The Supreme Court Is Poised To Remind States That the Constitution Doesn’t Stop at the Liquor Store

Twice in the past two decades, the U.S. Supreme Court has heard landmark cases involving protectionist alcohol laws, and twice the Court has made it clear that when states discriminate against out-of-state alcohol businesses, they are running afoul of the U.S. Constitution. But so far, many lower courts have refused 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 cannot simply ignore the Constitution.  

The latest case arises out of Arizona, where several wine enthusiasts have brought a legal challenge to the state’s requirement that all wine retailers must have an in-state physical storefront in order to ship wine directly to Arizona consumers. The challengers argue that this physical presence requirement violates the so-called Dormant Commerce Clause, which forbids states from unduly interfering with interstate commerce by discriminating against out-of-state economic interests.  

Requiring in-state storefronts puts a damper on what’s known as direct-to-consumer alcohol shipping, whereby out-of-state wine retailers could ship their products right to the doorsteps of Arizona customers. Since it is financially impossible for most out-of-state wine shops to open up brick-and-mortar storefronts in Arizona, the rule effectively locks out-of-state competitors out of the wine shipping market in the state.

The Supreme Court has grappled with similar questions before. In the 2005 case Granholm v. Heald, the Supreme Court struck down in-state physical presence requirements for wineries (but not wine retailers), thereby freeing up out-of-state wineries to ship across state lines directly to consumers. In 2019, the Court stepped into the fray again, striking down a Tennessee law that required liquor store owners to be residents of the state for multiple years before they were eligible to receive a retailing license.

The import of these landmark cases is clear: States cannot enact protectionist alcohol laws that discriminate against out-of-state economic interests unless they can show that such rules promote legitimate, nonprotectionist interests such as public health and safety. Instead of following these straightforward holdings, numerous lower courts have continued to narrowly interpret them or create manufactured loopholes to evade them.

Leading the charge is the infamous 9th Circuit, which has adopted what’s known as the “essential feature” test for evaluating alcohol laws like Arizona’s. Under this test, the 9th Circuit held that because Arizona’s in-state physical presence mandate was an “essential feature” of the state’s three-tier system of alcohol regulation, the law was immunized from a Dormant Commerce Clause challenge.

In the 9th Circuit’s view, the three-tier system—which requires that alcohol producers, wholesalers, and retailers all be legally distinct entities—is vital to the regulation of alcohol in America today. Therefore, if out-of-state wine retailers were allowed to ship directly to Arizona residents without an in-state physical storefront, they’d be bypassing the wholesaling and retailing tiers in Arizona.

Under the framing of the “essential feature” test, courts are simply able to deem discrete alcohol laws to be “essential” to the three-tier 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 willful evasion of past Supreme Court holdings, but it doesn’t even make sense on its own merits.

Alcohol delivery has exploded since COVID-19, as the vast majority of states have implemented some form of pro-delivery reform for booze. Regulating this delivery wave has proven relatively straightforward, with states using simple licensing and permitting rules.

Just like a brewery, winery, bar, or liquor store needs to obtain a license in order to operate, alcohol delivery likewise requires a license. If a retail shop proceeds to deliver or ship alcohol in a shady or dangerous way, the license can simply be revoked—just like a bar that is caught in a sting for serving underage patrons.

Requiring in-state storefronts is as non-essential a feature of the alcohol regulatory system as one can imagine. Moreover, 13 states plus Washington, D.C., already allow out-of-state wine retail shops to ship their products directly to in-state residents. All of these states have a three-tier system just like Arizona, further underscoring that in-state physical storefronts are entirely non-essential.

Given this backdrop, it’s clear that the 9th Circuit’s “essential feature” test is detached from the on-the-ground reality of how alcohol regulation actually works. Simply allowing states to deem parts of their alcohol regulatory code as “essential,” and thus magically escape a constitutional challenge, is an obvious sidestepping of the Supreme Court’s past decisions.

The Manhattan Institute and Reason Foundation have filed an amicus brief in support of petitioners in the Arizona case. Perhaps the third time this goes to the Supreme Court will be the charm.