[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
E-COMMERCE: THE CASE OF ONLINE WINE SALES AND DIRECT SHIPMENT
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
COMMERCE, TRADE, AND CONSUMER PROTECTION
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
OCTOBER 30, 2003
__________
Serial No. 108-51
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
__________
U.S. GOVERNMENT PRINTING OFFICE
90-726 WASHINGTON : 2004
_______________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800, DC area (202) 512-1800 Fax: (202) 512-2250 Mail: stop SSOP, Washington, DC 20402-0001
COMMITTEE ON ENERGY AND COMMERCE
W.J. ``BILLY'' TAUZIN, Louisiana, Chairman
MICHAEL BILIRAKIS, Florida JOHN D. DINGELL, Michigan
JOE BARTON, Texas Ranking Member
FRED UPTON, Michigan HENRY A. WAXMAN, California
CLIFF STEARNS, Florida EDWARD J. MARKEY, Massachusetts
PAUL E. GILLMOR, Ohio RALPH M. HALL, Texas
JAMES C. GREENWOOD, Pennsylvania RICK BOUCHER, Virginia
CHRISTOPHER COX, California EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia FRANK PALLONE, Jr., New Jersey
RICHARD BURR, North Carolina SHERROD BROWN, Ohio
Vice Chairman BART GORDON, Tennessee
ED WHITFIELD, Kentucky PETER DEUTSCH, Florida
CHARLIE NORWOOD, Georgia BOBBY L. RUSH, Illinois
BARBARA CUBIN, Wyoming ANNA G. ESHOO, California
JOHN SHIMKUS, Illinois BART STUPAK, Michigan
HEATHER WILSON, New Mexico ELIOT L. ENGEL, New York
JOHN B. SHADEGG, Arizona ALBERT R. WYNN, Maryland
CHARLES W. ``CHIP'' PICKERING, GENE GREEN, Texas
Mississippi KAREN McCARTHY, Missouri
VITO FOSSELLA, New York TED STRICKLAND, Ohio
ROY BLUNT, Missouri DIANA DeGETTE, Colorado
STEVE BUYER, Indiana LOIS CAPPS, California
GEORGE RADANOVICH, California MICHAEL F. DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire CHRISTOPHER JOHN, Louisiana
JOSEPH R. PITTS, Pennsylvania TOM ALLEN, Maine
MARY BONO, California JIM DAVIS, Florida
GREG WALDEN, Oregon JAN SCHAKOWSKY, Illinois
LEE TERRY, Nebraska HILDA L. SOLIS, California
ERNIE FLETCHER, Kentucky
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
DARRELL E. ISSA, California
C.L. ``BUTCH'' OTTER, Idaho
Dan R. Brouillette, Staff Director
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Commerce, Trade, and Consumer Protection
CLIFF STEARNS, Florida, Chairman
FRED UPTON, Michigan JAN SCHAKOWSKY, Illinois
BARBARA CUBIN, Wyoming Ranking Member
JOHN SHIMKUS, Illinois HILDA L. SOLIS, California
JOHN B. SHADEGG, Arizona EDWARD J. MARKEY, Massachusetts
Vice Chairman EDOLPHUS TOWNS, New York
GEORGE RADANOVICH, California SHERROD BROWN, Ohio
CHARLES F. BASS, New Hampshire JIM DAVIS, Florida
JOSEPH R. PITTS, Pennsylvania PETER DEUTSCH, Florida
MARY BONO, California BART STUPAK, Michigan
LEE TERRY, Nebraska GENE GREEN, Texas
ERNIE FLETCHER, Kentucky KAREN McCARTHY, Missouri
MIKE FERGUSON, New Jersey TED STRICKLAND, Ohio
DARRELL E. ISSA, California DIANA DeGETTE, Colorado
C.L. ``BUTCH'' OTTER, Idaho JOHN D. DINGELL, Michigan,
W.J. ``BILLY'' TAUZIN, Louisiana (Ex Officio)
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Duggan, Juanita D., President, Wine and Spirits Wholesalers
of America, Inc............................................ 17
Sloane, David P., President, Wineamerica..................... 24
Zywicki, Todd, Director, Office of Planning and Policy,
Federal Trade Commission................................... 10
Material submitted for the rcord:
Duggan, Juanita D., President, Wine and Spirits Wholesalers
of America, Inc., response for the record.................. 65
Hinchey, Hon. Maurice D., a Representative in Congress from
the State of New York, prepared statement of............... 46
Sloane, David P., President, Wineamerica, response for the
record..................................................... 49
Wine Institute, prepared statement of........................ 47
Zywicki, Todd, Director, Office of Planning and Policy,
Federal Trade Commission, letter dated December 4, 2003,
enclosing response for the record.......................... 57
(iii)
E-COMMERCE: THE CASE OF ONLINE WINE SALES AND DIRECT SHIPMENT
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THURSDAY, OCTOBER 30, 2003
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Commerce, Trade,
and Consumer Protection,
Washington, DC.
The subcommittee met, pursuant to notice, at 9:35 a.m., in
room 2123, Rayburn House Office Building, Hon. Cliff Stearns
(chairman) presiding.
Members present: Representatives Stearns, Whitfield,
Shimkus, Shadegg, Radanovich, Bass, Issa, Schakowsky, Towns,
and McCarthy.
Also present: Representative Thompson of California.
Staff present: Ramsen Betfarhad, policy coordinator; David
Cavicke, majority counsel; Jill Latham, legislative clerk; Jon
Tripp, deputy communications director; and Jonathan Cordone,
minority counsel.
Mr. Stearns. Good morning, everybody. Welcome to the
subcommittee's hearing entitled E-Commerce: The Case of On-Line
Wine Sales and Direct Shipment.
This hearing is one of a number of hearings that the
subcommittee has held on electronic commerce in this and the
107th Congress. As I have said in the past, I think it is
important that the subcommittee and the full committee, as
congressional custodians of the commerce clause, be vigilant of
and encourage interstate commerce in general and nascent forms
of interstate commerce such as E-commerce in particular.
In particular, this hearing is a follow-up to a
subcommittee hearing held in September of last year focused on
State impediments to E-commerce. At that hearing we heard
testimony on State legal and regulatory impediments that were
undermining consumer choice in E-commerce with respect to three
products and services: one, auctions; two, contact lenses; and,
three, wine.
Just 4 weeks ago the committee approved H.R. 3140, removing
a number of State regulatory barriers identified in the
subcommittee September 2002, hearing that impeded on-line
contact lens sales.
This past July the Federal Trade Commission issued a report
entitled Possible Anticompetitive Barriers to E-Commerce Wine,
and I ask for unanimous consent to enter into the record this
FTC report. Without objection, so ordered.
[The FTC report is available at: http://www.ftc.gov/os/
2003/07/winereport2.pdf]
Mr. Stearns. This staff report grew out of the FTC's
Internet Task Force convened in August of 2001 to evaluate
government regulations of particular products and services that
could stifle on-line commerce and competition. The objective of
the report is to inform a raging debate between those who argue
that direct shipment of wine to consumers, specifically on-line
sales, should not be banned because it provides consumers with
lower prices and greater variety of wines and States that ban
such sales so that they can protect against sales to minors and
collect excise taxes. I commend the Commission for undertaking
this report with the purpose of informing about this debate.
Today we hope to examine the FTC report carefully and
consider its broader public policy implications with respect to
interstate and electronic commerce. The FTC's July staff report
concludes that ``States could significantly enhance consumer
welfare by allowing the direct shipment of wine to consumers.''
The report states that through direct shipping, on-line wine
sales offer consumer's lower prices and greater selection.
In looking at both the availability and pricing of some 83
wines, all of which appeared in Wine and Spirits magazine's top
50 wines list for 2002 within a 10-mile radius of McLean,
Virginia, the Commission staff found that 15 percent of those
83 wines could not be found in McLean retail outlets, while
they were being available on-line.
Moreover, the Commission staff report found that on-line
prices for wines priced at above $20 were about 8 to 13 percent
lower than prices at brick and mortar retailers. The savings
accruing to customers from on-line sales increased to 20 to 21
percent for wines priced over $40. Yet they found that bricks
and mortar stores, after factoring in shipment costs, offered
better prices on less expensive wines. At the time of the
survey, Virginia had a ban on direct shipments of wine.
In light of the consumer welfare gains demonstrated in the
McLean survey, the report observes that public policy goals of
excise tax collection and prevention of sales to minors can
still be accomplished by States through less restrictive
regulation, short of an outright ban of direct interstate wine
sales. Many States, the report notes, permitting interstate
direct shipment report few or no problems with shipments to
minors or with tax collection.
My colleagues, I know this debate highlights attention
between the commerce clause and the 21st Amendment to the
Constitution. Under the dormant commerce clause doctrine, the
Supreme Court has held States cannot impede or discriminate
against interstate commerce. Meanwhile, the 21st amendment has
been interpreted as giving the States broad powers in its
regulation of the sale and distribution of liquor within and
across its borders.
Is there a split in the circuits on how to resolve that
tension? I think we believe that, ultimately, the Supreme Court
will address this matter. But notwithstanding this ongoing
legal battle, I think that the States' public policy objectives
of precluding wine sales to underage drinkers and the
collection of excise taxes, both of which are advanced under
the color of the States' 21st amendment authority, are very
important public policy objectives.
Still, if the FTC staff report's analysis holds true for
markets other than just McLean, Virginia, I find it persuasive
that States should pursue less restrictive forms of regulation
of direct interstate wine sales than outright bans. For
example, the report concludes that States can prevent sales to
minors using restrictions other than bans on direct shipments
by requiring wineries to label their packages as containing
alcohol and requiring the package carrier to verify the age of
the consumer by obtaining an adult's signature at the time of
delivery and by requiring out-of-State companies to obtain
shipping permits and setting up penalties and enforcement
systems.
I thank the witnesses for appearing before the subcommittee
this morning. I look forward to hearing their testimony.
With that, the distinguished ranking member is recognized
for an opening statement.
Ms. Schakowsky. I want to thank you, Chairman Stearns, for
convening the hearing on E-commerce and the on-line sale of
wines and to discuss the recent FTC staff report on the
subject.
The report explores the competitive impact of State
regulations that restrict the on-line sale of wines. The FTC
reached the conclusion that restrictive State laws and
regulations limit consumer choice and they force consumers to
pay artificially high prices for wine. The FTC also concluded
that on-line wine sales do not add to the problem of underage
drinking. The FTC's staff has concluded that restrictive State
laws and regulations should be loosened.
While I am in agreement that open and fair competition
benefits consumers, great competition means lower prices and
greater variety, adult consumers should have a broad range of
options when they are purchasing wine and unnecessary trade
barriers should be removed. Having said that, though, before we
hastily consider legislation that would deregulate the on-line
sale of alcohol, we need to carefully its potential impact on
minors, among other things.
Underage drinking continues to be a national public health
problem. There are more than 10 million underage drinkers in
our country. More than two out of five college students are
binge drinkers. Sadly, excessive drinking accounts for 1,400
deaths and contributes to 70,000 sexual assaults on college
campuses every year. Before considering legislation that might
weaken State laws, we need to take every precaution necessary
to ensure that we do not inadvertently make this serious
problem even worse.
In its report, the FTC asks State regulators to discuss on-
line wine sales, how they contribute to the underage drinking
problem. State regulators reported that they did not believe
that on-line wine sales create a problem. In their view, States
have taken adequate measures to prevent the illegal shipping of
wine to minors.
However, it should be noted that several State agencies,
including my own, including the Illinois Liquor Control
Commission, were not aware of any sting operations performed
against out-of-State shippers. Therefore, they cannot
adequately assess if the delivery of on-line wines adds to the
problem of underage drinking. In my view, the FTC report does
not satisfactorily answer this important question.
Proponents of on-line sale of wine point out that underage
drinkers do not usually buy expensive wines. However, if the
Congress passes legislation that preempts State law, what would
stop a business or a State from claiming in court that beer and
liquor companies should have to comply by the same rule as
wineries? Is this, in fact, a slippery slope?
As the chairman outlined, the on-line sale of wine also
raises important constitutional considerations for Congress.
The commerce clause of the Constitution gave Congress the power
to regulate interstate commerce. However, the 21st amendment of
the Constitution ended prohibition and gave the States broad
authority to regulate the sale, importation, and distribution
of alcoholic beverages within and across their borders. So the
question is, who has the power to regulate alcohol sales?
Should it be left to the States or Federal Government?
According to the courts, this remains an open question.
Federal circuit courts have reached contradictory conclusions.
Many experts believe that this question will eventually be
resolved by the Supreme Court. We need to carefully weigh this
question before we consider legislating on the issue.
We will also need to carefully review on-line wine sales'
impact on State revenues. As we all know, States are having a
very difficult time meeting the most basic needs of their
citizens. The FTC report does not provide conclusive evidence
about its impact on revenues. This raises a larger question
about collecting taxes from on-line sales that will need to be
considered as part of the debate.
I look forward to hearing from the FTC and industry
stakeholders. However, we don't have any witnesses from the
public health community. We are also not hearing from unbiased
constitutional experts or State government officials. Before
proceeding forward on legislation we need to hear their views
on this important topic.
Again, I thank the chairman and look forward to hearing
from our witnesses.
Mr. Stearns. I thank my colleague.
The gentleman from Illinois, Mr. Shimkus.
Mr. Shimkus. Thank you, Mr. Chairman--and good morning--for
holding this hearing to address on-line sale of wines and
economic inhibitors that face this industry. Ironically, my
home State of Illinois, which is largely known for its
agricultural production of corn and soybeans, is slowly
emerging as a wine-producing State. We now have over 39
wineries. The lower third of my State, which encompasses my
district, has rich loamy soil and long sun-drenched summers
which create an ideal grape- and fruit-growing region.
I will continue to support the wine growers and wineries in
my district because of the benefits they provide to my region.
These small businesses provide economic development. They
promote tourism, encourage domestic purchases of wine, and help
producers diversify their crops.
I see many benefits in allowing these local wineries to
sell their product on the Internet. These are not huge
production facilities. These are mom and pop organizations like
GenKota Winery in Mount Vernon, Illinois, and Fox Creek
Vineyards in Olney, Illinois. Olney is the home of the famous
white squirrels, for those of you who want to know where Olney
is. These businesses do not have the luxury of selling their
product wholesale. They are just local wineries who sell
roughly 15 different types of wine for about $10 to $20 a
bottle.
I am discouraged by States that have prohibited this type
of Internet retail. I am also disappointed that they have
enacted these laws as economic protectionism in the guise of
some greater public and social policy. For example, States that
allow direct shipment within the State will prohibit out-of-
State sales of the same product.
With that being said, I am concerned about the same
problems associated with on-line sales of wine. I have
sponsored legislation like Dot Kids that has provided a safe
place for children on the Internet. Therefore, I am looking for
some type of reasonable solution where we can promote wineries
like those in my district without providing a tool for minors
to obtain alcohol.
I look forward to the testimony from our witnesses; and,
Mr. Chairman, I yield back the balance of my time.
Mr. Stearns. I thank the gentleman.
The gentleman from New York, Mr. Towns.
Mr. Towns. Thank you very much, Mr. Chairman, for holding
this hearing today on an issue that is becoming timely as
technology converges on traditional business models. It does
not take a Fortune 500 CEO to tell you that if a business has
no ability to get goods or services to the consumer they will
not be operating too long.
I am proud of the many success stories spawned by E-
commerce; and even this year my colleague, Mr. Burr from North
Carolina, and I sponsored legislation that enables consumers to
get contact lenses on-line with greater ease and oftentimes a
more affordable price.
I do, however, have grave concerns about selling controlled
substances such as pharmaceuticals, tobacco and alcohol over
the Internet. They are not the same as contact lenses or golf
clubs. On-line sales seemingly have been a panacea for small-
and medium-size business, including wineries, to increase their
market share and revenues, but this profiteering must be
tempered with the possible detriment to society at large, due
to the pitfalls connected with underage drinking and alcohol
abuse.
Wine is alcohol, and I have long held the notion that all
alcohol should be taxed. So why should some types of alcohol be
regulated and distributed differently?
There is a truth to the notion that a 15-year-old is not
going to order a $500 bottle of Zinfandel. However, I do see
safety issues with respect to children ordering alcohol without
being checked for ID, as I have indicated above, and see no
reason to deputize an overnight carrier or letter carrier, a
mailman or mailwoman, to club bouncer status.
I would like to see the expansion of a system where out-of-
State shipments of all alcohol passes through a third party so
that not only are consumers able to have greater access to
small- and medium-sized wine labels but one that is financially
rewarding to all parties involved. Most importantly, it should
be responsible to our children as well. That should be our No.
1 goal, and we should not forget it.
Mr. Chairman, I look forward to hearing the testimony; and
on that note I yield back.
Mr. Stearns. I thank the gentleman.
The gentleman from California, Mr. Radanovich.
Mr. Radanovich. Thank you, Mr. Chairman.
I want to again start off by thanking you for holding this
hearing today. I appreciate your taking the time to do this.
I want to thank our witnesses, particularly David Sloane
from WineAmerica and Juanita Duggan from Wine and Spirits
Wholesalers. Welcome. Thank you for being here to testify.
As somebody who has been involved in the wine industry for
several years, I know that on-line wine sales provide a path
for significant economic growth in the wine industry. Also, on-
line sales have opened a window of opportunity for many
consumers to try a variety of wines, many of which are not
available to them in local retail outlets. In order for this
economic growth and consumer choice to continue, Congress must
actively support E-commerce through the principles established
in the commerce clause. The free flow of goods between States
critical in the future of E-commerce and wine should not be
excluded from this effort. Certainly when dealing with an
alcoholic product such as wine, there must be mechanisms in
place to ensure that children are protected.
The FTC report that we will hear today discusses the
various methods some States and shipping companies use to
protect children. Notably, the report states that there are no
documented non-sting cases of juvenile access to wine shipments
generated from on-line sales. The State of California has been
allowing direct shipments of wine for about two decades, and
they say it is not aware of any problems with minors buying
wine on-line and shipping the products to themselves.
Given this and other favorable aspects of the FTC report, I
believe that Congress has the responsibility to allow consumers
the choice to purchase wine on-line and to give this venue a
chance to grow and expand.
Again, Mr. Chairman, I appreciate your holding this hearing
today; and I look forward to the testimony and the dialog
afterwards.
Mr. Stearns. I thank my colleague.
By unanimous consent I want to offer Mr. Thompson an
opportunity to say some opening comments, and we welcome him as
an interested observer to our committee.
Mr. Thompson. Thank you very much, Mr. Chairman. I want to
thank you both for allowing me to participate today and for
holding this hearing. I also want to thank my colleague George
Radanovich for the influence that he exercised in making sure
that this hearing did in fact take place.
I just want to put some meat on the bones. A number of
folks have mentioned the importance that the wine industry is
to the economy. I just want to let you know what that means.
The wine industry is a vital part of our economy. It creates
over a half a million jobs across the country. It accounts for
over $12 billion in wages. The wine industry contributed almost
$4 billion in State and local taxes, and the industry generates
nearly $50 billion a year to our national economy.
In my district, I have a number of wineries, in
California's first congressional district; and many of those
wineries rely on their ability to send wine directly to
consumers. The typical small winery, someone mentioned, is a
mom-and-pop operation; and that is true. It is not uncommon to
see the mom and the pop picking the grapes, crushing the
grapes, bottling the wine and then out on the weekends trying
to sell that wine; and there is a big problem in being able to
get their wine to the consumers. It is not only an economic
problem for the winery, but it is also an access problem for
the consumers. We have a situation where consumers can't
purchase and enjoy the wines that they want to purchase.
There has been a tremendous consolidation amongst
distributors across this country, and that has greatly reduced
the financial incentive to represent small wineries. So for
these guys direct sales, direct shipment Internet sales are the
only way that they can get their product to the consumers.
It is interesting, Mr. Chairman, your being from Florida,
if you were to visit my district and buy a case of wine in my
district at a winery, legally buy it and then leave that winery
and try to mail it home to your house in Florida, not only is
that illegal but it is a felony in your State; and this is not
the sort of thing that I believe this Congress wants to
promote.
There has been a lot said about children getting wine, and
I think Mr. Towns had it somewhat correct, although I would
like to find a bottle of that $500 Zinfandel. I might start
growing----
Mr. Towns. You have to purchase it in New York.
Mr. Thompson. I have tasted some interesting wine from New
York.
Kids don't buy wine over the Internet. Kids don't pay the
amount that good wine or any wine sells for over the Internet
or anyplace else. I think it is important, however, to be
concerned about minors getting alcohol, and I believe that
underage drinking is a problem, but there are ways that we
should deal with that.
