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The uncorking of online alcohol sales

Lawsuit brought by small family winery could revolutionize the way alcohol is sold over the Internet. Map: Interstate restrictions on Net alcohol sales Photo: An unlikely rebel

Juanita Swedenburg is an unlikely Internet revolutionary. The owner of a small family winery on a 130-acre cattle farm in Middlesburg, Va., she admits she doesn't browse the Web or even own a computer.

"That's for the younger generation," she said.

Yet a lawsuit that Swedenburg has filed could revolutionize the way alcohol is sold over the Internet. On Tuesday, the U.S. Supreme Court began hearing arguments in the case, brought jointly by the Swedenburg Winery and the Lucas Winery in Lodi, Calif.

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A lawsuit brought by a small family winery could revolutionize the way alcohol is sold over the Internet.

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The economic stakes could be even higher, as states have been claiming the authority to impose hefty regulations on out-of-state shipments of everything from cars to funeral caskets and contact lenses.

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Dozens of states have slapped strict rules on interstate shipments of beer and wine, effectively erecting a formidable barrier that prevents out-of-state wineries like Swedenburg's from shipping directly to residents of those states.

Critics charge that such laws are little more than protectionist measures backed by local liquor distributors that enjoy fat markups and don't have room to stock less-known brews or vintages.

If Swedenburg prevails, the high court's ruling would likely doom state laws outlawing direct shipping and provide a tremendous boost to online and mail-order sales of wine, beer and perhaps hard liquor as well. A decision is expected by early July 2005.

While alcohol sales currently occupy only a small e-commerce niche, they're a sizable portion of the U.S. economy. The Beer Institute estimates the brewing industry employs about 1.7 million Americans and pays $47 billion a year in wages and benefits. Approximately 595 million gallons of wine were sold in the United States in 2002, according to the Wine Institute, up from 337 million gallons in 1972.

The economic stakes could be even higher. States have been claiming the authority to impose hefty regulations on out-of-state shipments of everything from cars to funeral caskets and contact lenses. A victory by Swedenburg could go a long way in overturning those laws as well.

At the heart of the current dispute before the justices is the 21st Amendment, which ended Prohibition and awarded states broad authority to regulate sales of "intoxicating liquors." States with legal barriers to out-of-state wine and beer shipments insist that the laws are needed to guard against unscrupulous vendors and against minors ordering booze online.

"New York has concluded that direct shipment of alcoholic beverages into the state by unlicensed entities would significantly impede enforcement of its laws by creating an unregulated channel for the sale of alcohol," New York Attorney General Eliot Spitzer argued in a brief. "The oversight enabled by these record-keeping and access rules is especially important for the prevention of sales to minors through direct shipment."

New York and Michigan are defending their laws in two separate cases that have been combined for the oral arguments. One appeals court found New York's rules to be acceptable; another struck down Michigan's by ruling against the Michigan Beer and Wine Wholesalers Association. New York's law says that "no alcoholic beverages shall be shipped into the state unless the same shall be consigned to a person duly licensed hereunder to traffic in alcoholic beverages."

The 21st Amendment is so sweeping, Spitzer argues, that it permits almost any kind of state law regulating alcohol to survive constitutional scrutiny. In addition, he said, such laws are especially important to combat out-of-state shipping, "which by its nature eliminates a face-to-face sale and thereby increases the risk that minors will be able to obtain alcohol through Internet sales or otherwise."

The Institute for Justice (IJ), a public interest law firm in Washington, D.C., that's suing New York in the Swedenburg case, dubs those arguments "economic protectionism" that is prohibited by the Commerce Clause of the U.S. Constitution. The Commerce Clause generally restricts states from interfering with interstate commerce, but the 21st Amendment carves out something of an exception to that rule.

The Supreme Court's attempts to reconcile those two portions of the Constitution have been mixed. A 1936 decision upheld a fee charged to beer importers. But in 1984, a 6-3 majority struck down Hawaii's protectionist law that levied a 20 percent excise tax, saying the 21st Amendment's purpose "was not to empower states to favor local liquor industries by erecting barriers to competition."

"At issue here is whether the states can discriminate in favor of in-state businesses and against out-of-state businesses," said Steve Simpson, an IJ senior attorney. "We argue that states have to treat all businesses equally. With the advent of the Internet, it becomes all the more important for states to allow commerce to flow freely."

The IJ alleges that New York's law is designed more to benefit the state's powerful beer and wine wholesalers, not potential customers. Markups tend to be in the 25 percent range, the group said, and any concerns about minors ordering a few bottles from a Napa Valley winery could be ameliorated by requiring an adult's signature for delivery.

In Swedenburg's case, total production is less than 2,000 cases a year--not enough to interest major distributors--and half of the customers who travel to her winery live in other states. Were it not for protectionist laws, she estimates, her winery could sell another few hundred cases a year to those customers.

"At issue here is whether the states can discriminate in favor of in-state businesses and against out-of-state businesses."
--Steve Simpson, senior attorney, Institute for Justice

"It's very important to us," she said. "That would pay the taxes on the farm."

Mike Faul, a former Silicon Valley software engineer who decided to enter the winery business this year, estimated that he could triple his sales if state laws were changed in New York, Florida, Pennsylvania and Texas. "That's based on people right now that are sending me e-mails and (who) want to order online," he said.

Faul--a veteran of Lotus Development and Netscape--runs Rabbits Foot Meadery from a warehouse in Sunnyvale, Calif. The government classifies him as a winery, but his primary product is mead, which is made of fermented honey.

"It's a very niche product, and it's quite unique," Faul said. "It's super difficult for me to get distributors to pick it up. If they do agree to pick it up, it's usually for an outrageous discount and a very low volume."

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