authorities that have experience with direct 
shipments do not consider this to be a significant part of the underage 
drinking problem.
    Common Carriers like Federal Express, DHL Worldwide, and United 
Parcel Service play a pivotal role in the delivery of wine to consumers 
via direct shipments with special handling taking place.
    The wine industry has worked with these common carriers to develop 
programs that ensure such compliance, and the success rate of these 
programs has been excellent. In crafting legislation to permit direct 
shipments, we include language to require that all packages be marked: 
``Contains Alcohol, Adult Signature (Over 21) Required for Delivery.''
    In these states, drivers have been trained as to how to handle 
packages that have these special delivery requirements. A good example 
of this is provided in the enclosed correspondence from Jon Olin, 
Senior Legal Counsel for DHL Airways, Inc. (See attachment #1) This 
letter was sent in response to a complaint by wine trade journalist 
Jerry Mead, who was upset that his 55 year old associate was made to 
show identification before she could sign and take possession of a wine 
delivery. (See attachment #2)
    To further ensure our own Wine Institute members compliance with 
the shipping laws, we have agreed with Federal Express that any member 
identified by Federal Express as making an illegal shipment, or who is 
not marking packages as containing alcohol as outlined above, will be 
removed from our discount program and prohibited from shipping via 
Federal Express in the future.
    Stings have almost exclusively been done in states where direct 
interstate shipment is not legal, and where drivers have not been 
trained on how to handle packages containing alcohol, as they have been 
in the legal shipping states. In addition, the packages involved in 
these deliveries have rarely borne the required warnings about special 
handling.
    Common carriers have created a good system of checks upon their 
systems in the legal shipping states. If direct shipping opponents are 
truly concerned about deliveries to minors, they should in fact 
encourage the adoption of the direct shipping model we have passed in 
the 15 legal shipping states, and thereby ensure that all packages will 
be marked in such a way--and drivers trained in such a way--as to 
achieve a much greater system of protections than simply further 
criminalizing such shipments.
                  iv. most direct shipments are legal
    Opponents of direct shipments cite it as a billion dollar 
business--an exaggerated figure that cannot be substantiated. The 
entire market of direct shipments is estimated at less than $600 
million. Contrary to the impression fostered by wholesalers, virtually 
all of these sales are fully legal, made within the 30 states which 
permit intrastate shipments and 15 states which additionally permit 
limited quantities of wine to be shipped directly to their citizens. No 
direct shipment of wine is sold without full payment of both federal 
excise tax and state excise tax in the state where legally sold.
    As an outgrowth of the Internet Tax Freedom Act, Congress created a 
commission to examine the means to ensure the fair imposition of 
consumption, sales and use taxes on business including those using the 
Internet in remote sales. A group of 35-plus Members from both the 
House and Senate has requested the Commission include an investigation 
of unreasonable state barriers which do not allow consumers access to 
out-of-state wine and remedies for states to collect excise and use 
taxes. This is where any legitimate revenue concerns should be 
addressed.
v. using the federal court system to regulate wineries is not necessary
    The members of Wine Institute respect the need for states to be 
able to administer the laws which they have on the books, even as we 
work to create legislation that is responsive to consumer needs across 
the country. There already exists a federal remedy for states to 
enforce their alcohol laws. The Bureau of Alcohol, Tobacco and Firearms 
(ATF) has informed the states, in Industry Circular 96-3 dated February 
11, 1997, that it has jurisdiction over any holder of a Federal Basic 
Permit (FBP)--a winery, distillery, wholesaler or importer--found to be 
in violation of a state's laws. ATF, once notified by a state, will 
take action. ATF will administer punitive action up to and including 
suspension or revocation of a license if a FBP-holder is in violation 
of a state's law. During the last two years, there has been one 
complaint to ATF which led to the loss of the violator's FBP--and the 
violator was a wholesaler.
    States have other remedies available if they so choose, including 
pursuing citizens for illegal importation and criminalizing underage 
solicitation and purchase. And just last week, the Utah Court of 
Appeals ruled that Utah may prosecute companies that ship alcohol 
across state lines in violation of state law.
    Passage of federal legislation in this area would harm efforts to 
craft creative state-by-state reforms. It would lock in the status quo 
and eliminate the incentive of the middle tier to work to find 
solutions.
                             vi. conclusion
    Our member wineries and I will continue to work with the various 
states to craft laws so that consumers in all states can have 
reasonable access to limited amounts of the wines which currently are 
not readily available to them. In the meantime, we recognize that in 
order to continue to do business, wineries must comply with the laws of 
the various states in order to retain their Federal Basic Permits.
    There is no need for states to be granted access to the over-
burdened federal court system as a second federal venue in which to 
pursue citizens and small wineries. American consumers want 
convenience, access and freedom to make their own purchases. America's 
winegrowers want to fulfill those desires. Local state-sanctioned 
distributors should not attempt to criminalize practices which in any 
other industry would be considered free enterprise.
    Interstate commerce and burgeoning E-commerce should not be 
hindered by one segment of the industry, which raises false concerns in 
order to hamper competition and create barriers to trade. The three-
tier system should be augmented on a state-by-state basis in order for 
consumers to have access to hard-to-find wines. Any federal legislation 
in this area should be balanced to allow this to happen.
    On behalf of the members of Wine Institute, I thank the Committee 
for this opportunity to express our views.
[GRAPHIC] [TIFF OMITTED] T8610.003

[GRAPHIC] [TIFF OMITTED] T8610.004

[GRAPHIC] [TIFF OMITTED] T8610.005

[GRAPHIC] [TIFF OMITTED] T8610.006

    The Chairman. Mr. Ballard, we will turn to you now.

