By Cole Boehler In Washington, D.C., it's called "blowback."
These are the unforeseen, unintended–and usually negative–consequences of a policy decision.
Usually the blowback isn't manifested immediately, sometimes not for years. In the following case, the fallout was immediate and is ongoing.
It is a somewhat complicated tale that everyone involved in the beverage alcohol industry should be following, for at stake are important long-term consequences of which no one, at this point, is certain, other than that it will affect producers, wholesalers, retailers (yes, even those in Montana), regulators and consumers alike.
Recent developments in the judicial and legislative arenas have jolted the 21st Amendment to the U.S. Constituition–the one that repealed the 18th Amendment which imposed Prohibition, and gave states the power to regulate beverage alcohol largely as they best saw fit.
As our economy has moved from a local, to state, to regional, to national and now international scope, great pressures are being brought to bear on tearing down geo-political barriers to enhance "free commerce"–some would say "anarchic commerce" totally devoid of responsible regulation.
international mega corporations want trade to flow unrestricted between nations, across state lines and between companies. This has alcohol commerce caught in a mega vise. As a result, the right of state's to regulate alcohol is under attack on a number of fronts.
In brief... Here in Montana, we have seen a challenge to our state's statutory prohibition against out-of-state residents owning retail alcohol licenses that succeeded. Today, an entrepreneur in Modesto, Calif., can own a Montana license as can, presumably, a Hong Kong merchant.
Some expect continued challenges of Montana's carefully constructed regulatory scheme, the result of over 70 years of enlightened policy bought at the price of mistakes and experience.
Giant retailer Costco has successfully challenged much of Washington state's regulatory system, including, and especially, Washington's prohibition on retailers buying directly from producers and even retailers functioning as wholesalers.
Right now, Washington is doing a down-to-the-bedrock examination of it's traditional three-tier system of keeping alcohol producers, wholesalers and retailers operating in separate spheres–proven, sound social policy backed by historical precedents and cases too numerous and complicated to venture into here.
Then there's the recent U.S. Supreme Court case that indirectly skewered the whole notion of three separate tiers, breaching the dam that has held back a horizontal integration of the industry, where the lines between producers, wholesalers and retailers could become blurred or obliterated.
Why do we care? Why should Montanans care? Because as the legal basis for state regulation is weakened elsewhere, so is the Montana system of carefully controlled alcohol production, distribution, retail sales and consumption weakened.
In an era where everyone–producers, wholesalers, retailers and citizens, especially parents–is calling for increased regulation of beverage alcohol, particularly when it comes to abuse and underage access, it seems entirely contradictory that a few powerful commercial interests are working to dismantle the system that has been so judiciously devised and demonstrably effective over more than seven decades.
The point of the attack In the name of economic development, a number of states had implemented laws to allow small, homegrown "farm wineries" to bypass the traditional alcohol control mechanisms built up since the repeal of Prohibition.
Policymakers determined that these small enterprises could be nurtured by removing some controls that govern shipments, wholesaling, retailing and taxation traditionally applied to more industrial producers of wine, beer and spirits.
The "boutique" wineries within some states' borders were authorized to market their products directly to consumers through wine clubs, direct-mail catalog and internet sales.
Fair enough. The reasoning went: Why not allow the local micro producers some competitive advantages over the mega vineyards on the west coast?; level the playing field so to speak by diminishing the advantages that accrue with size?
Just one problem: the big wineries, represented by front groups such as Free The Grapes and the Wine Institute, would tolerate no advantage for the small upstarts. They challenged the "direct shipping" allowances made for in-state wineries in New York and Michigan and in May 2005 wound up victorious in Granholm v. Heald fought out in the U.S. Supreme Court.
Blow it open or close it down? In that landmark decision, the court held that, under the interstate Commerce Clause of the 14th Amendment, states cannot enact laws or policy that discriminates between in- and out-of-state wineries.
This left states which allowed direct shipping from producer to consumer for in-state wineries but prohibited it for wineries outside their borders, essentially two choices: prohibit all direct shipping or open it up to wineries everywhere, perhaps even to those outside the U.S.
Unintended consequences Some states chose closing it down, which caused an immediate backlash from local wineries faced with losing direct shipping options and their previously enjoyed advantages.
Other states chose to open it up to all, with a new layer of regulation to assure proper tax collections and to limit underage access. However, it has been found most did not implement or fund an enforcement mechanism.
In this case, local boutiques were faced with massive new competition from the big wineries and wine groups along with new compliance costs, including shipping surcharges levied by shippers now required to obtain age verification and face-to-face delivery.