In regard to shipping of alcohol, it can be done the way
other items are controlled in the mail system and in the
shipping industry. Packages can be labeled. Alcohol delivery
folks can verify the age of the recipient. You can get an
adult-required signature at the time of the delivery. All these
work.
They work in California. We have intrastate shipping in a
number of States, California being one of those; and officials
from California will tell you that there is not a problem with
kids buying any type of alcoholic beverage and having it
shipped to them. This is an issue of consumers being able to
get the products that they want and people that produce these
products being able to get those products to the consumers, and
I hope that this hearing will help clarify that and move us
closer to resolving this issue.
Mr. Chairman I have a statement I would like to ask----
Mr. Stearns. By unanimous consent, so ordered. We will have
your statement made a part of the record, and we thank you for
your attention.
With that, there are no further opening statements.
[Additional statements submitted for the record follow:]
Prepared Statement of Hon. Fred Upton, a Representative in Congress
from the State of Michigan
Thank you, Mr. Chairman. I am very interested in this issue. It
might surprise you to know that Michigan has a good size wine industry.
In my district alone, there are TEN small to midsize vineyards:
Contessa, Domaine Berrien, Fenn Valley, Heart of the Vineyard, Karma
Vista, Lemon Creek, St. Julian, Tabor Hill, Warner, and Wyncroft.
You may not have heard of these vineyards yet, but they are gaining
in stature in the wine community. Over the course of four days in
March, more than 3,000 wines from around the world were judged at the
Tasters Guild International Wine Competition. Michigan wines were
awarded 25 Gold Medals and two Double Gold. St. Julian Wine Co. of Paw
Paw, MI--in my district--received the most awards for Michigan, with
one Double Gold and 10 Gold Medals.
The internet is allowing these vineyards to get exposure and grow
their businesses, and I think that is something to encourage not limit.
Internet commerce allows small towns like Coloma, Michigan to reach the
world with products grown and processed there. This is a GOOD thing!
Of course, there needs to be controls in place to ensure that
underage drinkers are not able to get a hold of alcohol. But with all
of the technology that is available, I find it hard to believe that we
can't find a compromise that will allow connoisseurs to order wines
that are not widely distributed.
Thank you, I look forward to hearing the testimony today.
______
Prepared Statement of Hon. Barbara Cubin, a Representative in Congress
from the State of Wyoming
Thank you, Mr. Chairman, for holding this hearing today. It
provides us with a valuable opportunity for continued discussion
pertaining to e-commerce.
The question before us today is the perfect demonstration of just
how far commerce has come in our country. The Internet has opened doors
for people in every community and access to goods is greater than ever
before. With increased access comes the need to maintain a watchful eye
and determine what, if any, regulation modifications or creation are
needed to evolve in-step with the marketplace in order to remain
effective.
While on the surface, the online sales of wine and direct shipment
may seem a narrow slice to address. In reality, the debate before us is
of monumental proportions. We are pitting the Commerce Clause from
Article I, Section 8 and the 21st Amendment of the U.S. Constitution
against one another and attempting to decide who wins. The question is
certainly worth considering, but leads to the question, is this
something we can legislate?
I am proud of the committee's steadfast work on similar issues
pertaining to contact lenses, but the playing field is more complicated
here. States, like my home state of Wyoming, have established state
regulations pertaining to online wine sales that are working. I commend
those in Wyoming with jurisdiction over this issue. Their examination,
evaluation and implementation has been, and continues to be, sufficient
for the citizens of Wyoming. As always, I am hesitant to throw federal
regulations into the mix and wary of the impact it might have.
The discussion today will be valuable in bringing to light the
interests involved here. If nothing else, the testimony and questions
put forth today will reveal the need to continue examination of this
marketplace, and where that examination should take place--the courts.
I thank the Chairman again and yield back the remainder of my time.
______
Prepared Statement of Hon. Darrell Issa, a Representative in Congress
from the State of California
Mr. Chairman, thank you for holding this hearing today on this
important subject. The three-tier system that the United States has
used to regulate alcohol sales since the passage of the 21st Amendment
to the Constitution is quickly becoming obsolete. The growth of e-
commerce for goods and services has fundamentally changed the way
business is done in this country. Small businesses now have more
opportunities than ever to create and market products to consumers
throughout the country. In most industries, entrepreneurs do not need
to have a physical presence in a particular marketplace to be
competitive. They simply need a quality product, a good website, and an
efficient distribution system.
Unfortunately, there are artificial barriers that have prevented
the wine industry from realizing the full benefits of e-commerce.
Currently, 24 states prohibit direct sales of wine from producers to
consumers across state boundaries. In Florida, for example, it is a
felony for a consumer to visit a winery in California, return to
Florida, and then order a case of that California wine to enjoy at
home. Only a few licensed wholesalers are able to legally distribute
out-of-state wines in Florida, often with a 30-40 percent markup. This
practice is blatantly anti-competitive and unfair.
A recent Federal Trade Commission (FTC) study reported that even
the most popular wines are difficult to find under the current three-
tier wholesaler system. The FTC report surveyed the accessibility of
the 83 most popular wines in the country. Of those 83 wines, 15 percent
were not available in any local store in McLean, VA, a town that has
strict direct distribution laws.
If the most popular wines are not even available to consumers, how
much more difficult will it be for consumers to find more obscure
vintages? These lesser-known wines are usually produced by small,
family businesses that make ends meet only through direct sales to
consumers. The number of these small businesses has grown considerably
in recent years. The FTC reports that there are more than 2,000
wineries today, compared to 500-800 in 1975. These small wineries must
be given a fair chance to compete against the large mega-brand
producers who can more easily distribute their product to retail
outlets around the country.
I am not convinced by the argument that opening up direct wine
sales will increase the likelihood of sales to minors. Over 70 percent
of alcohol sales to minors take place in face-to-face transactions in
retail stores. Less than 10 percent of all sales to minors take place
over the internet, and the majority of those sales are for either
spirits or beer. I question the sobriety of those who suggest that we
will see a surge in minors purchasing obscure wines as a result of
changes to our direct distribution laws.
Small businesses are being excluded from the national marketplace
by archaic laws that serve few practical purposes. Congress needs to
act quickly to correct these unfair trade practices and allow
entrepreneurs in the wine industry to compete at the national level.
______
Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee
on Energy and Commerce
I want to commend Chairman Stearns for holding this hearing and
continuing the Committee's important work in the area of e-commerce.
The Commerce, Trade and Consumer Protection subcommittee has held a
number of hearings on barriers to e-commerce, and today will examine
the unique issues involving direct shipment of wine.
Direct shipment is an important issue to most of the 30,000
wineries nationwide that are small family-run agricultural businesses.
To them, direct shipment is the best way to access the market. It is of
particular concern to communities on the Pacific Rim, and I want to
acknowledge the presence of Mr. Radonovich [Mr. Walden] who has [have]
a strong interest in these issues.
Direct shipment is an issue that raises important issues of
Constitutional law, as sales of alcohol were the only good ever taken
out of the interstate commerce clause of the Constitution.
Some states prohibit direct shipment of wine from out of state, but
permit it on an instate basis. This may be good old fashion
protectionism.
It also raises issues of prevent teenage drinking,
I look forward to the testimony, and yield back the balance of my
time.
Mr. Stearns. We will move to the witnesses.
We have Mr. Todd Zywicki, who is Director of Office and
Policy Planning of the Federal Trade Commission. Welcome. Ms.
Juanita Duggan, President of the Wine and Spirits Wholesalers
of America, we welcome you; and Mr. David Sloane, President of
WineAmerica.
Mr. Zywicki, we will have you start with your opening
statement.
STATEMENTS OF TODD ZYWICKI, DIRECTOR, OFFICE OF PLANNING AND
POLICY, FEDERAL TRADE COMMISSION; JUANITA D. DUGGAN, PRESIDENT,
WINE AND SPIRITS WHOLESALERS OF AMERICA, INC.; AND DAVID P.
SLOANE, PRESIDENT, WINEAMERICA
Mr. Zywicki. Thank you, Mr. Chairman.
I am Todd Zywicki, Director of the FTC's Office of Policy
Planning. I am pleased to testify before the subcommittee today
on behalf of the Commission regarding E-commerce: The Case of
Online Wine Sales and Direct Shipment.
The Commission thanks the subcommittee and particularly
Chairman Stearns for his excellent leadership in promoting E-
commerce and consumer welfare. I am especially pleased to
appear before Chairman Stearns today because my parents tell me
that they are residents of Florida's sixth district in Ocala,
and in fact last year for Christmas dinner they brought a
bottle of Lakeridge southern red wine with them to dinner--by
car, of course.
Free competition and consumer choice are the organizing
principles of the American economic system. The Internet
provides the potential to substantially advance these goals by
enabling consumers to purchase an unprecedented array of goods
and services from the convenience of their homes and by
enabling entrepreneurs to create and market new products. The
choices range from cars and caskets to contact lenses, and from
medical and legal advice to an education.
The Internet, however, also raises unique regulatory
concerns about on-line fraud and other abuses. Although the
Internet raises new regulatory challenges, it does not change
the baseline principles favoring freedom and competition.
Artificial restraints on liberty and competition should not be
lightly imposed but should be grounded in sound economic and
empirical analysis.
In October, 2002, the FTC held a workshop to study the
balance between the States' legitimate regulatory activities
and concerns that regulation could have the unintended effect
of choking off competition and consumer choice. Commission
staff heard testimony on possible anti-competitive barriers to
E-commerce in many different industries.
The purchasing of wine over the Internet illustrates the
competition and consumer protection issues involving E-
commerce. Through the Internet many smaller vineyards can now
market their wines to consumers around the country. On the
other hand, many States limit or prohibit direct wine sales
over the Internet. Under the common three-tier distribution
system, many States require that wine pass through a wholesaler
and a retailer before reaching the consumer. Other States
prohibit only interstate direct shipment of wine, while
permitting intrastate direct shipment. Lawsuits are pending in
many States regarding the direct shipment of wine, although the
FTC has taken no position on the constitutional issues raised
in those lawsuits.
In July, the Commission issued a staff report on this
issue. The report concludes that permitting direct shipment of
wine to consumers could significantly enhance consumer welfare
by increasing consumer choice and by reducing wine prices.
Using the Wine and Spirits list of the top 50 most popular
wines in America, an FTC staff study found that 15 percent of
the wines available on-line were not available from retail wine
stores within 10 miles of McLean, Virginia. Given that the
wines studied are among the most popular wines of many of
America's largest wineries, it is likely that the wines of less
popular or smaller wineries are even more difficult to locate
in wine retailers.
Moreover, the same study suggests that, including the cost
of shipping, consumers could save an average of 8 to 13 percent
of wines costing more than $20 per bottle and an average of 20
to 21 percent on wines costing more than $40 per bottle. Less
expensive wines, by contrast, may be cheaper in bricks and
mortar stores.
Some have expressed concerns and offered anecdotes that
permitting interstate direct shipping might have the unintended
effect of increasing underage access to alcohol or undermining
tax compliance. To determine whether these concerns were
factually grounded, FTC staff officials contacted officials
from 10 States that permit interstate wine shipping and
received testimony and comments from several States that
prohibit it.
In general, States that permit direct shipping report that,
although it is possible for minors to buy wine on-line, most of
them do not believe that shipment of wine to minors is
currently a serious problem, especially when compared with the
problem of underage access to alcohol through traditional
distribution channels. Given the high cost of wine relative to
beer and spirits as well as the cost and delay associated with
shipping, most States that permit direct shipping have
concluded that misuse by underage purchasers is unlikely to
present a major problem.
The report also identifies several procedural safeguards
and enforcement mechanisms that States have adopted to prevent
sales to minors. These include such precautions as requiring
labeling of packages containing wine and requiring an adult's
signature at the time of delivery. States can also develop
appropriate penalty and enforcement schemes such as by working
with other States' enforcement agencies, as New Hampshire does.
The report also finds that some States also have adopted
less restrictive means of collecting taxes while permitting
direct shipping, such as by requiring out-of-State suppliers to
obtain permits and to collect and remit taxes. Most of these
States report few, if any, problems with tax collection.
Finally, the report found little evidence, based on the
experience of State law enforcement authorities, to justify the
distinction found in several States that allow intrastate
direct shipment of wine but prohibit interstate direct
shipment.
The wine industry has general implications for E-commerce.
Anti-competitive State regulations can insulate local suppliers
from on-line competition and deprive consumers of lower prices
and greater selection. States have legitimate regulatory
concerns, but they should be encouraged to carry out these
goals by adopting less restrictive alternatives that recognize
the value of competition and, ultimately, provide the greatest
benefits to consumers. Whether the industry in question is
cars, caskets, contact lenses or wines, the Commission has
strongly encouraged policymakers to adopt rules that favor
competition and consumer choice as baseline principles.
Thank you for the opportunity to share the Commission's
views.
[The prepared statement of Todd Zywicki follows:]
Prepared Statement of Todd Zywicki, Director, Office of Policy
Planning, Federal Trade Commission
i. introduction
Mr. Chairman, I am Todd Zywicki, Director of the Federal Trade
Commission's Office of Policy Planning.1 I am pleased to
appear before the Subcommittee today to testify on behalf of the
Commission regarding ``E-Commerce: The Case of Online Wine Sales and
Direct Shipment.'' The wine issue is the subject of a recent staff
report entitled ``Possible Anticompetitive Barriers to E-commerce:
Wine,'' 2 and is representative of the types of policies
that are impacting e-commerce in many different industries across the
nation. The Commission would like to thank Chairman Stearns for his
excellent leadership in this area and for his efforts to promote e-
commerce and consumer welfare. The Commission would also like to thank
the Subcommittee for its continued interest in studying potential
anticompetitive barriers to e-commerce. Last September, this
Subcommittee held a hearing entitled ``State Impediments to E-Commerce:
Consumer Protection or Veiled Protectionism?'' that focused on the e-
commerce issues in three industries: auctions, contact lenses, and
wine.3
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\1\ The views expressed in this statement represent the views of
the Commission. My oral statement and responses to questions you may
have are my own and do not necessarily reflect those of the Commission
or any individual Commissioner.
\2\ FTC Staff Report, Possible Anticompetitive Barriers to E-
Commerce: Wine (July 2003), available at (hereinafter ``Wine Report'').
\3\ State Impediments to E-Commerce: Consumer Protection or Veiled
Protectionism?: Hearing Before the Subcomm. on Commerce, Trade, and
Consumer Protection of the House Comm. on Energy and Commerce, 107th
Cong. (2002), available at .
---------------------------------------------------------------------------
ii. overview of possible anticompetitive barriers to e-commerce
The Internet enables consumers to purchase an unprecedented array
of goods and services from the convenience of their homes. Consumers
can find and purchase thousands of goods, from thousands of suppliers
around the country, and have those goods delivered to their doors.
Moreover, perhaps for the first time, consumers can also conveniently
purchase a wide array of services from distant sources. Consumers can
obtain legal and medical advice, realtor services, and an education
from out-of-state online suppliers. In many instances, these consumers
may find lower prices and a greater variety of goods and services
online than in bricks-and-mortar stores.
The Internet, however, also raises regulatory concerns about online
fraud and other abuses. As a result, many states have adopted
regulations that may limit consumers' ability to buy certain goods and
services online. For example, some states require that online vendors
maintain a physical office in the state, while other states prohibit
online sales or shipments of certain products entirely. Many states
also require that out-of-state suppliers obtain an in-state license
before selling particular goods, like wine or caskets, or services,
like medical or legal advice. Although many of these regulations may
have legitimate consumer protection rationales, many of them also have
the effect of insulating local businesses from out-of-state
competitors.
In October 2002, the Federal Trade Commission held a workshop to
study these issues. Over three days, Commission staff heard testimony
on possible anticompetitive barriers to e-commerce in many different
industries: auctions; automobiles; caskets; contact lenses; cyber-
charter schools; online legal services; real estate, mortgages, and
financial services; retailing; telemedicine and online pharmaceutical
sales; and wine. For each industry, Commission staff gathered evidence
from many different perspectives, including online companies, bricks-
and-mortar businesses, consumer groups, academics, state officials, and
others. The staff also invited and received comments from the public at
large.4
---------------------------------------------------------------------------
\4\ Public Workshop: Possible Anticompetitive Efforts to Restrict
Competition on the Internet, 67 Fed. Reg. 48,472 (2002). More
information is available at the workshop's homepage, at .
---------------------------------------------------------------------------
As part of the process of examining possible barriers to e-
commerce, the Commission has strongly encouraged policymakers to adopt
rules that encourage e-commerce. For example, the Commission filed a
joint comment with the Department of Justice before the North Carolina
State Bar opposing two new opinions that would require the physical
presence of an attorney for all real estate closings and refinancings,
which would significantly increase the costs of Internet lenders that
rely disproportionately on lay closers.5 The Commission also
filed joint FTC/DOJ comments before the Rhode Island legislature and
Georgia State Bar on similar issues.6 On the health care
front, the Commission filed a staff comment before the Connecticut
Board of Opticians, which was considering additional restrictions on
out-of-state and Internet contact lens sellers.7 The
Commission has also filed amicus briefs to promote competition. For
example, the FTC recently participated in a court challenge to a state
law that banned anyone other than licensed funeral directors from
selling caskets to members of the public over the Internet. While
recognizing the state's intent to protect its consumers, the brief
questioned whether the law did more harm than good.8
---------------------------------------------------------------------------
\5\ FTC/DOJ Letter to the Ethics Committee of the North Carolina
State Bar re: State Bar Opinions Restricting Involvement of Non-
Attorneys in Real Estate Closings and Refinancing Transactions (Dec.
14. 2001), available at .
\6\ FTC/DOJ Letter to the Rhode Island House of Representatives re:
Bill Restricting Competition from Non-Attorneys in Real Estate Closing
Activities (Mar. 29, 2002), available at ; FTC/DOJ Letter to the Georgia State Bar re: Comments On
Potential Unlicensed Practice Of Law Opinion Regarding Real Estate
Closing Activity (Mar. 20, 2003), available at .
\7\ FTC Staff Comment Before the Connecticut Board of Examiners for
Opticians (Mar. 27, 2002), available at .
\8\ Memorandum of Law of Amicus Curiae Federal Trade Commission,
Powers v. Harris, Case No. CIV-01-445-F (W.D. Okla. Sept. 5, 2002),
available at .
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iii. wine
A. Background
Wine is a good example of how the Internet can permit fundamentally
different business models to flourish. Through the Internet, many
smaller vineyards, with limited distribution networks, can now market
their wines to consumers around the country. Consumers also can
potentially save money by buying online, avoiding markups by
wholesalers and retailers. Online wine sales are a small but growing
percentage of the wine market. From 1994-99, consumers doubled the
amount of money they spent having wine shipped directly to them to
around $500 million, or about 3% of the total spent on
wine.9 According to some private estimates, online wine
sales could account for 5-10% of the market within a few
years.10
---------------------------------------------------------------------------
\9\ Alix M. Freedman & John R. Emshwiller, Vintage System: Big
Liquor Wholesaler Finds Change Stalking Its Very Private World, Wall
St. J., Oct. 4, 1999, at A1. See also Vijay Shanker, Note, Alcohol
Direct Shipment Laws, the Commerce Clause, and the Twenty-First
Amendment, 85 Va. L. Rev. 353, 353 n.5 (Mar. 1999) (discussing other
estimates).
\10\ Mark Swartzberg & Jennifer F. Solomon, Salomon Smith Barney,
Clicking on Wine: Will E-Commerce and Other Forces Increase U.S.
Consumer Access to Wine?, at 18 (Mar. 17, 2000) (equity research
report).
---------------------------------------------------------------------------
On the other hand, many states limit or prohibit direct wine sales
over the Internet. Under the common ``three tier'' distribution system,
many states require that wine pass through a wholesaler or a retailer
before reaching the consumer. These states, and many commentators,
contend that the distribution system furthers the state's interest in
taxation, advances the Twenty-First Amendment's important public policy
goal of temperance, and helps prevent alcohol sales to minors. Lawsuits
are pending in many states regarding the direct shipment of wine,
although the FTC has taken no position on the constitutional issues
raised in the lawsuits.
At the workshop, Commission staff heard testimony from all sides of
the wine issue, including wineries, wholesalers, state regulators, and
a Nobel laureate in economics. Commission staff also gathered evidence
from a wide variety of published sources, such as studies and court
decisions, and from other sources, such as package delivery companies
and the Bureau of Alcohol, Tobacco, Firearms, and Explosives (now the
Alcohol and Tobacco Tax and Trade Bureau). Finally, FTC staff studied
the wine market in a state that until recently banned direct shipment
of wine to consumers from out-of-state sources, and, as a result,
banned most online wine sales. In particular, the study examined the
wine market in McLean, Virginia, and compared the prices and choices
that consumers could find in area stores to the prices and choices that
consumers could find online.