                  STATEMENT OF MICHAEL BALLARD

    Mr. Ballard. Mr. Chairman, my name is Michael Ballard. I am 
proud to be a 1978 graduate of the University of Utah, and am 
particularly honored by the opportunity to testify before your 
committee.
    My family owns a small California winery in the Santa Cruz 
Mountains, 1,400 feet above Silicon Valley. Prior to the 
purchase of the winery, I spent 18 years in Silicon Valley 
developing various Internet technologies. The small companies I 
helped to build developed many of the data and 
telecommunications technologies that led to and today serve as 
the primary means by which you and most other individuals gain 
access to the Internet.
    The Internet has made consumer access to products and 
services, and producer access to the broader marketplace, 
vastly more efficient. As a result, the Internet has shaken 
many established distribution models across all industries. 
Wholesalers, who are the distributors or middlemen, have taken 
notice, and that is why we are here.
    The annual U.S. production of wine in this country exceeds 
200 million cases. Only 6 percent of all U.S. wineries produce 
95 percent of that total. Our product, like that of many 
smaller wineries, is unique and specialized. Handcrafted from 
grapes grown on 90-year-old vines, our wines are inherently one 
of a kind, available only in small quantities. Consumers from 
all 50 United States seek us out with a desire to purchase our 
particular product. Our customers are frequently visitors to 
our property who seek out the product after returning to their 
home States.
    Savannah-Chanel Vineyards adheres to all State and Federal 
laws in order to retain its Federal basic permit, as issued by 
the ATF. Where direct shipment to a consumer is prohibited by a 
given State or county, we obey. Today, in 35 United States, 
that precludes our customers from receiving our wines.
    Prohibiting direct transactions between producers and 
consumers only results in paralyzing competition and consumer 
choice. At the heart of the American free enterprise system is 
the encouragement of small business and affording an even, 
competitive playing field. It is no secret that the three-tier 
distribution system is largely unchanged in the last 65 years 
and provides little value, except to the top 100 wineries.
    Some of the objections to direct interstate shipping are 
based on concern for State collection and the need to control 
underage delivery. Producers will gladly collect State taxes in 
accordance with local tax authorities for the freedom to ship 
legally. In partnership with the major shippers, delivery 
certification services have been instituted, and development of 
additional carrier certification programs will continue to 
guarantee delivery to legalaged individuals.
    Federal legislation in this area should represent a 
balanced approach of controlling undesirable commerce while 
enabling negotiations on a State-by-State basis to continue in 
a manner that permits wineries and their customers to conduct 
business. There are already several effective enforcement 
techniques that States can utilize. States can prosecute the 
citizen making the importation vis-a-vis use tax violations. 
States can criminalize underage purchases. Dry-area purchases 
and importation can be criminalized. States can criminalize 
failure to pay taxes on products imported at a citizen's 
request. States can regulate the carriers and require them to 
enforce underage delivery laws.
    And as John has said, there already exists a Federal 
remedy. The Bureau of Alcohol, Tobacco and Firearms has 
informed the States that it has jurisdiction over any holder of 
a Federal basic permit. ATF, once notified by the State, will 
take action, including suspension or revocation of the license, 
if a Federal basic permitholder is in violation of State law. 
That, ladies and gentlemen, is the death penalty for any winery 
owner.
    But more importantly, let's open up legal mechanisms. This 
will allow the best control of any associated risk and greatly 
reduce violations. Administrators in 15 States which today 
allow access can testify to the success of these legal 
mechanisms. Quite frankly, if States can defer to the Federal 
court system to resolve these matters, our ability to 
successfully work out intelligent reforms will be severely and 
unfairly handicapped.
    Help us to establish a fair, competitive marketplace for 
our products by directing the States to look inside their own 
sandbox for the solution. Protection of the distributors' 
monopoly position is not a viable solution to this problem. 
Passage of the bill as written will have a chilling effect on 
the effort to craft State-by-State solutions to allow consumer 
access to hard-to-find wines. Fifteen States, including two 
where the State completely controls sales, have already acted 
to provide such access. Legal, controlled market access is a 
well-known, proven solution that must be an alternative option 
to the closed system imposed by mandated three-tier 
distribution.
    Thank you for your time and consideration of these matters.
    The Chairman. Well, thank you, Mr. Ballard.
    I appreciate the testimony of all of you. I am concerned 
about this issue because I am the last who wants to 
overregulate or pick on people, but it is a serious issue.
    I notice in Congressmen Radanovich and Thompson's 
statements, or at least I heard this, that they have alleged 
that Prof. Jesse Choper, from the University of California at 
Berkeley, has concluded that, ``The proposed legislation would 
violate the Commerce Clause protection against barriers to free 
trade among the States by allowing States rather than Congress 
to establish those barriers.''
    Now, we have a single-page letter from Professor Choper 
basically saying that. In this particular letter he first 
asserts that neither Webb-Kenyon nor the 21st amendment 
authorizes a State to erect discriminatory barriers to 
interstate commerce. Now, I certainly would not argue that they 
do. But tell me, Mr. Diamond, if you would, where in the draft 
bill does it provide that we are conferring upon the States the 
authority to enact such barriers.
    Mr. Diamond. Well, I am a little uncertain as to what his 
objection is. The 21st amendment was clearly, and still is 
clearly understood to mean that traditional Commerce Clause 
limitations upon State activity--that is, allegations that the 
State action violates the dormant Commerce Clause--do not 
apply. It is true, as I mentioned, that the Supreme Court has 
said that overt protectionist activity, as they found took 
place in Hawaii where the State imposed a tax on all alcoholic 
beverages except two produced only in Hawaii, was 
unconstitutional. But I don't see what the problem is.
    The Chairman. Well, the bill merely allows a State to seek 
Federal injunctions and forcing compliance with its existing 
alcohol control laws. That certainly doesn't seem to erect a 
discriminatory barrier to interstate commerce.
    Mr. Diamond. No, sir.
    The Chairman. OK; well, he next asserts that the bill, 
``would dramatically expand the powers of the State to regulate 
alcoholic beverages.'' Yet, as I view it, the most powerful 
example of the State ability to regulate alcoholic beverages is 
to bring criminal actions in State court. Now, how can a lesser 
power to civilly enjoin practices which would allow prosecution 
under its criminal laws be a dramatic expansion of State 
regulatory power?
    Mr. Diamond. I agree with you once again. I don't see that.
    The Chairman. He cites the Bacchus case for the proposition 
that the States may not discriminate against interstate 
commerce. But he fails to mention that the Supreme Court also 
held in that case that State laws designed to combat the, 
``perceived evils of an unrestricted traffic in liquor,'' are 
entitled to greater deference by the courts.
    Now, isn't any regulation of the State which would tend to 
discriminate against interstate commerce subject to the same 
challenge in a Federal civil injunctive action as it would be 
if used in a State proceeding?
    Mr. Diamond. Well, the only thing that was objected to in 
Bacchus was overt facial discrimination.
    The Chairman. Right.
    Mr. Diamond. The fact is that everyone understands that a 
State regulatory system is one that interferes with free trade 
in the abstract, and as Justice Rehnquist has often said, 
either because it is trying to cope with preexisting 
distortions in free trade or because, as is obviously the case 
with alcoholic beverages, it is pursuing other social good. 
Again, I don't see what the problem is.
    The Chairman. I don't either.
    Mr. Klein, the recent Utah Court of Appeals decision in 
your case reinstated the criminal action Utah could bring, or 
instituted against Beer Across America. So in the absence of 
any further appeals, you can now proceed to trial.
    Mr. Klein. Yes; we expect the case will be remanded to the 
trial court and that a hearing date will be set for a 
preliminary hearing and then trial.
    The Chairman. Well, just one thing. Is the Utah opinion 
binding on any other State?
    Mr. Klein. No, it is not, because it reflects an 
interpretation of Utah law.
    The Chairman. My time is expiring, but I would like to ask 
you, Mr. DeLuca, a question or two. You point to the 
legislation that I will introduce as unnecessary, in part you 
allege because the ATF, the Alcohol, Tobacco and Firearms 
agency, is on the case and can revoke permits when shipments of 
alcohol in violation of State laws have occurred.
    Now, leaving aside the question of whether the ATF has the 
resources to effectively police permitholders, is it not true 
that ATF jurisdiction is limited to wineries and that there is 
no Federal permit process for retailers and microbreweries who 
engage in interstate sale of alcohol?
    Mr. DeLuca. The Federal basic permit applies to wineries, 
applies to wholesalers, to importers. They do not have the 
Federal permit jurisdiction over retailers and brewers. I am 
obviously addressing the issue in terms of the fact that the 
wineries are the ones that I represent.
    The Chairman. That could be hurt here.
    Mr. DeLuca. At the same time, there has been a case brought 
to the ATF. As I understand it, they investigated and they did 
bring action, and in this case it happened to be with a 
wholesaler. We are talking about a very big part of this issue, 
the wholesaler community and the wine community. But I do 
acknowledge what you have just said that the basic permit 
jurisdiction of ATF extends to us, but it does not extend to 
retailers and brewers.
    The Chairman. Well, I am just going to ask one other 
question of you before I turn to Senator Feinstein because your 
testimony is particularly important here, of course, as is all 
the other testimony. I want to give you every opportunity.
    You have stated in your testimony that, ``minors are not 
purchasing any significant amounts of wine or alcohol by the 
relatively expensive and slow path of direct shipments.'' Of 
course, the first question that comes to mind is what is a, 
``significant amount of wine or alcohol.'' Some would argue 
that even one sale to a minor, potentially devastating to that 
minor should he or she drink and drive or imbibe to 
unconsciousness, is more than enough. We have Brendan's 
testimony about what he faced when he overindulged in alcoholic 
beverages.
    But more importantly, how does the industry know minors are 
not purchasing, ``significant amounts?'' Certainly, a 
successful sale to a minor is not going to be reported by the 
minor.
    Mr. DeLuca. May I answer it in two parts?
    The Chairman. Sure.
    Mr. DeLuca. First, the context that you are discussing is 
obviously very important, and the whole issue of what do you do 
about underage drinking and binge drinking is clearly of 
paramount importance to us. Our code of advertising, how we 
promote, how we educate, our emphasis on wine with food--I 
mean, these are addressed across larger issues than the narrow 
one that we are focusing on now. And as I said, we make common 
cause with the whole issue of how to address this with regard 
to underage drinking.
    With regard to the Internet or direct sales and direct 
shipments, I think common sense prevails here. Most of the 
wineries are like Mr. Ballard's, hard-to-find wines, wines that 
are expensive, wines that are touted in magazines by 
journalists across the country. We have witnessed an 
extraordinary renaissance in tourism, people who can't find 
their products at home. If they were able to find it at home, 
they would buy it there; can't, so they write directly to the 
winery.
    These wines are expensive. Those that are not expensive can 
easily be found throughout the distribution system that we have 
today, through your normal wholesale-retailers. But we are 
talking about products that are either library editions or 
literally you cannot find in your own local market. I have been 
there at wineries when tourists have said, why aren't you 
interested in my business? I like your wine. Why isn't it back 
at home? And they find out that it isn't we who don't want to 
give it to them; it is just not available in their own 
commerce.
    You need to have credit cards. Look at the trail that you 
leave if you are thinking of breaking the law. You can easily 
find on the Internet the order or the credit card that is being 
used. It is time-consuming, versus going down and finding it 
right there at your corner liquor store. So, in truth, that is 
one part of the answer.
    The other one is we do have experience in California of 
almost 50 years intrastate. We are a big State, cover a lot of 
territory. We have been doing this for a long, long time, and 
the people who are policing this, as Congressman Radanovich and 
Congressman Thompson pointed out, have said in public testimony 
that it is a minor issue. It is serious for the people 
involved, but when you are looking at the totality of the 
underage issue, it is minor.
    So focus on underage drinking; we are right there with you. 
On that point, we are with you. The moment you start talking 
about underage abuses through direct shipments, you are talking 
about a relatively smaller issue. But this is not to negate the 
question and the sympathy that is obviously there for us on the 
question of underage drinking.
    The Chairman. Well, thank you.
    Senator Feinstein, we will turn to you.
    Senator Feinstein. Thank you very much, Mr. Chairman.
    First of all, Brendan, congratulations to you and to the 
organization you represent. I am a big fan and supporter of 
MADD, and it is the first time I have seen a young person 
testify, and I just want you to know you did it very well and 
you made a very strong point.
    Mr. Chairman, I have known the California Wine Institute 
well. I have known John DeLuca now for over 30 years, and know 
that he speaks the absolute truth. What has happened in 
California is you now have 800 wineries. They are in 45 of the 
58 counties, and what has developed is a real competition in 
the sense of developing wines that are very specialized. If you 
have 800 wineries, you don't have room on shelves for 800 
different products. So these wineries increasingly have the 
Internet as, some of them, their only source of sales. Ten 
million people a year visit these wineries, go through wine-
tastings. They make purchases, et cetera.
    I have been very proud of this industry because as it has 
grown, I think Congressmen Thompson and Radanovich said they 
employ 200,000 people on a regular basis. My figures are 
112,000 people on a regular basis, and 50,000 parttimers. It 
has become a huge industry, but it has an increasingly boutique 
kind of nature--specialized wines, if you like an okie wine, if 
you like a fruity wine, even differences in chardonnays, and 
particularly in the varietal wines. It is, I believe, today the 
best wine produced in the world. And the smallness of the 
wineries, a part of what is driving this--they are very 
concerned that your legislation would have a real chilling 
effect on what they are doing.
    I guess what I would like to say, rather than ask 
questions, is what Brendan pointed out is right. I don't know 
that he got what he drank when he went out--I suspect it was 
something that was bought at the corner store. And even in 
Virginia, our statistics indicate that enforcement along these 
lines is where the greatest weak point is; also, very much 
aware of the fact that there is a kind of three-tier approach 
here, and a lot of the support for the legislation comes from 
the very people that don't want to see the growth in Internet-
type sales of this product, the wholesalers, for example. So I 
think there is a fine balance here.
    I am a cosponsor with Senator Kyl on his legislation on 
Internet gambling, and I must tell you that I see some shades 
of difference there. So I would just hope that you would work 
with the Wine Institute. I am here to vouch for them as one of 
the most responsible representatives of an industry that I know 
of, and we are just extraordinarily proud of what has been 
developing in California.
    The Chairman. Well, thank you, Senator Feinstein. I have a 
high regard for every Senator on this committee, but certainly 
Senator Feinstein fights very strongly for her State. You seem 
to know an awful lot about wine. I know absolutely nothing, to 
be honest with you.
    Mr. DeLuca. Come visit us.
    The Chairman. I am afraid to. [Laughter.]
    A poor Mormon boy like myself, I would be in real trouble, 
I will tell you.
    But I do want to be fair to you. We want to solve a problem 
without hurting your industry. It is a legitimate industry, and 
most people I know take a great deal of pain to understand 
their wines and enjoy them very much. So we will be happy to 
have your suggestions. We will be happy to listen.
    We file these bills so that we can get comments, but if we 
can prevent deaths like Brendan almost suffered--and your 
testimony is very dramatic here today. I mean, I feel like what 
a wonderful young man you are to have gone through those things 
and now, having become an Eagle Scout at age 13 and now working 
with Mothers Against Drunk Driving and being used as somebody 
who can articulate some of their positions. I really think it 
is wonderful.
    So we will keep an open mind, and we would like you to look 
at this and see if there is some better way of solving these 
problems because we think the problem is more pervasive, Mr. 
DeLuca, than you do. We have some indications that it is; we 
will put it that way. And, naturally, we want to protect as 
much as we can our young people from these type of----
    Mr. DeLuca. Senator, will you permit me an auxiliary 
remark?
    The Chairman. Sure.
    Mr. DeLuca. Mothers Against Drunk Driving was started in 
Sacramento, CA, by Candy Leightner.
    The Chairman. Right.
    Mr. DeLuca. And in the early days when she was getting 
started, she came to see me and enlisted our support. And we 
were one of the earliest supporters of Mothers Against Drunk 
Driving. In fact, I held a wine-tasting at one of the events to 
try to promote interest in the subject matter as a way of 
showing that there was no ideological or theoretical or any 
practical reason for us not to support that effort. It is an 
extraordinarily important development, how they have been able 
to impact the laws across the country.
    And as I said, we will make common cause with anyone who 
wants to address the issue societally, and that is where we 
part company with you, is only on the specifics of your bill, 
but not in terms of the thrust of what you are talking about.
    The Chairman. Well, let's talk in terms of how we do this. 
I want to be fair to people, certainly to your industry. There 
are a lot of decent, wonderful, honorable people in your 
industry. And, of course, it is a tremendous part of the 
commerce of not only California, but many of the other States 
as well.
    I think that what we will do is we will keep an open mind 
and file the bill, and then you look at it and see how we can 
improve it or what we can do to resolve these problems. I will 
be happy to listen. I will be happy to do whatever we can to 
resolve them in a manner that really is fair to everybody 
concerned. But we are concerned about our young people in this 
society and there is no doubt in my mind that they are using 
credit cards to acquire alcoholic beverages of all kinds.
    And we don't mean to center on the wine industry here 
today. They are getting beer and they are getting, harder 
substances, alcoholic beverages, that they really shouldn't be 
getting under these laws, and they shouldn't be abusing. So 
help us to know how to do it, and I will be happy to keep an 
open door to you and we will see what we can do to get this 
done the right way.
    Mr. DeLuca. Thank you, Senator.
    The Chairman. All right.
    Senator Feinstein. Mr. Chairman, may I make a small 
suggestion? The key may well rest in tightening verification in 
some way of the age of the purchaser through the Internet. Now, 
I don't know how that can be done, but it seems to me to be the 
logical safeguard there and I would just add that.
    Mr. Chairman, may I ask that certain articles be entered 
into the record?
    The Chairman. Without objection.
    [The articles referred to follow:]
    [GRAPHIC] [TIFF OMITTED] T8610.001
    
    [GRAPHIC] [TIFF OMITTED] T8610.002
    
    The Chairman. I will enter some statements in the record, a 
statement from Jack Lynch, who is with the University of 
Baltimore School of Law; Simon Siegl, the president of the 
American Vintners Association; a letter from Jesse Choper, who 
is from the University of California School of Law; and then 
one--let's see; this one is from Jeremy Benson, executive 
director of Free the Grapes, an organization to ensure consumer 
access to fine wine.
    [The statements referred to are located in the appendix.]
    The Chairman. Now, let me just also note for the record 
that Professor Choper has, in response to my inquiry, informed 
us that he has been retained by the American Vintners 
Association. Now, this, of course, was not made clear in his 
letter to the committee. And in all honesty, I really don't, I 
have respect for Mr. Choper, but I don't see his point. 
Constitutionally, I think he is way off base. In fact, I don't 
think; I know he is way off base.
    And I think what we have got to do here is make sure that 
we always get the very best constitutional authorities and the 
best constitutional opinions that we can. Mr. Diamond, I 
certainly agree with you in your interpretations here today, 
and in your statement of the law for the record.
    But be that as it may, this has been an effective hearing 
for me. I have listened very carefully and I certainly want to 
be fair to the wine industry, and really to all of the 
alcoholic beverage industries. But I also want to be fair to 
our children and our young people in this society, who really 
should not have access to these things. As you know, the 
Internet has opened up all kinds of difficulties for us, and we 
have got to approach these difficulties in intelligent ways and 
we intend to do so. To the end, I want to thank each of you for 
appearing today because I think you have been very helpful to 
us. Thanks so much. It is great to see you.
    With that, we will recess until further notice.
    [Whereupon, at 11:28 a.m., the committee was adjourned.]
                             A P P E N D I X