Some criticized the chaotic situation that followed (33 states allowing direct shipping require 595 different reports–welcome to the world of regulated alcohol commerce), noting the shipping pipelines were full of leaks; that states were unable to collect taxes and that dangerous underage access was a reality.
Others, particularly bricks-and-mortar retailers whose business models were built on traditional regulation, complained they still had to bear the regulatory and tax costs while the direct shippers using internet and catalogs escaped them, creating an uphill competitive field.
Spinning the result But the big wine lobby hailed the new age of "consumer freedom" and "consumer choice" and "fair competition" as they ramped up their "new age" marketing power, as though wine were simply a commodity like jeans or potato chips, disregarding that alcohol is a powerful intoxicant when abused and that, as such, is the only commodity dealt with specifically–twice–in the U.S. Constitution.
Whenever a critic voiced the problems associated with deregulation, particularly the issue of underage access, the notion was pooh-poohed as a red herring; a mere scare tactic promulgated by wholesalers interested in retaining profits and a healthy business.
"Youth aren't interested in acquiring high-end wines over the internet," defenders of deregulation contend.
The breach is widened But here is the rub: some legal scholars have said that, under Granholm v. Heald, there is really no legal distinction between wine, beer or spirits; that alcohol beverage is alcohol beverage, and warned it wouldn't be long before beer and spirits interests were asking for the same "direct shipping rights" enjoyed by wine producers.
Of course, that has already come to pass.
The leaks are real Further, it has been proven, by this publication for one, that not only wine but also spirits can right now be ordered over the internet with no proof of age at purchase, and no proof of age–not even a face-to-face encounter–at delivery.
In a report in the September 2005 edition of the Montana Tavern Times, it was detailed how easily a bottle of liquor was ordered with no proof of age, and left by Federal Express on a porch when no one was home. Similar "internet stings" have been conducted by other entities with the same results.
Despite the proven ease of underage access, those pushing for direct shipping and deregulation continue to laugh off any claim that direct shipping is far from fail-safe.
Gaining traction The whole conundrum recently found the national spotlight again when the Wine and Spirits Wholesalers of American (WSWA) released the results of a survey and other research that illuminated the extent of the problem.
In a nutshell, the WSWA information found that millions of America's youth had ordered–or knew someone who did–alcohol from the internet. In addition, the survey found only five states had implemented or funded any kind of effort to control or regulate shipments of alcohol beverage direct from producer to consumer.
According to WSWA Chairman Stan Hastings, "Millions of minors either buy alcohol on-line with ease or know an underage friend who does. This is a dangerous situation. For the first time, we have hard evidence that millions of kids are buying alcohol on-line and that the internet is fast becoming a high-tech, low-risk way for kids to get beer, wine and liquor delivered to their home with no ID check.
"This landmark data is alarming because state legislatures are rushing to allow wine and other on-line alcohol sales at a time we know regulatory agencies are telling us they are unable to monitor these types of sales because they lack manpower and resources."
The research A new survey conducted by Teenage Research Unlimited (TRU) confirms that a significant number of teens purchase beer, wine and liquor on-line. Specifically, TRU's survey of 14- to 20-year-olds confirms:
--3.1 million minors (12 percent) ages 14-20 report having a friend who has ordered alcohol on-line.
--Two percent (551,000) of those ages 14-20 say they personally have bought alcohol on-line.
--As exposure and awareness of buying alcohol on-line increase, even more minors can be expected to purchase wine, beer and liquor on-line. This is consistent with a 2003 National Academy of Sciences report which confirmed kids are buying alcohol on-line and that increasing use of the internet will make this problem worse in the future.
--Nearly one in 10 of those ages 14-20 have visited a site that sells alcohol.
--One-third–nearly 8.9 million ages 14-20 nationwide–are open to the possibility of an on-line alcohol purchase before age 21.
--Seventy-five percent say their parents aren't able to control what they do on the internet.
--Among those ages 14-20 who have tried alcohol, 75 percent tried liquor, followed by wine at 64 percent, beer at 60 percent and wine coolers at 55 percent.
Richard, a high school student who didn't want his last name used, bought liquor on-line and said it was easy. "Most of us live and shop on-line. It is a no-brainier for us to get alcohol on the Web," he said. "Just do a search for 'buy alcohol on-line' and watch all the random sites pop up. That's how my friends and I found someone to ship us a bottle of absinthe."
WSWA CEO Juanita D. Duggan commented, "Allowing alcohol to be sold on-line and delivered to the home is like inviting a 14-year-old to pull up a bar stool anytime he or she surfs the Web. This is a dangerous trend that needs to be stopped. Alcohol should not be sold on-line and state regulators need more resources to be able to enforce their state's alcohol laws, and that includes regular on-line compliance checks."