B. FTC Staff Report
Commission staff wrote the report based on the study of the McLean
market, testimony received at the workshop, and additional research.
The Commission's staff report assesses the impact on consumers of
barriers to e-commerce in wine. The report also surveys the alternative
policies adopted by many of the states that permit their citizens to
order and receive wine from out-of-state sources.
1. Benefits of E-Commerce
The report concludes that states could significantly enhance
consumer welfare by allowing the direct shipment of wine to consumers.
Through direct shipping, consumers can purchase many wines online that
are not available in nearby bricks-and-mortar stores. The McLean study
found that 15% of a sample of wines available online were not available
from retail wine stores within ten miles of McLean. Similarly,
testimony unambiguously reveals that, by banning interstate direct
shipments, states seriously limit consumers' access to thousands of
labels from smaller wineries.11
---------------------------------------------------------------------------
\11\ Wine Report at 16-26.
---------------------------------------------------------------------------
Moreover, the report finds that, depending on the wine's price, the
quantity purchased, and the method of delivery, consumers can save
money by purchasing wine online. Because shipping costs do not vary
with the wine's price, consumers can save more money on more expensive
wines, while less expensive wines may be cheaper in bricks-and-mortar
stores. The McLean study suggests that, if consumers use the least
expensive shipping method, they could save an average of 8-13% on wines
costing more than $20 per bottle and an average of 20-21% on wines
costing more than $40 per bottle.12
---------------------------------------------------------------------------
\12\ Id.
---------------------------------------------------------------------------
2. Barriers to E-Commerce
In terms of the regulatory regime, the report finds that state bans
on interstate direct shipping represent the single largest regulatory
barrier to expanded e-commerce in wine. Approximately half the states
prohibit or severely restrict out-of-state suppliers from shipping wine
directly to consumers. In approximately seven states, interstate direct
shipping can be prosecuted as a felony. Many of these same states,
however, allow intrastate direct shipping, such as from in-state
wineries and retailers.13 Besides the direct shipping bans,
many other regulations impede e-commerce in wine. These include
prohibitions on online orders, very low ceilings on annual purchases,
bans on advertising from out-of-state suppliers, requirements that
individual consumers purchase ``connoisseurs' permits,'' and
requirements that delivery companies obtain a special individual
license for every vehicle that might be used to deliver
wine.14
---------------------------------------------------------------------------
\13\ One such state is Texas. In a recent case, a federal court in
Texas found that Texas law does not promote temperance in banning
direct shipment of out-of-state, but not in-state, wines:
The Court finds that there is no temperance goal served by the
statute since Texas residents can become as drunk on local wines or on
wines of large outofstate suppliers able to pass into the state through
its distribution system, and available in unrestricted quantities, as
those that, because of their sellers' size or Texas wholesalers or
retailers' constraints, are in practical effect kept out of state by
the statute.
Dickerson v. Bailey, 212 F.Supp.2d 673 (S.D. Tex. 2002),
incorporating Dickerson v. Bailey, 87 F.Supp.2d 691, 710 (S.D. Tex.
2000), aff'd, No. 02-21137, slip op. at 2 (5th Cir. June 26, 2003).
\14\ Wine Report at 14-16.
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3. Underage Drinking
The direct shipping debate involves other public policy goals. For
example, citizens are concerned about the direct shipment of wine to
minors. To gather information on the actual experiences of states that
allow interstate direct shipping, FTC staff contacted officials from
numerous reciprocity and limited importation states and asked them a
variety of questions, including whether they had experienced problems
with interstate direct shipping to minors. Most of the surveyed states
provided written responses. Staff also reviewed testimony from a
California alcohol regulator who had testified before California's
legislature.
In general, these state officials report that they have experienced
few, if any, problems with interstate direct shipment of wine to
minors. Most of them do not believe that interstate direct shipment of
wine to minors is currently a serious problem, although several of them
believe that it is possible for minors to buy wine online. None of them
report more than isolated instances of minors buying or even attempting
to buy wine online. Some of them, such as California, have monitored
the issue of alcohol delivery to minors for years or even
decades.15
---------------------------------------------------------------------------
\15\ See Wine Report at 26-40.
---------------------------------------------------------------------------
These state officials offer many possible explanations for their
experiences. Several state officials opined that minors are more
interested in beer and spirits than wine.16 New Hampshire
concluded that minors are less likely to purchase wine online because
of the extra expense of ordering over the Internet.17 These
conclusions correspond with the McLean study, which found that when
transportation costs are included, lower-end wines are more expensive
when purchased over the Internet than through the three-tier
system.18 Minors would have to pay a hefty premium, from 33-
83%, to purchase a bottle of wine costing less than $20 online and have
it delivered to them via 2nd Day Air.
---------------------------------------------------------------------------
\16\ Illinois letter; Washington letter (Wine Report, App. B).
\17\ New Hampshire letter (Wine Report, App. B).
\18\ Wiseman & Ellig (Wine Report, App. A).
---------------------------------------------------------------------------
Several state officials commented that, based on their experience,
minors were much more likely to buy alcohol through offline sources
than over the Internet.19 In a 2002 survey, large
percentages of high school students, from 68-95%, said that it is
``fairly easy'' or ``very easy'' to get alcohol.20 In
examining offline and online stings, there are not enough data from
which to conclude that minors can buy wine more easily or less easily
online than offline (among other reasons, there is far more sting data
about offline sales). In the absence of such information, it is
difficult to ascertain whether online wine sellers are, or would be, a
significant source of alcohol for minors.
---------------------------------------------------------------------------
\19\ See California testimony; letters from New Hampshire and
Wisconsin (Wine Report, App. B).
\20\ See Wine Report, notes 47-50 and accompanying text.
---------------------------------------------------------------------------
Of course, the fact that states have received few complaints about
direct shipments to minors does not establish that minors are not
purchasing wine online. As noted by a Michigan Assistant Attorney
General, minors who buy wine online are unlikely to report their
purchases to the authorities, and neither the package delivery company
nor the supplier may know or care that they are delivering wine to a
minor.21 The FTC cannot rule out the possibility that minors
are buying wine online undetected by state officials.
---------------------------------------------------------------------------
\21\ Testimony of Irene Mead 196, available at .
---------------------------------------------------------------------------
The report, however, finds two clear results. First, several states
that permit interstate direct shipping have adopted various procedural
safeguards and enforcement mechanisms to prevent sales to minors. New
Hampshire, for example, requires an adult signature at the time of
delivery, permanently revokes the direct shipping permit of anyone who
ships wine to minors, and declares him guilty of a class B
felony.22 Second, states that allow interstate direct
shipping generally say that direct shipping to minors currently is not
a serious problem, and that they have received few or no complaints
about direct shipping to minors.
---------------------------------------------------------------------------
\22\ New Hampshire letter (Wine Report, App. B).
---------------------------------------------------------------------------
4. Tax Collection
The report finds that some states also have adopted less
restrictive means of protecting tax revenues while permitting direct
shipping, such as by requiring out-of-state suppliers to obtain permits
and to collect and remit taxes.23 Most of these states
report few, if any, problems with tax collection. Nebraska, for
example, reports that they ``have also not, as yet, had any problems
with the collection of excise tax[es].'' 24 North Dakota
reports that ``Taxes are collected. No problems to date that we are
aware of.'' 25 The staff report finds that, to the extent
that states have problems with out-of-state suppliers, they have
addressed the problem in less restrictive ways than banning all
interstate direct shipping. Other states with reciprocity agreements
forego taxing interstate direct shipments altogether.
---------------------------------------------------------------------------
\23\ See, e.g., La. Rev. Stat. Ann. 26:359(B)(1); N.H. Rev. Stat.
Ann. 178:14-a(V); Nev. Rev. Stat. 369.462.
\24\ Nebraska letter (Wine Report, App. B).
\25\ North Dakota letter (Wine Report, App. B).
---------------------------------------------------------------------------
5. Less Restrictive Alternatives
As mentioned previously, the report finds that some states have
adopted less restrictive means to satisfy their regulatory objectives
an alternative to banning interstate direct shipment of wine. For
example, some states register out-of-state suppliers and impose various
civil and criminal penalties against violators. Several states,
including Nebraska, New Hampshire, and Wyoming, require out-of-state
suppliers to register and obtain permits for a reasonable fee (a permit
can be conditioned on the out-of-state supplier's consent to submit to
the state's jurisdiction). None of these states reported any problems
with interstate direct shipping to minors.26 In addition,
some states have applied the same types of safeguards to online sales
that already apply to bricks-and-mortar retailers, such as requirements
that package delivery companies obtain an adult signature at the time
of delivery. Unfortunately, there is no systematic empirical data
revealing how often couriers obtain a valid adult signature. FTC staff
contacted both FedEx and UPS, and neither company keeps such records.
Both companies, however, have adopted policies that require their
couriers to obtain adult signatures.
---------------------------------------------------------------------------
\26\ See Letters from Nebraska, New Hampshire, and Wyoming (Wine
Report, App. B).
---------------------------------------------------------------------------
iv. conclusion
For these reasons, the staff report concludes that consumers could
reap significant benefits if they had the option of purchasing wine
online from out-of-state sources and having it shipped directly to
them. Consumers could save money, choose from a much greater variety of
wines, and enjoy the convenience of home delivery. Indeed, in states
that are litigating the constitutionality of direct shipping bans,
several courts have found that the bans deprive the state's consumers
of lower prices and greater variety. In addition, many states appear to
have found means of satisfying their tax and other regulatory goals
that are less restrictive than an outright ban. These states generally
report few or no problems with shipments to minors or with tax
collection.
The report has general implications for e-commerce. Anticompetitive
state regulations can insulate local suppliers from online competition
and deprive consumers of lower prices and greater selection. Although
states have legitimate regulatory goals in protecting consumers, they
may have less restrictive alternatives that would allow online
competition and, ultimately, provide the greatest benefits to
consumers.
The wine debate illustrates several key principles that
policymakers should consider as they address the growth of e-commerce:
Legacy laws can unintentionally inhibit e-commerce. In many cases,
state bans on interstate direct shipment of wine exist not as a
response to e-commerce, but because the three-tier distribution system
developed before the Internet even existed. As e-commerce continues to
expand, the potential cost to consumers of restrictions will rise.
Consequently, legacy laws that inhibit e-commerce merit re-examination.
New laws restricting e-commerce deserve careful scrutiny. Not all
restrictions or penalties for direct shipping are of ancient vintage.
Some states, for example, have recently converted interstate direct
shipping from a misdemeanor to a felony. On numerous workshop panels,
consumer representatives and scholars warned that new restrictions on
e-commerce often are driven more by the desire to protect established
businesses than to protect consumers. Given this risk, proposals for
new restrictions on e-commerce, or harsher penalties for existing
violations of the law, deserve careful scrutiny.
Not all licensing is created equal. Some states that permit
interstate direct shipping use licenses and permits to make suppliers
identify themselves and agree to abide by the state's laws. Such
licensing appears to have little negative impact on e-commerce. In
other states, however, high license fees or cumbersome procedures
impede e-commerce by imposing substantial costs on suppliers, delivery
companies, and consumers. For states that favor licensing, the key
challenge is to craft a licensing regime that is only as burdensome as
necessary to satisfy the state's objectives. Reciprocal licensing
agreements with other states may provide one means of accomplishing
regulatory objectives at lower costs to consumers.
States may have alternatives to in-state office requirements. A
common argument for prohibiting interstate direct shipping is that
states can only enforce the law against in-state suppliers. This
argument also arises in other contexts where states require sellers of
goods or services to maintain in-state offices and hire state
residents. States may, however, have less burdensome means of
regulating out-of-state suppliers. Through permits and cooperation with
federal law enforcement agencies and other states' enforcement
agencies, states may be able to permit e-commerce while still
satisfying their regulatory objectives.
Not all ``level playing fields'' benefit consumers equally. In the
wine context, states could ``level the playing field'' either by
prohibiting all direct shipping or by permitting interstate as well as
intrastate direct shipping. The FTC staff study of McLean, Virginia
suggests that Virginia consumers will benefit from the Commonwealth's
recent decision to achieve policy neutrality by legalizing interstate
direct shipping. Virginia's experience illustrates a general principle:
although there are many ways to avoid discriminating against a group of
suppliers, a pro-consumer approach would attempt to achieve policy
neutrality by expanding consumer choice.
Thank you for this opportunity to share the Commission's views. The
Commission looks forward to working with the public and with the
Subcommittee to help give consumers the full benefits of online
commerce.
Mr. Stearns. Thank you.
Ms. Duggan.
STATEMENT OF JUANITA D. DUGGAN
Ms. Duggan. Thank you, Mr. Chairman; and thank you for the
opportunity to appear today. I am Juanita Duggan, and I am
representing the Wine and Spirits Wholesalers of America.
Today's subject in reality is not trade barriers or E-
commerce but rather the deregulation of alcohol and the
consequences of doing so, loosening restrictions including
access to minors and local community control.
At a time when society is trying to restrict minors' access
to alcohol through conventional means, we should not at the
same time create a virtual vending machine for alcohol through
the Internet. Nor is today's subject about wine but rather all
forms of alcohol--beer, liquor and wine--a unique product with
a long regulatory tradition and troubled history in our
country. Alcohol is not like other products, and the FTC failed
to recognize this fundamental point when it included alcohol
with other products sold on-line such as contact lenses and
caskets.
Through the 21st amendment to the Constitution and later
congressional actions, this country made a decision that there
should be a separation of the manufacturing, wholesaling and
retailing tiers of the alcohol industry and that States have
the jurisdiction to promote the goals of temperance, control
and revenue collection. The American public understands that we
need these safeguards. A new poll shows that 77 percent of all
Americans support regulating alcohol through our current
safeguards; 83 percent believe sales of alcohol over the
Internet should be banned because it would increase the minors'
access to alcohol. The American public understands that this is
about kids, communities and common sense versus an uncontrolled
environment where plain brown boxes crisscross the country in
an anonymous fashion.
Unfortunately, this is happening as we speak. Because the
FTC did not, WSWA conducted tests to demonstrate the reality of
these uncontrolled direct shipments of alcohol over the
Internet. Bottles of alcohol were ordered on-line. The alcohol
providers made no attempt to verify a consumer's age or even
notify the consumer that they need to be 21 years or older. The
shippers understood they were breaking the laws of several
States by putting their products in unmarked boxes with
euphemistic return addresses. The results: bottles of liquor
sent to consumers in several States where the shipments are
prohibited by law regardless of the age.
In one case, a 15-year-old, using his own credit card,
ordered bottles of tequila--very nice tequila, I might add--
delivered to a State that prohibits those shipments regardless
of consumer age. The package was left on his doorstep--two
bottles, I might add, to be accurate. In most cases, the liquor
boxes concealed their true content. They came in plain brown
boxes, like this one, did not note their contents and had vague
return addresses like Dave or John.
Dave, I hope this is not you.
This was sent from California to Franklin, Michigan; and
the return address is Dave. It is not marked in any way,
clearly attempting to hide the fact that it was shipped from
alcohol purveyors.
In one instance a bottle of wine arrived in a box clearly
marked wine and requesting an adult's signature. Yet an 11-
year-old boy accepted the delivery, unchallenged by the
carrier.
While advocates of deregulating alcohol will tell you that
truck drivers are carding people when they deliver alcohol,
that boxes are clearly marked and that alcohol is not left on
doorsteps, these claims are pure fabrication. Unfortunately,
the FTC ignored testimony about this from a number of sources
in their official report, including the Michigan Attorney
General's office.
These legitimate concerns do not seem to resonate with a
handful of wealthy oenophiles and winery owners who have filed
suits in several States to deregulate alcohol sales. Daniel
McFadden, a Nobel-Prize-winning economist, grape grower and
proponent of unregulated alcohol sales, admitted in his FTC
testimony that the subject of direct sales is an elitist
issue--his term, not mine--that caters to only a tiny
percentage of the consuming public.
Unfortunately, that minority is endangering the very system
of control that the rest of us in society are working to
strengthen. Direct sales of wine result in the direct sales of
beer and liquor and, ultimately, to the breakdown of our
trusted system of safeguards. We must not deregulate the system
to satisfy an elite group of people who don't want to play by
the rules.
Just a few weeks ago, the National Academy of Sciences
issued a report to Congress on underage drinking. The NAS says
that 10 percent of kids who use alcohol get their alcohol
through the Internet or through home delivery and that the
number is likely to grow. The NAS said ``an argument can be
made for banning Internet and home delivery sales altogether in
light of the likelihood that these methods will be used by
underage purchasers.''
Let us talk about the business of alcohol sales. There is
no more competitive marketplace than the one for alcohol. This
system was designed to foster such competition in spite of
tight restrictions. Because of local distributors, consumers
have an enormous selection of alcohol products. For instance,
in New York a retailer has access to over 20,000 different
brands and SKUs of wine alone. The average retail store in most
States carries between 300 and 500 different wine brands at any
given moment. Can you imagine selecting from that many
toothpastes or contact lenses or cars?
And price, the FTC hearing itself established that wineries
selling on-line do not pass the savings on to the consumers.
They sell it at retail price and keep the additional profits
for themselves. When you add the cost of shipping, consumers
spend more for on-line purchases than at local retail
establishments for the same product.
The wholesale tier is a partner with State regulatory
systems that are designed to promote the 21st amendment core
concerns. This license system assures that every bottle of
alcohol is properly labeled, taxed and sold only to adults of
drinking age. States created this system, and no court has ever
challenged its logic or a State's right to establish such
regulation.
Mr. Chairman, we as wholesalers of wine and spirits
recognize that our product, alcohol, is not cheese and must be
treated specially and differently. We support and defend the
regulation and control of its distribution.
Thank you for the opportunity to appear today, and I look
forward to answering any questions.
[The prepared statement of Juanita D. Duggan follows:]
Prepared Statement of Juanita D. Duggan, President and CEO, Wine and
Spirits Wholesalers of America, Inc.
Mr. Chairman: Thank you for the opportunity to submit testimony to
your Subcommittee for this important hearing. I represent the Wine and
Spirits Wholesalers of America, Inc. (WSWA), a national trade
organization and the voice of the wholesale tier of the wine and
spirits industry. Founded in 1943, WSWA represents more than 370
privately held, family-owned and operated companies in 44 States, the
District of Columbia and Puerto Rico that hold state-issued licenses to
act as wine and/or spirits wholesalers. Our companies are licensed
entities because they distribute alcohol--a product that our society
has deemed a controlled substance and therefore subject to the highest
possible regulations determined by each state.
alcohol is a unique product with a long regulatory tradition.
First, let's all agree that wine is alcohol. And this issue isn't
just about wine, it's about all forms of alcohol--beer, liquor and
wine. And alcohol is not like other food products, books or compact
discs. This issue is about kids, communities and common sense.
It's also about deregulating the alcohol industry and the
consequences of doing so. Because that's what we're talking about--
deregulating alcohol, which includes loosening our restrictions on the
control of alcohol products, including access to minors. That should be
a very real concern to all of us.
The FTC commissioned its staff report as part of an examination of
products and industries across America. They looked a number of other
industries, including auto dealerships, funeral home operations, and
the contact lens market, among others. These businesses are all
regulated primarily at the state level. The first flaw in the FTC study
is the failure not to recognize that all forms of alcohol are not like
cars, caskets or contact lenses. Alcohol is one of the few products
that has its own constitutional amendment defining how it should be
regulated and by whom. Simply put, wine is not like the other thousands
of consumer products that sit on shelves in retail outlets across the
country. To fail to recognize this uniqueness is to make a fundamental
mistake when assessing the role the federal, state and local
governments play in the alcohol industry.
america has complicated views about alcohol.
The long history America has had with beer, wine and spirits is a
contributing factor to the uniqueness of the alcohol industry and its
system of distribution. Some of this historical background has resulted
in significant tradition--Thomas Jefferson writing the Declaration of
Independence with a mug of beer on the table. Wine and distilled
spirits have had positive effects on the country as George Washington
himself built a distillery at Mt. Vernon and created his own whiskey
recipe.
Unfortunately, some of America's history with alcohol has not been
positive. The use of federal troops in putting down the so-called
``Whiskey Rebellion,'' the chronic abuse of alcohol by new immigrants
and those living during America's industrial revolution when there was
a so-called ``unrestricted market'' for all alcohol products. That
turbulent time gave America some of our most familiar sayings--``lock,
stock, and barrel'' and ``skid row.'' Then came a fifteen-year social
experiment called Prohibition.
America thought the answer to alcohol abuse and a free market for
alcohol products was to move in the absolute opposite direction and
make alcohol illegal. Every serious academic and legal authority
recognized, and continues to recognize, that Prohibition was a serious
and disastrous mistake. It made average Americans criminals, encouraged
and strengthened organized crime and did little to reduce abuse.
