Twice in the past two decades, the US Supreme Court has heard landmark cases involving protectionist alcohol laws, and twice the Court has made clear that when states discriminate against out-of-state businesses, they violate the US Constitution. But so far, many lower courts have DENIED to listen Now, the Supreme Court may be poised to step in and clarify once and for all that when it comes to alcohol, regulators can’t simply ignore the Constitution.
The most recent case comes out of Arizona, where several wine enthusiasts have brought a legal challenge to the state’s requirement that all wine retailers have a physical storefront in the state to deliver wine directly to Arizona consumers. The appellants argue that this physical presence requirement violates the so-called latent commerce clause, which prohibits states from unreasonably interfering with interstate commerce by discriminating against out-of-state economic interests.
The request for showcases in the state puts a damper on what is called directly to the consumer alcohol shipping, which allowed out-of-state wine retailers to ship their products right to Arizona customers’ doors. Because it is financially infeasible for most out-of-state wine stores to open brick-and-mortar stores in Arizona, the rule effectively blocks out-of-state competitors from the in-state wine shipping market.
The Supreme Court has faced similar questions before. In the 2005 case Granholm v. HealdThe Supreme Court struck down in-state physical presence requirements for wineries (but not wine retailers), freeing up out-of-state wineries to ship across state lines directly to consumers. In 2019, the Court entered the fray again, Facing a Tennessee law that required liquor store owners to be residents of the state for several years before they were eligible to receive a retail license.
The importance of these landmark cases is clear: States may not enact protectionist alcohol laws that discriminate against out-of-state economic interests unless they can demonstrate that such rules advance legitimate, non-protectionist interests, such as public health and safety. Instead of following these simple holdings, numerous lower courts have continued to do so interpret them narrowly or create fabricated loopholes to evade them.
Leading the charge is the infamous 9th Circuit, which has adopted what’s known as the “essential function” test for evaluating alcohol laws like Arizona’s. Under this test, the 9th Cir KEPT that because the physical presence mandate in the state of Arizona was an “essential feature” of the state’s three-tier system of alcohol regulation, the law was immune from a latent commerce clause challenge.
In the 9th Circuit’s view, the three-tier system—which requires alcohol manufacturers, wholesalers, and retailers to all be legally distinct entities—is vital to alcohol regulation in America today. Therefore, if out-of-state wine retailers were allowed to ship directly to Arizona residents without a physical storefront in the state, they would bypass Arizona’s wholesale and retail levels.
Under the “essential feature” test, courts are simply capable CONSIDERATIONS discrete alcohol laws to be “essential” to the three-tiered system, which in turn creates a get-out-of-jail-free card that inoculates these protectionist laws from constitutional scrutiny. Not only is the 9th Circuit’s test an obvious and intentional departure from previous Supreme Court decisions, it doesn’t even make sense on its own merits.
Alcohol delivery has it exploded since COVID-19, as the vast majority of states have implemented some form of pro-delivery liquor reform. Regulating this wave of delivery has proven relatively straightforward, with states using simple licensing and permitting rules.
Just as a brewery, winery, bar, or liquor store must obtain a license to operate, alcohol delivery also requires a license. If a retail store proceeds to deliver or deliver alcohol in a shady or dangerous manner, the license can simply be revoked – just like a bar that is caught in the act of serving underage customers.
The demand for showcases in the state is approx inessential a feature of the alcohol regulatory system, as we can imagine. What’s more, 13 states plus Washington, DC already allow it out-of-state wine retail stores to ship their products directly to in-state residents. All of these states have a three-tier system, as does Arizona, further emphasizing that physical storefronts in the state are completely non-essential.
Given this context, it’s clear that the 9th Circuit’s “essential feature” test is detached from the ground reality of how alcohol regulation actually works. Simply allowing states to deem parts of their alcohol regulation code to be “essential,” and thereby magically escape a constitutional challenge, is an obvious circumvention of prior Supreme Court decisions.
The Manhattan Institute and the Reason Foundation have filed an amicus brief in support of the petitioners in the Arizona case. Maybe the third time this goes to the Supreme Court will be the charm.
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