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U.S. Supreme Court decision affects eCommerce

May 18, 2005

The U.S. Supreme Court gave out a ruling this week that US states cannot prevent their citizens from purchasing wine from out-of-state vintners. Such a decision has large implications for eTailers and the eCommerce industry as whole, since it may eliminate barriers in other industries such as cars, contact lenses and even funeral caskets.

In a 5-4 decision opening the door for online wine sales, the court said the 23 states that currently ban direct wine sales from other states constitutionally discriminate against interstate commerce. In those states, direct sales are allowed from in-state wineries, but out-of-state sales are prohibited.

"The mere fact of non-residence should not foreclose a producer in one state from access to markets in other states," Justice Anthony Kennedy wrote in the majority opinion. "States may not enact laws that burden out-of-state producers or shippers simply to give a competitive advantage to in-state businesses."

The case reached the high court late last year after a lengthy journey through the legal system. The Supreme Court consolidated disputed cases in New York and Michigan.

Both states regulate the sale and importation of alcohol through a three-tier distribution system of producers, wholesalers and retailers. The scheme allows in-state wineries to obtain a license for direct sales. Out-of-state wineries, on the other hand, cannot.

"The differential treatment between in-state and out-of-state wineries constitutes explicit discrimination against interstate commerce," Kennedy wrote.

Michigan and New York contended that, among other things, the direct shipment of wine undercuts their ability to police underage drinking and to collect taxes on alcohol, one of the most heavily taxed commodities in the United States.

"The states provide little evidence that the purchase of wine over the Internet by minors is a problem," Kennedy wrote. "Indeed, there is some evidence to the contrary."

Two years ago, the Federal Trade Commission (FTC) produced a report finding that sales to minors is not a problem in states that allow direct shipments of wine.

As for tax collections, Kennedy again dismissed the states' arguments. "If licensing and self-reporting provide adequate safeguards for wine distributed through the three-tier system, there is no reason to believe they will not suffice for direct shipments."

The FTC also concluded in the report that direct wine sales lower prices and increase choices for consumers.

"In wine and other markets' anti-competitive barriers to e-commerce are depriving consumers of those benefits," the FTC report concluded.

"Today's decision is a tremendous victory for e-consumers. Not only will wine lovers in Michigan and New York benefit from the choice, convenience and savings e-commerce provides, but the decision could also threaten other protectionist state laws around the country," Steve DelBianco, executive director of NetChoice, said in a statement. NetChoice filed an amicus brief in the case.

According to NetChoice, "protectionist, anti-competitive regulations" such as New York's and Michigan's are expected to cost American consumers more than $44 billion a year.

"This ruling makes it harder for states to maintain discriminatory barriers that prevent the kind of competition enabled by e-commerce," DelBianco said. "Look for more barriers to fall in markets like cars, contact lenses and funeral caskets," he said.

Source: eCommerce Guide



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