Michigan attempts to restrict DTC wine shipping will create major problems!

Proposed legislation in Michigan that targets out-of-state wine direct shippers would have a devastating impact on the State of Michigan.[1] If passed the proposed legislation would rob Michigan of tax revenue, severely restrict consumer choice, and would leave the state vulnerable to a constitutional challenge.

Proposed legislation

Michigan Senate Bill No. 1138 would redefine what constitutes a direct shipper of wine. Specifically, the bill would not allow a winery to ship wine to Michigan consumers if the winery holds “a license in another state that is the substantial equivalent to a retailer license.”

Although the proposed legislation makes these distinct changes, the legislation does not change the present law which allows a winery to perform wine tastings or selling at retail wine they produce or bottle or have made for them.

So, what does this all mean? Many out-of-state wineries would be excluded from the marketplace, while Michigan wineries would not be subject to the same prohibition as out-of-state wineries.

Over 2,400 California wineries hold a Michigan direct shipper’s license. A good number of these California wineries hold a retail license along with their winery license, a practice permitted under California law. These wineries would be excluded from shipping wine into Michigan.

Also, wineries that sell alcohol they don’t produce, would be subject to Michigan’s prohibition and be shut out of the Michigan marketplace. The right to sell product other than their own, a right afforded under their own state laws, would make their license substantially equivalent to a retailer license.

For example, in Illinois a wine-maker’s premise license allows a wine-maker to sell beer, wine, and spirits of other manufacturers on its premise. Under Michigan law, this specific Illinois license holder, would not be allowed to ship its wine into Michigan.

Tax and Consumer Choice Impact

If this legislation passes, the negative impact on Michigan could become severe. Michigan consumers demand out-of-state wines and want to purchase these wines. If numerous California wineries and wineries from various other states are shut off from the Michigan marketplace, consumers could not purchase the wines they demand, and the state would lose tax revenue from the purchases not being made.

The fiscal note on Senate Bill 1138 indicates “the bills would have no fiscal impact on State or local government.” I think the facts would show otherwise!

Constitutional Challenge

Problematically, Michigan’s proposed law intends to eliminate numerous out-of-state wineries from the marketplace, even though these wineries are operating legally in their own state. The proposed action could run afoul of the Constitution and land Michigan in court.

In Baude v. Heath, the Seventh Circuit overturned an Indiana law requiring wineries that wanted to sell direct to consumer to abide by an Indiana law that if a winery wanted to sell to retailers, it was required to go through the three-tier system. If a winery resided in a state where the winery is allowed to sell directly to retailers under their own state laws, the Indiana law would forbid them from accessing the state’s wine shipping markets.

The Seventh Circuit held that that because Indiana’s law prevents direct shipment of almost all out-of-state wine, while allowing all wineries in Indiana to sell direct, its law was unconstitutional.

The Seventh Circuit indicated that the Indiana law could only stand if the putative local benefits could possibly justify the burden on interstate commerce.

Similarly, Michigan is imposing its laws on out-of-state wineries as a condition for accessing the direct-to-consumer market. This will result in precluding many out-of-state wineries from competing with Michigan wineries in the marketplace. As the proposed Michigan law clearly interferes with interstate commerce, it would only stand if there are putative local benefits that could possibly justify the burden on interstate commerce. Identifying these benefits seems very difficult if not impossible.

Conclusion

Michigan’s proposed legislation has many problems. Numerous out-of-state wine shippers may be closed off from the market which will impact tax revenue and consumer choice. The fiscal note that the bill has no fiscal impact does not reflect reality, and the bill on its face leaves the state with a constitutional conundrum.

Michigan should jettison the proposed legislation and leave a law that was operating perfectly, alone to its own devices.

[1] http://www.legislature.mi.gov/documents/2019-2020/billintroduced/Senate/htm/2020-SIB-1138.htm