                              ----------                              


                         Questions and Answers

                              ----------                              


        Responses of Wayne Klein to Questions From Senator Hatch

    Question 1. Many small wineries have argued that the current three-
tier system shuts them out and their efforts to introduce their product 
into potentially lucrative markets are being stifled. They also claim 
that the costs of participation in the system would be passed on to the 
consumer making their products less affordable, and thus less 
marketable. These are certainly valid concerns. But to what extent do 
such economic factors justify contravention of State laws regulating 
the sale of alcohol as are appropriate under the Twenty-First 
Amendment?
    Answer. The profit motives of alcohol marketers do not justify 
violating state laws. Similarly, desires by alcohol producers to 
collect the full markup between the cost of production and retail 
prices also do not warrant changing longstanding laws regulating the 
sale of alcohol.
    Policy Choices/Enforcement. It is important to separate two 
distinct concepts implicit in this question; the arguments about what 
governmental policy should exist and the question of enforcement of 
valid laws that are on the books.
    If changes were made to state laws, the availability of alcohol to 
consumers in various states might expand (including the availability of 
alcohol to minors). The costs of that alcohol to consumers might be 
reduced.\1\ If it is the policy goal of government to reduce the costs 
and to increase the availability of alcohol to citizens, laws will need 
to be changed to accomplish this goal. However, this just begs the 
question of what the governmental policy should be and who should set 
the policy regarding alcohol access--the federal government or state 
governments.
---------------------------------------------------------------------------
    \1\ As noted below, if distribution costs were lowered for alcohol 
producers, such as wineries, it is by no means certain that the savings 
would be passed on to consumers.
---------------------------------------------------------------------------
    The Twenty-First Amendment specifically conditioned repeal of 
Prohibition on granting to the states the ability to control the sale 
and distribution of alcohol within a state's borders. Pursuant to the 
authority of the Twenty-First Amendment and the Tenth Amendment, the 
states have exercised their police powers over the sale of alcohol. In 
the exercise of these police powers states have chosen to impose high 
taxes on alcohol, restrict the availability of alcohol, and limit the 
manner of sales. Every state has restrictions of these types.
    To change these policy decisions requires that existing police 
powers be taken from the states. To do so requires a constitutional 
amendment to strip these powers from the states. If that is done, 
Congress then would obtain the power to dictate to the states that they 
could not restrict or control the sale or transport of alcohol in the 
states and could cot impose special taxes on its sale.
    Unless policy authority is taken from the states, then state laws 
regulating or controlling the sale of alcohol are valid. So long as 
those valid laws exist, enforcement officials are permitted--indeed, 
obligated--to enforce those laws.
    In sum, the complaints asserted by wineries go to policy decisions 
of state legislatures, not to law enforcers. The arguments for change 
should be addressed either to state lawmakers or in support of a 
constitutional change. The language of S. 577, by contrast, 
specifically avoids having the federal government express a policy 
preference in this area. The bill is narrowly targeted at removing 
artificial barriers to efforts by state officials to enforce valid 
state laws.
    Costs, Availability of Alcohol. The current distribution system for 
alcohol does not necessarily increase the retail costs for alcohol or 
reduce the availability of products to consumers, beyond what would 
exist in a commercial setting. In some control states, including Utah, 
the state is not only the wholesalers, but also the retailer. Thus, 
Utah is a two-tier state, not a three-tier state. This enables the 
states to reduce the costs of a multiple-tier system. As a consequence, 
even if state law were usurped, a commercial distribution and retail 
system might very well result in retail prices higher than found in the 
state system. there are no assurances of lower prices.
    Wine clubs or other distribution systems currently being offered to 
consumers do not necessarily represent a lower cost structure. A wine 
club becomes a distribution tier. Whether the sales are made through 
retailers or through a wine club, that level of distribution will incur 
costs and markups in price. Distribution systems such as this do not 
necessarily reduce costs as compared to the current systems. Wine club 
prices generally equal or exceed the shelf prices at Utah state liquor 
stores--before the wine club adds its separate shipping fee.
    The assertions of increased costs under the state systems or the 
claims of limited availability may well be a ``red herring.'' 
Regulators suspect that even if alcohol producers could sell their 
product to consumers at a lower price, they would not do so. The small 
wineries or other producers who market and ship directly to consumers 
are not selling to those consumers at below market prices. Any savings 
from climination of different levels of distribution are not passed on 
to consumers. The money saved is retained as extra profits. The 
wineries relish the possibility of collecting a retail price for their 
products rather than a wholesale price. Faced with the prospect of 
collecting a much larger margin on sales than through other 
distribution methods, the wineries are charging full retail price, plus 
shipping, and keeping the higher margin of profits. If the goal of 
shippers were to make their products more available to consumers and at 
a lower price than through the retail system, direct sales would be 
significantly cheaper than the prices at which the same products are 
sold at retail. However, this is not what is occurring.
    The availability of alcohol also may not be improved by alternative 
systems. The Utah Department of Alcohol Beverage Control (DABC) has a 
policy permitting consumers to make special orders. Any product desired 
by a consumer will be ordered for that consumer on request.\2\ In these 
instances, the prices offered to consumers is almost always less than 
the retail price and shipping costs consumers pay through wine or beer 
clubs. In such cases, the price is lower and the demand is consumer 
driven, not supply driven.
---------------------------------------------------------------------------
    \2\ The state will special order other products only where the 
consumer is willing to purchase the entire amount of any minimum amount 
of a special order. If, for example, a winery is willing to sell its 
product only in cases of six bottles, the consumer must be willing to 
purchase the entire order. The winery must be willing to sell its 
product to the state liquor store. In some cases, such as the Stony 
Hill Winery, the producer sells products only at retail. There is no 
wholesale price. After the state's markup, the final price to consumers 
is very high because the winery is unwilling to provide the product at 
wholesale.
---------------------------------------------------------------------------
    Utah requires no fees whatsoever for a winery to be set up with the 
Utah DABC as a vendor/supplier. The DABC does apply a fixed markup and 
tax structure to any product supplied for resale. This is what many 
mail order suppliers want to keep for themselves.
    Another point to be remembered with alcohol availability is that 
not all products are readily available for purchase. Some California 
wineries already are selling all their output to consumers in 
California and to consumers located in reciprocal states. They simply 
do not have excess capacity to sell to buyers in other states, whether 
or not those states are willing to permit the product to be sold. For 
consumers in other states, the product simply is unavailable. This 
unavailability should not be the cause of criticism of state regulators 
or the state-control system.

    Question 2. It has been argued that States can address all their 
concerns by simply enacting legislation permitting direct shipments 
with certain restrictions. Such legislation would require licensing by 
the State and would result in effective State control and ensure the 
receipt of appropriate tax revenue for those direct sales. Would the 
enactment of State laws permitting direct shipment of alcohol solve all 
the state problems and vitiate the need for federal legislation on this 
area?
    Answer. No. This approach is neither good public policy nor an 
effective solution.
    False Premise. This question presupposes a false premise. Yes, 
states could address the concerns of wineries and alcohol producers--if 
the states felt that the approach suggested by alcohol producers was 
good policy for the state. The false premise exists because it assumes 
that the states have adopted their various regulatory systems out of 
ignorance or incompetence rather than as a deliberate policy choice. 
Indeed, when states have adopted the industry-recommended approach, the 
results have been unsatisfactory.
    It is my understanding that all states do have procedures to permit 
out-of-state companies to sell alcohol in the state. The complaint 
seems to be that the procedures available are not the ones preferred by 
alcohol marketers. However, these are the procedures that are being 
followed by in-state companies and by out-of-state companies that have 
chosen to comply with the law.
    It would be unwise for the states to adopt a policy of not 
requiring out-of-state companies to comply with laws applicable to in-
state producers. To do so would penalize those companies that are 
located in the state, encouraging them to move their operations to 
another state. It certainly would not be fair to exempt out-of-state 
producers from compliance with state laws, but still impose taxes and 
restrictions on in-state companies. No advantage should be given to 
out-of-state companies that disadvantages in-state companies or those 
who are willing to comply with the law. If some California wineries 
satisfy the requirements to sell in a particular state--and demonstrate 
that compliance is feasible--why should other wineries not be expected 
to do the same?
    Compliance with the law is possible. While there may be costs 
involved in complying with state laws, it can be done. I commend the 
many companies that do comply with state laws. There are commercial 
enterprises and technological advances that facilitate this process. 
The Internet, for example can be an affective and efficient means of 
understanding and complying with the laws of each state, instead of 
being used as a means of facilitating violations of the law.
    The pernicious notion that states can (they really mean ``should'') 
address producers' concerns about difficulties in selling their 
products in certain states by changing their laws to no longer restrict 
those products is akin to having promoters of gambling or 
prostitution--which are legal in some areas--insist that other states 
change their laws to facilitate the export of these products to all 
states.
    When States do Permit Direct Shipments, Alcohol Sellers Still are 
Not Complying with the Laws. Evidence that the states' concerns are not 
alleviated by the passage of legislation permitting direct shipments is 
shown by the experience of states that do permit direct shipments. It 
is my understanding that at the National Alcohol Beverage Control 
Association (NABCA) Symposium on Alcohol Beverage Law, held in March, 
1999, a representative of the New Hampshire State Liquor Commission 
reported that the New Hampshire law permitting direct sales to 
retailers and consumers has been met with very limited use. Since the 
law went into effect on July 1, 1998, only 14 permits have been 
purchased. Taxes of $373 have been collected, reflecting very low 
levels of retail sales. This indicates that alcohol sellers are not 
utilizing the straight-forward compliance procedures provided by the 
law. The vast majority of direct sellers continue to sell alcohol to 
New Hampshire residents without taking the effort or paying the 
licensing fees to comply with the law.
    While the state of New Hampshire created a mechanism for relatively 
simple compliance, the mechanism is not being used. The suspicion is 
that alcohol shippers do not want to submit to any regulatory oversight 
or are unwilling to pay any taxes or licensing fees.
    The much-anticipated experience of Louisiana, the other state 
permitting direct sales by companies that register with the state, has 
been similar. A permit is required in order to ship alcohol directly to 
purchasers. A fee of $150 is charged to manufacturers and $1,500 to 
out-of-state retailers such as wine or beer clubs, or retail marketers. 
To date, the state has collected a mere $7,000 in licensing fees--fewer 
than 50 out-of-state vendors. Again, this indicates that enacting 
legislation to permit direct shipments (with certain restrictions) is 
not a successful approach since few shippers are willing to comply the 
law.
                                 ______
                                 

      Responses of Wayne Klein to Questions From Senator Grassley

    Question 1. Several of you have indicated that the ATF has 
regulations on alcohol sales. Has the ATF issued regulations or 
guidance on this issue of the direct selling of alcohol across state 
lines?
    Answer. Yes. On February 11, 1997, the Bureau of Alcohol, Tobacco 
and Firearms (BATF) issued Industry circular 96-3, which noted that 
compliance with the Webb-Kenyon Act is a condition for the maintenance 
of the federal basic permit issued by the agency. Without a basic 
permit, a company is not eligible to engage in the distribution or sale 
of alcohol beverages. However, RATF is prohibited by law from 
regulating brewers or retailers, so 96-3 is of limited application. The 
BATF can take no action against brewers or against wine or beer clubs 
(as retailers).
    Industry Circular 96-3, however, states that BATF will respond to a 
request for state assistance only where a written determination has 
been made by the state regulatory agency or Attorney General that the 
conduct at issue violates state law, and where the BATF has 
independently determined that the conduct has some ``pronounced 
impact'' on the state regulatory or enforcement scheme.
    A copy of Industry Circular 96-3 is attached. BATF has taken no 
enforcement action relating to direct shipping against any holders of 
permits since the issuance of the circular. State regulators report 
that BATF devotes little of its resources to alcohol (one estimate is 
less than 10 percent). Instead, BATF focuses on collecting fees and is 
reluctant to bring enforcement actions. At the 1999 NABCA Symposium, a 
BATF official stated that the Department of Treasury (of which BATF is 
a unit) has not taken a position on direct shipping in the past. It 
recognizes the issues of violations of state laws and minor sales but 
is taking a cautious approach as it tries to learn more about the 
issue.

    Question 2. Mr. Klein, your testimony indicates that you are 
prosecuting an Illinois company for illegal shipments of alcohol into 
Utah. You also mention that the state of Utah had warned the defendant 
in your case to stop shipping alcohol into your state. Could you 
elaborate on how the defendant was warned and whether the defendant 
responded to this warning in some way?
    Answer. Yes, the defendants in our case were advised that their 
conduct violated the law and were requested to cease shipments. It was 
only after shipments continued six months later (over a hundred cases 
per month) that the state determined to bring a criminal prosecution.
    The Affidavit of Probable Cause, accompanying the criminal charges 
provides the background of this warning:

          9. On or about April 19, 1996, a representative from UPS, 
        Loss Prevention, reported that UPS had in its possession 
        several cases of beer (each case containing twelve bottles) 
        which were shipped from BAA [Beer Across America) to residents 
        within the State of Utah. Sgt. Braegger, Utah Division of 
        Investigations (``UDI''), contacted Amoroso [Louis Amoroso, 
        President of Beer Across America] on this same day and advised 
        him that BAA was illegally importing alcoholic beverages into 
        the State of Utah. Amoroso was also told at this time that Utah 
        law required BAA to obtain an appropriate license, that all 
        shipments must be sent through the Utah Department of Alcoholic 
        Beverages, and that if shipments continued without the 
        appropriate license, the product would be seized and legal 
        action taken. Sgt. Braegger was then immediately contacted by 
        Morton Siegel who identified himself as the attorney for BAA. 
        After a discussion of the laws of the State of Utah and the 
        expressed intent of UDI to enforce the alcoholic beverage laws, 
        Mr. Siegel advised that BAA would cease imports into the State 
        of Utah and the expressed intent of UDI to enforce the 
        alcoholic beverage laws, Mr. Siegel advised that BAA would 
        cease imports into the State of Utah until legal arrangements 
        could be made with the Utah Department of Alcohol Beverages.
          10. Upon checking with Earl Dorius, Utah Department of 
        Alcoholic Beverages, I [the affiant, UDI agent Evan Terry] was 
        advised that BAA had not filed for nor received a license from 
        the State of Utah for the import of any alcoholic beverage 
        before April 19, 1996. Subsequent to that time, BAA has never 
        filed for or received a license.
          11. In my contacts with numerous customers within the State 
        of Utah, I was advised that in many instances after April 19, 
        1996, BAA advised the customers that BAA could not ship into 
        Salt Lake City, but encouraged customers to list a shipping 
        address outside of the city. In addition, upon reviewing 
        printed materials for BAA, I have noted that these materials 
        contain information stating that BAA will refuse orders and 
        will not ship into certain states because of legal 
        requirements. The State of Utah is not on this list.

