HOSPITALITY CHECKPOINT SPOTTER SERVICE
Do you get wine shipped from out-of-state? That may be about to end. Here's why.
Arizona officials have been cracking down on wine shipped to consumers. What are the rules, and will your wine club be cut off?
The Arizona liquor department cracked down this summer on wineries that ship bottles to consumers’ homes, slapping more than 150 businesses with notices that they are violating liquor laws. As a result, a long list of out-of-state wineries agreed to stop shipping wine to Arizona consumers.
Lee Hill, a liquor department spokeswoman, said Wednesday the state started the crackdown started through its own initiative.
She had said previously that the Liquor Department acted after receiving a letter from the Goldwater Institute, a Phoenix-based organization that typically supports free-market principles and limited government. But on Wednesday, she said that a 2012 letter from the Goldwater Institute was the "catalyst" for a previous investigation, one that also affected wine shipping into Arizona. But not this summer's crackdown.
The Goldwater Institute's vice president for litigation, Clint Bolick, said the group did not seek the crackdown. Bolick said he feared the letter sent three years ago asking the state to relax regulations might have accidentally triggered the enforcement actions.
Bolick said on Wednesday that the Goldwater Institute would join forces with those wishing to rewrite Arizona's shipping laws when the legislative session starts in January.
The Arizona Department of Liquor started sending out notices of the violations in June to wineries that ship directly to Arizona consumers
Under Arizona rules, wineries anywhere can ship directly to consumers if they adhere to certain production limits and rules. (It's complicated, but read on if you want to know the specifics.) The notices of violation include accusations that wineries exceeded those production limits, violated those rules or did not give the liquor department the required report of how much wine was made.
Fines for the first offense are $500. Most offending wineries sidestepped the fine, Hill said, with citations ending in meetings where wineries agreed to comply with state statutes. But for some out-of-state wineries, compliance would mean a choice between no longer shipping to customers in Arizona or curbing how much wine they produce.
The department used information from Federal Express and United Parcel Service in its investigation, Hill said. Under state statute, those companies are obligated to provide information on liquor shipments.
The enforcement of these long-standing regulations began this year. A search of the liquor department's website shows that no out-of-state wineries were accused of violating shipping laws in 2014.
And the crackdown is not over. Hill said the liquor department is waiting for delinquent reports from more than 300 wineries. Depending on what those production numbers show, some or all of those wineries also might be found in violation.
But the crackdown has invigorated a push to change Arizona's shipping laws. Two California-based groups that have long sought to relax the state's shipping laws said they were contacted this summer by consumers frustrated that they could no longer order their favorite wines. The groups expect a bill to be introduced in the Arizona Legislature in January.
In recent years, at the request of Arizona winemakers, lawmakers have made a variety of moves to give in-state producers more freedom. They have lifted a rule that banned wineries from also operating a brewery, and now permit wineries to also be distilleries and form cooperatives to share space and equipment.
But for now, a growing number of consumers may find they can no longer get the wines they want from their favorite spots in Napa Valley, Oregon or elsewhere.
So, what is happening and will you still be able to order wine at home? The rules about this can get complicated fairly quickly. Here's a step-by-step guide:
What's happening, and how is it going to affect me?
If you are a wine club member of an out-of-state winery, or are used to ordering by phone or the Internet, those days could be over.
There are three main statutes that affect wine shipments into Arizona.
Wineries have different restrictions on their ability to sell directly to consumers, depending on how big they are.
The smallest wineries have the most freedom. Bigger wineries have less freedom. Those limits are defined in statutes.
One of the rules bigger wineries have to live by is this: They can only directly ship to a customer who is actually at their winery.
Additionally, out-of-state wineries can apply for a special license that allows them to ship wine into Arizona. But that law restricts how much wine it can ship into the state.
The state found 74 violations of those regulations this summer. The vast majority involved wineries in California, and included the most popular regions: Napa, Sonoma, Paso Robles and Santa Barbara County.
In order to comply with the law, these wineries would have to change their shipping practices. Some will only be able to ship to customers who make an annual trip to their winery. Others will either stop shipping into Arizona or produce less wine.
Another 104 wineries were cited for not reporting their production numbers. These wineries are small enough to still be able to ship into the state — so long as the regulatory hassle doesn't make them shy away from Arizona.
All these rules apply solely to shipments to residences in Arizona. Obviously, the state can't regulate, say, what a California winery can ship to New York.
As the Arizona wine industry continues to grow, it's possible local wineries could soon go over the production limit. At that point, they could still ship to consumers in New York (where shipping rules are more permissive) but not to an Arizonan.
What are the rules in Arizona, exactly?
The rules are spelled out in Title 4 of the Arizona Revised Statutes, an entire section devoted to liquor laws.
Wineries that can ship to consumers through phone and computer sales must be licensed as a "farm winery." That means, essentially, it needs to be a winery that actually makes wine, not merely re-selling bottles of finished wine, or a catalog company selling bottles as part of a gift basket . Being a farm winery allows the winery to have a host of benefits, including operating an on-site tasting room.
If a farm winery makes less than 20,000 gallons of wine each year, or 8,412 cases, it is allowed to take orders over the phone or via computer and ship directly to customers.
That is a small operation: To put it in perspective, Arizona's own Page Springs Cellars was investigated for going over that 20,000-gallon production cap this year.
Wineries bigger than that can ship wine to a consumer's house if that customer is "physically present" at the winery when ordering it. In practice, customers are considered physically present if they visit the winery once each year, fill out a signature card and verify their age.
Additionally, out-of-state wineries with a "limited out-of-state winery license" can ship only 240 gallons, or 100 12-bottle cases, of wine into Arizona each year.
