Tennessee, we have a constitutional problem

Tennessee HB 0742 and SB 0705 represented an ill-fated attempt to ban fulfillment houses from shipping wine to Tennessee residents. Based on a groundswell of opposition and the legislative sponsor actually gaining an education on wine shipping, the fulfillment house ban provision was taken out of HB 0742.

However, all is not well in Tennessee, HB0742/SB 0705 still attempts to subject fulfillment houses to legal provisions that violate constitutional norms.

Under HB0742/SB 0705, Tennessee would require fulfillment houses become licensed, even though fulfillment houses perform no business activities in the state.

Under the Constitution to become subject to state regulatory jurisdiction, a business must be “doing business” in a state. Many U.S Supreme Court decisions were decided on this issue, and the U.S. Supreme Court was very clear on this constitutional standard.

The “doing business” provision protects a business from becoming subject to regulatory jurisdiction, when it is not performing activity in the state.

If it wasn’t for the “doing business” provision, a state could bring a business into a legal proceeding, no matter how tangential a businesses’ connection is to the state. The “doing business” provision acts as a check on government regulatory power and ensures there is no government overreach.

A fulfillment house provides a service to a winery who direct ships wine to consumers. Mainly, the fulfillment house stores wine and packs it and gets a package ready to put on a UPS or FedEx truck.

The fulfillment house gets paid for these services by the winery, not by the consumer in Tennessee. A fulfillment house does not sell products to Tennessee residents, and if it is not located in Tennessee, the fulfillment house does not perform services in the state.

Problematically, HB0742/SB 0705 attempts to strong arm businesses to become subject to Tennessee’s regulatory jurisdiction, even though Tennessee’s jurisdiction over these businesses is nonexistent and questionable at best. Tennessee mandates that fulfillment houses sign a form consenting to Tennessee jurisdiction and mandating the fulfillment houses turn over information to the state. To the State of Tennessee, I say good luck with that.

So, it begs the question, if there is a questionable basis for jurisdiction, why would fulfillment houses comply?

First, fulfilment houses may after the original version of the legislation, look at this version as the lesser of two evils. Second, the state regulatory agencies hold great sway over common carriers, and may convince the common carriers that if the fulfillment house does not have a Tennessee license, they should not do business with them. Cutting off common carrier access to a fulfillment house would kill the fulfillment house’s business.

Tennessee politicians justify the fulfillment house licensing scheme on the premise that many unlicensed wine shipments originate from fulfillment houses.

What Tennessee politicians fail to mention is common carriers must already file direct shipper delivery reports. Because the common carriers enter into the state and do business there, Tennessee already maintains jurisdiction over them. Tennessee should already have the information necessary to track wine shipments. Being armed with the common carrier reports, means it is duplicative for the state to require another entity to provide this information.

Further, if you want to stop illegal wine shipping, go after the winery! The 21st Amendment Enforcement Act allows the state to go to federal court to enjoin what they deem an illegal shipper from shipping wine into the state. The 21st Amendment Enforcement Act does no apply to fulfillment houses.

Sadly, Tennessee’s present legal enforcement mechanisms are not deemed as enough for them. Tennessee desires to force fulfillment houses to act as an additional policing entity.

But this raises an important question, is increasing the police state by violating Constitutional norms, the standard we want to set in a Constitutional republic! If we start with this trend in Tennessee, what will come next?

When I discussed this issue with a fulfillment house client, he did not know any other state which requires a license for out-of-state fulfillment houses. Mainly, because these businesses are not involved in the business of selling alcohol and the state has no constitutional basis for licensing them.

Tennessee, clearly bit the big one and got out in front of everyone in the worst way possible. In the end, you can highlight your tips, but at the roots your true colors really show.