    The records of seized shipments bear out that BAA encouraged 
customers to list false addresses. A review of 244 invoices from 
shipments from BAA to Utah residents in October and November 1996 shows 
that 33 of them (or 13.5 percent) listed an out-of-state address for 
billing, but a Utah address for shipment.
    In addition to warnings by Sgt. Braegger, Lt. Mitch Ingersoll of 
UDI spoke with Mr. Siegel on two occasions during this period. Lt. 
Ingersoll explained the operation of Utah's liquor laws and Utah's 
intent to prosecute if shipments continued. Mr. Siegel told Mr. 
Ingersoll that he refused to advise his client (BAA) to stop shipping 
into Utah.

    Question 3. From the written testimony, I get the impression that 
direct sellers of alcohol use common carriers like ``UPS'' or ``FEDEX'' 
to deliver the alcohol to customers. Are there any laws on the books to 
go after the carriers who transport alcohol into a state in violation 
of state law on behalf of direct seller[s] of alcohol? If not, should 
there be such laws?
    Answer. There is a Utah statute that prohibits carriers from 
transporting alcohol in a state in violation of state laws. Utah Code 
Ann. Sec. 32A-12-504 provides:

          It is unlawful for any motor carrier, or any officer, agent, 
        or employee of a motor carrier, or any other person, to order 
        or purchase any alcoholic product or to cause any alcoholic 
        product to be shipped, carried, or transported into this state, 
        or from one place to another within this state, when the 
        alcoholic product is intended by any interested person to be 
        received, possessed, sold, or in any manner used, either in the 
        original package or otherwise, in violation of the laws of this 
        state.

    I believe that many, if not most, states have similar laws. There 
are good arguments in favor of, and against, strictly enforcing such 
laws. There is an initial question of fairness in enforcing laws such 
as this against innocent shippers. Since some shippers (and perhaps the 
majority) do not label the packages as containing alcohol and do not 
completely identify the source of the package as an alcohol shipper, it 
is possible that shippers can be transporting alcohol without knowing 
the contents of the package. The state must determine whether it is 
fair to punish them?
    A further complication is that some manufacturers have alcohol 
products packaged and introduced into the shipping process by other 
companies. This further disguises the contents, sometimes resulting in 
the alcohol being described as glassware or fruit juices.
    On the other hand, practical considerations indicates that it might 
not be unfair to impose such requirements, if the shipper knows the 
contents of the packages. In many cases, the same company picks up the 
alcohol from the warehouse of the alcohol producer and then distributes 
the packages through its network to the ultimate destinations. Thus, 
while the delivery driver at the destination may not know what is in 
the package, the company knows very well that the alcohol was picked up 
from an alcohol seller and that it was destined fro delivery in various 
states. Indeed, UPS representatives told me that in many cases, 
companies that do a significant amount of shipping prepare the delivery 
documents using computers and computer programs provided by UPS. In 
other words, UPS easily can know whether it is shipping alcohol. FEDEX 
and UPS say they have corporate policies against transporting alcohol 
into states where it is illegal, but they also do not ask what is in 
packages picked up from wineries. In such cases, the carrier can be 
considered to be aiding and abetting the alcohol marketer in selling 
its alcohol products into states where the sales are illegal.
    Unfortunately, there may be significant limitations on the ability 
of states to regulate common carriers who are delivering alcohol to 
consumers in the various states. It is my understanding that the 
Airline Deregulation Act, and perhaps other statutes, prohibit the 
states from imposing rules or regulations on federally-regulated air 
carriers. I believe that FEDEX is such a carrier. States may be unable 
to impose restrictions on interstate shipments because of the 
Constitution's Commerce Clause without express permission from 
Congress.
    As to whether there should be laws prohibiting carriers from 
transporting alcohol, it is my opinion that this is a decision that 
should be made by the various states as part of their regulatory 
structure for alcohol control. But, if a state desires to restrict the 
transport of alcohol, Congress should assist that state by removing the 
ability of violators to claim immunity from enforcement because of the 
Commerce Clause. Importantly, S. 577, would permit the Attorney General 
to bring enforcement actions against carriers as well as alcohol 
producers--so long as the conduct violates state law. It is left to the 
individual state to (a) determine whether to make transportation 
unlawful, and (b) decide whether the facts of a particular case justify 
initiation of an enforcement action. This bill will help those states 
who choose to go after carriers who are aiding in the illegal conduct.

    Question 4. One of the major arguments used against the direct sale 
of alcohol is that states into which alcohol is shipped will miss out 
on sales tax revenue. Are any of the witnesses aware of whether the 
internet tax commission is looking at this issue or has made any 
pronouncements on this issue?
    Answer. I do not know whether the Internet tax commission is 
examining this issue. There have been no pronouncements as yet. The 
commission likely will examine this issue only within the broader 
context of sales taxes being collected on all types of remote selling.
    However, it is important to keep in mind that the sale of alcohol 
involves more than just the collection of sales tax. Alcohol production 
and sales are subject to excise taxes and the collection of fees on 
producers, distributors, and retailers as part of the regulatory 
process. These alcohol-specific taxes serve a distinctly different 
function than sales tax. Sales taxes generally are designed as pure 
revenue sources and are paid into the general tax coffers of a state.
    By contrast, alcohol-specific taxes serve a different function. 
They may be intended to discourage sales (by increasing the cost to 
consumers), to fund the costs of regulation (e.g. public education, 
training of servers, enforcement efforts, defraying costs to society of 
alcohol use), or to fund social projects (such as school lunches in 
Utah, where 13 percent is added to the markup of alcohol purchases to 
fund school lunch programs). Often these alcohol-specific taxes provide 
the funding for the alcohol regulatory agencies.
    Alcohol-specific taxes are imposed by states pursuant to exercise 
of their police powers and exist in furtherance of policy goals 
selected by the states. Thus, these taxes are of a very different 
nature than sales taxes and they should be treated in a different 
manner than sales taxes.
    It should be noted that S. 577 is not an anti-Internet nor is it a 
tax bill. It is a simple law enforcement device allowing state 
enforcement action against anyone who violates state law, regardless of 
how the sale was solicited or consummated.
    I hope this provides sufficient response to your questions. If you 
have further questions, please feel free to contact me.
                                 ______
                                 

   Industry Circular--Department of the Treasury, Bureau of Alcohol, 
                   Tobacco and Firearms--Number 96-3

                  direct shipment of alcohol beverages

                                                 February 11, 1997.

Bonded Wineries, Breweries, Importers, Wholesalers, Retailers and Other 
Concerned

    Purpose. The purpose of this circular is to inform industry members 
that an ATF Ruling will be published in a future issue of the Alcohol, 
Tobacco and Firearms Bulletin. The ruling will read substantially as 
follows:

    The Bureau of Alcohol, Tobacco and Firearms (ATF) has recently 
received a number of requests from various States for our assistance in 
the enforcement of State alcohol beverage laws. The States are 
concerned with mail order, telephone, and Internet sales and shipments 
made directly to consumers in a State from sellers located outside the 
State. these transactions usually involve small quantities of wine or 
beer shipped by out-of-State sellers (including beer and wine of the 
month clubs) and, when considered individually, seem to have a 
negligible effect on interstate commerce. taken in the aggregate, 
however, these shipments result in a substantial revenue loss to the 
States of the purchasers. The National Conference of State Liquor 
Administrators has estimated that these types of interstate sales 
currently amount to $300 million annually and result in State tax 
revenue losses of tens of millions of dollars. The States are also 
concerned that shipments may be made to underage drinkers.
    The States have asked ATF whether these types of transactions 
violate the Webb-Kenyon Act, 27 U.S.C. Sec. 122. The States have also 
asked about the circumstances under which ATF will take enforcement 
action against these types of transactions.
    Background. Section 202(b) of the Liquor Law Repeal and Enforcement 
Act, known as the Webb--Kenyon Act, was enacted relative to the 
adoption of the Twenty-first Amendment and is, in effect, a statutory 
declaration of the constitutional prohibition. The Twenty-first 
Amendment provides that 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 prohibited.
    The Webb-Kenyon Act provides that the shipment or transportation of 
any beverage alcohol product, from one State into any other State in 
violation of any law of such State is prohibited. Neither the Twenty-
first Amendment nor the Webb-Kenyon Act provide for any criminal or 
civil penalties for violations thereof.
    The Federal Alcohol Administration Act (FAA Act), 27 U.S.C. 
Sec. 203, requires a basic permit in order to engage in the business of 
importing into the United States, distilled spirits, wine or malt 
beverages. Likewise, a basic permit is required to engage in the 
business of distilling spirits or producing wine. Finally, a basic 
permit is required for persons who engage in the business of purchasing 
for resale at wholesale distilled spirits, wine, or malt beverages. 
Retailers are not required to obtain basic permits under the FAA Act. 
In addition, 27 U.S.C. Sec. 204(d) provides that basic permits are 
conditioned upon compliance with the Twenty-first Amendment and other 
Federal laws relating to its enforcement.
    Consequently, ATF could under appropriate circumstances take 
administrative action against a basic permit where a basic permittee 
ships alcohol beverage products into a State in violation of the laws 
of that State. However, the extent of this authority does not extend to 
situations where an out-of-State retailer is making the shipment into 
the State of the purchaser.
    Held, the Webb-Kenyon Act is a law relating to the enforcement of 
the Twenty-first Amendment and is a condition of the basic permit under 
27 U.S.C. Sec. 204(d) for violations of which ATF may suspend or revoke 
the basic permit.
    Held further, ATF will respond to an official State request for 
assistance only where a written determination has been made by the 
chief administrative officer of the State liquor enforcement agency or 
the State Attorney General that the conduct violates State law and ATF 
has independently determined that the State law violation has some 
pronounced impact on the regulatory and/or criminal enforcement scheme 
of the State in question. That is, ATF will evaluate the conduct in 
question in relation to the proper exercise of its federal authority 
over matters that necessitate federal intervention. For example, ATF 
will not take action to suspend or revoke a basic permit for a 
violation of a local ordinance prohibiting the sale or delivery of 
alcohol beverage products prior to 10 a.m., when the direct shipment is 
delivered by a common carrier earlier than 10 a.m.
                               __________

      Responses of Stephen Diamond to Questions From Senator Hatch

    Answer 1. There was language in some of Justice Brandeis' decisions 
in the 1930's that suggested that the Twenty-first Amendment immunized 
discriminatory state regulations. In Young's Market, however, Brandeis 
found the challenged California statue to be a reasonable, i.e. 
nondiscriminatory, one. In other decisions, he suggested that 
retaliatory state legislation might better be described as protective, 
implying that the legislation was reasonable. In Ziffrin, decided 
contemporaneously, Justice McReynolds explicitly evaluated the 
reasonableness of the challenged law.
    Subsequently, in Bacchus, the Supreme Court explicitly rejected 
protectionist, i.e. facially discriminatory, tax legislation in which 
Hawaii attempted to exempt two locally produced alcoholic beverage 
products from a general tax on all other alcoholic beverages. Facial 
discrimination, exempting in-state products from taxes, permitting only 
products created from locally grown grapes to be sold in grocery 
stores, [(see Loretto 601 F. Supp. 850 (1985)] is therefore forbidden.
    That a wine producing state has a lower tax rate on wine or a beer 
producing state has a lower tax rate on beer has not been deemed 
discriminatory. A policy that benefits local producers, but does not do 
so explicitly or exclusively, is thus permitted. States also can do 
permit in-state breweries and wineries to sell retail on site. All 
states require that sales be through regulated channels. Most of these 
states do not produce wine--about which much of the present controversy 
seems to be focused. They are not protecting their own producers either 
explicitly or implicitly.

    Answer 2. If the judicial interpretation of extra-territoriality 
was such that a state could not prevent unregulated interstate 
shipments, i.e. no jurisdiction over sellers, no realistic possibility 
of action against transportation companies, then the state's capacity 
to collect taxes or regulate prices in ways that justices of the 
Supreme Court have recently suggested are options available to states 
would be vitiated.

    Answer 3. Those who supported Repeal believed that there could and 
should be no single, centrally imposed, regulatory structure for 
alcoholic beverage sale and use. To create its own regulatory regime, 
either a monopoly or a license system, a state needed and needs the 
capacity to control its own borders. State wholesale monopolies or 
regulated private wholesalers were the techniques used to structure 
access to and permit regulation of the state market.

