The alcohol retail marketplace has undergone seismic transformation in recent years. Wineries have access to most of the U.S. drinking population through expansive direct-to-consumer (DTC) networks. Craft manufacturers are gaining ever more legal privileges to reach and serve retail consumers.
Bottle shops, grocery stores, package stores, and other off-premise retailers process more and more orders for local delivery, often through third parties. Restaurants and bars are even mixing to-go cocktails for their patrons to enjoy away from their establishments.
All the while, consumers are flooded with apps, like Vivino, Untappd, and Minibar, to help them learn about, find, select, purchase, share, and rate alcohol. By many metrics, it has never been a better time to be an alcohol consumer in post-Prohibition America.
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Yet, one transformation remains highly contentious, increasingly risky, and more popular than ever: alcohol sales by out-of-state retailers. These appear in familiar formats—for instance, online shops where consumers can buy alcohol as easily as they can pet food or a sweatshirt. But these also include a diverse range of subscription services and membership clubs, which offer alcohol products.
Retailers—and third-party ecommerce companies who rely on them—continue to join this nationwide marketplace and innovate the consumer experience. But judicial and enforcement attention has recently turned on interstate alcohol sales, and now, more than ever, those involved in this business are facing an increasingly embattled legal landscape in which to operate.
State Regulators Take Notice—and Action
Currently, nine states—Connecticut, Louisiana, Nebraska, New Hampshire, Oregon, North Dakota, Virginia, West Virginia, and Wyoming—offer permits to out-of-state retailers for varying degrees of alcohol sales and shipments. Additionally, the District of Columbia and Florida permit limited sales by retailers from other states without specific alcohol licensure. Most states, however, still prohibit shipments by out-of-state retailers.
“At the height of the pandemic in 2021, 18 states considered DTC spirits shipping legislation; even fewer considered interstate retail shipping,” says Michael Bilello, the executive vice president of strategic communications and marketing at Wine & Spirits Wholesalers of America (WSWA). “Not one DTC spirits shipping bill was passed that year or in any year since.”
Lawmakers and regulators cite various reasons for maintaining the bans. This became evident in July 2020, when Ohio Attorney General David Yost brought several out-of-state retailers to federal court for illegal shipments into the Buckeye State.
“We’re not talking nickels and dimes here,” Yost said through a press release at the time. “The tax revenue lost due to online liquor sales could be anywhere from tens of thousands to millions of dollars.”
Loss of tax revenue is just part of the story for Ohio. Like other control states, Ohio is involved in the sales of distilled spirits. As the state’s exclusive wholesaler and retailer of distilled spirits, the Division of Liquor Control competes against unlawful alcohol shipments to consumers. According to Ohio’s complaint, both private and in-state retailers of wine and the Division of Liquor Control would suffer irreparable harm if the shipments weren’t stopped.
Ohio’s lawsuit was remarkable for two reasons. First, it marked a step up in the enforcement of state alcoholic beverage control laws against unlawful shipments by out-of-state retailers, which would reverberate around across the country. And second, it was the first time a state had relied on the powers of the 21st Amendment Enforcement Act. This federal law, enacted in 2000, authorizes states’ attorneys general to stop the unlawful import or transport of alcoholic beverages into their states. It gives them the full weight of the federal court system to cease such shipments. (It does not, however, have its own provisions for fines or other monetary penalties.)
After the last five years of inter-agency focus on unlawful alcohol shipments to consumers, Michigan followed Ohio’s lead and, in 2020, sought relief against out-of-state retailers under the same federal law. Similarly, in the wake of a series of cease-and-desist actions, Tennessee invoked the law against six online businesses in 2023. Ohio and Michigan settled with the retailers in 2021, and Tennessee settled in May 2024. All of the retailers agreed to cease shipments, and several faced substantial civil penalties.
Preventing Alcohol Sales to Minors
Besides taxes, states also cite protecting minors to justify their prohibitions.
