America’s Antiquated System of Wine Distribution

Picture: The White House in Washington DC

What people outside of the US often do not understand is that the US is very much a “Union of States“ and a very decentralized country, often lacking desirable homogeneity. This is evident in many aspects of live. A prime and well known example is the death penalty, which exists in some States but not in others. Most States impose a sales tax, but not all, and those that do impose a sales tax levy it at different rates. In Germany, by contrast, there is uniformly death penality in all States and the sales tax - the VAT- is uniform across all States.

Switzerland is another country that resembles in many aspects the US. There, taxes and laws differ significantly from Canton to Canton. In fact, each of the 26 Cantons has its own constitution and is sovereign to the extent the sovereignty is not limited by federal law.

In the US, one area that comes up again and again in this context, at least among wine consumers, is the way the Americans have organized their wine distribution system. This is in general not only very cumbersome, but differs from State to State. Some States have modernized their wine distribution system, others are well behind. One State that is well behind is Maryland. Dave McIntyre from the Washington Post is inviting readers today to put pressure on the Maryland legislators to reform their obsolete wine distribution system.

My daughter’s parents-in-law live in Maryland. When they order wine on-line, they cannot have it shipped to their Maryland home. They either have it shipped to my home in Virginia or our daughter’s home in New Hampshire. Maryland is one of 17 States that do not allow shipment of wines directly to consumers. There are many other examples. In some States you have to go to a government-run store to by wine. Most States do not regulate prices, but some do.

The only common denominator among the American States is the so-called three-tier system, which exists in some form in every State. In the three-tier system, consumers must buy wine from retailers. Retailers in turn must buy wine from wholesalers. Wholesalers in turn must by from from the producers. Retailers cannot skip the second stage and buy directly from producers. Consumers cannot buy directly from the winery either.

This are in broad terms the main features of the three-tier system, but there are many exceptions. Many States permit wineries to sell bottles of wine on-site to customers, and some States, such as Oregon, permit intrastate shipments of wine directly from the producer to the customer. More than 35 States permit some form of direct shipping, but laws often vary. Some states, for instance, restrict how many wine bottles a person can order, or require that consumers pick up wine shipments at a retail outlet.

Picture: Christian G.E.Schiller

The basis for today's wine distribution system in America is the 21st Amendment, which repealed Prohibition and which specifically gave the States the authority to regulate alcohol sales. The 21st Amendment to the US Constitution was ratified on December 5, 1933. Prohibition end 75 years ago, but the three-tier system has remained.

Generally, you hear 3 groups of arguments, why States do not want to modernize the wine distribution system and rather like to stick with an antiquated regime: (1) The current strictly regulated system makes the collection of taxes on alcohol easier than in a liberalized system. (2) The minimum drinking age in the US is very high by international standards, 21 years. The three-tiers system offers an extra tier through which to limit the alcohol consumption of the young consumers. (3) There are little incentives for those in the wine business and the legislators to change the system as it works fine for them, with the latter often getting generous campaign contributions from the former. In other words, the system serves the interests of a group of insiders at the expense of consumers -- not to mention Maryland's 41 wineries, which are also banned from shipping to consumers.

The internet giant amazon.com had started a pilot project to add wine to it's list of products it sells, but announced a few months ago that it had abandoned the project. Why?

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