    Answer 4. If states cannot control the flow of alcohol across their 
borders, they cannot realistically protect their tax or monopoly mark-
up revenues. They also cannot regulate the distribution system in the 
interest of temperance or orderly markets (the ultimate purpose of 
orderly markets again being temperance). If the business of in-state 
retailers is significantly reduced by out-of-state shipments, they may, 
to survive, engage in sales to the underaged or intoxicated, sales 
after hours, etc. A lesson of Prohibition was that government should 
not simply ban what are perceived to be undesirable activities. It 
should instead administer a system which reduces the likelihood of 
illegal behavior rather than simply punishing it when it is discovered. 
It is the unregulated and potentially limitless nature of the shipments 
that threaten state regulatory interests.

    Answer 5. It is unlikely that voluntary codes of ethics would work. 
This is not because the alcoholic beverage industry is any more lawless 
than any other industry. It is because voluntary codes, to the extent 
they have ever worked, have only done so when the activities involved 
were sufficiently public and visible, at least within the trade, that 
they could be effectively policed by competitors, who would report or 
threaten to report violations to the authorities. This does not appear 
structurally possible with interstate shipments.
                                 ______
                                 

    Responses of Stephen Diamond to Questions From Senator Grassley

    Answer 1. BATF rejected requests that it pursue interstate 
shipments under Webb-Kenyon, but did eventually, as amicus, support 
Florida's unsuccessful effort to get injunctive relief under the Act. 
In Industrial Circular No. 96-3, issued February 11, 1997, BATF stated:

          ATF could under appropriate circumstances take administrative 
        action against a basic permit where a basic permittee ships 
        alcohol beverage products into a State in violation of the laws 
        of that state. However, the extent of this authority does not 
        extend to situations where an out-of-State retailer is making 
        the shipment into the State of the purchaser.

    BATF has announced, I believe, that it would investigate state 
complaints about winery shipments.

    Answer 2. Common carriers are included in several states' penal 
statutes prohibiting unauthorized interstate shipments. Some state 
regulators have voiced concern that carriers might successfully defend 
themselves from felony prosecutions, by asserting their ignorance of 
the contents of the package, especially when the shipment is not made 
directly from the winery or retail store, but from, for instance, a 
packaging company. On the other hand, several states have informally 
put pressure on common carriers to refuse such shipments.
    Recently a federal court in Massachusetts, in Wine and Spirits 
Wholesalers of Massachusetts, Inc. v. Net Contents, Inc., 10 F. Supp. 
3d 84 (1998), a suit brought by wholesalers against an out-of-state 
shipper and Fed. Ex, held that, with regard to the tort claim against 
Fed Ex, state law was pre-empted by the Airline Deregulation Act, which 
prohibits states from regulating prices or services. If the same result 
were to be reached in a suit brought by a state, states would not be 
able to pursue legal action against air carriers unless Congress were 
to amend the Act.

    Answer 3. I have no information on this subject. The commission may 
not be considering alcoholic beverage taxes since states prohibit such 
sales for regulatory as well as fiscal reasons.

                 Additional Submissions for the Recoed

                              ----------                              


                             American Vintners Association,
                                           Napa, CA, March 5, 1999.
Senator Orrin Hatch,
Chairman, Senate Judiciary Committee,
U.S. Senate, Washington, DC.
    Dear Senator Hatch, Free the Grapes! ia a national, non-profit 
coalition of 145,000 wine consumers and associations representing over 
1,000 of America's winemakers. Our mission is to ensure consumer access 
to fine wine by exposing pending legislation that is anti-consumer and 
anti-free trade. Our strategy is to rally wine lovers who are fedup 
with laws which protect wholesaler middlemen at the expense of their 
ability to enjoy wines not available in their market.
    Our funding comes exclusively from wine consumers tired of 
unnecessary government intervention, and individual winemakers who just 
want to satisfy demand for their wines and get back in the cellar to 
blend the latest vintage. (Some of the organizations at left provided 
seed money in mid-1998.) From the stacks of letters and emails I 
receive, I can assure you that our consumer supporters show an 
enthusiasm for this issue which is inversely proportional to the size 
of our modest budget.
    These same wine lovers, your voters, are very aware that America's 
wineries produce far more labels each vintage than any wholesalers or 
retailers could possibly stock and sell. Of America's 1,800 wineries 
located in 48 states, over 1,700 of them are small, family owned and 
operated; cumulatively, they produce less than 5 percent of all the 
wine produced in the U.S. Yes, less than 100 U.S. wineries produce over 
95 percent of all wine, and they need the 3-tier system to efficiently 
distribute millions of cases.
    We advocate augmenting, not replacing the current 3-tier system by 
allowing the estimated 1 percent of wine that is direct shipped to be 
appropriately regulated. Buying wine by catalogue or online is not like 
buying sweaters from Maine; both consumers and wineries understand the 
differences with a socially sensitive product. As evidenced by their 
model legislation, the wine industry supports purchasing licenses in 
each state, making excise tax payments, volunteering to pay sales tax 
liabilities, reporting shipments, labeling cartons, and using couriers 
accustomed to validating identification of adult recipients. 
Additionally, Free the Grapes! issued in January a voluntary ``Wine 
Industry Code for Direct Shipping'' which includes these provisions and 
is now open for a comment period, although the Santa Barbara County 
Wineries Association already endorsed the code without changes.
    I urge you to carefully consider the costly implications and 
motivations behind this effort to more aggressively prosecute out-of-
state winemakers for shipping a bottle of wine. Certainly every state 
should be able to enforce its law. My fear is that legislation 
resulting from your hearing will put a damper on creative state-by-
state solutions that have been enacted (e.g., NH, LA) or are currently 
being considered (e.g., AZ, TX, MT, NY) which satisfy my consumer 
constituents, and are supported by the wine industry.
    One wonders how the public is served, and what the motivations are, 
behind legislation which seems unrelated to legitimate state interests 
for ensuring public safety. You should know that California, which 
accounts for 29 percent of the nation's table wine consumption, allows 
direct shipping--wholesalers, wineries, retailers and consumers all 
thrive. If there are no problems with direct shipping in California, or 
with the other 29 states that allow intra-state direct shipping, what 
other motivations can there be for the legislation you are considering?
    In some states (e.g., FL, GA, KY), harsh felony laws are only meant 
to intimidate winemakers into compliance with laws seemingly inimical 
to the letter and spirit of the commerce clause. In North Dakota, a 
pending bill supported by wholesalers names wine consumers accomplices 
to felony offenses for direct shipping. In Texas, a pending bill 
carriers the same penalty as a conviction for assault with a deadly 
weapon. Do you really want to criminalize wine connoisseurs and 
winemakers?
    The motivations for this legislation are simple: the powerful wine 
wholesaler middlemen mistakenly fear that direct shipping is the first 
step towards dismantling the 3-tier wine distribution system. They want 
100 percent of sales to flow through their coffers, not 99 percent, 
because they wrongly fear that 99 percent will eventually decrease. 
They are using the 21st Amendment to prop up a business model that was 
appropriate when created 65 years ago. Direct shipping has two main 
causes: it is pressure relief valve for wineries to satisfy tourism-
generated demand for small production wines; and secondly, for small 
family-owned and operated wineries to gain access to consumers in 
states where wholesalers have no financial incentive to represent them.
    Undoubtedly our well-funded opponents will cry foul over lost state 
tax revenues and underage access. I've addressed the tax issue; in 
fact, state revenue may increase as states establish the provisions to 
receive both the excise and sales taxes wineries are willing to pay. 
The underage access issue will no doubt capture your imagination with 
colorful testimony fron well-meaning but misguided witnesses. Reports 
of elaborate PR ``stings,'' concocted purely for TV cameras, are 
artificial, forced sales attempting to prove a hypothetical point. They 
are not indicative of legal, responsible transactions that are the 
norm.
    Do you really believe that the clerk at the corner store is better 
qualified to validate identification than a courier who is trained to 
deliver radioactive materials, flammable liquids, and body organs?
    Is the system perfect? Of course not. We do not condone, nor turn a 
cheek, to those who break any state laws. But the industry is 
voluntarily establishing standards and supporting provisions to 
mitigate any risks to public safety and state revenue sources. As you 
know, Congress has established a commission to grapple with the issues 
of burgeoning Internet commerce and there is a laudable effort to 
interject interstate wine shipments into the discussion.
    If you're going to shackle the winemakers, and criminalize the 
connoisseurs, where does this lead? Under the 21st Amendment 
Enforcement Act''--which I would rename the ``Wholesaler Protection 
Act''--are Americans now subject to not only federal and state law, but 
also the laws of any other state which chooses to use the 21st 
Amendment to prosecute them? Are the states, in effect, enacting laws 
that they cannot themselves enforce?
    This legislation may only add the number of cases before the 
Federal judiciary and could end up costing Americans more in taxes. 
Please, let the states and the industry solve this industry squabble 
for the benefit of adults who just want to enjoy a delicious glass of 
wine with tonight's dinner.
    Thank you very much for your time and for considering the viewpoint 
of thousands of consumers.
            Sincerely yours,
                                             Jeremy Benson,
                                                Executive Director.
                               __________
                                  University of California,
                                       Berkeley, CA, March 5, 1999.
The Hon. Orrin G. Hatch,
Chairman, Senate Judiciary Committee,
U.S. Senate, Washington, DC.

The Hon. Patrick J. Leahy,
Ranking Minority Member, Senate Judiciary Committee,
U.S. Senate, Washington, DC.

    Dear Senators Hatch and Leahy: I write about Senator Hatch's Bill, 
scheduled for hearing before the Judiciary Committee on March 9, 1999, 
that has been said to ``add enforcement'' to the Webb-Kenyon Act passed 
by Congress in 1913. I am a Professor specializing in Constitutional 
Law (and the former Dean) at the School of Law of the University of 
California at Berkeley (Boalt Hall). I attach a copy of my curriculum 
vitae.
    I believe it is most important to underline that the Bill goes far 
beyond simply providing a remedy for a violation of Webb-Kenyon. 
Instead, it makes fundamental changes in current law and in doing so 
affects serious constitutional and public policy issues. Webb-Kenyon 
prohibits the importation of alcoholic beverages into a state in 
violation of that state's laws. It is generally understood that 
Congress' intent in passing the statute in 1913 was to give federal 
sanction to a state's decision to ``go dry,'' an authority that had 
been denied to the states by the Supreme Court in  Leisy v. Hardin, 135 
U.S. 100 (1890).
    Webb-Kenyon does not authorize a state to erect discriminatory 
barriers to interstate commerce. Indeed, in the absence of an express 
federal enactment, any attempt by a state to do so--by conferring 
different rights on in-state and out-of-state producers of alcoholic 
beverages--would violate the core principle underlying the Commerce 
Clause of Congress can so regulate trade between the states.
    Nor does the 21st Amendment, which confers special powers on the 
states regarding alcoholic beverages, affect that conclusion. In 
Bacchus Imports, Ltd. v. Dias, 468 U.S. 263 (1984), the Supreme Court 
held the 21st Amendment did not permit state regulations of the local 
sale or use of liquor to discriminate against interstate commerce. To 
do so, the Court reasoned, would be inconsistent with a central tenet 
of the Commerce Clause: forbidding economic protectionism.
    I believe that the Bill, rather than simply creating a federal 
remedy for a violation of Webb-Kenyon in its current form, would 
dramatically expand the powers of the states to regulate alcoholic 
beverages. Most significantly, it would run counter to the spirit of 
Bacchus and remove the protection that the Commerce Clause grants the 
alcoholic beverage industry, along with all others, from state erection 
of barriers to free trade.
    I would be happy to provide any further information you may find 
helpful.
            Sincerely,
                                           Jesse H. Choper,
                               Earl Warren Professor of Public Law.
                                 ______
                                 
                                  University of California,
                                       Berkeley, CA, March 9, 1999.
The Hon. Orrin G. Hatch,
Chairman, Senate Judiciary Committee,
U.S. Senate, Washington, DC.

The Hon. Patrick J. Leahy,
Ranking Minority Member, Senate Judiciary Committee,
U.S. Senate, Washington, DC.