Massachusetts’s Alcoholic Beverage Control Commission (ABCC) has been investigating DTC alcohol shipments in recent years. (Like many other regulators, the ABCC uses the term “DTC” to refer to any direct shipment to a consumer, whether it is from a producer or a retailer.) The agency regularly has dozens of active investigations into unlawful out-of-state shipments, devoting nearly 50 percent of its investigative resources to these efforts. According to a January 2023 presentation by Massachusetts ABCC chief investigator Ted Mahoney, as recounted by WSWA, the ABCC’s 2022 DTC compliance checks found that 43 percent of deliveries did not require an adult signature and none required proof of age.
In 2021, David Makson, the manager of a local liquor retailer Damon’s Beverage and Redemption in Bangor, Maine, testified before a legislative committee considering two DTC bills, LD 1093 and LD 1358, that a shipment of whiskey from an out-of-state retailer was delivered into the hands of his five-year-old daughter.
Whether such experiences are widespread is unknown. A 2023 age-verification study commissioned by Vinoshipper found that of more than 600,000 attempted alcohol purchases through its website, just 0.15 percent of those came from minors.
For some, the concern about minors getting hold of alcohol is overblown. “There is no issue with tainted alcohol or minors obtaining alcohol over the Internet,” says Tom Wark, the executive director of the National Association of Wine Retailers. “I am unaware of any jurisdiction claiming they have a problem with minors ordering alcohol over the Internet.”
More Regulatory Scrutiny
When alcohol agencies investigate out-of-state shipments flowing into their states, regulators typically rely on two methods of data gathering: stings and carrier reports. Agency personnel who initiate and receive unlawful alcohol shipments by placing orders through out-of-state retailers’ websites, or websites who rely on out-of-state retailers, later use their experiences and the records that go along with them as the evidentiary bases of inspection requests, cease-and-desist letters, noncompliance notices, administrative orders, and lawsuits. Ohio, Michigan, and Tennessee all relied on evidence collected from stings in their lawsuits against out-of-state retailers.
Whereas stings provide qualitative evidence of noncompliance, carrier reports offer regulators quantitative proof of illegal shipments to consumers, according to a 2022 alcohol compliance report from Maine’s Bureau of Alcoholic Beverages and Lottery Operations. By and large, alcohol shipments are sent to consumers via common carriers. More than one-third of states require common carriers who deliver alcohol to file reports with their liquor regulators. Agency investigators audit these reports and compare their shipping data against shipping data from those reports required to be filed by direct shippers, which are typically wineries. The mismatches between the two sets reveal a portion of those shipments that are unauthorized.
After a boom in online sales amidst pandemic-related restrictions, American wineries continue to invest in the DTC segment with in-person and virtual initiatives
For U.S. Wineries, Direct-to-Consumer Sales Remain Essential
Audits of carrier reports often result in agency enforcement actions. In recent years, in addition to Massachusetts, Michigan, Ohio, and Tennessee, agencies in Illinois, Kansas, New Hampshire, North Carolina, Oklahoma, and Virginia have issued cease-and-desist letters and noncompliance notices to out-of-state shippers. Such letters frequently precede more serious agency actions, particularly levying civil penalties and filing lawsuits.
As Bilello sees it, this nationwide enforcement attention may be a cumulative clarion call for compliance: “Across the country, lawmakers and regulators are sounding the alarm about the dangers of DTC alcohol due to states losing millions in tax revenue, underage consumers gaining greater access to alcoholic products, and the increased risk of adulterated products entering the marketplace.”
Alcohol Shipping Court Battles Accumulate
State agencies are not the only government bodies addressing DTC regulation. Courts have increasingly become the focal point for consumers and businesses seeking to abolish state DTC prohibitions.
Over the last five years, court challenges to interstate retailer bans have flared up in Arizona, Illinois, Indiana, Kentucky, Michigan, Mississippi, Missouri, New Jersey, North Carolina, Ohio, and Rhode Island. Similarly, consumers and manufacturers have brought lawsuits against bans on out-of-state producer DTC shipments in Maryland, Oregon, and Washington.
For Wark, the courts may be the best, if not the only, branch of government to bring about a change in alcohol shipping laws. “The greatest impediment to any legal change is legislation, and wholesalers donate millions of dollars to legislatures. The biggest impediment is breaking through that wall of money.”