Out of the repeal of Prohibition came what might be called a middle
position for America, resulting in the 21st Amendment to the U.S.
Constitution; the separation of the manufacturing, wholesaling and
retailing tier of the alcohol system; and aggressive state oversight to
encourage the goals of temperance, control and revenue collection. This
regulatory system has served this country well. And we need those
safeguards perhaps even more today than we did before.
Why is that? A new National Academy of Sciences report confirms
that kids are buying alcohol online and through the mail today. A new
WirthlinWorldwide survey also confirms that the overwhelming majority
of the public is against allowing alcohol sales via the Internet. The
question I hope this Subcommittee will be asking is: If we know kids
are getting alcohol online, and we know the public is opposed to online
sales in general, why on earth should we deregulate alcohol sales to
create a shadow trade that is both unchecked and unaccountable? Such a
move defies common sense and is wholly irresponsible.
To demonstrate just how dangerous uncontrolled direct sales of
alcohol are, WSWA recently conducted a series of tests. Bottles of
alcohol were ordered online and the alcohol providers made no attempt
to verify th consumer's age or even notify the consumer that he or she
must be 21 years of age. The results:
Bottles of liquor were sent to consumers in several states where such
shipments are prohibited by law (regardless of age).
In one case, a 15-year-old, using his own credit card, ordered
bottles of tequila (delivered to a state that prohibits such
shipments regardless of consumer age), and the package was left
on his doorstep. The package was not marked as containing
alcohol.
In most cases, the liquor boxes concealed their true content: they
came in plain brown paper boxes, did not note their contents
and had vague return addresses like ``Dave'' or ``John,''
clearly attempting to hide the fact they were shipped from
alcohol purveyors.
In one instance, a bottle of wine arrived in a box clearly marked
``wine'' and requesting an adult signature, yet an 11-year-old
boy accepted the delivery unchallenged by the carrier.
We were not surprised by these results. In fact, we encourage
Subcommittee members to conduct tests of your own. We have no doubt you
will find similar results. While advocates of deregulating alcohol will
tell you truck drivers are carding people when they deliver alcohol,
that the boxes are clearly marked, and that the alcohol is not left on
doorsteps--such claims are pure fabrication and easily debunked. We'd
be happy to provide you a list of online providers, or you can search
them out for yourselves.
Moreover, if you were to ask anyone in your local communities
across this country--a parent, teacher, or police officer--whether it
is a good idea to deregulate the sale of alcohol, the answer would be a
resounding ``No!'' Overwhelmingly, people understand that alcohol is
different from unregulated consumer products and that the rules
governing its distribution must reflect that reality. Reasonable people
understand that when you are dealing with the potentially deadly
combination of teenagers and alcohol, it is unthinkable to support laws
that allow kids to order intoxicating liquor from ``virtual vending
machines.'' Most people understand that when you already are dealing
with the troubling and widespread problem of underage alcohol abuse,
you don't make it worse by proposing that teens be given yet one more
way to buy their buzz. As noted earlier, when it comes to beer, wine
and liquor, our society recognizes its unique nature and the need for a
unique system to control its distribution. After all, to reiterate,
sales of beer, liquor and wine are not the same as those for cars,
books or CDs.
But those legitimate concerns do not seem to resonate with the
handful of wealthy oenophiles who are leading the battle to have
limited edition chardonnay shipped directly to their homes. These self-
proclaimed connoisseurs appear to have their blinders firmly in place
and want to ignore the fact that their actions would also open the door
for a 15-year-old to buy tequila or grain alcohol over the Internet and
have it delivered without question to his door. As Nobel prize-winning
economist, grape grower and proponent of unregulated alcohol sales
Daniel McFadden admits in his testimony before the FTC, the subject of
direct sales is an elitist issue that caters to only a tiny percentage
of the consuming public. Unfortunately, that elitist minority is
endangering the very system of control that we as an industry, in
partnership with the government, parents and others, are working to
strengthen in order to protect the public.
Thus, when the FTC announced in the fall of 2002 that it would be
conducting a ``Public Workshop'' on the subject of ``Possible Anti-
Competitive Efforts to Restrict Commerce on the Internet,''--and
included within its purview the subject of wine sales--WSWA and many in
the regulatory community viewed it as a great opportunity to showcase
the dangers of uncontrolled distribution of alcohol. We noted that the
FTC was apparently so alarmed with the danger to kids of online
gambling that it had set up an exclusive web page to warn parents about
that problem. Surely, we thought, and the FTC felt it necessary, to
warn parents about the dangers to kids of Internet gambling would need
little prompting to come to the same conclusion about Internet sales of
alcohol.
Voluminous evidence was produced through testimony at the Workshop
and through information later submitted to the FTC during the comment
period demonstrating the dangers of uncontrolled direct shipping and
explaining the inability of the states to monitor and hold accountable
companies that shipped directly. It was hoped that the FTC would fairly
evaluate that information. That was not the case.
The final FTC report is a study in preordained conclusions. It is
the triumph of rhetoric over reason. It is intellectually dishonest and
scientifically specious. The report ignores evidence contrary to its
suppositions, manufactures evidence out of whole cloth, and misapplies
the findings of a geographically limited, inconclusive economic study.
In other words, the final FTC report is a one-sided propaganda piece of
little substance that this Subcommittee should not only ignore, but
also wholly discredit.
the truth about sales to minors--
In the report, the FTC concludes that sales to minors are not a
significant problem--despite the fact that in its press release it
notes that it has no evidence concerning the effectiveness of adult
signature requirements.
To support that conclusion, the FTC notes the results of a survey
it sent to eleven different states to determine if there was a problem.
The report contains a chart highlighting the results of that survey
which they characterize as demonstrating that ``[i]n general, these
state officials report that they have experienced few, if any, problems
with interstate direct shipment of wine to minors. Most of them do not
believe that interstate direct shipment of wine to minors is currently
a serious problem, although several of them believe that it is possible
for minors to buy wine online.''
From the survey information, most readers would be led to believe
that the states have studied the matter and have determined based upon
that study that there is no problem. However, if you actually look at
the surveys (contained in the Appendix) you note that, without
exception, not one of those states conducted any compliance checks or
stings to determine the dangers of such uncontrolled shipments to
minors. Not one went online to investigate the ease with which alcohol
can be ordered and delivered without any age verification or control.
There is no excuse for such an oversight.
And in fact, several states in the survey noted their belief that
there was a problem with such sales and one even went so far as to
identify direct sales as having the potential to become a major
problem. One state reported that there was no system available to
assure that minors did not obtain alcohol online since many had credit
cards and they were not face-to-face transactions. Another reported
that compliance checks on the far more secure face-to-face transactions
even revealed sales to minors at a rate of 30%. Still another reported
that 67% of high school seniors said they have purchased alcohol in
face-to-face transactions alone. Even in states that reported having
laws on the books requiring carriers to report alcohol shipments, some
do not, and no actions have been taken against them. Absent such
empirical evidence, any conclusion by the FTC to the effect that sales
to minors are not occurring online is devoid of any real basis in fact.
The survey merely records the opinions of various state control
functionaries who apparently base their beliefs on the fact that no
kids have self-reported their criminal misconduct, telling them they
ordered and received a box of pure grain alcohol at their doorstep, for
example.
What makes the FTC findings even more problematic is the additional
evidence they omit beyond their skewing of the state survey.
For instance, you can look in vain for the testimony of Michigan
Assistant Attorney General Irene Mead who recounted an enforcement
action conducted by that state which ensnared scores of wineries and
retailers shipping illegally to minors in that state, including
shipments of such rare and hard to find vintages as ``Eye of Newt''
wine and blackberry wine. She also told a frightening story--omitted in
the report--of a teen in a rehabilitation facility who actually
succeeded in having a case of bourbon delivered to the facility--
straight to him via the Internet. When he finished that case he
contacted the Internet site and said all the bottles were broken on
delivery. A free case was promptly shipped to him, again without
detection.
Moreover, you don't see reference to the testimony of former White
House counsel C. Boyden Gray reciting the experience of South Dakota
Governor Bill Janklow, who vetoed pro-direct shipment legislation when
an underage staff member in his office was able to order and have
shipped to him--in the State House--a bottle of wine. And you certainly
don't see reference to my comments submitted to the FTC in which I
catalogued the sale and delivery of beer to a 17-year-old in Alabama
from a company in Illinois, the shipment of beer to a minor in the
Missouri Attorney General's Office, or the unsolicited report of
recurring attempts by minors to buy online by the owner of the Internet
company ``877 Spirits.''
the national academies--
The conclusion of the FTC, with respect to sales to minors, is
finally and completely discredited by the recent study by the National
Academies of Sciences report studying the marketing of alcohol to
minors.
In section two of the report entitled ``The Strategy,'' the NAS
focuses on the issue of underage access, in particular, Internet Sales
and Home Delivery. The report states that underage purchase of alcohol
over the Internet or through home delivery is a method of illegal
access to alcohol used by 10% of underage drinkers. That figure,
however, is based on data reported in the 2000 Journal of Studies on
Alcohol, and the report correctly concludes that increasing utilization
of the Internet likely has increased that percentage greatly over the
last three years. Finally, the NAS report goes so far as to suggest
that the significance of these illegal underage sales is so great that:
``. . . an argument can be made for banning Internet and home
delivery sales altogether in light of the likelihood that these
methods will be used by underage purchasers . . .''
(Page 176)
controlled delivery protects our kids, and that's what the public
wants--
As noted earlier, the overwhelming majority of Americans oppose
allowing beer, liquor and wine to be sold directly to consumers over
the Internet or through the mail, according to a new poll by
WirthlinWorldwide conducted on behalf of the Wine and Spirits
Wholesalers of America, Inc. and released just last week.
The poll expressed what everyone from parents of teenagers to
alcohol consumers understand--that Internet and mail purchases of beer,
liquor and wine will result in less control in local communities. The
survey reveals that:
83% of respondents agree that sales over the Internet should not be
allowed because they would give minors easier access to alcohol
products.
80% of respondents believe that Internet commerce is generally a good
thing for both businesses and consumers; however, alcohol is a
socially sensitive product and should be treated differently
from other products.
63% of respondents say that the sale of beer, liquor or wine over the
Internet will result in less control over alcohol sales in
their community.
These poll results are in line with similar findings from a WSWA
poll conducted just prior to the FTC Workshop, which found that 75% of
the respondents did not believe that online sales could be controlled
to prevent sales to minors.
Once again, these results are not surprising given the nature of
such sales.
Shadow sales made via telephone or through the Internet, since they
are not face-to-face, cannot establish the age of the purchaser. There
is no guarantee that the person ordering the alcohol is of age. Most
young people between the ages of 18 and 21 years of age--and many who
are even younger--possess credit cards allowing them to order online--
still others have the use of their parents' cards and there is no way
for the online seller to verify the age of the person ordering.
Moreover, there is no way to ensure that a minor does not
ultimately receive a shipment of alcohol. The sellers wash their hands
of the alcohol once it leaves their premises, and there is no guarantee
that the delivery service will require an I.D. upon delivery--or that
they will not simply drop the box off at the door unattended.
That is exactly what happened when scores of media outlets
conducted stings over the past several years to determine the safety of
direct sales. Those stings showed how easy it was for minors to order
alcohol online--and how sloppy the carriers were who delivered the
alcohol, often without checking I.D. or often just leaving the alcohol
on the front doorstep. After all, it is not the job of truck drivers to
card people--especially if boxes of liquor are being shipped in plain
brown boxes with no indication alcohol is inside. That's why face-to-
face transactions with licensees are so important. Anything less simply
does not work.
junk science: mclean, virginia is not representative of anywhere but
mclean, virginia--
A report that attempts to speak to the nature of the availability
of certain wines nationwide is hardly authoritative when it tries to
extrapolate the findings of a study from one small corner of a state
across the entire country. It is self-evident that the ability to
obtain different varieties of wines in Chicago, New York, New Orleans,
Albuquerque or even the Washington, D.C. Metropolitan Area is not
comparable to what can be obtained in the small suburb of McLean,
Virginia.
For instance, in New York, a retailer has access to over 20,000
different brands or SKUs of wine alone. The selection is so great
because of the wholesalers in that market. Our companies bring
selection and competition to a highly competitive marketplace. If the
FTC had conducted its economic study there, you can be sure that the
findings with respect to variety and availability would be quite
different than that represented in the final report.
The same holds true for price. Price differentials from market to
market are not insubstantial. In many markets, the prices for high-end
wines are much cheaper when purchased through the licensed system than
if purchased online. It should be noted that testimony at the FTC
hearing itself established that wineries selling online often do not
pass the savings on to the consumers--they sell at retail price keeping
the additional profits for themselves. If you add in the cost of
shipping to that bill, consumers often end up spending more for online
purchases than at local retail establishments for the same product.
the ftc is treading on state turf, and encouraging disruption of local
control--
The 21st Amendment, ratified in 1933, is unambiguous in its
enumeration of power to the states to regulate the importation and
controlled distribution of alcohol within its borders. This is the
specific language contained in the 21st Amendment:
21st Amendment Section 1: The eighteenth article of amendment
to the Constitution of the United States is hereby repealed.
21st Amendment Section 2: 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.
No Supreme Court decision interpreting that amendment over the past
70 years has ever diminished that authority. The simple fact is, as
noted by respected jurist Frank Easterbrook in a compelling 7th Circuit
opinion upholding Indiana's right to determine and control the channels
of distribution, alcohol is not cheese and its sale and distribution
should be treated specially.
As prohibition ended, state lawmakers were determined to learn from
the mistakes made prior to 1918. Principal among the reasons that the
licensed system was established was consumer protection. It was
determined that there should be an intermediary separating the supply
and retail tiers to ensure that large suppliers with market power did
not dominate individual retailers by establishing ``tied-houses.''
These pre-prohibition tied-house retailers made their profits not by-
the-glass, or by-the-bottle, but rather through winning incentives for
moving large quantities of alcohol. In other words, the imposition of a
mandatory wholesale tier served to end many unhealthy and unsafe
practices that prevailed prior to Prohibition.
The wholesale tier functions as a partner with state regulatory
systems that are designed to promote the core 21st Amendment concerns--
ensuring orderly market conditions, promoting temperance, including
keeping alcohol out of the hands of minors and collecting tax revenue.
By requiring that every drop of alcohol passes through the licensed
system, states are assured that every bottle of alcohol is properly
labeled, taxed and sold only to adults of legal drinking age.
In order to understand how the licensed system operates as a
partner with the state and federal regulatory communities and serves
the interests of consumer protection, I would ask you to follow a
bottle as it flows through that licensed and accountable system.
A supplier must obtain approval for the label from the Alcohol and
Tobacco Tax and Trade Bureau (TTB) to ensure that it contains truthful
and non-misleading information about the product's contents and that it
contains mandatory health warnings. That bottle must then be sold to a
state and federally licensed wholesaler who is responsible for
maintaining and filing detailed records of each bottle brought into the
state, pays the excise taxes due on the alcohol, and delivers the
alcohol to a state licensed retail establishment. The retailer is
responsible for paying over to the state the sales taxes generated by
each sale, and is directly responsible for ensuring that alcohol does
not fall into the hands of minors or other prohibited individuals.
Since both the wholesaler and the retailer must be licensed by the
state, they are fully accountable for any dereliction of their duties.
They are subject to on-site inspections, auditing and compliance
checks, and any violation can result in a loss of license, fines and
other potentially more severe penalties.
Wholesalers believe that the licensed system is our nation's
premier safeguard against underage access to alcohol. States created
this system and no court has every challenged the logic of this system
or a state's right to establish such regulations. As an industry, we
are not only committed to this system, but also to its philosophy. We
work diligently to uphold the letter and spirit of the stringent laws
of each state in which we do business.
Congress has recently recognized the need for legislative action to
support the safeguards and accountability mechanisms of the licensed
system. ``The 21st Amendment Enforcement Act,'' passed by the 106th
Congress and signed into law in 2000, provides state Attorneys General
with a powerful means by which to protect their citizens and prosecute
illegal direct shippers.
if you destroy the system, you destroy the safeguards--
However, the contributions of the wholesalers to the communities in
which they live and work go far beyond protecting the licensed system
of alcohol distribution. Our commitment as good corporate citizens is
also unwavering.
Last year, WSWA conducted the first-ever survey of our members'
broader contributions to their communities. We found that our members
donate more than $55 million a year to charitable causes throughout
this country. They include:
United Way, Boys and Girls Clubs of America, YMCA/YWCA, The Sober
Ride Project, D.A.R.E. (Drug Abuse Resistance Education), Ronald
McDonald House, MADD, Make a Wish Foundation, Project Graduation,
Center for Women and Families, Crusade for Children, Sky Ranch, Big
Brother Project, Camp Braveheart and many others.
Our members not only contribute to organizations that confront the
problems some people face with alcohol abuse and other risky behaviors,
but to other organizations that contribute to the greater good of us
all--artistic endeavors, environment enrichments and developmental
teachings that exemplify responsible behavior. These efforts promote
social connectedness and help dissuade inappropriate behavior such as
alcohol abuse and underage consumption. For example, the youth groups I
listed help disadvantaged kids make the right choices about drugs,
alcohol and risky behavior in general. You cannot overlook our
commitment to these organizations.
conclusion--
The proponents of direct shipping are posing a growing threat to a
time-tested system best suited to prevent underage alcohol access. Led
by a handful of oenophiles, powerful retailers and elite wineries--who
by the way got into the business fully aware that they were producing a
controlled product--advocates of unregulated alcohol sales--want to
dismantle the licensed system of safeguards and instead sell alcohol
with little or no real controls in place--creating a free-wheeling,
anything goes environment. These groups are suing in several states to
deregulate alcohol sales. And the issue is headed straight for the
Supreme Court. The bottom line issue that must be addressed is simply
this: Should leaders in local communities control how alcohol is
marketed and sold within their state, or will wineries and large
international alcohol conglomerates make that decision? We think local
communities should have more control, not less--and most Americans
agree. Besides, this issue is squarely addressed in the 21st Amendment,
which gives states that authority.
In conclusion, Mr. Chairman, we as wholesalers of wine and spirits
recognize--as did Judge Easterbrook--that our product is not cheese and
must be treated specially. We recognize alcohol's unique consideration
in our society and support--even defend--the regulation and control of
its distribution. We also believe that we are good partners to the
communities in which we live and work. As such, we are appreciative of
the opportunity to provide testimony at this hearing and would hope
that the Chairman will continue to consider Wine and Spirits
Wholesalers of America a resource as you work to prevent underage
consumption and access to alcohol.
Thank you again for this opportunity to provide testimony today for
this important hearing.
Mr. Stearns. Thank you.
Mr. Sloane, for your opening statement.
STATEMENT OF DAVID P. SLOANE
Mr. Sloane. Thank you, Mr. Chairman, members of the
subcommittee.
My name is David Sloane; and I am President of WineAmerica,
a national trade association representing more than 700
wineries in 48 States. The vast majority of our members are
small family owned and operated farms, producing less than
10,000 cases of wine per year.
Thank you for convening this important hearing on barriers
to on-line wine sales. I very much appreciate the opportunity
to discuss the market access problems of small wineries and the
important contribution the FTC has made to the debate
surrounding this issue. Before doing so, however, I would just
like to clarify what this debate is really about.
Sometimes things are not quite as they appear, and folks in
Washington usually have a finer appreciation for that than
most. This debate is not really about tax evasion. This debate
is not really about underage access. This debate is not really
about elite wine geeks deregulating alcohol or dismantling the
three-tier system, and this debate is most decidedly not about
a public galvanized against direct shipment. This debate, as a
very wise poet once said, is all about the money, honey.
The facts are simple. We have a mandatory three-tier system
of distribution for alcohol that began with the repeal of
prohibition. To ensure an orderly marketplace in the collection
of applicable taxes, this system made wholesalers the funnel
through which all beverage alcohol must go in order to reach
the consumer. When the market had fewer brands and Americans
had not yet developed a taste for wine, this market worked
well. For the top 100 wineries with the powerhouse brands, the
production capacity and the financial wherewithal, this system
still works reasonably well today. However, it does not work
well for the 2,900 other wineries in this country which do not
have the brand clout or production capacity to be viable
players in the three-tier system.
It is not that wholesalers have anything against small
wineries. They are in this business to make money, and the
volume brands are where the big money is to be made. What is
more, given the plethora of successful brands in today's
market, particularly with respect to wine, wholesalers are no
longer in the business of building brands. Even the largest
wineries have difficulty launching new brands.
When small wineries do end up working with large
wholesalers, as does occasionally happen, these relationships
are rarely satisfying or enduring. The typical refrain from the
unhappy vintner is, they parked my wine in the warehouse and
forgot about it and now that I want out, I can't get my wine or
my money back. So without a willing wholesaler or a
distribution system they can afford, the 2,900 other mostly
smaller wineries are effectively locked out of the commercial
mainstream, with few avenues for reaching consumers that lie
much beyond the borders of their own States.