A winery must keep track of how much wine it produces and how much wine it ships into Arizona. Failure to keep a record and provide those numbers to the state results in another violation.
How did these rules get to be that way?
We can start with Prohibition, which ran from 1920-1933.
Once alcohol was legal in the United States again, the worry was that alcohol producers would have too much control over the sale of their product.
So states, including Arizona, instituted a three-tier system of distribution:
- A producer of alcohol had to send their product to...
- A distributor, who would in turn move it to...
- A retailer.
The customer could only buy alcohol from a retailer.
While nothing in the law mandated it, as a matter of simple business practice, each tier that handled the product — the distributor and the retailer — would raise the price to earn a profit.
So, there was a time when Arizona customers could not have any wine shipped directly to them. And the state's wineries could not ship to any address, in state or out of state. Wines from both Callaghan Vineyards and Doz Cabezas WineWorks had been served during state dinners at the White House. But shipping that wine to D.C. was technically illegal.
Arizona’s liquor laws have evolved due to both consumer and industry pressure because its wineries and breweries have become popular and powerful.
The shipping law first changed after a consumer in Paradise Valley wanted to get shipments of the boutique and expensive Screaming Eagle label. He contacted his state senator, Barbara Leff, R-Paradise Valley. She introduced the law that allowed limited direct shipping if a customer was physically present at the winery. That law passed in 2002.
The next year, the legislature passed a bill that allowed Arizona wineries to ship directly to state residents. This was good news for the budding local wine industry, which had a new way to reach consumers.
A Supreme Court decision in 2005 complicated matters. The court ruled, in the case of Granholm vs. Heald, that a state could not treat an out-of-state winery differentlyhan an in-state winery.
So in 2006, Arizona made a distinction among wineries based on size rather than geography. The rules were no longer about being in state or out of state, but about being small, medium or large.
The caps were set defining those. . And, whether coincidence or not, at the time that law passed, all but one Arizona winery was below the 20,000 gallon limit and that winery, Kokopelli, was not concerned about direct shipping to customers.
Why is the state cracking down now?
It appears the state acted because it finally had a database of information about licensed winemakers.
In December, the Liquor Department asked winemakers to submit their required reports about production and shipping by computer. That database made it easy, for the first time, for auditors to look at whether wineries were violating any of the rules, Hill said. It also let the department know which wineries had not filed any reports at all.
A letter from the Goldwater Institute in 2012 did inadvertently spark another investigation. In that letter, Bolick asked that the department to end the requirement that wine purchasers visit an out-of-state winery once a year. Bolick said the rule prevented people from joining wine clubs, where wineries send a number of bottles annually to a customer, usually at a discount, and sometimes including wines not available to the general public.
Bolick's letter, Hill said, made the department curious about whether those out-of-state wineries were licensed. Some wineries were sent letters to cease and desist. Though Hill did not know Wednesday how many.
Bolick, said his group would never have explicitly made a request for more enforcement.
"The last thing we would want is more stringent enforcement of a law we consider unwise and unconstitutional," Bolick said.
Bolick appeared before the U.S. Supreme Court in 2004 arguing on behalf of Virginia and California wineries. That case resulted in the Granholm decision, which eased restrictions nationwide, ensuring that states treat in-state and out-of-state wineries the same. At the time, Bolick was working for the Institute for Justice, a libertarian organization.
Arizona's wine growers were also not told the liquor department was taking this step, nor would they have asked for it, said Rod Keeling, president of the Arizona Wine Growers Association.
"The wine growers' association is not looking of any kind of protectionist approach," Keeling said.
Speaking as the owner of Keeling-Schaefer Vineyards, Keeling said his opinion is that wine shipping should be as free as possible.
How did Arizona officials catch the alleged offenders, anyway?
The liquor board didn't have to go far. It checked its own electronic database.
Wineries are supposed to file annual reports listing the amount of wine made and the amount shipped.
Investigators started by looking at those reports, Hill said.
If a report was missing, the liquor department asked the winery to provide it.
Hill also said investigators worked with FedEx and UPS. The department asked for and received documents it used to verify shipping amounts and ensure that the wine shipments were delivered to a sober adult, as required by law.
The sheer number of violations over missing paperwork indicated that the department was not doing a good enough job in educating license holders, she said. The department changed the deadline for the annual reports — moving from fiscal year to calendar year — and that caused many of the violations, she said.
Hill said this type of investigation wasn't done much in years past because staff were working on other priorities.
What about this push to change the law?
Two California groups are working on a proposed change to Arizona law.
Though both entities, Free the Grapes and the Wine Institute, have long proposed changes to the wine shipping laws, as they have done in other states, this push comes from Arizona consumers who this summer found out they were being cut off from their favorite wineries.
Lisa James, of Gordon C. James Public Relations, said that her firm was hired by Free the Grapes to publicize the effort.
“Some people didn’t understand that law existed here,” James said. “Now they’re getting notices.”
Jeremy Benson of Free the Grapes said that his non-profit group hired the James firm using money donated by Arizona consumers. He said he expects Arizona to join the 43 states allow direct shipping from wineries of any size.
“Free the Grapes has been working to essentially channel consumer frustration… into some sort of constructive act,” he said.
Benson said his group’s model legislation would remove the production cap. It would allow wineries to ship a limited amount of wine to a customer each year.
“The idea of requiring customers to visit a winery before they can get wine shipped is ridiculous,” Benson said. “There’s no protocol or reason why that should be the case.”
Michael Zenner - CEO
Hospitality Checkpoint LLC
PO BOX 995 Gilbert AZ 85299
Toll Free: 800-880-0811