Broad support for controls "A growing number of individuals and organizations are seeking a ban on direct wine and other forms of alcohol sales," WSWA said. The WSWA-affiliated web-site has more than 24,000 individual supporters who oppose on-line alcohol sales. They are joined by a number of safety, medical, law enforcement and religious groups calling for stronger alcohol sales, distribution and access laws.
A bright light On July 28, 2006, Maine Magistrate Judge Margaret J. Kravchuk submitted a recommendation to Maine's U.S. District Court to reject an Oregon winery's lawsuit seeking to overturn Maine's ban on unaccountable internet, mail and phone wine sales.
Kravchuk wrote, "...wine is an alcoholic beverage that is contraband when placed in certain minors' hands, and the State has concluded that mail order transactions cannot reliably be policed in order to protect certain minors from themselves."
WSWA's Duggan commented, "This smart legal rationale should encourage other states to comply with the Supreme Court ruling by treating all alcohol producers equally and ensuring none are given preferential treatment to opt out of the state-regulated system of alcohol safeguards."
Consistency needed New York Attorney General Eliot Spitzer recently led a successful effort by 33 state attorneys general, leading credit card companies and overnight delivery services to ban the sale and delivery of on-line tobacco products, in part because it was too easy for kids to buy tobacco on-line.
"State officials and delivery companies talk out of both sides of their mouths when they ban on-line tobacco sales to protect kids as they embrace on-line alcohol sales. If we don't trust rushed FedEx and UPS drivers to card kids for cigarette shipments, why on Earth should anyone trust them to card kids for vodka and merlot shipments," Duggan said.
Copies of the complete teen survey and audit of state regulators can be found on-line at
.
The WSWA state audit An audit of the states was conducted to document what regulators and law enforcement know of the direct shipping/underage access issue, and whether any state agency has investigated alcohol access through on-line compliance checks similar to those conducted routinely on brick-and-mortar establishments.
The audit found: 39 states and the District of Columbia, have conducted no on-line compliance checks to determine if minors can purchase alcohol; six states did not know whether compliance checks had been conducted and of those, two could not identify the jurisdictional agency; in four states WSWA researchers were able to speak with personnel in the correct agency but individuals did not know whether stings had been conducted.
Finally, only five states have conducted on-line compliance checks to determine if minors can purchase alcohol, and in every case agency personnel indicated an on-line sale of alcohol to a minor would have been possible.
How'd Montana do? According to Shauna Helfert, administrator of the Liquor Division of the Montana Department of Revenue, if a survey was sent to Montana, it never arrived on her desk or anyone else's that she knows of. WSWA did not respond to two requests regarding results from Montana.
Helfert did say, had Montana gotten the survey, she would have responded that, indeed, direct shipping and on-line sales compliance is in the bailiwick of the Department of Revenue, but that the liquor investigative function has been transferred to the Department of Justice's Gambling Control Division. That happened several years ago when the liquor and gaming license investigations were combined to streamline the process.
She also said that in her knowledge no direct shipping investigations or enforcement have occurred and that no money has been budgeted for them. She added that tobacco tax enforcement "is another (on-line sales) matter" that has been receiving priority.
No direct shipping of spirits into Montana is allowed under state law, and beer and wine may only be shipped direct-to-consumer with the proper "connoisseurs license" in place and with producers properly licensed by the state.
Helfert added that she was "very concerned" with the finding in the WSWA report and would be "looking at what other states are doing and what options we have." She did not rule out the possibility of future direct shipping compliance checks.
NBC weighs in NBC Nightly News latched onto the WSWA report in a featured segment August 9, where they, too, much to their alarm, found internet access to all alcohol beverage without age verification at purchase or delivery was a grim reality.
NBC reported, "Massachusetts, Texas and Virginia have launched undercover investigations of on-line sales to minors and they all found it very easy to do.
"So did NBC News. Two packages were delivered to a state where mail order alcohol is illegal; one was delivered to a 15-year-old who happened to be standing in the front yard, no questions asked. Only one came marked as alcohol. The others came in brown paper wrappers. There is no indication anywhere wine is in one, grain alcohol in the other.
"And some on-line sellers blatantly flaunt the law. One Web site says it ships 'discreetly in plain packaging.' It warns making absinthe is illegal, but adds: 'Don't worry, we don't think the Feds will shoot a stun grenade through your window for placing a little on-line order.'"
And, apparently, neither will the state authorities.
USA Today had their spin The USA Today report took a different tack with a different spin in its August 9 report, choosing to use percentages (where "only" 2 percent translates into a half-million youths) to minimize the raw numbers.