To solve this problem and since dozens of States have
already permitted local wineries to ship wine to consumers on
an intrastate business basis, wineries began in the 1980's to
advocate interstate direct shipment legislation. As a result of
this effort, a number of States enacted laws permitting
wineries in one State to ship to consumers in another State,
provided those rights were extended on a reciprocal basis.
Despite the fact that wholesalers had no interest in
representing small wineries, they saw these laws as a threat to
their control over the flow of alcohol and fought back by
passing laws making the interstate shipment of wine a felony or
the delivery of wine to a consumer by common carrier a
misdemeanor.
Today, notwithstanding strong wholesaler opposition, 26
States in the District of Columbia governing roughly 52 percent
of the population now permit the limited interstate shipment of
wine to consumers. Forty States representing 87 percent of the
population permit local wineries to ship to consumers on an
intrastate basis, something wholesalers have never lost much
sleep over despite their professed concern about the dangers
posed to underage access by any form of direct shipment.
As you know, wineries and consumers have now turned to the
courts to help settle the question of where the powers under
the 21st amendment begin and end for States. The approach taken
in this litigation is as follows: Out-of-State wineries and
consumers bring suit against a State that bans interstate
direct shipments but permits local wineries to ship within the
State, arguing that such discrimination is a violation of the
dormant commerce clause that cannot be saved by the 21st
amendment.
Of the four appellate decisions handed down thus far, the
courts have ruled in our favor with only one exception in the
Seventh Circuit. Had an injured winery been a party to that
case, as the court conceded in its opinion, the outcome would
have been very different.
In addition, the Second Circuit in New York is expected to
render a decision within the next few months, which we also
hope to win. As such, at least for the moment, without any
significant disagreement among the circuits, this issue is not
yet ripe for Supreme Court review. Nonetheless, we are quite
satisfied with the results of the litigation, which has also
proven a useful lever in getting States to enact legislation
extending direct shipment rights to out-of-State wineries.
Thus far in 2003, three States--Virginia, North Carolina
and South Carolina--have adopted laws opening their borders to
the direct shipment of wine. In addition, the Fifth Circuit
Court of Appeals has declared unconstitutional the Texas ban on
interstate shipments, thus opening that State to direct
shipments from out-of State wineries.
Interestingly, these appellate court decisions read like
the FTC report in many respects, which found that there are
less restrictive means for meeting State regulatory obligations
than outright bans on the interstate shipment of wine. For
example, in handing down its ruling, the Michigan court said,
``the proper inquiry is whether the three-tier system advances
a legitimate local purpose that could not be adequately served
by reasonable nondiscriminatory alternatives. We find no
evidence on this record that it does.''
Turning specifically to the FTC report, I was pleased to be
a participant in the agency's workshop on wine and believe this
report has done much to inform this debate, particularly for
policymakers trying to sort through all the claims and
counterclaims that have developed over the years. Importantly,
the agency concludes that consumers will benefit from direct
shipment by having more choices and lower prices and that the
underage and tax concerns are not sufficient to warrant State
prohibitions on interstate wine shipments. Indeed, in
conducting interviews with State regulators, the agency found
States reporting few, if any, significant problems with respect
to either concern. They base this decision on the fact that a
number of States have passed laws requiring out-of-State
wineries to obtain permits, report sales activity and pay
taxes, just like their in-State counterparts. WineAmerica
strongly favors this type of legislation.
While there is much hard work ahead, I have every reason to
be optimistic that more States will enact permanent laws in the
near future and that the FTC report will factor prominently in
those legislative debates. Moreover, these issues will in no
way disturb but rather augment the current three-tier system by
providing a more functional mechanism for smaller producers.
Notwithstanding the tensions surrounding this evolutionary
process, wholesalers can rest assured that they will remain the
primary conduit for the distribution of beverage alcohol in
this country and that direct shipment will only be a very small
piece of that pie.
In closing, I do not believe that Federal legislation to
eliminate State barriers to on-line wine sales is necessary at
this time. However, this committee should give consideration of
legislation making clear to the courts and to the States that
commerce, particularly E-commerce, should not be impeded absent
compelling policy reasons and when there is no less disruptive
alternative. Otherwise, States will continue to erect such
barriers, disregarding the commerce clause and significantly
diminishing the promise of the Internet.
Thank you very much.
[The prepared statement of David P. Sloane follows:]
Prepared Statement of David P. Sloane, President, WineAmerica
Good morning, I am David Sloane, President of WineAmerica (formerly
the American Vintners Association), the national association for
America's wineries, with over 700 members in 48 states. The vast
majority of our members are small family owned and operated farm
enterprises, producing less than 10,000 cases of wine per year.
I wish to commend and thank the Subcommittee for holding this
important hearing to examine state barriers to the interstate shipment
of wine, and whether such barriers serve rational policy purposes, or
amount to economic protectionism. My statement will provide the
Subcommittee with the following information:
Background on the burgeoning small craft winery movement;
Marketing realities for small wineries;
Thoughts on the Federal Trade Commission (FTC) Report on Wine
Update on litigation and state legislative efforts;
Recommendations for Congress.
the burgeoning u.s. winery movement
The number of wineries in the U.S. has expanded dramatically in the
last quarter century, rising from some 600 in 1975 to over 3,000 in
2002--an increase of more than 400 percent. Since 1990 alone, the
industry has more than doubled from 1,400 wineries to its current
number of over 3,000. In addition, local wineries now exist in all 50
states, a development that Thomas Jefferson, a visionary of America's
wine producing potential, could not have predicted.
California is the premier winegrowing state comprising roughly half
the nation's wineries and over 90 percent of the production. There are
also high concentrations of wineries (in rank order), in Washington,
Oregon, New York, Ohio, Virginia, Pennsylvania, Texas, Missouri,
Colorado, New Mexico, Illinois and Michigan. All these states have at
least 30 wineries, and the top three--Washington, Oregon and New York--
have more than 150 each.
Wineries and vineyards comprise one of the fastest growing sectors
of American agriculture, and have become a major force for economic
development and rural stability. The vast majority of American wineries
are small, family owned businesses, which invest heavily in vineyard
and winery development. Indeed, behind every bottle of wine sold at a
winery is an investment of almost $50 in land, development, equipment
and working capital. In addition to bringing capital investment to
rural communities, wineries are also an important source of stable,
mostly year round employment, and are a magnet for tourism. Wineries
also promote crop diversification and farmland protection--two
additional elements that are critical to the stability of rural
communities.
Virtually all wineries have on-site retail operations to receive
visitors. Through their ``tasting rooms,'' craft wineries expose a wide
and diverse population to their products. Many visitors seek to
continue that relationship even though they may reside in other states.
Similarly, because America has a very mobile population, many customers
who have discovered and developed relationships with particular
wineries while living in one state want to continue purchasing those
wines after moving to another state.
Most states have recognized the tourism-generating potential of
wineries by featuring them in their tourism publications. Almost a
dozen states now have wine regions that are major tourist attractions,
welcoming between 50,000 and 700,000 visitors per year from almost all
states. This tourism also helps other agricultural enterprises and
rural communities to gain visitors and customers. Where wineries have
become concentrated--in Eastern Washington, Oregon's Willamette Valley,
the Finger Lakes in New York, Michigan's Leelanau Peninsula, Grand
Junction in Colorado, and the Blue Ridge foothills in Virginia--
economic prospects have greatly improved. This trend is now spreading
to a much broader range of geographic regions, including the hill
country of Texas, Iowa, Missouri, southeast Pennsylvania, and many
other parts of the country.
Wineries have a unique capacity to generate sales through direct
contact with customers. Out-of-state visitors, wine club members,
preferred customer groups, national media exposures, and other
opportunities create a pool of qualified customers who know the product
they want and can initiate the purchase directly from the winery.
Advantages of such marketing include a much more limited need for
dispersed inventory, and much better alignment of product with actual
sales.
However, because of restrictive laws in many states, it is
impossible for wineries to fulfill orders from consumers who reside in
states that do not allow the direct shipment of wine. In addition to
the negative public relations implications of not being able to fulfill
all customers orders, the lost sales opportunities isolate and limit
the geographical marketing reach of wineries, diminish their revenues
and undercut their potential for growth.
marketing realities for small wineries
While America's wineries are an exemplar of the country's
entrepreneurial and craft spirit, they are also, unfortunately,
``poster children'' for the problem of state impediments to e-commerce.
Under the guise of ``protecting citizens against the evils of alcohol''
more than half of the states--including big states like New York, Texas
and Florida--have effectively shut all but the top 100 wineries out of
their markets by prohibiting direct sales to consumers from out-of-
state wineries, and by requiring out-of-state wineries to market their
products exclusively through the so-called ``mandatory three-tier
system of distribution.'' Under the three-tier system--broadly adopted
by the states following the repeal of Prohibition--out-of-state
wineries are only permitted to sell their products to licensed in-state
wholesalers, who in turn sell to licensed in-state retailers (both on
and off-premise) who then sell to consumers.
Herein lies the conundrum for small wineries: the three-tier system
is simply not a viable method for distributing their products. Indeed,
with the exception of the highly branded products of the 100 largest
wineries, most wine is ``hand sold.'' Advertising, or mass brand
identification, is unheard of in this market. Instead, such wine is
sold through the knowledge and recommendation of members of the wine
trade in direct, one-to-one contact with the person who is going to
purchase and consume the wine. This fact illustrates, in a dramatic
way, the limited influence of wholesalers on the marketing of wine.
Their sales personnel never come directly in contact with the ultimate
customer. At best, they help fulfill a sale made by a winery, retailer
or restaurateur to a customer; at worst, they actually impede a sale by
adding a layer of bureaucracy and unnecessary cost to the process.
As such, outside of their own immediate markets, small wineries
simply do not have the volume, brand clout or financial wherewithal to
secure wholesaler representation--and wholesalers are not inclined, as
a rule, to work with small wineries. However, when small wineries do
enter into relationships with wholesalers in other states, these
arrangements rarely last long or end happily. Indeed, the most common
complaint we hear is: ``The wholesaler never expended any effort to
sell my wine, and when I wanted out, I was unable to recover my
inventory, or get paid by the wholesaler for my wine.''
Like other small companies that specialize in marketing limited
quantities of unique products with limited but more than adequate
demand, small wineries must rely on remote sales to be profitable--
either through catalogs, newsletters or increasingly the Internet. It
is clearly impractical to convince retail stores with very limited
shelf space to make that precious space available to the small winery,
which might sell less than a case per year.
Yet if direct shipment were allowed on a nationwide basis, a winery
could market 10,000 cases (70 percent of America's wineries produce
less than 10,000 cases per year) without too much difficulty. Coupled
with tasting room sales, which typically account for 50 percent or more
of a winery's receipts, this could make the difference between mere
survival and profitability for most small wineries. As such, opening up
a national market for the remote sale of wine is of vital interest to
our members.
the federal trade commission report
The FTC is to be commended for its report, ``Possible Anti-
Competitive Barriers to E-Commerce: Wine,'' issued this past July. This
report explores the benefits to consumers of online wine sales, and the
public policy issues surrounding the direct shipment issue. WineAmerica
was pleased to be a participant in the workshop series convened last
October by the FTC to examine state barriers to e-commerce for many
different products.
The report also examines in considerable detail the most commonly
cited reasons for prohibiting the direct shipment of wine to consumers
from out-of-state wineries--underage access and tax evasion--and
concludes that they are not sufficient to justify prohibitions on the
interstate shipment of wine. Importantly, the FTC suggests that
barriers to trade should only be acceptable when there are no less
restrictive means for meeting public policy goals--a policy that this
Subcommittee may find useful in developing any generic legislation to
discourage unnecessary barriers to e-commerce. The report states,
``Without a showing of likely harm, restraining competition in a way
that is likely to hurt consumers by raising prices and eliminating
their ability to choose among competing providers is unwarranted.''
To quote from the report's summary: ``. . . consumers could reap
significant benefits if they had the option of purchasing wine online
from out-of-state sources and having it shipped directly to them.
Consumers could save money, choose from a much greater variety of
wines, and enjoy the convenience of home delivery . . . [M]any states
appear to have found means of satisfying their tax and other regulatory
goals that are less restrictive than an outright ban. These states
generally report few or no problems with shipments to minors or with
tax collection.''
Underage Concerns
The FTC report examines whether allowing the direct shipment of
wine would significantly exacerbate the problem of underage drinking.
Their findings are instructive. Commission staff contacted officials
from states that allow the interstate shipment of wine to their
citizens. The agency concluded that there were ``few, if any, problems
with interstate shipment of wines to minors . . . [N]one of them report
more than isolated instances of minors buying or even attempting to buy
wine online.''
The ``laboratory of the states'' has more than adequately
demonstrated that direct shipment of wine can be accomplished without
unacceptable risks. California, the nation's most populous state, has
allowed the intrastate shipment of wine for 50 years and the interstate
shipment of wine for more than 35 years. In 1999, Manuel Espinoza, then
Chief Deputy Director for the Department of Alcoholic Beverage Control,
wrote to Congressmen Mike Thompson and George Radanovich, stating that
``California has permitted direct wine shipments [from sources outside
of California] to consumers since 1963 . . . 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.''
He also said, ``we have . . . experienced no enforcement problems or
impediments to our ability to enforce laws relating to sales to minors
as a result of [remote sales of wine or other alcohol beverages].''
At this time, 40 states--covering approximately 87 percent of the
nation's population--permit consumers to order and have shipped to
their homes wine from in-state wineries. In addition, despite
extraordinary pressure from wholesalers to erect or maintain
protectionist barriers to out-of-state wines, 26 states and the
District of Columbia--representing 52 percent of the population--permit
the direct shipment of wine from out-of-state sources. This number is
actually somewhat higher because a recent Federal statute [P.L. 107-
273] permits wineries to ship to a purchaser's home that amount of wine
the consumer could have lawfully carried back to his/her state so long
as the consumer makes the purchase while visiting the winery.
All of this state action begs the question: ``If direct shipment
posed such an enormous risk of underage access, why have so many states
enacted laws to permit it?''
Tax Concerns
The FTC also examined in some detail the question of tax collection
and the potential for evasion. Here it reached the same conclusion it
did with respect to underage access, indicating from its survey work
that states permitting direct shipment report few if any tax collection
problems. The Commission also suggested that, by choosing to license
out-of-state wineries that are engaged in the direct shipment of wine
to consumers and requiring the payment of taxes, states could reduce
the potential for tax evasion.
At the state level, wine is subject both to an excise tax based on
gallonage, and to sales/use taxes based on a percentage of the value of
the product, as would be applicable to any other consumer product. Much
has been made about potential revenue losses that might arise from the
interstate shipment of wine to consumers. Careful analysis suggests
that these arguments are grossly overstated.
The average state excise tax on table wine is about $0.65 per
gallon, so each bottle is subject to an excise tax obligation of just
over thirteen cents. WineAmerica estimates that the maximum potential
for out-of-state direct shipment of wine is 0.5 percent of the total
U.S. table wine market of about 500 million gallons. Even if states did
not collect a single penny of excise taxes from these sales, the total
revenue loss from excise taxes would be approximately $1.6 million!
Some perspective on potential revenue losses associated with sales/
use taxes is also helpful. As this Committee is fully aware, remote
commerce in general poses serious tax collection problems for the
states. A national study estimates that states lost approximately $16.4
billion in uncollected sales and use taxes in 2001 on remote sales of
all types of goods (Donald Bruce & William F. Fox: State and Local
Sales Tax Revenue Losses from E-Commerce: Updated Estimates, Center for
Business and Economic Research, University of Tennessee, 2001).
Wine is a tiny portion of this potential loss. Using the
WineAmerica estimate of interstate shipment potential at 0.5 percent of
total wine market, and valuing the wine shipped at an average of $20
per bottle, the annual sales/use tax obligation engendered by
interstate wine shipments ($250 million in sales) would amount to about
$16 million (using an average sales tax of 6.5 percent), or 0.12
percent of the projected loss in sales/use taxes the states could
incur.
However, as the FTC pointed out in its report, there is no need for
states to lose any revenue because of the interstate direct shipment of
wine. Several states--including Georgia, Louisiana, Nebraska, Nevada,
New Hampshire, North Dakota, Wyoming and in 2003 Virginia, South
Carolina and North Carolina--have chosen to establish a system for a
wine shipper's permit where all taxes, including excise and sales
taxes, are collected by the shipping winery, and are remitted to the
states based upon those sales.
Another way to recapture virtually all of the potential lost
revenue would be for Congress to solve the global problem of
uncollected use taxes by requiring businesses to collect and remit
those taxes as is currently recommended by the National Governors
Association.
For the Subcommittee's information, WineAmerica endorses a model
direct shipment bill which includes provisions for a shipper's permit,
reporting requirements and collection of both excise and sales/use
taxes. The bill also provides that all wine be shipped in packaging
that is clearly marked: ``CONTAINS ALCOHOL: SIGNATURE OF PERSON AGE 21
OR OLDER REQUIRED FOR DELIVERY.''
So-called ``shipper permit'' bills provide a workable mechanism for
the collection of both excise and use taxes from interstate wine
shipments. This approach, now law in ten states, requires all shippers
to be licensed by both the state where the shipment originates and the
state where the consumer receives the wine, thus providing both nexus
and enforceability.
litigation and state legislative action
The appellate courts considering direct shipment litigation, like
the FTC, have concluded that there are less restrictive mechanisms for
states to meet their regulatory goals than outright bans on the
interstate direct shipment of wine. The courts have pointed the way for
proper analysis by indicating that the public policy concerns of the
states can be met by less restrictive means than banning direct
shipment, especially when in-state wineries are allowed to ship
directly to their customers.
To date, the 4th (VA & NC), 5th (TX), 6th (MI), and 11th (FL,
though still seeking more details on the tax issue) Circuits have ruled
that this type of discrimination--permitting in-state wineries to ship
wine to consumers while prohibiting out-of-state wineries from doing
the same--in unconstitutional. The 2nd Circuit (NY) heard oral
arguments in early September and a ruling is expected soon from that
jurisdiction. The 6th Circuit, ruling that Michigan's prohibition on
interstate direct shipment was unconstitutional stated, ``The proper
inquiry . . . is whether (the three-tier system) `advances a legitimate
local purpose that cannot be adequately served by reasonable
nondiscriminatory alternatives.' We find no evidence on this record
that it does.''
Thus far in 2003, three states--Virginia, North Carolina and South
Carolina--have adopted permit laws opening their borders to the direct
shipment of wine. In addition, the 5th Circuit Court of Appeals has
declared the Texas law restricting shipments from out-of-state wineries
unconstitutional, and wineries may now ship to consumers in Texas.
recommendations for congress
While we do not recommend that Congress take any specific
legislative action at this time to reduce barriers to online wine
sales, given the importance and potential of the Internet, we do,
however, recommend that Congress consider developing legislation to
provide more generalized guidance to the states and courts in this
area.
Specifically, Congress could indicate that commerce--especially e-
commerce--should be allowed in the absence of good, sufficient reasons
to erect barriers, and when there is no alternative and less disruptive
mechanism. The alternative--that of allowing states to erect barriers
without regard to the Commerce Clause--will forever limit the potential
of the Internet. The FTC found that reasonable and minimally
restrictive means of protecting the public policy goals, such as
requiring an adult signature at the point of delivery and requiring
out-of-state suppliers to obtain a permit, are effective and states
that have experience with these approaches report few, or no problems.
The U.S. Supreme Court captured the dilemma faced by America's
wineries: ``Our system, fostered by the Commerce Clause, is that every
farmer and every craftsman shall be encouraged to produce by the
certainty that he will have free access to every market in the Nation .
. . Likewise, every consumer may look to the free competition from
every producing area in the Nation to protect him from exploitation by
any. Such was the vision of the Founders; such has been the doctrine of
this Court which has given it reality.'' H.P. Hood & Sons, Inc. v. Du
Mond, 336 U.S. 525, 539 (1949).
Our member wineries are both farmers and craftsmen!
Mr. Stearns. I thank the gentleman.
I will start with my questions, and I think most members,
when there is not a pressing issue in our congressional agenda,
we come to this I think with really not a preconceived notion.
If you are of one political persuasion, you are in favor of
competition, lower prices, and choice. Perhaps if you are
coming from another political persuasion, you are concerned
about consumer safety and you are concerned about the children.
So, hearing both sides, I think when I come down to try to
understand it, I say, is there an actual situation where it is
working; and, if so, would that be the norm? As I understand,
Ms. Duggan there are 40 States that allow intrastate purchase
of wine; is that true?
Ms. Duggan. There are--that is correct.
Mr. Stearns. Just approximately.
Ms. Duggan. Approximately, yes.