    Dear Senators Hatch and Leahy: I wish to add an important addendum 
to my letter to you of March 5 concerning my views on the proposed 
amendment to the Webb-Kenyon Act.
    I should have noted and I regret not doing so in my letter, that I 
was retained in this matter by the American Vintners Association. 
Further, my opinion is my own, not that of the University of California 
or Boalt Hall, and my title appeared for purposes of identification 
only.
    Needless to say, I want to underline that my conclusion in that 
letter was reached as a matter of objective appraisal of the governing 
constitutional and statutory provisions, not simply put forward as 
advocacy.
    With best wishes.
            Sincerely,
                                           Jesse H. Choper,
                               Earl Warren Professor of Public Law.
                               __________
                                           Kendall-Jackson,
                                     Santa Rosa, CA, March 2, 1999.
The Hon. Patrick Leahy,
Senate Judiciary Committee,
Russell Senate Office Building,
Washington, DC.
    Dear Senator Leahy: On behalf of the wine industry in general and, 
more specifically, Kendall-Jackson winery, I would like to take this 
opportunity to express to you my concerns the upcoming Judiciary 
Committee Hearing and any potential legislation that may be introduced 
for that hearing. We understand that legislation may be modeled in part 
after H.R. 1063, a bill that was introduced in the house last session 
by Congressman Ehrlich to expand the jurisdiction of the Webb-Kenyon 
Act to Federal courts. That bill died in committee last session. 
Chairman Coble's position was that the bill would not move forward 
unless members of the industry came to a compromise, although the wine 
industry proposed a compromise solution, the alcohol beverage 
wholesalers would not agree to this compromise.
    There is a tendency to muddy this issue with serious matters of 
concern for public policy, namely, underage consumption of alcohol and 
State taxation. However, we believe that two facts are important to 
remember (1) based on our experience with direct shipping in 
California, we believe that underage purchases of wine is anomalous, 
and there is nothing but anecdotal evidence about underage internet 
access to alcohol (few teens for or can afford cabernet sauvignon); and 
(2) there are existing remedies at the state and federal levels to 
address violations of underage purchases of alcohol.
    As a threshold matter, Kendall-Jackson questions whether it is 
necessary to grant states access to Federal courts to enforce 
violations of state law given that there is an existing Federal remedy 
available to the states at present. Pursuant to the 21st Amendment to 
the United States Constitution the ``transportation or importation into 
any State * * * in violation of the laws thereof, is * * * 
prohibited.'' The Federal government does not have a role in regulating 
the liquor industry through the Federal Alcohol Administration Act. 27 
U.S.C. Sec. 201 et seq. A federal ``basic permit'' is required to 
engage in the business of producing, importing or purchasing an alcohol 
beverage for resale. 27 U.S.C. Sec. 203. The basic permit is 
conditioned on compliance with federal law. 27 U.S.C. Sec. 204 (d). 
Even with the Constitution empowering states to regulate alcohol, the 
Commerce Clause could arguably be interpreted to erect an impediment to 
state regulation of liquor. See, U.S. Const., Art. I, Sec. 8, Cl. 3. 
However, Congress passed the Webb-Kenyon Act to prohibit ``[t]he 
shipment or transportation * * * of any * * * intoxicating liquor * * * 
into any other State * * * in violation of any law of such State.'' 27 
U.S.C. Sec. 122.
    While the Webb-Kenyon Act did not provide for federal remedy or 
jurisdiction (see Florida Dept. of Business Regulation v. Zachy's Wine 
and Liquor, 125 F. 3d 1399 (11th Cir. 1997), cert. denied, 118 S.Ct. 
1402 (1998) (holding the 21st Amendment and Webb-Kenyon do not confer 
on the states a civil remedy)), it does serve two important functions 
:(1) liquor has been divested on its interstate character and States 
are empowered to restrain trade and burden commerce (with some 
limitations) \1\ as they regulate liquor; (2) the Federal government 
which issues basic permits to distillers and wineries can revoke the 
basic permits upon the violation of federal law. Webb-Kenyon 
``assimilated'' state law violations into federal law violations for 
this purpose. Therefore, a violation of Webb-Kenyon by shipping liquor 
in violation of state law subjects the basic permit to suspension or 
revocation. 27 U.S.C. Sec. 204(e).
---------------------------------------------------------------------------
    \1\ The Supreme Court held that the ``Twenty-first Amendment grants 
the States virtually complete control over whether to permit 
importation or sale of liquor and how to structure the liquor 
distribution system. Although States retain substantial discretion to 
establish other liquor regulations, those controls may be subject to 
the federal commerce power in appropriate situations.'' California 
Retail Liquor Dealers Assn. v. Medcal Aluminum, 445 U.S. 97, 110 
(1980).
---------------------------------------------------------------------------
    The Department of Treasury is charged with enforcement of the 
Federal Alcohol Administration Act, but it has delegated this task to 
ATF. Under current law, a state may submit a complaint, ATF will 
investigate the complaint and, if it is credible, take appropriate 
action, including the withdrawal of the offenders basic permit. ATF 
Industry Circular 96-3. This avenue is rarely used--perhaps due to the 
effectiveness of State enforcement efforts--but in the single instance 
of which I am aware involving a producer in Louisiana, ATF investigated 
the case which resulted in the voluntarily withdrawal of its permit. 
This example demonstrates that the intended result will occur if the 
available remedies are used. If there is serious concern that AFT would 
not take the appropriate action, there may be adequate remedies to 
encourage more appropriate action by AFT short of an additional federal 
law such as H.R. 1063.
    Kendall-Jackson seeks to comply with all local, state and federal 
laws and would never jeopardize its ATF basic permit--that permit is 
the life of its business, as is true with all wineries. Clearly, the 
Federal remedy is an adequate deterrent and remedy. State courts 
already have jurisdiction over those who violate their state laws--
unless there are no minimum contacts. Therefore, the only remaining 
issue that Congress could consider is how to reach out-of-state brewers 
and retailers who do not have minimum contacts with the state.
    Cases in Florida and Utah have touched upon this issue. The Florida 
state court case (State of Florida v. Sam's Wines & Liquors) held that 
mere shipment does not constitute minimum contacts. The Florida Federal 
court case (State of Florida v. Rachambeau Wines and Liquor) confirms 
that there is no Federal court jurisdiction to enforce Webb-Kenyon. The 
court's discussion of the legislative history, including the intent of 
Congress to exclude jurisdiction, is worth reviewing. The Utah case 
(State of Utah v. Amoroso and Beer Across America) addressed the 
question of where the sale occurs, holding that the sale takes place in 
the State where the seller is located and that the shipment is for the 
convenience of the customer. In other words, there is no violation of 
State law in the recipient State that would seek to enforce Webb-
Kenyon. Therefore, one is left wondering what hypothetical situation 
the proponents of Webb-Kenyon Act reform hope to reach.
    States have been enforcing their liquor laws against out-of-state 
entities and continue to do so today. See, e.g., Ivey v. Bacardi 
Imports, Inc., 541 So.2d 1129 (Fla. 1989); James B. Beam Distilling Co. 
v. State, 382 E.2d 95 (Ga. 1989), rev'd 501 U.S. 529 (1991), appeal 
after remand, 437 S.E. 2d. 782 (1993), cert. denied, 513 U.S. 1056 
(1994); All Brand Importers, Inc. v. Department of Liquor Control, 567 
A.2d 1156 (Conn. 1989); Division of Alcoholic Beverages and Tobacco, 
Department of Bus. Regulation v. McKesson Corp., et al, 524 So. 2d 1000 
(Fla. 1988) rev'd on other grounds, 496 U.S. 18 (1990); Williams v. 
Commonwealth, 56 S.E. 2d 537 (Va. 1949); Oregon Liquor Control Comm'n 
v. Coe, 99 P.2d 29 (Or. 1940).
    Last session, proponents of H.R. 1063 decried the limited reach of 
state court jurisdiction. However, the exercise of state court 
jurisdiction is limited by the lack of personal jurisdiction, which is 
a fundamental legal principle with roots in due process that stands for 
the common sense proposition that you cannot sue someone and exercise a 
judgment against them in a place where they have no connection. H.R. 
1063 did not solve this problem. the fallacy of the approach of H.R. 
1063 is two-fold. First, the limits of due process and personal 
jurisdiction do not disappear in federal court--they are essentially 
the same. Second, the grant of federal jurisdiction to enforce the 
recipient-state laws is useless: since the sale occurs out of state, 
the recipient-state laws would not even apply. See e.g., State of Utah 
v. Amoroso and Beer Across America (holding that the sale takes place 
where the seller is located and that the shipment is for the 
convenience of the customer).
    Even so, one needs to address the emotional issue of underage 
drinking. Fundamentally, I believe the history of New York and 
California--two States that allow direct shipment--demonstrates that 
direct shipment of wine is not a factor with underage drinking. 
Panelists speaking about direct shipping at the Unified Wine and Grape 
symposium in Sacramento, including Manuel R. Espinoza, the Deputy 
Director of California's Alcoholic Beverage Control Board, came to the 
same conclusion. Unfortunately, if a law enforcement official wants to 
create a sting operation by directing an underage person to obtain wine 
through direct shipment, sooner or later it will result in an improper 
shipment. Nevertheless, we are confident that this contrived situation 
does not occur with any statistical significance.
    The vast majority of wine produced by Kendall-Jackson is 
distributed through the traditional three-tier distribution system. To 
put this issue of direct shipment in perspective; during a period 
between February 1992 and December 1998, Kendall-Jackson sold 
approximately 15 million cases of wine. Over the same timeframe it 
shipped about 2 tenths of 1 percent (0,0002 percent) to consumers 
outside California. Kendall-Jackson presently does not ship outside of 
the State of California due to the danger of entrapment sting 
operations and harsh state laws, some imposing felonies--punishable 
with jail time--simply for shipping a bottle of wine. This situation 
simply harms small family-owned wine businesses and adults who wish to 
purchase wine without addressing any real world problem such as 
underage drinking. There are commonsense ways to address underage 
drinking problems. For one, producers and shippers should always 
require the purchasers to certify their age and the container should be 
marked indicating an adult signature is required before it is released. 
Several States, including New Hampshire, have enacted laws requiring 
producers to register with the State before they can ship into the 
State. This seems to be a reasonable approach--and one that can be 
achieved without burdening the Federal judiciary.
    Another issue concerns the States' ability to tax transactions over 
the internet. I know that you are keenly interested in legislation 
affecting internet tax. For the highly regulated wine industry, 
taxation is a way of life. federal and state regulators have free and 
open access of our records in order to verify that all the taxes that 
are levied on our product have been paid. This is not something that is 
new to our industry. Look at the States of Louisiana and New Hampshire. 
While working with legislators in those progressive states to craft 
permit legislation that would allow us to reach loyal customers, we 
have openly agreed and encouraged these states to have access our 
records to document that the appropriate taxes have been remitted for 
wines shipped to their states. The issue is not payment of Texas, the 
industry would agree to pay its fair share, the issue is the undue 
barrier to interstate commerce.
    The industry is highly concentrated among the top few wholesalers. 
According to the Johnson Liquor Handbooks, wine producers in the U.S. 
have increased from 377 to 1,772 from 1963 to 1994 (over 400 percent). 
In the same period, the wholesale tier has dropped dramatically from 
10,900 to 2,928 distributors nationwide. Therefore 25 percent as many 
wholesalers are left to serve 4 times as many wineries. This 
proliferation of primarily small, family owned, wine businesses and 
consolidation of distributors has significantly restricted access to 
reasonable commerce channels. Clearly, the small wineries are not able 
to get representation to serve loyal customers in many markets. The top 
15 U.S. wine and spirits wholesalers distribute over 50 percent of the 
market share. We the producers, on the other hand, want to provide the 
consumers with a greater choice in products at a reasonable price. 
Simply put, we want to encourage entrepreneurs to continue to devise 
new legal methods to bring their products to market.
    There is a final piece of the puzzle that needs consideration. 
Attorneys-General has targeted wine producers as the villain in some 
states with sting operations. I find it very interesting that the other 
two parties to the transaction escape scrutiny. The producers have put 
safeguards in place at the time of ordering that require certification 
by the customer that they are adults. When we give our product to the 
second party in the chain, the shipper, it is clearly labeled ``adult 
signature required''. The carrier must be diligent and confirm that our 
wine id delivered to a legal consumer. The third party is the consumer. 
Have there actually been prosecutions by these same Attorneys-General 
of underage purchasers using direct shipment to acquire alcohol? The 
simple answer is no. A sting operation is one thing, actual violations 
are another. Kids are not going to use direct shipment to acquire 
alcohol. They don't want the paper trail of a credit card purchase. 
They are not going to purchase relatively expensive table wine. They 
are not willing to wait for the period of the delivery time. They can 
not risk the possibility of delivery when their parents are home, and 
if the carrier does its job, they would not be able take delivery since 
they are not adults and would not be able to sign for the shipment.
    Kendall-Jackson supports direct interstate shipments. Please call 
if you have questions or concerns. Again, thank you for your 
willingness to hear our side of this issue.
            Sincerely,
                                           Jess S. Jackson,
                                        President, Kendall-Jackson.
                               __________
                           University of Baltimore,
                                             School of Law,
                                      Baltimore, MD, March 8, 1999.
Re: S. ______: 21st Amendment Enforcement Act

