Can states ban certain wine parcels?

Tuesday the Supreme Court considers how New York and Michigan have regulated out-of-state shipments.

When Prohibition was repealed in 1933, state governments were granted an extraordinary power - the authority to ban alcohol within their borders.

It is a power that no state, acting alone, had possessed under the US Constitution until passage of the 21st Amendment.

Now, more than 70 years later, that authority is at the center of a US Supreme Court battle that could change the face of the liquor industry, opening the door for widespread direct-to-customer sales over the Internet.

At issue is the scope of state power to regulate alcohol. Tuesday, the high court takes up three consolidated cases examining whether Michigan and New York have the authority to enforce state regulations that favor in-state wine producers.

If the dispute involved any other legal product - from cheese to washing machines - clearly the answer would be no. The US Constitution's commerce clause establishes and protects a national common market, mandating free interstate trade.

But because of the fallout from America's failed 13-year experiment in temperance, alcohol retains a special status within the Constitution. That is why the 50 states have 50 different ways of regulating alcohol.

Although the 21st Amendment gives the states that power, it isn't clear how far the power extends.

On one side are Michigan, New York, and 33 other states arguing that the 21st Amendment gives them near total control over alcohol - including the authority to enforce regulations that may create certain hardships for out-of-state producers.

On the other side are producers, potential consumers, and free-trade advocates. They acknowledge the state power to regulate alcohol, but they say that power must be wielded on an evenhanded basis so that whatever restrictions or benefits apply to in-state producers must also restrict or benefit out-of-state producers.

"States can prohibit [alcohol] altogether or permit it on whatever terms they wish. The one thing they cannot do, in our view, is discriminate based on the [out-of-state] origin of the product," says Clint Bolick, a lawyer with the Institute for Justice, which is representing a group of out-of-state wine producers.

The affected states disagree. "Nothing in the text of the 21st Amendment limits the states in how they may choose to set up their regulatory framework to deal with the transportation, importation, and distribution of alcoholic beverages," says Michigan Solicitor General Thomas Casey in his brief to the court.

How a majority of justices resolve the issue could be worth billions of dollars to the liquor industry. If the high court strikes down state restrictions that discriminate against out-of-state producers, it would probably mean lower prices and more selection for consumers.

But it could also make it easier for minors to obtain alcoholic beverages. Some states say that a ruling against them would make it harder to police the liquor industry and collect taxes on alcohol sales.

Lower federal courts have split over the issue. Federal appeals courts based in New York and Chicago have permitted states to enforce their regulations as written. Appeals courts based in Cincinnati, New Orleans, and Richmond, Va., have barred regulations they view as discriminatory.

The New York and Michigan cases involve challenges by out-of-state wine producers. The producers want to be able to sell and ship their wine directly to consumers in New York and Michigan. But both states prohibit direct shipments by out-of-state wineries, requiring that such shipments first pass through the hands of an in-state licensed dealer.

Out-of-state wineries say the required double shipments they face raise the price of their product and amount to a protectionist effort to favor in-state wineries.

Michigan and New York reply that their state's regulation of the liquor industry depends in part on industry members maintaining a physical presence within the state. If there are violations, state officials know where they can go to enforce the law quickly and efficiently.

Not all states require a physical presence. Roughly half of states permit direct shipments from out-of-state producers to customers. Twenty-four states prohibit it, according to briefs filed in the case.

Mr. Bolick says that states have a wide range of regulatory tools other than requiring liquor producers to open new business operations in each state, a requirement that disadvantages small, family-run wineries. "States may condition the right to engage in business on a permit so that if a winery disobeyed the law, it could lose the right to operate in that state," he says.

The last time the Supreme Court confronted a similar case was 1984. The justices ruled 5 to 3, striking down a discriminatory tax scheme in Hawaii involving imported alcoholic beverages. But only three members of that court remain on the high court, and all three were in dissent.

Justice John Paul Stevens said in his dissent that the court was misreading a 1936 precedent that had broadly construed state power under the 21st Amendment. "If the state has the constitutional power (under the 21st Amendment) to create a total local monopoly - thereby imposing the most severe form of discrimination on competing products originating from elsewhere - I believe it may also engage in a less extreme form of discrimination that merely provides a special benefit ... for locally produced alcoholic beverages," Justice Stevens wrote in the dissent.

"That is the burden we have to overcome," Bolick says when asked about Stevens's dissent. "We hope those justices will honor that 1984 precedent even though they disagreed with it."

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