When the Supreme Court struck down discriminatory state laws that prohibited out-of-state wineries, but not in-state wineries, from shipping directly to consumers in the 2005 case Granholm v. Heald, consumers and many businesses similarly hoped for that case to bring down other prohibitions. Despite attempts, including in California and New York, courts did not extend Granholm to prohibitions against out-of-state retail shipments.
But following the 2019 Supreme Court case Tennessee Wine & Spirits Association v. Thomas, proponents of DTC shipments renewed their hope for change. In that case, the nation’s highest court struck down a state law that required applicants for a liquor store license to be state residents for two years before becoming eligible for the license.
“Combine Granholm’s anti-discrimination language with Tennessee Wine’s messaging, and it is clear that Granholm applies to all three tiers,” says Wark. “It is pretty clear that bans on shipping are unconstitutional.”
For the most part, courts have upheld state bans on out-of-state alcohol shipments by retailers as valid exercises of state powers granted by the 21st Amendment. But at least a couple cases demonstrate that these court battles are far from over. In Block v. Canepa in 2023, a consumer and Illinois wine retailer challenged Ohio’s direct-shipment restrictions. The U.S. District Court for the Eastern District of Ohio upheld the restrictions, concluding that they were justified to maintain Ohio’s three-tier system. The U.S. Court of Appeals for the Sixth Circuit disagreed and sent the case back because the trial court ignored evidence from the consumer and retailer, which could have resulted in a different legal outcome. The case remains pending. In response to a request for an interview for this article, the Division of Liquor Control of Ohio’s Department of Revenue declined to comment, citing ongoing litigation.
Commercial Deluge and the Regulatory Flood Gates
In its most recent “Direct to Consumer Wine Shipping Report,” Sovos ShipCompliant estimates that DTC wine sales by wineries in 2023 reached $4.1 billion—about a 28 percent increase over 2019. And that doesn’t even include retailer shipments to consumers.
Sales statistics on alcohol shipments by out-of-state retailers are nearly impossible to come by, in large part given their illicit nature. If Illinois’s 2014 study is representative, though, the figures are staggering. Taking a closer look at the state’s data, the Wine and Spirits Distributors of Illinois estimated that the state was losing up to $20 million in tax revenue annually to unlawful shipments, which includes shipments by retailers, as well as producers and unlicensed persons. And that was before the COVID-19 pandemic sent DTC alcohol sales and shipments soaring.
Regardless, more and more state agencies are investigating unlawful DTC shipments. Earlier this year, the Arizona Department of Liquor Licenses and Control created a trade squad to investigate alcohol shipments into its state. In April, the agency reported that its pilot program had uncovered hundreds of illegal shipments in the few brief months the program had been active.
On the other side of the country, the Vermont Department of Liquor and Lottery (DLL) recently completed the first phase of its own pilot program. Of the 116 orders the Vermont agency attempted to place, only 40 were delivered, none completely lawfully.
“Results of the pilot program will serve as a baseline survey of lawful shipments of beverage alcohol to consumers in Vermont and will inform DLL of the necessary regulatory framework should DTC shipping of spirits be permitted in Vermont,” the agency announced in a press release.
Whether DTC shipments of spirits will ever be permitted in Vermont or any other state remains an open question.
Emboldened by robust state alcohol laws and longstanding legal controls, frequently upheld by courts, state agencies have demonstrated a willingness to contribute substantial resources to investigations, administrative enforcement, and judicial remedies against spirits shipments from out-of-state retailers. Pending changes to state laws, retailers and unlicensed persons shipping alcohol unlawfully to consumers risk becoming the object of these actions.
For those seeking a more permissible legal landscape, regulatory changes may be slow to materialize, if at all. Aside from the handful of states that permit out-of-state retailer shipments, there is little indication that other states will follow suit, at least not without judicial intervention.
“People who are frustrated with the pace of change, they have good reason to be. Courts move at a glacial pace,” says Wark. “The wheel of justice moves slowly.”
Editor’s note: Nothing in this article is intended to be—and should not be—construed as specific legal advice.
Dispatch
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Brian Fink is an attorney at Foster Garvey PC. He represents members of all tiers of the alcoholic beverage and cannabis industries, as well as people and companies who do business with them. The information provided in this article does not, and is not intended to, constitute legal advice.
