The legal battle over direct interstate wine shipments has now reached the US Supreme Court. Anne Brockhoff reports on what's at stake for winemakers, wholesalers and retailers.

When it comes to interstate wine shipments, the arguments are clear. Winemakers believe the Commerce Clause of the US Constitution gives them the right to ship wine directly to consumers of legal drinking age in any state. States say the Constitution's Twenty-First Amendment puts all such regulation in their hands.

"Does the Commerce Clause trump the Twenty-First Amendment?" asks W. Reed Foster, co-founder and chairman emeritus of Ravenswood Winery and president of the Coalition for Free Trade, a non-profit legal foundation. "It seems like a simple question, but it of course isn't."

Winemakers, consumers and states have wrangled over this question in dozens of lawsuits, but the lower courts have failed to definitively resolve it. All sides are now looking to the US Supreme Court for an answer.

The Supreme Court will examine cases from New York and Michigan; oral arguments are expected in December and a ruling by mid-2005. In New York, the US Court of Appeals for the Second Circuit upheld a law that says only companies with a physical presence within the state could ship to its residents. The US Court of Appeals for the Sixth Circuit in Michigan took the opposite view, saying the state's ban on interstate shipments was illegal and discriminatory.

But while direct shipping is the focus, wholesalers say the real issue is deregulation. "This is about more than a couple bottles of wine," says Craig Wolf, general council for Wine and Spirit Wholesalers of America, whose members account for more than 90% of wholesale wine and spirits sales in the US. "It is a broad-based attack on the regulatory system."

Suppliers must, according to the US three-tier system, sell wine, spirits and beer to wholesalers, who then distribute to retailers, who sell to consumers. Each state has its own regulations, and 26 have elected to legalise direct-to-consumer shipments from out-of-state winemakers. Such transactions, however, remain illegal in the other 24 states, and are a felony in Florida, Georgia, Indiana, Kentucky and Maryland.

Why? Because bypassing the three-tier system can make it harder for states to collect taxes on alcohol and easier for minors to illegally purchase it, especially if they place orders via the Internet, wholesalers say. Indeed, the state of Massachusetts recently sued four out-of-state online retailers accused of selling wine, beer and spirits to underage buyers.

Both concerns are red herrings, says Jeremy Benson, executive director of Free The Grapes!, a lobbying group representing more than 1,000 US wineries. The group's website offers a "model direct shipping bill" that ensures collection of tax revenue, and Benson points to a 2003 Federal Trade Commission (FTC) survey of regulators in 11 states that found no evidence that direct shipping increased underage access to alcohol.

Direct shipping benefits consumers by improving selection and availability, Benson says. It also lowers prices (by as much as 21% in some states, the FTC report said) and gives winemakers a way to meet demand outside their home state. While only 1% of US wine is sold directly to consumers, those sales are essential for small wineries that aren't represented by a wholesaler. "It's called survival," Benson says.

Of the nation's 2,700 wineries, only 17% have distributor representation in all 50 states. Even if a small label did want to be carried by a wholesaler, industry consolidation is making that increasingly difficult, winemakers say. "We've never wanted to kill the three-tier system, but we do want to give the smaller wineries an opportunity to ship their goods," Ravenswood's Foster says.

But killing the three-tier system is exactly what could happen if the Commerce Clause prevails over the Twenty-First Amendment, wholesalers warn. Such a ruling could apply to retailers as well as consumers, allowing them to cut costs by buying directly from suppliers.

"The big economic impact would be if, in fact, we start having large big-box retailers purchasing from the lowest price source anywhere in the world and shipping directly to their warehouses," says Mike Lashbrook, president of the Michigan Beer and Wine Wholesalers Association.

Retailers are already exploring that possibility. Costco sued the state of Washington over what it calls restrictive regulations, including one that prevents out-of-state wineries from selling directly to retailers while allowing in-state wineries to do so.

Regardless of the arguments, no one's taking bets on which way the Supreme Court will rule and how that ruling will manifest itself in the industry. "You have to remember that this is the Supreme Court," Benson says. "You can't predict what they will do."