[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

                               __________



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90-726                       WASHINGTON : 2004
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                    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

                              ----------                              


                       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 .
---------------------------------------------------------------------------
                               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.
---------------------------------------------------------------------------
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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