Greetings from Atlantic City: Constitutional Law Liquor Panel

Greetings from Atlantic City. Today I had the privilege of speaking on a Constitutional Law Panel with some widely admired colleagues. In my opinion, one of the greatest legal minds on liquor issues Richard Blau moderated the panel. Also, I had the privilege of speaking with two very esteemed colleagues, Wes Geiselman and Chris Riano.

We discussed four cases: Chris discussed Byrd v.Tennessee, Sean O’Leary, yes that would be me, discussed the South Dakota v. Wayfair decision, Wes Geiselman discussed Hood v. Wine Express, and the full panel discussed Missouri Broadcasters Association v.Taylor.

Byrd v. Tennessee

Chris Riano provided an outstanding constitutional analysis of the Byrd case. Byrd was decided by the 6th Circuit and is currently on appeal to the U.S. Supreme Court. Before we cover the big question on whether the Supreme Court will hear this case and determine if Granholm will expand to retailers, we will go through Chris’ thoughtful analysis.

Chris looked at the statute from an interesting perspective. The Tennessee statute requires that to receive a retail license the retailer needs to establish residency 2 years before obtaining the license and has a durational residency requirement for 10 years from the date of obtaining the license. Interesting point that Chris brought up, the license holder is required to renew the license every year. So there is a 2 year and 10 year requirement to hold a license that is valid for the duration of 1 year. Chris indicated that this statute was the epitome of arbitrariness and was not a logical statute.

Chris posed the question, what is the state trying to do within this framework?

Even if the S.C. takes this case on appeal, Chris believes that even on a rational basis analysis, when a statute seems illogical, it is hard for the Courts to uphold the statute. Even with a deferential standard of review, when you have a statute that has strange year requirements, how can a court uphold this statute?

Chris indicated that as a broad view when looking at a statute, we should look at what are the facts, what are the interest involved, and what is the state and regulatory agency grappling with, and how is it going to be analyzed by the court?

In his opinion, this is not the case the S.C. will hear as a way to revisit Granholm and make a determination of whether Granholm expands to retailers.

In his view, Byrd is more about the failings in drafting an illogical statute pertaining to the year requirements, than a substantive challenge to Granholm.

Great job Chris!

 

South Dakota v. Wayfair

I covered this case and summarized why it is important for liquor issues.

Wayfair overturned Supreme Court precedent which required a business to maintain a physical presence in the state before the state could impose a sales tax.  The Court now looks at a substantial nexus presence to determine whether sales tax nexus will be established. In Wayfair the Court held that $100,000 worth of sales and 200 separate transactions constituted sufficient sales tax nexus.

I presented three reasons why this case is relevant for liquor issues.

Justice Kennedy based this decision on a changing modern economy, especially the development of ecommerce, and that the physical presence rule becomes more obsolete each year.

In the 7th Circuit Lebamoff oral argument Chief Judge Wood indicated that an Illinois law which did not allow out-of-state retailers to ship wine into the state was contrary to modern commerce and in fact Illinois laws are hampering modern commerce.

With the modern ecommerce line of reasoning embedded in a S.C. decision in Wayfair, does the reasoning get utilized in decisions like Lebamoff  to overturn state bans on out-of-state shipments?

The second and third issues pertain to state reactions to Wayfair.

Second, Illinois indicated that in light of Wayfair they may issue something (probably letters/notices) pertaining to tax to entities shipping into the state. I imagine this would be aimed at unregistered entities like out-of-state retailers. If Illinois issues these notices, we need to make sure that the business in which the notice is issued is availed to the fact that taxable presence is only established with 200 separate transactions or $100,000 of sales. Not doing so in my mind would be a wrong and an arbitrary practice.

Third, an Illinois statute indicates that a retailer is maintaining a place of business in the state if they have gross receipts of $100,000 or more from sales of tangible personal property or enters into 200 or more separate transactions pertaining to tangible personal property.