Mr. Stearns. So that means if I am in Ocala and I go on the
interstate and I want to buy wine from Orlando, I could do that
in the State of Florida.
Ms. Duggan. I believe so.
Mr. Stearns. Okay. So the wine comes up from Orlando, and I
have a teenager, and the system is all worked out. Yet in my
State I could not buy this same wine from California. That
seems to me a little illogical. If I can do it in Orlando, why
can't I do it from Napa Valley?
So I just say that as an example where it seems to be
working. So that is intrastate commerce.
Now let us move to interstate commerce. If I am in New
Hampshire and I want to buy wine from California, Napa Valley,
I can do it through the interstate. So somehow New Hampshire
and, in fact, 26 States allow the interstate commerce; is that
correct?
Ms. Duggan. Yes. There are some with reciprocity laws, and
there are some with limited direct shipping.
Mr. Stearns. The State of Washington? The State of Oregon?
Ms. Duggan. Some that have what we call a personal
importation law, but they are all minor exceptions to what is
the regulated license system. There isn't any State that has
completely unregulated alcohol sales at this point.
Mr. Stearns. But what I am trying to understand is, is this
something that cannot work and yet it is working intrastate in
40 States and it is working in 26 States interstate? So my
question is, if it is working, all these concerns that you have
don't seem to be a problem, for example, in New Hampshire,
which has been doing it for some time and they have got a
system that seems to be working well. Even in your own opening
statement you reported that almost 70 percent of high school
seniors have purchased alcohol face to face.
So the predominant problem is not through the Internet, but
it is through this distribution where we don't have the premium
safeguard to protect our teenagers from underage drinking, and
that is the teenager, my son and the teenager walking down the
street and doing a fake ID. That is almost 70 percent of the
problem. So this whole problem on the Internet is a very small
part.
So I just submit that as a person who is trying to
understand if this is possible, that this is a very serious
problem, to stop it; and it appears that 40 States are doing it
intrastate and 26 are doing it interstate, that it seems to be
working with some safeguards. So your job is to convince me
that it is not, that those 40 States are wrong and the 26 are
wrong.
Ms. Duggan. I think I can answer for you what we consider
to be the distinction there. In the intrastate situation that
you just described, the person who is selling that and
delivering that is licensed and authorized by the State to do
so, and they are under local law enforcement control. So when
and if they do something that violates Florida law, for
instance, they are under local control and that law enforcement
and those courts have jurisdiction over that individual. They
can take his license away, they can put penalties. When it
happens from California or Washington or from whatever other
State into Florida, the State of Florida has no jurisdiction
over that remote seller. So they have no way of enforcing their
laws.
So there is a huge difference between buying and selling
between people who are privileged by the State and have a
license to do so and then interstate shipments that are coming
in violation of that law by people who are not licensed. So
from our perspective that is a very important point.
And you raised a very important point about the teenage
access. Our point is that we have enough problems right now
with face-to-face transactions. And face-to-face transactions,
in our view, are really the only way to prevent teen-age
access.
Mr. Stearns. So if--you are saying if they have face-to-
face problems, why should we contribute--even though it might
be a small amount, we should not risk it further.
Ms. Duggan. It is a small amount, but it is growing. We
know what the Internet usage is among those populations, and we
know what the teen-age drinking incidence is among that
population, and from our perspective there is absolutely no way
to control that. The best way to do it is by people who are
licensed by the State in that State and are under local law
enforcement.
Mr. Stearns. I am just going to close. Mr. Zywicki, you
might want to comment on what she said or anything that I
commented on.
Mr. Zywicki. With respect to those particular issues, we
address this in some detail in the report. Again, one of the
main reasons why we did this report is simply because there is
such a vacuum of facts about how exactly these systems work and
what we should be concerned about and that sort of thing; and
we certainly agree and are concerned about access by minors to
alcohol through traditional bricks and mortar liquor stores.
What we conclude in the report, though, is that it is
unclear whether or not the problem would be better or worse as
a result of Internet shipment. Face to face is one way of doing
it, but there are a number of safeguards built into the
Internet shipping system, including verification at the time of
order, verification at the time of delivery, for instance, that
raise particular issues on the other side of the equation. So
we conclude that it is ambiguous how it would wash out.
Mr. Sloane. Could I respond to that, by chance?
Mr. Stearns. Sure.
Mr. Sloane. I would like to say this. First of all, we are
not talking about deregulating the system. The laws that are
passing today are permanent laws that actually require the
issuance of a permit from, to and out of State winery; and
States do work cooperatively together to bring enforcement
actions from time to time.
I would mention a few other things. The U.S. Congress just
a few years ago passed something called the 21st Amendment
Enforcement Act--how could I have forgotten--which provides new
authorities to States to go into Federal court to get
injunctions to stop out-of-State shippers who break laws on
that. And, by the way, nobody has pulled the trigger on that so
far, which I find kind of interesting.
Then, finally, the Department of Treasury itself, the ATF,
has suggested in a circular that they are more than happy to
cooperate with States in taking away a Federal basic permit of
a winery that violates laws like that. So I think there are
actually many, many safeguards in place.
Ms. Duggan. This is the evidence right here.
Mr. Stearns. My time has expired.
Ms. Schakowsky.
Ms. Schakowsky. As I said in my opening remarks, I think
that the panel, as important as the interests that are
represented here, is incomplete because we don't have people
who represent the public health sector or even State
regulators. But listening to the various economic interests,
Ms. Duggan, I would have thought at first you were from Moms
Against Drunk Driving----
Ms. Duggan. I am a Mother Against Drunk Driving.
Ms. Schakowsky. I understand, but I thought you were
representing that organization, and it took a while, in fact,
never quite got to what is the economic interests. Surely you
are representing the economic interest here today?
Ms. Duggan. Yes, ma'am.
Ms. Schakowsky. And, Mr. Sloane, it is all about the money,
honey. In fact, there is a public policy goal. It is true that
the money interest may end up being the decisive players in
what we do here in Congress, but the fact is there are public
policy goals here that involve underage drinkers and taxes and
those kinds of things that do need to be considered. So it is
not simply about Sloane versus Duggan or--you know, we do need
to factor in these other things and----
Mr. Sloane. I think the Federal Trade Commission did that.
Ms. Schakowsky. I understand that. But it is not just about
the money, honey. We do have to consider these other things.
I do want to tell you, though, in Illinois we had a
situation--because, Ms. Duggan, you talked about competition--
where one of the most uncompetitive pieces of legislation was
passed by distributors, by alcohol distributors, where they
were given these territories where a retailer had to actually
give notification. It was hard to even get out of the contract.
And, Mr. Sloane, you talked about a markup that wholesalers
take, how much money it costs. I am wondering if--from your
points of view, what are the economics here?
Let me begin with you, Mr. Sloane, talking about where do,
in your view, the wholesalers fit into this and the economic
benefit. If you could again talk about that to the----
Mr. Sloane. Wholesalers play a crucial role and are the
ones who source probably, you know, 99.5 percent of the product
in the United States today, and I--you know, we can make an
argument about wholesaler consolidation, for example, but there
is still a large number of wholesalers in the United States. I
don't personally place a great deal of stake in that issue.
But what I would say to you is that the problem is if you
are a small winery--and I realize that we can say it is alcohol
and all of that, but if you are a small winery it is not
unlike, other than the fact that it is alcohol, of being a
small sort of artisanal food company, except they have got the
burden of the 21st amendment. The problem is that when you want
to be able to sell your product, typically if you want to be
able to reach beyond your own State and to actually get into
interstate commerce--and keep in mind that most of these
wineries operate tasting rooms and they are a big source of
tourism and that is really one of the main parts of this whole
program for them--when people come in and establish
relationships with them, they want to be able to continue
selling to those customers who may or may not live in that
State, unable to really get into the commercial three-tier
system by not having enough volume, by not really having a
recognized brand and all of those things. They are not able to
participate in that market, and that is what this fight is
really all about.
Ms. Schakowsky. Ms. Duggan, the example that Mr. Thompson
raised, where if I go to one of these wineries I can't even
have something shipped to me--but let us say I go home and I
think that was the best wine I ever had and I want to go on-
line and have it shipped to me. What is the harm of that?
Ms. Duggan. Well, it depends on what State you live in.
There are some States that would allow that, and our point is
that the 21st amendment gives a State the right to decide and
to choose whether or not that is the right thing for that
State. Some of them have adopted reciprocity laws that allow
you to do that. Some have adopted some limited direct shipping
laws. Some have personal importation laws. So it really depends
on where you are.
Ms. Schakowsky. Can I ask you, does your association lobby
against those laws in States or are you there supporting those
laws?
Ms. Duggan. We have not lobbied--my organization does not
lobby on State legislation, period. There are individual State
associations that do that on behalf of the wholesaler, and they
make those local decisions, but our viewpoint----
Ms. Schakowsky. Do you know of any situation where
wholesalers have lobbied in favor of State laws that would
allow----
Ms. Duggan. Yes. In fact, in Georgia and in Virginia recent
direct shipping laws were promoted and written by the
wholesalers and were supported and they are law now. They are,
we think, very responsible kinds of direct shipping laws
because they require licenses and taxes are paid and they go
through a license system, but they are direct shipping laws.
Some of the issues that you asked Mr. Sloane about, the
economics I would like to address. One of the problems you have
in the wine industry right now is that there is a huge
worldwide glut of wine on the market. All you have to do is
look at any California newspaper at any given time and read the
gloom and doom stories because there is--every year the
California wine grape harvest is growing by something like 10
percent. Something like 100,000 additional acres have been
planted in the last 4 to 5 years.
So there is just a huge amount of wine that keeps coming
into the market and exports as well and as imports. There
simply is too much wine.
I would like to quote the former head of the National
Conference of State Liquor Administrators who said there is too
much wine on the market and when there is too much wine on the
market you can't sell all that wine and the easiest thing to do
is to attack the system. So that is a very serious problem.
With regard to the establish a brand, the comments that Mr.
Sloane made don't really coincide with what you have seen with
some of the remarkable success stories of former wines.
Look at a brand like Yellow Tail, which was introduced 1
day, and the next day it was one of the hottest brands in
America.
It is possible to establish a brand from a small remote
place and it happens all the time, but there is too much wine
on the market right now.
Mr. Stearns. The gentlelady's time has expired.
The gentleman from Illinois, Mr. Shimkus.
Mr. Shimkus. Thank you, Mr. Chairman.
I am kind of caught in the middle here with these
microphones.
Let me just begin with--I really love the Constitution, and
we do not get a chance to pull it out every now and then, deal
with it, and I am not a constitutional scholar or a lawyer, but
basically the 21st amendment repealed the 18th, which was
prohibition, and then it put in a requirement for, in essence,
State control of the sale of intoxicating liquors, so that the
legal debate here is whether the interstate commerce clause
trumps the 21st amendment, is that correct, as we see it?
Ms. Duggan. Generally speaking, yes, sir.
Mr. Stearns. Mr. Zywicki?
Mr. Zywicki. Generally, yes.
The pivotal question has been whether it trumps the
discrimination provision, which is to say that what has been
tested is the distinction between intrastate and interstate, as
opposed to sort of treating them equally.
Mr. Shimkus. And, Mr. Sloane, I think in your opening
statement you mentioned lower Federal court rulings that, in
essence, have upheld the fact that interstate commerce trumps
the 21st amendment.
Mr. Sloane. Certainly needs to be considered.
Mr. Shimkus. And of course it hasn't gone to the highest
court yet, but boiling it down as far as a constitutional
debate, that is kind of where we are at; is that correct?
Mr. Sloane. That is correct.
Mr. Shimkus. Thanks.
Mr. Sloane, would WineAmerica object to the safeguards
suggested in the FTC to protect against the dangers of
teenagers buying wine online?
Mr. Sloane. Absolutely not.
Mr. Shimkus. Okay, thank you.
Mr. Zywicki, in your view, is there a poster child-like
State that has in place less restrictive but effective
regulation of direct interstate shipment of wine in place?
Mr. Zywicki. A number of places have a number of good
provisions, but studying New Hampshire, they were the ones that
were mentioned in a number of different contexts as having a
well-conceived system.
Mr. Shimkus. And, Ms. Duggan, has your organization
expressed concern with States that permit direct intrastate
wine shipments, as both interstate and intrastate direct
deliveries pose the same courier delivery problems that you
have testified?
Ms. Duggan. Yes, sir.
In a number of States, there were times when we were
actually trying to repeal those intra state exemptions. We see
no reason why there should be a distinction.
Our viewpoint is that there shouldn't be very much direct
shipment at all because it departs from the face-to-face
transaction. It is very difficult to control, very difficult to
track. People do not report their illegal behavior. It is
unfortunate.
Mr. Shimkus. Thank you, Mr. Chairman.
I yield back my time.
Mr. Stearns. I thank the gentleman.
We have three votes on the floor, so I think what we will
do is take a recess and come back after the three votes, and I
urge all members to come back.
With that, the subcommittee will take a recess.
[Brief recess.]
Mr. Stearns. The subcommittee will come to order again.
We will continue our questions for the witnesses and we
thank them for their patience and forbearance here as we had
our three votes, and with that, the gentleman from California,
Mr. Radanovich.
Mr. Radanovich. Thank you very much, Mr. Chairman.
I want to thank, again, the panel and the committee for
being here today.
There has been a lot of comment about what this is about
and what it is not, and I am happy to contribute my opinion
about what I think this is about and what it is not.
I would have to say I think it is about 5 percent for the
kids and about 95 percent for the money, honey, because there
is a legitimate issue regarding underage sales to children
under the age of 18, but I think that what this report does
today is does identify it as an issue and a manageable one, as
proven by practices in interstate trade and also our shipments
and where it is allowed to occur, I think, quite naturally.
This is about money, and it is about market share, and that
is okay. You know, I think that that is just fine, and rather
than--I think, hopefully, this hearing will help this clear
out, the issue of underage drinking and the direct shipment
issue and market protection, so that maybe someday we can have
a real debate on the merits of the issue, and that is if direct
shipment were allowed to occur or more encouraged, what effect
would it have realistically on the wholesale, on the three-tier
system and wholesalers or retailers or distributors throughout
the United States?
I would like to see that debated here someday, rather than
from front issues that may have some legitimacy but are minor
and manageable and can be dealt with so that we someday can get
to the real issue.
I would like to ask Mr. Zywicki; is it?
Mr. Zywicki. Yes.
Mr. Radanovich. Radanovich is a tough one, too, so if I
don't get it right the first time, let me know. But did the
report address the excise issue, the tax loss issue, and the
controversy on that on interstate shipments?
Mr. Zywicki. Absolutely.
We discussed basically all the issues that were relevant to
this, and again I think it should be remembered that there has
been a real factual vacuum out there about all these things and
a lot of anecdotes and theories about these things and one of
the things we looked at was the tax issue, and again we
contacted officials of 10 States that allowed direct shipping,
and all of them reported that they have not had any problems
with tax collection issues, that there are a variety of
mechanisms that are set up through licensing and that sort of
thing that allows them to allow shippers to remit taxes back to
the State.
Mr. Radanovich. Right.
It has been mentioned that the FTC report was based on junk
science. Would you care to respond to that?
Mr. Zywicki. Sure. I obviously disagree with that
characterization. I think again this is without a doubt the
most comprehensive and detailed report that has ever been done
on this topic.
We are proud that the Bureau of Consumer Protection and the
staff of the Bureau of Consumer Protection, who are second to
none in their commitment on a number of the issues that we are
talking about here today, signed on to the report, along with
the rest of it. In addition I want to address the
characterization of the National Academy of Sciences study,
which to the best of my knowledge is the only thing that had
been out there prior to this, and I have it here, and we
discuss the National Academy of Sciences report in some detail
in our report at pages 37 and 38.
It cites the one paper, which is a paper by Fletcher, which
is this paper here, and it turns out this paper seems to have
nothing to do with Internet direct shipment. This is a paper by
academics that relates to local delivery of alcohol by grocery
and liquor stores, primarily focusing on keg parties by teenage
kids from a beer truck.
It is also interesting that the NAS report's conclusions
and recommendations in the end line up with ours. We do not
think that that study is very probative. In some sense I guess
if wine is not cheese then a keg of beer is not a bottle of
Merlot. We looked at that report, we considered it, and
weighted it accordingly, and so I think that through our
interviews with State officials, reading testimony, looking at
the scientific literature and that sort of thing, our report is
by far the most comprehensive study of this issue that has ever
been done.
Mr. Radanovich. Does your agency have a history of
producing, filing reports based on junk science?
Mr. Zywicki. We do not. We take our responsibilities very
seriously through the Bureau of Economics and the high
standards of the Federal Trade Commission.
Mr. Radanovich. In your view then is the issue of underage
drinking, as it is connected with direct shipments, manageable
in the areas where you observed that it is allowed by various
techniques?
Mr. Zywicki. Based on the experience of State officials who
we interviewed who allow direct shipping, our conclusion is
that it is manageable. They certainly believe that it is
manageable, and I think this is a very good example of where
State experimentation has really taught us a lot of lessons
about how to balance the goals of competition and consumer
choice with these legitimate State goals, but in a way that is
the least intrusive infringement on our competition.
Mr. Radanovich. Okay, thank you.
I would like to state for the record, too, that there isn't
anybody on the panel represented by Mothers Against Drunk
Driving or any anti-alcohol consumption for minors group here,
right?
We have those representing wineries in America and those
representing the wine wholesalers and distributors, and I would
like to ask you, Mr. Sloane: Using common sense, are teenagers
more likely to observe or obscure--are they more likely to buy
an obscure Oregon Pinot Noir online and wait a week to get it
or will they focus their efforts on purchasing beer in a retail
store immediately?
Mr. Sloane. I think the latter.
Mr. Radanovich. Your mike.
Mr. Sloane. I think the latter. I think it is clear from
even the NAS study, for example, that beer seems to be the
product of choice primarily for young people, and so I think
their presence would be there.
I also think, you know, one of the things you also have to
think about when you look at the question of regulation here,
and I think the FTC said it, is you have to decide what is the
threshold? How much effort are we going to put in to regulate
something based upon the level that it poses to the system, and
I think it was decided that it was manageable, State officials
had indicated it was manageable, so I think it is important to
note that just purely from a regulatory standpoint States can
satisfy their 21st amendment responsibilities in ways short of
banning the product, so--and the other thing to say, too, I
think, finally, is alcohol is so abundantly available locally
most kids are sort of more into instant gratification. Even if
they wanted to order a bottle of Pinot Noir they would probably
try to get it locally, I would think.
Mr. Stearns. The gentleman's time has expired.
Mr. Radanovich. I am sorry.
Mr. Stearns. That is okay.
The gentleman from New York.
Mr. Towns. Thank you, Mr. Chairman.
Mr. Sloane, do you believe that wine is alcohol?
Mr. Sloane. Absolutely.
Mr. Towns. If you believe it is alcohol, please describe
why small wineries are asking for special treatment under the
law as opposed to larger beer distributors and of course spirit
producers who are not allowed to ship alcohol directly to
consumers.
Mr. Sloane. Well, of course, the distributors are not
seeking to ship alcohol directly to consumers. We have a unique
situation, and, frankly--I mean, I understand the parallels
that people draw between other forms of alcohol and I realize
it is difficult to make distinctions, but if you look at the
history of alcohol controlled law in the United States, they
make all kinds of distinctions about different categories of
products.
I for one believe that it doesn't really make a lot of
sense to ship spirits and things like that via the Internet or
beer. I just do not think it has the same degree of--I realize
people are doing it, but I think you could easily create a
policy that would say, you know, it doesn't make sense to do
that and that there are other wines, for example, which the
problem that we face--and let me give you an example in New
York, in the State of New York.
If you look at the Finger Lakes, which New York is now one
of the fifth or sixth largest producer of wine in the United
States and just to give you an idea of what the distribution
problems are like, many of those wines from the Finger Lakes,
the only way you would really be able to get as a citizen in
the State of New York is to ship them by intrastate shipment
because they are not readily available in many retail
establishments, because it is just not a viable system for
small wineries to really participate, and I do not think it is
a question of special treatment. I think it is a question of
these folks cannot function.
In that system, people do. There is a market for these
products. It may not be the tidal wave that it is for large
mainstream commercial products, but I think there is a market
and I think the FTC has concluded that that market can be
served safely through direct shipment, so I do not think it is
a question of special treatment.
The flip side would be is it fair to create a situation
where a certain category of producers cannot really get access
or play a meaningful role in the commercial mainstream
marketplace?
I mean, I think it is kind of un-American almost.
Mr. Towns. Well, let me tell you what my real problem is. I
have concerns about making letter carriers and overnight
couriers responsible for checking IDs of people at their own
homes. Maybe we need to have FedEx, UPS, and others here
testifying as well.
