Michigan proposes liquor legislation, beware!

The Michigan legislature has proposed several pieces of legislation that will become problematic if passed into law.

The legislative bills if passed, will grease the palms of the Michigan wine and beer wholesalers, and leave the State of Michigan vulnerable to Constitutional challenges.

SB 934-Unconsitutional legislation which would violate the Commerce Clause

Based on SB 934 Michigan could become subject to a Commerce Clause Constitutional challenge. SB 934 allows a small winemaker (a winery manufacturing less than 50,000 gallons a year) or an out-of-state entity that is equivalent to a small winemaker, to self-distribute their product to retailers. However, the proposed legislation requires any winery self-distributing to utilize their own employees and deliver the wine in company owned vehicles.

Although this law is not discriminatory on its face, as both in and out-of-state wineries can self-distribute and are subject to the same regulatory requirements, the law violates the Commerce Clause based on having a discriminatory impact. It is exceedingly difficult for a California small winemaker to meet these requirements, while it is easy for a Michigan small winemaker to meet these requirements.

In Cherry Hill Vineyards, the Sixth Circuit held that a Kentucky law requiring a consumer make an in-person purchase before wine could be shipped, violated the Commerce Clause. Although the requirements were the same for both in-state and out-of-state wineries, the impact was not the same.

The Sixth Circuit held that the practical effect of the law was discriminatory, because the in-person requirement made it economically and logistically infeasible for most consumers to purchase wine from out-of-state wineries.

Because of these logistical and economic barriers to out-of-state wineries, Kentucky wineries benefited from less competition, and Kentucky’s wholesalers received the benefit of wineries that would have bypassed the three-tier system and ship directly, if not for the law.

The Court determined the law’s in-person purchase requirement was a burden on interstate commerce and was clearly excessive in relation to the putative local benefits.

Finally, the Court considered whether the statute, “advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory means.” The state argued similar to Granholm that the in-person requirement was necessary to prevent underage drinking and tax avoidance. The Sixth Circuit dismissed these justifications as reasons to discriminate. Cherry Hill Vineyards, LLC v. Lilly, 553 F.3d 423 (6th Circuit 2008)

SB 934 allows self-distribution for small winemakers if they deliver with their employees in company owned vehicles. Similar to the Kentucky law ruled unconstitutional in Cherry Hill Vineyards, the proposed Michigan legislation’s practical effect discriminates against out-of-state small winemakers. The company owned vehicle requirement makes it economically and logistically infeasible for many wineries including wineries a far distance from Michigan to enter the marketplace.

Additionally, SB 934 provides an advantage to Michigan small winemakers over out-of-state small winemakers in that because of the economic cost, the small winemaker cannot take advantage of the law’s benefit and must go through an in-state distributor. This raises the cost of the out-of-state small winemaker’s wine versus the Michigan winemaker.

Even if the law discriminates, which it does, it could be upheld if it advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory means. I cannot see a legitimate local purpose for this proposed law which would sustain a Commerce Clause challenge.

SB 1138 also has a similar provision which pertains to small distillers.

SB 1139-Redefining wine and excluding wines from being direct shipped to consumers. Is the state attempting to take seltzers considered wines out of the DTC market and put them into the hands of wholesalers to exclude certain products from being shipped?

Another issue is Michigan will redefine wine. There is the traditional definition of wine and then there is wine in a separate category. The legislation defines this other wine as “a product that contains 16% or less alcohol by volume consisting of spirits mixed with nonalcoholic beverages or flavoring or coloring materials and that may also contain 1 or more of the following; (i) water. (ii) Fruit juices (iii) fruit adjuncts (iv) sugar.”

Under the proposed legislation, any wine falling into the second category could not be shipped via a wine shipping permit. This would seem to be aimed at seltzers and harder mixed drinks that could be considered a wine.

Under current Michigan law, drinks with fruit juices and fruit adjuncts are considered mixed spirits drinks.[1] Spirits are distributed by the state of Michigan whereas wine is distributed by private wholesalers. The proposed legislation moves this category out of the state’s control to the private wholesalers.

So, the question becomes, why redefine spirits into wine?

With the growing popularity of the fruity type drinks, the wholesalers desire to take the category for themselves and take it away from the state.

Remember they also wrote this legislation to have their cake and eat it too. These spirits now considered wine will not be eligible for direct shipping and must go through the wholesalers.

In essence, the wholesalers helped grease the language through maneuvers and reclassifications to add to their pocketbooks, while at the same time denying consumers a greater access to these fruity drinks that have become so popular.

There is no good policy reason to classify these liquors from mixed spirits drink to wine and then make this a special category of wine not eligible for shipping.

This legislative proposal is a gift to enrich the Michigan Beer and Wholesalers and nothing less.

SB 1139-Violations of the First Amendment

If a supplier has product that retailers will sell or ship to Michigan residents, it must put the name and link of every retailer which will ship product for the supplier.

The requirement that every retailer be listed on an advertisement or website may violate the supplier’s 1st Amendment rights. In the Missouri Broadcaster’s Association case the Eight Circuit upheld a lower court decision, which held it is a violation of the 1st Amendment to dictate that a supplier is required to put more than one retailer on its advertising.[2]

Even though Michigan is in the 6th Circuit, the law may face a challenge based on the 8th Circuit’s ruling.

A law mandating suppliers provide the address and link of every retailer that sells their product is a little extreme and definitely subject to legal challenge.

SB 1138-Impact on wine retailer shipping

Michigan may be drafting its legislation to make it harder for out-of-state retailers to ship in if Michigan loses Lebamoff at the U.S. Supreme Court, or wine retail shipping becomes legal down the line. Under Michigan law a specially designated merchant license (sdm license) is required for a retailer to ship wine.

Presently, under Michigan law, only Michigan retailers can hold a sdm license and ship wine to Michigan consumers, a privilege denied to out-of-state retailers.[3] Under the proposed legislation to hold a sdm, an entity would need to be a “qualified retailer”.

Under the legislation a sdm license is held by a “qualified retailer”. In the original law the license was held by a retailer. This distinction is important because the legislation adds many requirements to a “qualified retailer”. Under the legislation a qualified retailer is required to maintain at least 25% of its sales from face to face transactions, the retailer must sell in addition to alcohol, packaged food and other consumer products, and the retailer is required to hold and maintain a retailer food establishment license.

A couple of observations, if wine retailer shipping becomes legal and the sdm applies to out-of-state retailers, how will out-of-state retailers comply with this statute?

I think the last requirement about holding and maintaining a retail food establishment license under Michigan law is impossible for out-of-state retailers to comply with. Hence, this provision will change or be deemed unconstitutional if it becomes law.

But I think the big takeaway is this legislation is meant to strike at internet only retailers from other states. When wine retailer shipping becomes legal, the 25% face to face sales requirement is meant to preclude an internet only retailer from shipping into the state.

The thing to watch out for is what will occur once wine retailer shipping becomes legal. Will Michigan plan on leaving these requirements in place, or will they change them?

[1] Mich. Comp. Laws § 109 (7)

[2] https://irishliquorlawyer.com/8th-circuit-missouri-broadcasters-decision-the-state-loses-the-battle-but-avoids-losing-the-war/

[3] Mich. Comp. Laws § 436.1203(3), (15)