M. Craig Wolf, Esquire,
Counsel, Senate Judiciary Committee,
U.S. Senate, Washington, DC.
    Dear Mr. Wolf: Thank you very much for your request for comment on 
S. ______. I suppose that it is not very often that elementary 
principles of civil procedure are essential to the deliberation of our 
country's highest legislation. S. ______ appears to present such a rare 
occasion and I am happy to assist you.
    I will address service of process and venue, though only briefly, 
and comment more fully on personal jurisdiction. I note that the 
``lastest draft'' that you faxed me provides for venue in the district 
where the defendant resides. This differs from an earlier draft you 
sent me that provides a suit may be brought in ``a judicial district 
where a person resides or is found that has received liquor transported 
or shipped to that person from another person * * *'' (emphasis added). 
Presumably this means a district court in the state which seeks to 
bring such an action.
    If the Committee has decided to abandon an approach which allows a 
state to enforce its liquor laws in its ``own'' federal courts, and 
instead, to require state attorney general offices to chase 
``electronic bootleggers'' around the country (no doubt, an expensive 
proposition for some states in hard times), there is not much for me to 
comment upon. Suing a defendant where it resides or ships liquor from 
poses no serious issues of process, venue or personal jurisdiction. 
Assuming the possibility that the plaintiff's venue approach of the 
earlier draft was discarded because of constitutional personal 
jurisdiction concerns, I presume to address such concerns. In my 
opinion, they are not serious enough to require state officials to 
chase long distance violators of their liquor laws around there 
country.
    As to the matter of service of process, I submit that Rule 
4(k)(1)(A) of the Federal Rules Civil Procedure would suffice even if 
state plaintiffs were able to sue in federal courts in their own 
states. Process under this rule is effective if the defendant is 
amendable to suit under the due process analysis I will discuss below.
    As to venue, I submit that it would not be objectionable to fix 
venue in the district courts in the plaintiff state. Although 28 U.S.C. 
Sec. 1391, the general venue statute, no longer provides for 
plaintiff's venue as such, it did so until 1990. In light of the 
jurisdictional considerations I discuss below, I believe that venue 
could appropriately be fixed in federal courts in the plaintiff's 
state.
    With respect to personal jurisdiction, the question that jumps out 
at one who considers S. ______ is: how is it possible to assert 
personal jurisdiction over a party in a forum across the country from 
where that party conducts its operations simply because that party has 
shipped a few cases of wine to the forum? The answer to this question 
is not as simple as might appear at first glance.
    The seductively simple answer that the suit to prevent interstate 
violation of state liquor laws may not be brought in the state where 
liquor is shipped in violation of state laws rests on the notion that 
the Supreme Court, since Hanson v. Denckla, 357 U.S. (1958), has tended 
to construe personal jurisdiction restrictively. While it is true that 
defendants resisting state personal jurisdiction have won in the 
Supreme Court more frequently than plaintiffs asserting it, that is not 
the central reality of the Supreme Court jurisprudence of due process 
and personal jurisdiction of the modern era, i.e., the era opened by 
International Shoe  v. Washington,  326 U.S. 310 (1945). The central 
reality of the court's jurisprudence in this area is the development of 
protection for three interests:

  1. Fairness to a defendant, requiring that the burden of defense not 
    be disproportionate to defendant's affiliating circumstances vis a 
    vis  the forum;

  2. Protection of the mutual sovereignties of the states from judicial 
    encroachment; and

  3. Protecting the right of states to provide forums for controversies 
    in which they or their citizens have substantial interests.

    The first of these interests, the protection from constitutionally 
inconvenient litigation springs in the modern era from International 
Shoe Co., v. Washington, 326 U.S. 310 (1945). The court, pursuant to 
the Fourteenth Amendment, required minimum contacts between a defendant 
and a forum in order to require a defendant to defend in the forum. In 
that case the suit was to collect Washington State employment taxes 
from a manufacturer of shoes that had sent shoe salesmen to the state. 
In holding that assertion of jurisdiction by Washington over the out of 
state defendant was constitutional the Court noted, among other things, 
that the suit arose out of the defendant's activities in the state. In 
the years since International Shoe, the Court has looked to whether or 
not agents of a defendant have been physically present in the forum, 
but the Court has not always required some sort of physical presence in 
the forum as a precondition of a determination of constitutional 
fairness.
    An interesting example of a finding of jurisdiction over a 
defendant who was never present in a state may be seen in Calder v. 
Jones, 465 U.S. 783 (1984). In that case actress Shirley Jones sued the 
National Enquirer  and a reporter, one Calder, in a California state 
court for defamation. The reporter, who lived in Florida and did not 
travel to California in connection with the story, asserted lack of 
personal jurisdiction. The Court upheld California's jurisdiction over 
the reporter on the basis of the foreseeable effects the story caused 
in California.
    In a case decided the same day, Keeton v. Hustler Magazine, Inc., 
465 U.S. 770 (1984), the Court upheld personal jurisdiction under New 
Hampshire law over a libel suit against Hustler, an Ohio corporation. 
It found minimum contacts on the basis of the sale of 10,000 to 15,000 
copies of Hustler every month in New Hampshire.
    In both cases, it might be argued that the ``presence'' of the 
defendants in the forums was of a lesser magnitude than that of the 
defendant in International Shoe, which actually had employees in 
Washington. Nonetheless, the Court in both cases was influenced by the 
interest of both forums in protecting their citizens from the harm of 
defamation.
    It is clear that the object of due process to protect a defendant 
from unconstitutional inconvenience has not been viewed in isolation. 
It has been balanced with the interests of the forum. A number of lower 
federal and state courts have upheld jurisdiction based upon the 
sending of goods or services into a forum state. See e.g., APC 
Commodity Corp. v. Ram Dis Ticaret, A.S., 965 F. Supp. 461 (S.D.N.Y. 
1997); Digital Equipment Corp. v. Alta Vista Technology, Inc., 960 F. 
Supp. 456 (D. Mass. 1997); Connecticut Nat. Bank v. Hoover Treated Wood 
Products, Inc., 376 Mass. App. Ct. 231, 638 N.E.2d 942 (1994); Bergherr 
v. Sommer, 523 N.W.2d 17 ( Minn. App. 1994), review granted and appeal 
dismissed, Univ. of Iowa Press v. Urrea, 211 Ga. App. 564, 440 S.E.2d. 
203 (1993), cert denied.
    The second interest that the Supreme Court has acted to safeguard 
in the post-International Shoe era is the scope of jurisdiction of 
individual state judiciaries. It has done so by preventing state courts 
from adjudicating controversies more appropriate for the resolution by 
courts of other states owing to firmer connection of the parties with 
such states. That a state must not adjudicate the personal rights of 
persons with whom it lacks sufficient connection so as to avoid 
encroachment on states which have such connections is not a novel 
proposition. It generally prevented state courts from exercising 
jurisdiction over persons not found within a state, particularly in the 
nineteenth century. See Pennoyer v. Neff, 95 U.S. 714 (1878).
    The notion was resuscitated in Hanson v. Denckla, 357 U.S. 235 
(1958). In that case the testamentary beneficiaries of a Florida 
decedent sought, in a declaratory judgment action, to have an inter 
vivos trust established by the decedent invalidated. All of the parties 
except the trust company that held the property were Floridians. The 
trustee was a Delaware corporation. The trustee had no corporate 
presence in Florida. It had simply continued to deal with the decedent 
after she had moved to Florida, sending her reports on the affairs of 
the trust.
    In rejecting Florida's exercise of jurisdiction over the Delaware 
trustee, the court conceded that ``progress in communications and 
transportation has made the defense of a suit in a foreign tribunal 
less burdensome.'' Id. at 251. That may have been sufficient to vitiate 
the inconvenience that was crucial to International Shoe. But the Court 
articulated another rationale for the due process restrictions on 
personal jurisdiction: ``They are a consequence of a territorial 
limitation on the power of the respective states.'' Id. Implicit in 
this is the proposition that for Florida to adjudicate the status of 
the trust on the basis of such tenuous contacts to the Delaware trustee 
would amount to an encroachment of the sovereignty and jurisdiction of 
Delaware.
    This principle became clearer over time. In Kulko v. Superior 
Court, 436 U.S. 84 (1978), the Court rejected California's exercise of 
jurisdiction over a suit for child support against a New York father 
whose children lived with their mother in California. The father's 
``contact'' with California was essentially limited to acquiescence in 
the choice of the children to live with their mother and whatever 
effects the presence of the children in California may have had there. 
The Court held, inter alia, that California should not have adjudicated 
a suit that more properly should have been maintained in New York: 
``[T]he controversy between the parties arises from a separation that 
occurred in the State of New York; appelle * * * seeks modification of 
a contract that was negotiated in New York and that she flew to New 
York to sign.'' Id at 97.
    In Worldwide Volkswagen Corp. v. Woodson, 444 U.S. 286 (1980) 
persons injured in an automobile accident in Oklahoma sued the 
manufacturer, national distributor, regional distributor and local 
dealer of the vehicle they had purchased in New York and then drove to 
Oklahoma. The regional distributor, which did business only in New 
York, New Jersey and Connecticut, and the local dealer, which served a 
community in New York, resisted jurisdiction in Oklahoma. In upholding 
the objections of these parties to jurisdiction, the Court again acted 
to prevent the forum from encroaching on the jurisdiction of a state 
with stronger connections to the defendants:

          Even if the defendant would suffer minimal or no 
        inconvenience from being forced to litigate before the 
        tribunals of another State; even if the forum State has a 
        strong interest in applying its law to the controversy; even if 
        the forum state is the most convenient forum for litigation, 
        the Due Process Clause, acting as an instrument of interstate 
        federalism, may sometimes act to divest the State of its power 
        to render a valid judgment.

Id. at 294.

    Finally, in the last word on the subject, Asahi Metal Industry Co., 
Ltd. v. Superior Court of California, 480 U.S. 102 (1987), the Supreme 
Court extended its protection through the Due Process Clause of the 
jurisdiction of the states to protection of the jurisdiction of foreign 
countries. Asahi initially involved a product liability suit in a 
California state court by injured plaintiffs against the Taiwanese 
manufacturers of a motorcycle tire. The Taiwanese defendant impleaded 
the Japanese manufacturer of the tire's valve stem. After all other 
parties were removed from the case by settlement, the Japanese 
defendant moved to dismiss the Taiwanese defendant's claim for 
indemnification on the basis of lack of jurisdiction.
    The Japanese defendant sent no products directly to California, 
though many of its products made their way to California through the 
efforts of others. In light of the limited contacts of the Japanese 
defendant with California, the Court regarded California's exercise of 
personal jurisdiction as an infringement on the jurisdiction of foreign 
states with which the defendant had a closer relationship. Id. at 115.
    The protection of the jurisdiction of the states and, where 
applicable, foreign countries, has become as significant a component of 
due process in the context of personal jurisdiction, as inconvenience 
to the parties. It should not play an important role in limiting 
jurisdiction under S. ______ since suits under that provision would be 
in federal courts. Nevertheless, the affiliating circumstances that 
permit a dispute to be adjudicated in one forum rather than another are 
indicia of the forum with the strongest interest in a suit. That a 
state under S. ______ would be adjudicating its claim in a federal 
court would not mean that it should be precluded from benefitting from 
advantages it would enjoy in litigating in its own courts. These would 
include access to proof and ease in administration of the remedy. 
Divesting completely the place most affected by conduct proscribed by 
S. ______ would amount to a departure from the sound logic of state 
personal jurisdiction cases that have manifested a purpose to limit 
adjudication to the most appropriate forums.
    The third interest that the Court has protected in the course of 
post-International Shoe  jurisprudence is the interest of a state to 
provide a convenient forum for adjudication of controversies in which 
it or its citizens have an interest.
    The leading case involving this interest is McGee v. International 
life Insurance Co., 355 U.S. 220 (1957). That case involved a suit in a 
California state court by the beneficiary of a small life insurance 
policy against a Texas insurer. The insurer defaulted in California and 
the insured sought to enforce the California judgment in the Texas 
courts. The Texas courts refused to enforce the judgment based on lack 
of personal jurisdiction of the California court. The Supreme Court 
held that the Texas courts erred in not giving full faith and credit to 
the California judgment.
    McGee involved the slightest connection with a forum that the Court 
has approved as a basis for jurisdiction. there was no indication that 
the defendant insurer had any connection with California other than the 
policy at issue, which it had offered to the insured when it took over 
an Arizona insurer with which the insured had previously had a policy.
    An important factor in the Court's approval of California's 
assertion of jurisdiction on the basis of such limited contacts was the 
enactment by California of a statute that subjected out-of-state 
insurance companies to personal jurisdiction in suits by California 
residents on insurance contracts with such companies. The Court stated:

          It cannot be denied that California has a manifest interest 
        in providing effective means of redress for its residents when 
        their insurers refuse to pay claims. These residents would be 
        at a severe disadvantage if they were forced to follow the 
        insurance company to a distant State in order to hold it 
        legally accountable.

Id. at 223. Clearly the interest of California, as expressed in a 
statute led the Court to permit it to require an out of state company 
to incur expense in defending that was undoubtedly disproportionate to 
the business it did there.