"A year after the Supreme Court made it easier for wineries to ship products to customers in a different state, a new survey indicates that teens haven't necessarily rushed to use the internet to buy alcohol, as critics of the court's decision have feared," the USA Today report stated.
"The survey by Teenage Research Unlimited (TRU) in Northbrook, Ill., found that 2 percent of youths ages 14-20 reported having purchased alcohol on-line (editor's note: in Montana, this would be 2,500-3,000 kids making illegal internet purchases), and that 12 percent (editor's note: over 10,000 Montana kids) reported having a friend who had ordered alcohol on-line.
"It's unclear how many teens were buying alcohol on-line before the court's ruling, but the TRU survey suggests such purchases are rare."
Change the focus The big wine interests shot back immediately, trying to shift blame for illegal youth access to traditional retailers. There was no admission that internet or mail order alcohol sales were problematic and potentially set to explode as other channels of youth access are shut down, and as youth use of the internet for purchasing grows exponentially.
Instead, they claimed effective safeguards are in place to prevent underage access at both the point of purchase and point of delivery, all patently proven false by every entity that has cared to conduct a check.
The Wine Institute A news release from this backer of deregulation said, the "Wine Institute questions whether this WSWA survey is motivated by concern over underage access or is another misguided attempt to protect their distribution stronghold following a major defeat in the Supreme Court."
And the deflection: "Any legitimate survey of the issue would also include a review of underage purchases at retail establishments and consider the important role that parents must play in the home where alcohol is most easily procured. Wine Institute believes WSWA should channel its resources into such efforts instead of financing surveys and slick publicity campaigns."
Finally, Free The Grapes In an attempt to "kill the messenger," Free The Grapes–"a national grassroots coalition whose goal is to ensure consumer choice in wine"–issued this caustic release: "The wine wholesaler cartel today trotted out a tired argument already dismissed by the U.S. Supreme Court, the Federal Trade Commission, and state alcohol regulators.
"The intent of the Wine & Spirits Wholesalers of America's 'survey' on underage access is to deflect attention from their real motivation: economic protectionism," said Jeremy Benson, executive director of Free the Grapes! "But now, the courts, Federal Trade Commission, and state legislatures are supporting consumer choice and responding with reasonable regulations and controls," he added.
Montana Montana is a state that allows no direct shipping of alcohol, with one exception: citizens can apply for a "connoisseurs license" which allows them, within limits, to purchase wine directly from wineries–in-state or out–so long as they secure the permit, report purchases and pay requisite taxes.
That law requires a $50 permit to direct-order wine and $50 to direct-order beer or $100 to do both. Permittees must agree to file semi-annual reports detailing purchases and to pay the usual taxes. Proof of age is required with the application. Any producer shipping direct to a Montana consumer must be registered with the state.
A statement issued August 15 by Montana Department of Revenue Director Dan Bucks, in response to a Montana Tavern Times inquiry, said, "At the Montana Department of Revenue, we take the issue of underage drinking very seriously. For that reason, we are not considering expanding sales of alcoholic beverages directly to consumers, especially in ways that could make alcohol easily accessible to our youth."
The statement continued, "The recent Granholm decision does not require a state to authorize sales directly to consumers, bypassing licensees and agency stores. It merely requires us to treat in-state and out-of-state businesses in the same manner. Any changes made in response to the Granholm decision should only be within the framework of face-to-face sales through licensees."
Such a statement would seem to affirm that the department will seek no legislative changes regarding direct shipping, and will resist efforts to loosen the current laws and regulations. Further, it would seem to indicate that Montana, with its connoisseurs license, is believed to be in compliance with the Court.
Montana Tavern Association
Montana Tavern Association Government Affairs Counsel Mark Staples is in agreement with the department interpretation and position.
He said, "The department's statement confirms what I always believed, that the statutes we crafted was in compliance with the court, so it did not, and does not, discriminate between in-state and out-of-state businesses."
Staples added, "Montana retailers–on- and off-premise–and wholesalers are all working hard to limit illegal youth access to alcohol and all indications are that much progress has been made.
"However," he continued, "studies by the Century Council, and more recently by the American Medical Association, indicate that the real problem of youth access–up to 65 percent of it –is getting it from adult family members and friends, with only 7 percent coming from irresponsible retailers.
"To me, this targeting of our retailers almost exclusively with the resources dedicated to ending youth access is misguided," Staples continued. "We need to be focusing more effort and money on the real problem, and maybe on the developing problem of mail order and internet sales."
Source: The Montana Tavern Times, Sept., 2006, published monthly by Continental Communications, 125 W. Granite St., Suite 102, Butte, MT 59701.