What are your views on that, because I do not see them
coming and asking for identification or looking at someone and
saying that I do not think you are old enough to receive this
or you are too young? I mean, how do you avoid that?
Mr. Sloane. Well, let me say this to you: I mean, I think
in any situation you can find instances where people do not do
what they are supposed to do.
Mr. Towns. And also tell me who is liable in a case like
that if something happens.
Mr. Sloane. In a case where you would be shipping alcohol
to somebody, it depends on the State's laws. In some States
carriers have gotten into some trouble and they have had to
sign notices of discontinuance where they are not selling
alcohol because they didn't do it properly.
I think what you will find today, though, the market for
this is gradually maturing. It has been very small, it is
gradually maturing, and in dealing with companies, with UPS and
FedEx, they have now made a pretty significant commitment to
trying to carry out their responsibilities in this area, and,
for example, I know FedEx does very, very intensive driver
training to educate people about how to deliver various types
of products, and it is not just, you know, alcohol. In many
cases it can be firearms, it can be other things that have
various types of State controls or other things on them. So
they actually are fairly sophisticated at dealing with
different types of products.
Ms. Duggan. Mr. Towns, could I comment?
Mr. Towns. Sure.
Ms. Duggan. You just asked who is liable in that situation?
The shippers will indicate that they are shipping under the
law that they are shipping from and that the consumer is the
one that is responsible and that they do not have to comply
with the laws of the State they are shipping into and then vice
versa.
The common carriers have no responsibility here for
delivering alcohol. In our view they are not law enforcement,
they are not equipped, they should not be requested to be the
law enforcement arm for our alcohol laws, and I would strongly
disagree with Mr. Sloane's viewpoint that FedEx, UPS, are doing
a lot of training, because we have found so many instances
where hopefully through no--without knowledge, they are
delivering alcohol because they come in unmarked boxes and they
have no idea what is in it.
This one came from Dave in California to someone in
Michigan. So you know there is a situation in Michigan where a
kid was in a rehab facility. Obviously, he had a problem with
alcohol. He ordered a case of bourbon. It was delivered to him
directly to the rehab facility. This was in the FTC's testimony
from the Michigan Attorney General's Office. He drank the whole
thing. It came to him in a rehab facility. He drank the whole
thing, then called and told them it was broken and he got
another case shipped to him and he drank that. That is going to
happen.
There is no checking of ID's, nor should the common
carriers be the people to do that.
Mr. Towns. Mr. Chairman, I know my time has expired.
I just think that this creates a problem because there is
really no control here in terms of youngsters being able to
order it, being able to receive it, and that is a real problem.
So on that note I yield back, Mr. Chairman.
Mr. Stearns. Thank the gentleman.
Gentleman from New Hampshire, Mr. Bass.
Mr. Bass. Thank you, Mr. Chairman.
I am sure the Chair of the subcommittee was good enough to
mention New Hampshire's system which I suspect all three of you
are familiar with, and I have three or four questions.
First, Ms. Duggan, taking a follow-up to a response you
made to my friend from New York, you mentioned that there was
some ambiguity about whether or not people who deliver packages
by UPS or Federal Express being law enforcement.
Understanding, as you know, in New Hampshire there is a
requirement that the package be clearly marked and that the
delivery require ID and the signature, what is the difference
between the qualifications of that individual making the
delivery and the person who is at the checkout stand in the
stop and shop where the exact same product is sold in terms of
their qualifications for law enforcement?
Ms. Duggan. One is a licensed by the State to sell alcohol
and one is not.
Mr. Bass. It is my understanding they are licensed. It is
my understanding that at least in my State, the State requires
a permit from the seller and so therefore the vendor is indeed
licensed by the State and pays a fee, collects taxes and pays
it and that the person who delivers the product is no
different, in terms of qualifications, than the person who is
18, 19, or, rather, actually, in New Hampshire, there are
people at the checkout counter who are under the age of 18, but
they have to be accompanied by somebody else if beer or wine
comes through. I just wonder what the difference is in terms of
somebody who has a driver's license and has to collect a
signature versus somebody in a store.
Ms. Duggan. Well, except the fact that we know it is not
happening, and that is one of the biggest problems; I mean,
look at this.
Mr. Bass. Are there any instances that you can cite where
this has occurred in New Hampshire?
Ms. Duggan. I do not know of any in New Hampshire, but one
of the things I would like to follow up on, our colleague from
the FTC said in fact, what the State administrator has stated
that is in the FTC report is that there is no enforcement, not
that there was not a problem but there was no enforcement, and
their own press release admitted they did not address the tax
issue.
Mr. Bass. Reclaiming my time, please, the FTC in the State
of New Hampshire wouldn't be the force mechanism. It would be
the State Liquor Commission.
Ms. Duggan. I understand.
Mr. Bass. And my understanding is there is no evidence that
there is any greater access to alcohol by minors as a result of
the passage of New Hampshire's law.
If I could move to Mr. Sloane, no one has asked that the
provisions of the 21st amendment be used yet; is that correct?
Mr. Sloane. To the best of my knowledge, that is correct.
Mr. Bass. Are there any other--is there any other type of
Federal support that could be provided that would ensure that
violators be--violations be addressed?
Mr. Sloane. ATF, now TTB, the Tax and Trade Bureau, issued
a circular some time ago, indicating that they would be more
than happy to cooperate with States in enforcement actions,
even to go as far as yanking the license, the Federal basic
permit of a winery that engaged in illegal direct shipment of
any kind, which, if you lose your license, you are out of
business. So it is a pretty significant deterrent, I think,
actually.
Mr. Bass. Mr. Chairman, I have no further questions.
Mr. Stearns. Thank the gentleman.
Ms. McCarthy.
Ms. McCarthy. Thank you, Mr. Chairman.
Mr. Zywicki, I want to commend you for the report that was
done by the FTC staff. My State, Missouri, is not necessarily
one of the frontier States in this matter, but our Attorney
General has done some work in a sting operation to see about
how it affects underage drinking, but overall, having been a
State legislator and a chairman of the Ways and Means
Committee, I am very involved in tax matters and how important
those revenues are to States. I wonder if you would comment
briefly, and if you have already done this, because I have been
in and out because of votes and other matters and I do not want
you to have to repeat yourself, but the report seems to show a
disparity in what States actually do, although you didn't
really have the breadth to look into it, how they do with that
revenue issue, but in the course of the work on that that your
staff did on this, did they come up with any thoughts that
would be helpful to us on this revenue issue, because the
Federal Government restricts the States in what tax tools they
have, and sales tax on products is one of the areas that are
important to States? And so I am wondering, as we review this
whole issue and its many facets, if the revenue issue was
something that was looked at and, if so, would you care to
share your thoughts with us on that matter and what it does
mean?
Mr. Zywicki. Absolutely. That was one of the things that,
when we contacted the States and asked them about it, that was
one of the particular things we tried to find out.
First, an obvious point is in States where direct shipping
is illegal and it still occurs, such as situations that Ms.
Duggan was describing, clearly no taxes are collected. We are
basically talking Al Capone during Prohibition. In a number of
States that she has described activity is illegal, which may
account for why taxes are not collected. They are shipped in
unmarked boxes and that sort of thing.
With respect to the States that allow direct shipping,
though, our reports are that they had no problems collecting
taxes, that they used a number of systems, including permits,
and various different systems for remitting taxes. That was
simply something that appears not to have been a problem in the
States that have allowed direct shipping.
Ms. McCarthy. I thank you for that information.
I appreciate also the evidence in the report that bans on
interstate direct shipping raised prices and that States not--
you know, shall not engage in this activity if it is
appropriate to the State and its vintners, can also be losing
revenue at a time when States are really pressed for revenue.
So, Mr. Chairman, I am really grateful you held that
hearing, and I think we should pursue that revenue where it is
appropriate to our committee's work at a time when States are
indeed looking for opportunities to make ends meet, and that is
just because of my former Ways and Means role I am very
sensitive to those matters.
Mr. Stearns. Well, thank you for your insight.
Ms. McCarthy. Thank you.
Mr. Stearns. Thank all of the panel for being here today.
Did any of the other panelists want to comment?
Mr. Sloane. Well, one thing, I would like to comment on the
tax issue. There are some States, Missouri is one of them, that
have engaged in a reciprocal kind of arrangement with other
States where they have made the decision from a public policy
perspective to forgo the collection of the revenues if the
other State, the receiving State, does the same when they ship
wine to the other State, and in this day and age I think that
is kind of a tough sell from a public policy perspective, given
where the States are financially with the service structural
deficit situation that they are looking at.
On the one hand, I would like to make one point, and I am
not advocating not paying taxes by any stretch of the
imagination; in fact, we support permanent legislation. We are
even volunteering to pay Internet taxes, sales taxes and excise
taxes as opposed to many other folks in the business community,
but let me just point out one thing just to sort of give some
perspective to the tax issue so the people can understand:
Right now the basic estimate, no one really knows but the basic
estimate is of the wine trade in the United States, about .5
percent, half of 1 percent, may be going via direct shipment,
okay?
If you were to take the average State excise tax on wine,
which is 65 cents per gallon, and you decided that you weren't
going to collect that tax at all for that .5 percent around the
United States, the entire revenue loss from that would be about
$1.6 million. So when they made the decision in the reciprocal
States, I think it was largely made over the notion that it
would actually be more trouble and more costly to try to
collect those taxes administratively than to just forgo them.
Ms. Duggan. Ms. McCarthy, I would like to speak to that.
Again, I think what my colleague is referring to is .5 percent
sales that are illegal. The problem is there has been no
enforcement and so you have no idea what the true scope of the
illegal trade is. So you have no way of having a tax revenue
shortfall estimate for the States.
There have been some estimates that the States were losing
over a billion dollars a year in lost excise taxes due to
illegal directed shipments. So it is a very significant issue,
and nobody reports their own illegal behavior.
Ms. McCarthy. Okay.
Mr. Sloane. Well, can I also just respond to one thing?
Ms. McCarthy. Mr. Chairman, may I have an extension of
time?
Mr. Stearns. Yes.
Ms. McCarthy. Thank you.
Mr. Sloane. Can I just respond to that briefly?
I think one of the questions you have to ask is: Yes, you
can, under a variety of circumstances, orchestrate and it has
been demonstrated that you can game the system and that
somebody could buy alcohol, an underage person could buy
alcohol, over the Internet.
The question is not whether they can or not. The question
is whether they will and do. That is the real question that
needs to be asked to determine how much of a regulatory kind of
a framework you really want to establish for that. Is it really
worth it, and to date, to the best of my knowledge, there are
only maybe a handful of real cases in the United States where
underage people have actually been apprehended, arrested,
tried, or convicted, even if they had just been arrested.
To the best of my knowledge, almost all of the cases that
you talk about are things that are basically orchestrated
stings, and so I think you need to make a distinction. I do not
think, given the wide availability of alcohol on the streets of
America that you are going to find a great likelihood that kids
are going to resort to something like the Internet. It is too
easy locally. Why bother?
Mr. Zywicki. If I may, this is a letter signed by James
Barbuti, who is the State of New Hampshire Liquor Commissioner.
We asked the States about precisely this issue, do you try to
collect sales or excise taxes; and I will just quote the
response of New Hampshire's representative: ``Yes, the State of
New Hampshire Liquor Commission collects an 8 percent fee on
all shipments into the State of New Hampshire. When the New
Hampshire Liquor Commission discovers an improper shipment, we
contact the company and inform them of the laws of New
Hampshire. Once the company learns of New Hampshire laws, they
normally get a permit or stop shipping into New Hampshire. The
New Hampshire Liquor Commission is working with out-of-state
suppliers and encouraging them to obtain a permit.'' And just
to add, the question was asked earlier sort of about
compliance. One other response we got from New Hampshire was in
response to the question: Does your State conduct stings and
with respect to whether there has been any compliance, New
Hampshire--and again this is a quote: ``the New Hampshire
Liquor Commission Bureau of Enforcement has in the past done
compliance stings against out-of-state shippers who do not hold
permits and against shippers who do hold permits.''
So I think the States are well aware of these problems. The
States that have allowed direct shipping are just as concerned
as everybody in this room about the various problems about
excise taxes and underage drinking, and their experience, I
think, tells us a lot on both of these particular issues.
Mr. Sloane. My associate advises me that actually the level
of State excise tax collection today for wine in the United
States totals around $300 million a year, so it would be hard
to imagine a State would lose up to a half a billion or a
billion dollars through illegal direct shipment.
Ms. Duggan. That was a public source.
Ms. McCarthy. Thank you, Mr. Chairman, for allowing the
extension of time. I know I strayed into Ways and Means issues,
but I think it was an important part of our understanding.
Mr. Stearns. Well, you were chairing the committee in the
State and your experience is very helpful.
Ms. McCarthy. Thank you.
Mr. Stearns. We are going to conclude our subcommittee
hearing. I think the last word is if the FTC staff report
analysis holds true for markets other than McLean, Virginia and
it can be extended to other communities across the United
States then it is a persuasive argument, and I think the best
poster child of that case is New Hampshire, that if they can do
it properly, in which it appears they are doing, then it seems
to be an argument for questioning an outright ban on other
States, particularly when almost 50 percent of the States are
doing it.
So I think we have at least aired that idea that you had,
and anyone else?
Mr. Radanovich?
Mr. Radanovich. Mr. Chairman, please forgive me. I would
like to ask one question.
Mr. Stearns. Sure.
Mr. Radanovich. I would like to ask of Ms. Duggan, the
excise tax number that was quoted of a billion dollars, it is
easy to throw out numbers, and I would like to ask if there
would be an opportunity for written response----
Mr. Stearns. Sure.
Mr. Radanovich. [continuing] where you came up with that.
Ms. Duggan. Forbes Magazine.
Mr. Radanovich. If you would like to submit the article.
Ms. Duggan. Yes, I would be happy to, but it is actually an
old figure, and it has probably grown since then.
Ms. Radanovich. That is fine, but I would like to see proof
of that.
Mr. Stearns. By unanimous consent, so ordered to be
submitted, but also to allow other members if they wish to to
submit other questions, perhaps some that are not here that
would like to submit questions. They have up to 5 working days
to do so?
Yes, okay. With unanimous consent, so ordered.
So I will thank you for your patience and forbearance, and
with that and the subcommittee is adjourned.
[Whereupon, at 11:45 a.m., the subcommittee was adjourned.]
[Additional material submitted for the record follows:]
Prepared Statement of Hon. Maurice D. Hinchey, a Representative in
Congress from the State of New York
Chairman Stearns, Ranking Member Schakowsky, and members of the
Subcommittee, thank you for calling this hearing and for allowing me to
submit testimony for the record. State laws that restrict on line sales
and direct shipment of wine to consumers are relics of prohibition era
policies that are long overdue for revision.
I represent a district in upstate New York that is home to a number
of small, on-farm wineries. These wineries are bright lights in a
region that has suffered much over the past decade. In addition to
being a very high value agricultural crop, wine and grapes have done
more for tourism, economic development, and job creation in rural New
York than just about any other factor in recent memory.
New York is third behind California and Washington in wine and
grape production. Our growers are projected to harvest a record 210,000
tons of grapes this year. Roughly two-thirds of this production will be
made into juice and the remaining one-third will become wine. New York
wineries employ nearly 3,000 people in the state, with a total payroll
of nearly $35 million. Almost half of these jobs are full time, year-
round positions.
The wine industry is fairly young in New York, but is growing
rapidly. Just 25 years ago, the state had only 19 wineries, while today
there are more than 160. Because many New York wineries are small,
family-owned businesses with limited production, they have added
tasting rooms and retail outlets on their farms to attract visitors,
educate consumers, and sell directly to their customers.
Visitors to New York's four primary wine regions--Long Island, the
Hudson Valley, the Finger Lakes, and Lake Erie--purchase a substantial
portion of the wine produced in New York. My winemaking constituents
tell me that many of their visitors come from other states and other
countries, and that many make purchases on the spot. The most
frequently asked question is whether they can buy more from the winery
after they've returned home. To the great economic dismay of my
constituents and their visitors, the answer to that question is no.
Despite the importance of the wine and grape industry to rural New
York, my state is one of the largest that still prohibits direct
shipment of wine to the state. That law was overturned last year by a
Federal district court (Swedenburg v. Kelly); the injunction enforcing
that decision was stayed while an appeal with the Second Circuit is
pending. Because the states that allow direct shipment do so on a
reciprocal basis, New York's prohibition effectively prevents New York
wineries from shipping all but a very limited amount of their product
out of state.
This is ultimately a state issue, and one for the New York
legislature to resolve. A measure allowing direct shipment passed the
legislature several years ago, only to be vetoed by Governor George
Pataki because of concerns about underage drinking and a possible loss
of sales tax revenue from mail order and Internet sales. Bills have
been introduced in the Assembly and the Senate this year that address
these problems, but are being held hostage to the competitive concerns
of wine wholesalers who have monopoly on distribution in the state.
These are the same wholesalers and distributors who will not handle
sales and marketing for small wineries with limited production, but who
call for strict enforcement and prosecution if even one bottle is
shipped outside their system.
Because of the legislative impasse, New Yorkers are putting great
faith in the courts to resolve this issue. Oral arguments in the
Swedenburg case were held in early September and a decision is expected
shortly. If the Second Circuit upholds the lower court's decision, we
will have our hands full persuading the state not to appeal the case to
the Supreme Court.
Congress addressed some of the issues surrounding direct shipment
last year when we passed H.R. 2215, and allowed retail customers to
ship home purchases of wine they made on the spot. This law should not
be amended or repealed. In addition, the Federal Trade Commission
issued a report this summer that studied the likelihood of increased
underage drinking and sales tax evasion under direct shipment. By
looking at the experience of states that have enacted direct shipment
laws, the FTC concluded that direct shipment, properly constructed,
could greatly benefit consumers and winemakers without increasing
underage drinking or tax evasion. Furthermore, the Commission found
that direct shipment complements, rather than supplants sales of wine
through traditional distribution channels. http://www.ftc.gov/os/2003/
07/winereport2.pdf
Mr. Chairman, I want to thank you again for holding this hearing
and for allowing me to submit my statement for the record. Congress
should not stand in the way of the state legislatures and courts that
are removing barriers to direct interstate shipment of wine through e-
commerce or mail order. The rural economy is hanging on by a thread and
needs the boost that these sales will provide.
______
Prepared Statement of the Wine Institute
Restrictions on interstate direct-to-consumer wine sales limit
competition and place constraints on consumer choice. This issue
impacts the ability of consumers to have reasonable access to the wines
of their choosing and has been a fundamental concern for Wine
Institute's member wineries for decades. Wine Institute is the public
policy advocacy group representing more than 660 California wineries
and affiliated businesses responsible for more than 80 percent of U.S.
wine production and 90 percent of the country's wine exports.
The Wine Institute believes that positive change will continue to
be achieved within a regulated marketplace that will accommodate the
requirements of state regulators and legislators. Several events,
favorable to consumers, have occurred to allow for limited, regulated
direct access in a manner that regulators, wineries and consumers all
find satisfactory.
The Department of Justice Appropriations Authorization Act allows wine,
purchased while visiting a winery, to be shipped to another
state.
As a result of heightened airline security and restrictions on
passengers to ensure safety, President George W. Bush signed this Act
into law on November 4, 2002, which contained a limited direct shipping
provision. Consumers, who could otherwise hand carry wine on aircraft
into their state in accordance with their state law, can now have it
direct shipped to their homes. The Act was a formal endorsement of
limited direct shipment by the U.S. Congress.
S.577, the ``21st Amendment Enforcement Act,'' signed into law in
October 2000, recognizes that state authority for alcohol
distribution laws are not absolute and must be balanced with
other constitutional rights.
Congress recognized that the powers vested in the states by the
21st Amendment are not absolute. S.577 requires the courts to balance
state authority with other constitutional rights, such as the commerce
clause, the due process clause, and the First Amendment. State
Attorneys General can now gain access to federal courts to pursue
litigation for alleged violations of state law regulating alcohol
shipping. However, they must demonstrate that state law is a valid
exercise of power under the 21st Amendment and not inconsistent with
any other provision of the Constitution.
Certain states maintain preferential treatment of local industry.
Despite U.S. Supreme Court decisions in the past that have ruled
preferential taxes and treatments of local wine industries to be
unconstitutional, a number of states continue to maintain such
practices. As an example, Arkansas allows for local wineries to sell
their products in grocery stores, while out-of-state wines are only
available in package stores. Missouri and Washington both have imposed
taxes on all wines (including out-of-state wines) that are used for the
marketing and promotion exclusively of in-state wine industries. Eight
states, Indiana, Maine, Michigan, New Jersey, New York, Florida, Rhode
Island and Ohio, prohibit interstate direct wine sales, but allow
intrastate wine sales and direct shipments.