    Although McGee is the high-water mark for personal jurisdiction in 
decisions of the Supreme court, the significance of providing a home 
forum for the state or its citizens has not been overlooked in 
subsequent decisions.
    In Shaffer v. Heitner, 433 U.S. 186 (1977), plaintiff attempted to 
sue directors of Greyhound Corp., a Delaware corporation, in Delaware 
in a shareholder's derivative suit. the defendants had no contact with 
Delaware other than ownership of stock in Greyhound which a Delaware 
statute deemed to have a situs in Delaware. Plaintiff attached the 
stock at the beginning of the suit (effected by stop transfer orders on 
the books of the corporation) in order to exercise quasi-in rem 
jurisdiction.
    There was no connection between the property seized and the cause 
of action. There was no connection by the defendants with Delaware 
other than ownership of stock in a Delaware corporation. The Court 
applied the minimum contacts test of International Shoe to the 
assertion of quasi-in rem jurisdiction and held that Delaware's 
assertion of jurisdiction violated due process.
    Justice Brennan argued vigorously in dissent that jurisdiction was 
warranted on the basis of Delaware's interest in ``vindicating [its] 
substantive policies regarding the management of its domestic 
corporations.'' Id. at 222. Justice Marshall responded for the majority 
that ``[t]his argument is undercut by the failure of the Delaware 
Legislature to assert the state interest [the plaintiff] finds so 
compelling.'' Id. at 214.
    Weeks after the court's decision in Shaffer, the Delaware 
legislature enacted a statute that provided that acceptance of election 
as a director in a Delaware corporation was deemed as consent to 
service of process upon a registered agent in actions for violation of 
duty as a director. Jurisdiction under this statute was upheld by the 
Delaware Supreme Court in Armstrong v. Pomerance, 423 A.2d 174 (Del. 
1980). The court stated:

          Clearly, Delaware's interest in providing a sure forum for 
        shareholders derivative litigation involving domestic 
        corporations is firmly grounded on considerations more 
        important and compelling than mere convenience of the parties.

Id. at 178.

    As in McGee, the interest of the forum outweighed other factors 
relevant to the personal jurisdiction inquiry.
    In Kulko v. Superior Court,  436 U.S. 84 (1978), although the 
Court, as discussed above, rejected jurisdiction, it addressed the 
matter of ``California's legitimate interest in ensuring the support of 
children resident in California * * * Id. at 98. It responded to that 
consideration by noting that Californians could prosecute claims for 
child support without leaving California through the Uniform Reciprocal 
Enforcement of Support Act. The Court took cognizance of California's 
need to provide a forum for its residents and found it had been met.
    The interest of a state in providing a convenient forum to 
effectuate important interests of the state or plaintiff is an interest 
that the Court has recognized. It carried the day in McGee.
    I submit this interest should be considered as informative on the 
issue of where jurisdiction under S. ______ should be exercised.
    The 21st Amendment grants the states broad powers to regulate the 
importation and use of intoxicating liquors. This interest is probably 
stronger than that involved in providing a forum for insurance claims 
in McGee and in providing a forum for shareholder's derivative actions 
in the wake of Shaffer. The interest in providing a forum where the 
impact of violations of liquor laws are felt, in the state the laws of 
which are violated, may outweigh the inconvenience to senders of such 
beverages entailed in defending in places in places where laws are 
violated. This is particularly so since offending shipment is sent 
intentionally per a customer's order.
    Looking at due process decisions involving assertion of 
jurisdiction by states. I do not believe that it would violate due 
process to require interstate shippers of alcoholic beverages to defend 
suits under S. ______ at the places to which such beverages are 
shipped. I believe that the state law precedents are most relevant 
because these suits would entail collisions between state and private 
interests that are analogous to those at issue in post-International 
Shoe Supreme Court jurisprudence. In that jurisprudence, inconvenience 
to a defendant has not been an absolute that has negated jurisdiction. 
It has been balanced with other interests.
    Once again, I appreciate this opportunity to comment on this 
important proposal.
            Sincerely,
                                        John A. Lynch, Jr.,
                                                  Professor of Law.
                               __________

 Prepared Statement of the Hon. Ron Sarasin, President, National Beer 
                        Wholesalers Association

    Mr. Chairman, thank you very much for scheduling this hearing on an 
issue of great importance to the 3,000 federally licensed beer 
wholesalers in the United States. Beer wholesalers are the independent, 
often family-owned small businesses that proudly distribute America's 
beverage.
    The National Beer Wholesalers Association opposes the direct 
shipment of licensed beverages to consumers in violation of state law. 
This is a large and growing problem that poses grave risks to the 
health and safety of the American people, and especially those who are 
underage. As you will hear and see today, young people may, with ease, 
order beer, wine and distilled spirits over the phone or via the 
Internet and have these licensed beverages delivered to their home or 
dorm room days later, no questions asked. Almost as troubling, young 
people and older consumers can and do order licensed beverages and have 
them delivered to their homes even though such direct shipments violate 
the law in at least 20 states. It is incumbent on this Committee to 
give state law enforcement officials the tools necessary to enforce 
their own laws, and your bill will do just that.
    As you know, the 21st Amendment to the Constitution, which repealed 
Prohibition, also granted to States extrordinary authority over 
licensed beverages within their borders. Section 2 of the Amendment 
bears repeating here:

          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.

    Some 24 states prohibit such shipments outright; 19 others have 
significant restrictions on the quantities of licensed beverages that 
can be directly shipped. Nonetheless, many companies continue to ship 
licensed beverages into states that prohibit direct shipments.
    A recent Internet search by my staff found two dozen companies 
offering to ship beer directly to anyone filling out the on-line 
questionnaire. Most of these web sites contained a line about the buyer 
having to be 21 to make the purchase, but one click of the mouse 
removes that barrier. However, none of them contained any indication 
that half the states prohibit direct shipments and many more place 
heavy restrictions on the quantities that may be purchased in this 
manner. In my opinion, Mr. Chairman, that comes close to fraud.
    The main justification for enactment of this legislation is that 
States face a nearly impossible enforcement task in trying to identify 
and take action against direct shipments that violate state law. Often, 
the only way a state can even find out about a violation of law is 
through a ``sting'' operation, when an agent of the state places the 
order, receives the illiegally shipped order, and then files a 
complaint against the shipper. Even then, out of state companies are 
often beyond the reach of the authorities.
    Mr. Chairman, enactment of your bill will provide incentive for all 
to obey the law. It will provide state law enforcement authorities with 
the ability to go into federal court to enforce its law against direct 
shipments. It is fundamental a states' rights approach to this vexing 
problem.
    Indeed, there are many sound reasons for a state to prohibit direct 
shipments to consumers:

   To stem the loss of state tax revenue, estimated to be at 
        least $200 million a year;

   To keep minors from getting licensed beverages delivered to 
        their doors;

   To prevent deliveries to the 400 ``dry'' counties in the 
        United States;

   To ensure a level playing field for licensed, law-abiding 
        and taxpaying wholesalers and retailers within the state;

   To preserve and protect the three-tier system for licensed 
        beverage distribution.

    Of these reasons, perhaps the most misunderstood today is the last. 
I submit to you that the three-tier system, developed in nearly every 
state in the wake of Prohibition, is more vital today than when it was 
established. The system requires an independent wholesale tier to 
insulate retailers from undue influence by suppliers, ensure the 
integrity of the product, provide a paper trail of handling of the 
product, and permit state enforcement officials to stop the flow of 
particular licensed beverages into their state for reasons of health, 
safety or violation of law.
    There are legal alternatives to direct shipping. In Maryland, for 
instance, a consumer may order a particular beverage not normally 
available and secure delivery through a wholesaler and retailer at no 
great additional cost. The CellarMasters wine program is another 
notable success in providing consumers access to hard-to-find beverages 
while conforming to state laws. NBWA is committed to helping small 
brewers and microbreweries get their product to market and, to that 
end, we have joined forces with the Brewers Association of America, 
representing small brewers, to make it happen.
    But direct shippers who operate in violation of state law are more 
interested in avoiding the state excise taxes and keeping the increased 
profits obtained by eliminating the in-state retailer and wholesaler 
than they are in consumer welfare. This is simply not a consumer issue.
    Mr.Chairman, the beer wholesalers in your state are licensed, pay 
all appropriate taxes, keep all required records and sell one of the 
most regulated products available today. Simply put, we believe that a 
beer-of-the-month club halfway across the country should have to obey 
the same laws.
    We strongly support the right of states, as guaranteed by the 21st 
Amendment, to regulate the distribution and sale of licensed beverages 
within their borders. Enactment of your bill will that possible.
                               __________

    Prepared Statement of Simon Siegl, President, American Vintners 
                              Association

    Chairman Hatch and Members of the Committee: I am grateful for the 
opportunity to submit written comments on proposed legislation titled 
``The Twenty-First Amendment Enforcement Act.'' The American Vintners 
Association is the national trade association, representing over 550 
wineries in 43 states. On behalf of our members, and all American 
wineries, we urge you to tread very cautiously in making any changes to 
federal statutes in this area. Any federal legislation must represent a 
balanced approach of controlling undesirable commerce while enabling 
negotiations, on a state-by-state basis, to continue in a manner that 
permits wineries and their customers to conduct business.

 i. the demographics of the industry underscore the importance of the 
                           issue to wineries

    Wine is enjoying a period of tremendous growth in the United 
States. Consumer interest is fueling high demand, supporting increases 
in vineyard acreage and wine production which, in turn, allows existing 
wineries to grow in size and new wineries to be established. During 
this growth, the industry remains very much ``90-10'' in profile: 90 
percent of the country's wine is produced by 10 percent of the 
wineries. This serves to illustrate that the majority of America's 
wineries are small in size, and sell primarily to a select market of 
customers who often have visited the winery and retain an active 
relationship.

         ii. the issue is consumer-driven and national in scope

     Wine is a very complex--occasionally intimidating--subject and 
beverage. Through promotion efforts and media exposure, wineries are 
able to gain consumer attention and interest. The explosion of 
communications--especially the presence of the Internet--has provided 
consumers more information about wineries all over the world than ever 
before.
    Like any business, a winery always wants to satisfy its customers 
requests. When a consumer learns that wines of interest are not 
available in local stores. It is very easy for him or her to 
communicate directly with the winery. When that consumer learns that 
the winery cannot sell or ship its wines to them they become very 
frustrated. Wineries and their customers ought to be able to complete 
these sales with a minimum of difficulty.
    The situation is national in scope. It is matrix of the production 
of wine in 47 states and the presence of consumers everywhere.

          iii. direct shipment is not a threat to wholesalers

    Wholesalers seem to be convinced that direct shipment is their 
death-knell. This is hardly the case. Wholesalers are thriving in the 
thirty states that currently have inter- and/or intra-state direct 
shipment. it is more convenient and economical to purchase wines from 
the local retail stores when possible. Consumer orders for direct 
shipment are focused on hard-to-find wines, or wines from very small 
wineries that cannot effectively work in the conventional distribution 
system.
    Opponents of direct shipment put forward two primary arguments that 
are easily addressed. First, is the statement that underage access will 
be increased. While the perception can be simulated with ``stings'', 
the fact is that states with many years of experience in intrastate 
shipment to consumers have not received complaints. The suggestion that 
greater protection is offered against direct shipments to minors by 
``face to face'' sales with the retail sector is challenged by a study 
conducted by the Department of Health and Human Services that show 50 
percent of 18-20 year olds consume alcohol at least once a week. 
Clearly these underage citizens are obtaining their beverages through 
the three-tier system, and needn't face the higher cost, risk and delay 
of direct shipments.
    The second opposition argument is that direct shipments are an 
effort to evade taxes. Wineries are ready and willing to pay applicable 
state excise and sales taxes. The state need only establish a 
mechanism, as New Hampshire and Louisiana have already done. The 
Electronic Commerce Tax Commission is poised to address the tax 
collection system fir all interstate commerce, and can easily include 
wine in its deliberations.
    Wineries view direct shipment of wine as a supplement to the three-
tier system, not a substitution. Direct shipment allows the very small 
wineries to generate a customer base outside their immediate home 
market, to grow and develop into a viable brand that a wholesaler will 
want to represent. This mechanism also allows larger wineries to 
respond to customers who seek special bottlings or older vintages that 
are too small in volume to distribute through their distribution 
network.

   iv. balance is required in considering the legislation before the 
                               committee

    We view the potential of adding federal jurisdiction over state 
laws through the Webb Kenyon Act a major change in the delicate balance 
of the political solution that ended prohibition. The draft legislation 
under consideration by the Committee allows significant expansion of 
states' ability to regulate business in other states and will be 
subject to abuse. Congress should not alter the balance between the 
protections of competition conferred by the Commerce Clause and the 
regulatory needs embodied by the 21st Amendment. If Congress believes 
it is necessary to control undesirable commerce it should not harm 
negotiations, on a state-by-state basis, to continue in a manner that 
permits wineries and their customers to conduct business.
    In 1933, the antidote to widespread bottlegging was not greater 
enforcement of unpopular laws. It was legalization and regulation under 
the auspices of the 21st Amendment. If direct shipment of wine is 
viewed as ``widespread bootlegging''', then today's antidote should be 
establishing reasonable market access for limited shipments of wine to 
consumers by United States wineries.
    On behalf of the member wineries of the American Vintners 
Association, and the millions of responsible wine consumers throughout 
our nation, I am hopeful that you will be fair, will encourage 
competition, and will seek a balanced resolution of this issue.
            Sincerely,
                                               Simon Siegl,
                                                         President.
  

                                