This leaves an interesting question unanswered, can retailer challenge Illinois by indicating they could make $100,000 worth of sales to Illinois, then be considered as maintaining a place of business in the state, and at the same time Illinois considers them maintaining a place of business in the state,  somehow finds a way not to license them. This is ripe for a legal challenge.

 

Hood v. Wine Express

In this case Mississippi law enforcement officials purchased wine from a New York retailer and had it shipped to Mississippi. The sale occurred in New York and Wine Express worked with the Mississippi agents to have it shipped via common carrier. Mississippi sued Wine Express indicating that it shipped wine illegally to the state and to dry counties. It attempted to use its long-arm statute to impose jurisdiction over Wine Express. Wine Express countered the claim by stating that based on contract and property laws and based on the UCC principles, the valid sale happened in New York and not Mississippi.

Richard started off the discussion by asking, what law allows a state to stop out-of-state shipments, is it the inherent powers of the 21st Amendment, or is it the law the retailer relies on that it is the law in my state and principles of contract and property law says title transferred to the buyer in my state?

Richard indicated that nobody wants to talk about this issue because if it gets resolved, one way or another, somebody wins big and someone loses big. Richard indicated colorfully nobody is ready to push the button and go nuclear on this issue.

Wes started off talking about state undercover stings, they are great but problematically, there is absolutely no jurisdiction. He indicated that in Hood jurisdiction is kind of funky, Mississippi had no jurisdiction and this is why ecommerce cases are very scary. When you read the briefs, Wine Express’ lawyer extensively cited to the UCC and stated that the sale takes place in New York, its FOB New York and if you want to ship to Mississippi we will help you. Under Mississippi law that is a perfectly a legal NY sale and Mississippi lost jurisdiction in this case.

The question becomes how does this violate the commerce clause, essentially there is no commerce clause violation and Mississippi had no remedy under contract law!

Ultimately even if you have long –arm jurisdiction, how are you going to demonstrate in the age of Amazon that the sale is happening in your state? This becomes a real challenge to legislators and regulators that don’t have any federal legislation or guidelines to rely on.

The interesting questions that Wes and Richard discussed is how do these cases get resolved? If the out-of-state retailers can prove via valid property and contract law that the transactions are happening in their state, then we have a truly national market. If the opposite is proven then it is back to the days of the 60s where the state regulators have unlimited control.

 

Missouri Broadcasters v. Taylor

There was an analysis provided by the whole panel.

Wes’ analysis:

Temperance is dead, when you read this case, and when you read the opinion of Justice Stevens in Liquormart, he said that underage drinking is not curtailed by liquor advertising bans. Further, in Granholm they threw out the under age drinking justification as a reason for discrimination. In the RDN case in California, even the final decision would not accept temperance, and in this case they obliterated the temperance argument.

Wes stated that the scary takeway from this decision is the judge’s view that the three-tier system has been blurred if not wholly abandoned. This is scary stuff!

 

My analysis:

I agree with Wes that temperance is dead.

Pertaining to the issue of maintaining the integrity of the three-tier system, it is interesting when comparing this case with RDN, California provided evidence of why the exceptions do not blur the three-tier system while Missouri did a terrible job proving this.

With every state having exceptions to the three-tier system, does the judge’s decision become a scary precedent that looks at every three-tier system as being blurred or even abandoned, and have we let the beast out of the cage!

I personally think this a decision in isolation, if not we have a bigger problem.

 

Chris’ analysis:

As you continue to provide exceptions and break down the three-tier system, you face questions of why are you upholding that system?

 

Richard’s thoughts:

Temperance is not dead, regulators have lost their way in what temperance means. In the old days you could say temperance in court and you win, now that has changed. It is not that temperance is dead, it’s that it has to be recalled. The state needs to research and provide evidence to back up their point. Temperance is still a strong principle of the three-tier system.

 

Final last point

Richard posed a final and interesting question to leave you with.

How much of the alcohol law as we know it will survive?

It is not only the changing technology but industry members willing to challenge the laws that threaten the current system.

 

 

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