Texas, Virginia, South Carolina and North Carolina have changed their
laws this year to bring total limited direct shipping states to
26.
As an indication that momentum is on the side of the consumer,
court cases, followed by legislative action, have resulted in new state
laws allowing limited direct shipping. Several of the courts ruled that
bans on interstate shipping were unconstitutional. The District of
Columbia and 26 states now allow legal, limited direct shipments. This
is the result of ongoing work by the wine industry, and provides
various models for how the issue could be resolved in other states. In
all cases, the amounts of wine that can be shipped are limited, and
provisions exist to prevent delivery to minors.
Opponents of interstate direct shipping do not oppose in-state direct
shipping and online sales, making their underage access
argument invalid and the laws discriminatory to out-of-state
wineries.
Direct shipping opponents have not targeted in-state online wine
sales and delivery. The real reason for direct shipping bans is for
protection of in-state businesses and the wholesaler system. In fact,
opponents, such as the Wine & Spirits Wholesalers of America (WSWA)
which claims that direct shipping provisions exacerbate underage access
to alcohol, endorsed in 1999 the e-commerce web site, WineShopper.com.
This now defunct website attempted to complete the sales transaction
through the use of the three-tier distribution. WSWA is not opposed to
the fulfillment method as long as the sale is completed through the
wholesaler three-tier system.
A July 3, 2003 FTC Report concludes that direct shipping states with
delivery safeguards have ``few or no problems'' with underage
access.
The Federal Trade Commission (FTC) issued a July 3, 2003 report,
entitled ``Possible Anticompetitive Barriers to E-Commerce: Wine.''
Based on FTC survey responses, the report concludes that the states
that allow direct shipping have procedural safeguards against shipments
to minors and report ``few or no problems'' with these shipments.
The FTC report further concludes that many states hold the view
that minors are more likely to buy alcohol from local retailers than
the Internet because of the high cost of shipping and the fact that
minors would have to wait days before learning if a delivery would be
made. The FTC ``found no evidence suggesting that direct shipping
increases underage drinking beyond the levels attributable to sales by
brick-and mortar stores . . . Unfortunately, the evidence shows that
adolescents currently can obtain alcohol without going to the trouble
and expense of ordering it over the Internet.''
Several reports indicate that most youth obtain alcohol through
friends, acquaintances, family members, and other adults who buy or
provide alcohol to them. These conclusions are from reports from the
Century Council, ``Underage Alcohol Access,'' published May 2003; the
NAS ``Reducing Underage Drinking'' and FTC ``Alcohol Marketing and
Advertising Report to Congress,'' both issued September 2003.
Procedural delivery safeguards are in place to prevent underage access.
All states where direct shipping is legal already have regulations
that include the three National Academy of Science (NAS)
recommendations: calling for alcohol packages to be clearly labeled as
such; requiring the alcohol delivery person to verify the recipient's
age; requiring that an adult signature be obtained from the recipient
of the delivery. Wine Institute has consistently supported the use of
these safeguards to help prevent underage access. In addition, common
carriers, such as Federal Express and UPS, continuously conduct
educational sessions for their delivery staff in those states with
legal direct shipments to assure procedural safeguards that will
prevent underage deliveries of alcohol packages.
Wineries can service their tasting room customers with direct
shipments, especially if they do not have distribution in the
customer's state.
Most of the 3,000 wineries in the country's 50 states begin their
sales and marketing efforts primarily through their on-premise tasting
rooms. In California alone, wineries are receiving nearly 11 million
visitors annually. While most early visitors usually come from within
the state where the winery is located, out-of-state visitors typically
come to represent an expanding part of any winery's tasting room sales.
The challenge for wineries is finding a way to allow consumers to
buy the wines that they tasted when visiting the winery. In a 2003
survey of Wine Institute members, 54 percent of the wineries indicated
that they have been unable to gain access to another's state's market
due to an inability to find a wholesaler who was willing to carry their
brands. This is so because the number of wineries has dramatically
grown, while the number of wholesalers has decreased. According to the
October 15, 2002 issue of Wine Spectator, there were 2,188 wineries in
the United States as of 2000, up from 579 in 1975. The vast majority of
those wineries are small, producing multiple labels that the
wholesalers are not able to carry. In contrast, WSWA had 450 members in
1975, down to only 170 today.''
The wine media provides wide exposure to wine brands, leading consumers
to contact wineries for a direct purchase.
Unlike most consumer goods, wine has generated an entire trade and
consumer-based media. Wine-oriented consumers have access to a myriad
of publications that discuss, critique, review and rate wines on a
regular basis. Unlike most industries where product lines remain
constant from year-to-year, wine is an agricultural product that can
vary with every harvest. Consumers have come to rely upon the wine
media to make recommendations and observations about the various wines
that are available. Since most wine media is national in scope, it is
inevitable that some consumers are going to find themselves searching
for wines that are not readily available to them in their local
markets. This exposure to new products often leads consumers to contact
a winery directly to make a purchase.
Wine Institute supports the three-tier system, but advocates for
augmenting distribution.
A number of state laws and regulations have developed since the
repeal of Prohibition that serve to limit consumer choice. Wine
Institute has worked carefully with its member wineries to develop
solutions to this consumer problem which do not undermine the ongoing
role of state regulators and local wholesalers and retailers. It has
been Wine Institute's position that ``we need to augment the three-tier
system, not replace it.''
CONCLUSIONS
Wine Institute believes that the right path for the future is
working with states to craft legislation that is a compromise between
consumer demand for choices and the regulatory requirements that create
a safe and orderly market. Eighteen years ago no state had passed
direct shipment legislation. Today, more than half of the states have
some type of curative legislation on the books. Additional states will
open up their markets for direct wine shipping. It is the consumer who
will benefit. Wine Institute applauds the Congress for taking an
interest in this consumer-driven issue.
______
Responses by David P. Sloane to Questions from Hon. Edolphus Towns
Question 1. With respect to the Federal Trade Commission (FTC)
staff report that included a study of market conditions in McLean,
Virginia:
a. How does that study provide guidance for the rest of the United
States with regard to the price and variety of wines available to
consumers?
b. Doesn't the FTC testimony to the Committee contradict testimony
received by the FTC at the FTC Workshop clearly demonstrating that
wineries sell wine directly to consumers at retail prices, and when
shipping costs are included, the cost to consumers is actually more
expensive than purchasing the same products through the three-tier
system?
Answer to Question 1
a) The FTC made a sound choice in selecting McLean, Virginia for
its wine market analysis. This community, not being too urban or too
rural, is reasonably reflective of the average wine market in the U.S.
today in terms of price and availability. If anything, McLean, Virginia
may offer consumers better pricing and selection than the average wine
market, effectively skewing the results in favor of the three-tier
system.
b) In general, since most wineries rely upon the three-tier system
to sell at least some portion of their inventory in local markets,
undercutting the established retail price would cause serious trade
relations problems. The FTC study reveals that consumers do reap
savings when they purchase more expensive wines over the Internet.
Question 2. The FTC press release regarding the FTC report claimed
the report did not address the issue of lost taxes, yet at the
Subcommittee hearing, the FTC claimed knowledge of the tax
ramifications of direct shipping.
a. Has new information with regard to the tax collection
ramifications of direct shipping been made available to WineAmerica?
b. How were you able to explain the tax collection ramifications of
direct shipping to the Subcommittee if the FTC report did not address
this issue?
Answer to Question 2
a) WineAmerica has developed a methodology for estimating revenue
losses when direct shipment is permitted without taxation, which was
discussed in my written statement to the Subcommittee. The average
state excise tax on table wine is $0.65 per gallon, so each bottle is
subject to an excise tax obligation of just over thirteen cents. Based
upon all available literature, we estimate that the maximum potential
for out-of-state direct shipment of wine is 0.5 percent of the total
U.S. table wine market of about 500 million gallons. As such, even if
states did not collect a single penny of excise taxes from these sales,
the total revenue loss from excise taxes would be approximately $1.6
million. For example, New York, one of the largest states in terms of
wine sales, would lose less than $40,000 per year in excise taxes if it
permitted interstate direct shipping without collecting the tax.
However, if New York enacts a ``permit'' direct shipment law similar to
the ones enacted in Virginia, and the Carolinas in 2003, it will be
able to collect those taxes.
b) These estimates are in an affidavit WineAmerica filed in the
wine shipping case in New York district court. To our knowledge they
are uncontested.
Question 3. The 21st Amendment to the Constitution of the United
States gives individual states the right to regulate the distribution
of alcohol.
a. Although admittedly not addressed in the FTC report, doesn't the
21st amendment give states the right to regulate the distribution of
alcohol?
b. What constitutional or statutory authority gives the Federal
Trade Commission the right to involve itself in alcohol importation or
distribution?
c. What authority allows the Federal Trade Commission to supersede
the authority of the Constitution of the United States and the 21st
Amendment?
Answer to Question 3
a) Yes, but the courts have been gradually narrowing state
authority under the 21st Amendment.
b) The Federal Trade Commission has general authority to examine
issues of trade within the United States.
c) Clearly, the Federal Trade Commission does not have the
authority to supercede the Constitution, nor has it made any attempt to
do so with respect to its examination of barriers to e-commerce.
Question 4. What logical process has WineAmerica used to
extrapolate from a report declaring that a state did not conduct any
compliance checks or stings with regard to sales to minors, and
conclude from that lack of information that there is not a problem with
sales of alcohol to minors associated with direct shipping?
a. How do you reconcile the FTC's finding of ``no problem'' with
respect to sales to minors in light of testimony given to the FTC by
the Michigan Attorney General's office, media reports, and information
provided by witnesses at the Subcommittee hearing?
b. What evidence does WineAmerica possess that the ``safeguards''
noted by proponents of direct shipping actually work? How do you
reconcile that lack of evidence with the evidence given at the FTC
Workshop and by witnesses at the Subcommittee hearing that shows the
safeguards do not work?
c. In light of the information reported in media and other sting
operations clearly demonstrating that common carriers often do not
properly ascertain that the recipient of packages containing alcohol is
of legal age; and that carriers sometimes leave packages containing
alcohol at the doorstep of mailing addresses without any attempt to
obtain proper identification, why does WineAmerica believe that common
carriers can be relied upon to carry out the function of properly
delivering alcohol by checking the identification of the package
recipients?
d. In light of the fact that the Tax and Trade Bureau has never
taken a single license away from a winery [in spite of voluminous
evidence of violations from the Michigan Attorney General's office, for
example], why does WineAmerica believe that the Tax and Trade Bureau
can be relied upon as a caution to those shipping alcohol illegally?
Answer to Question 4
a) First, few of the state regulators responding to the Federal
Trade Commission survey indicated any significant underage access
problems related to direct shipment. Second, while tens of thousands of
minors are prosecuted every year for illegally obtaining alcohol
through the three-tier system, there are only a few known cases where
minors have been prosecuted for trying to purchase alcohol illegally
via direct shipment. Third, the appropriate question is not whether
minors can obtain alcohol via the Internet, but whether they will given
its general availability; states must target their enforcement
resources to real problems, not hypothetical ones suggested by
orchestrated stings.
b) The Federal Trade Commission examined the facts and drew
conclusions. Irene Mead, then Michigan's Assistant Attorney General for
Enforcement admitted during the FTC proceedings that her staff never
determined whether any of the intercepted shipments were addressed to
underage persons.
c) More than 50% of the nation's population may receive wine by
interstate direct shipment and more than 80% by intrastate shipment.
The laboratory of the states has demonstrated that direct shipment of
wine does not constitute a significant risk of underage access.
Moreover, there is no data to suggest that a clerk in a liquor or
convenience store is any more reliable than a driver employed by a
common carrier.
d) On February 11, 1997, ATF (now TTB) issued Industry Circular 96-
3 clarifying its authority to assist states in enforcing their laws
prohibiting the illegal importation of alcohol under the Federal
Alcohol Administration Act. WineAmerica has no reason to doubt that TTB
would respond to state requests for assistance. In 2000, Congress
enacted the 21st Amendment Enforcement Act at the behest of state
attorneys general to give states additional authority to pursue illegal
out-of-state shippers in the federal courts. Since then, not one state
has exercised that authority. That actions have not been taken by
either TTB or the states suggests that illegal direct shipment is not
of significant concern to warrant such action by state or federal
regulators.
Question 5. What would be the response of WineAmerica to a mother
of a teen who ordered wine over the Internet, who had the wine
delivered to his door or didn't have his ID checked, and ended up
getting hurt in a drunk driving accident? How would WineAmerica
characterize the alleged safeguards in place in this circumstance?
Answer to Question 5
Drunk driving is a major problem in the United States, which is of
deep concern to WineAmerica. Our members take very seriously their
responsibilities to uphold the law, and to ensure best practices at
their wineries. To our knowledge, however, the direct shipment of wine
to teenagers has never resulted in any automobile accidents.
Question 6. How would the safeguards against minors' access to
alcohol espoused by WineAmerica have prevented deliveries of alcohol
from being made in the following cases:
a. The teen in the alcohol rehabilitation facility in Michigan who
successfully ordered 2 separate cases of bourbon, and had them
delivered to him in the rehabilitation facility?
b. The teen that successfully ordered a bottle of wine delivered to
him in the South Dakota state capitol?
c. A 15-year-old who used his own credit card to successfully order
bottles of tequila, and had the package left on his doorstep [no I.D.
check] in a state that prohibits such shipments regardless of consumer
age?
d. An 11-year-old boy who successfully accepted delivery from a
common carrier of a bottle of wine in a box clearly marked ``wine'' and
labeled to require an adult signature?
e. The sale and delivery of beer to a 17-year-old in Alabama from a
company in Illinois?
f. The shipment of beer to a minor in the Missouri Attorney
General's office?
Answer to Question 6
a) Clearly this involved a delivery in violation of Michigan law.
The individuals responsible for that delivery should be prosecuted.
b) Illegal shippers should be prosecuted.
c) Illegal shippers should be prosecuted.
d) No system is perfect. However, since there is little hard
evidence to indicate that teens are obtaining alcohol via the Internet,
they must be obtaining it from other sources, such as the three-tier
system.
e) Illegal shippers should be prosecuted.
f) Illegal shippers should be prosecuted.
Question 7. What system of safeguards is WineAmerica aware of that
would prevent the foregoing incidents listed in Question 6 a-f from
happening in the future?
Answer to Question 7
It is clear that direct shipment of wine does not pose a
significant threat. Furthermore many of the instances cited in question
6 involve unrealistic ``stings'' where underage persons are being
protected against the consequences of violation. There is no question
that the difficulty, inconvenience and risk of being caught by
attempting to obtain wine through direct shipment--with its high cost,
delay in gratification, and paper trail--obviously serve as an enormous
deterrent to abuse. There is no point in legislating more stringent
safeguards where there is no evidence of abuse.
Question 8. What is the legal or regulatory difference between
products such as ``fortified wine'' or ``Eye of Newt wine'' and so-
called ``fine wine'' such that WineAmerica can be certain that only
fine wine is shipped directly?
Answer to Question 8
Given the cost of shipping wine, most direct-to-consumer wine
shipment involves more expensive wines that are not easily obtained
through standard channels of distribution.
Question 9. If the lawsuits that allege discrimination, and which
your members support, are successful, and wine is allowed to be shipped
directly, won't your lawsuits result in further lawsuits seeking to
ship beer and spirits directly on the same basis of discrimination
against these other forms of alcohol?
Answer to Question 9
There is ample precedent for treating various kinds of alcoholic
beverages differently, both at the state and federal level. Federal
excise taxes are much higher for spirits than for beer or wine. Some
states have chosen to limit their direct shipment laws to wine only. We
cannot predict the future, but doubt such litigation will materialize,
or be successful.
Question 10. Why do wineries sell wine via direct shipping at
retail prices? If you are truly concerned about the price markup to
consumers, why not pass any cost savings associated with direct
shipping along to consumers? Isn't the ``money, honey'' issue you
raised at the hearing all about more money accruing to the wineries you
represent if direct shipping is allowed?
Answer to Question 10
The practical answer was already supplied in my response to
question 1 b). As I testified during the hearing, the three-tier system
works very well for the top 100 wineries in the U.S. However, most
American wineries are small, and do not have the brand clout,
production capacity or financial wherewithal to secure distributors
outside of their own immediate markets. As such, in order to serve
winery customers that reside in other states, an alternative market
mechanism, such as direct shipment, is necessary.
Question 11. What is the average cost per acre of vineyard land for
the members of WineAmerica? What is the average profit per bottle your
members sell on their winery premises? What is the average profit per
bottle your members sell by direct shipment?
Answer to Question 11
Cost per acre varies from a few hundred dollars to tens of
thousands, depending upon state and region. We do not have any profit
per bottle figures. However, one of our larger members, Robert Mondavi
Winery, is a public company, so its financials are available. In 2002,
the company sold slightly less than 10 million cases of wine with net
income of approximately $40 million dollars, which translates to about
$4/case, or 33 cents per bottle. The vast majority of our members are
small family owned and operated farms, producing less than 10,000 cases
per year. These are hard working farmers who depend upon direct sales
because the three-tier system does not adequately serve their
interests.
Question 12. If an average consumer consumes an entire bottle of
Cabernet Sauvignon by himself, does that consumer become legally
intoxicated? Is that level of intoxication less dangerous because wine
is produced by an ``ancient craft''?
Answer to Question 12
As any scientist will attest, it depends on factors such as whether
the wine is consumed with food, as wine typically is, and the length of
time over which that wine is consumed. However, such a quantity is
probably excessive under any circumstance.
Question 13. Please provide the name of every member of and donor
to the Coalition for Free Trade.
Answer to Question 13
We do not have membership or donor lists for the Coalition for Free
Trade.
Question 14. Please provide the name of every member of and donor
to Free the Grapes.
Answer to Question 14
We do not have membership or donor lists for Free the Grapes.
Question 15. Are any retailers or wine or spirits suppliers members
of or donors to either the Coalition for Free Trade or Free the Grapes?
Please provide the names of these entities.
Answer to Question 15
We do not have membership or donor lists for these organizations.
Question 16. Are any members of WineAmerica also members of either
the Coalition for Free Trade or Free the Grapes? Please provide the
names of those entities.
Answer to Question 16
We do not have membership or donor lists for these organizations.
Question 17. In a February 22, 2001, letter sent by you to the
Progressive Policy Institute, while you were the chief lobbyist for the
Wine and Spirits Wholesalers of America, you stated, ``beverage alcohol
does not fit `cookie cutter' assumptions about e-commerce.'' How is it
that you now, as the head of WineAmerica, can argue to the contrary
that wine, which you do agree is beverage alcohol, should be a part of
that ``cookie cutter'' deregulated system and be shipped freely over
the Internet the same as books, CDs or other consumer products?
Answer to Question 17
I did not then, nor do I now, advocate the unregulated shipment of
wine. WineAmerica supports the limited direct shipment of wine under
state regulation. The legislation we support calls for payment of
taxes, filing of reports, requirements for an adult signature and age
verification with a government ID.
Question 18. In that same February 2001 letter, you stated, ``The
21st Amendment to the Constitution cedes to the states the
responsibility for regulating the importation and sale of alcohol
across their borders. Alcohol is the only consumer product with a
constitutional amendment affecting its regulation and distribution.''
You apparently now believe that the 21st Amendment should be ignored in
favor of the dormant Commerce Clause. How did this change in your
viewpoint come about?
Answer to Question 18
As the Supreme Court has stated, the 21st Amendment and the
Commerce Clause are parts of the same constitution and must be
considered in light of each other. This conflict deserves and needs a
resolution, and I have always believed that.
Question 19. In addition, in that same February 2001 letter, you
also stated, ``Unlike other areas of e-commerce, the sale of wine over
the Internet does not yield any savings to the consumer.'' Now,
apparently, your story has changed and you state that direct shipments
offers significant savings to the consumer. How did this change in your
viewpoint regarding the alleged cost savings to consumers of direct
shipping come about? Can you demonstrate that all of your member
wineries are passing on the savings to consumers realized through
bypassing the wholesale and retail tiers, and that your members are not
taking advantage of direct shipment to enable them to pocket all three
(producer, wholesaler and retailer) price margins?
Answer to Question 19
As I stated in my response to question 1 b), the FTC study reveals
that consumers do obtain savings when they purchase more expensive
wines over the Internet. However, by far, the more significant benefit
is consumer choice. As I stated in response to one of your questions
during the hearing, wineries in the Finger Lakes of New York State,
which are making world-class wines, cannot find distributors to sell
their products in New York City. Fortunately, New York permits in-state
wineries to ship their products on an intrastate basis, so that
consumers in Manhattan can still obtain these wonderful products. That
authority has existed since the 1970s, without any incidence of
underage access, and that experience is being repeated all over the
country, as more states enact laws to regulate the interstate shipment
of wine.
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