Tennessee Attorney General Jonathan Skrmetti last week filed a lawsuit against six online liquor retailers accused of illegally selling liquor from out-of-state, an aggressive move that suggests retailers and brands may be facing greater scrutiny about how they ship products.
Spirit advocacy groups have continued to prioritize direct-to-consumer (DTC) shipping since pandemic lockdowns gave e-commerce a boost, and as wholesalers continue to consolidate, leaving smaller brands with fewer routes to market. Online alcohol sales surged in the pandemic and are expected to grow more than 66% and reach $42 billion across key markets by 2025, according to research by IWSR Drinks Market Analysis.
Legal control over the production and sale of alcohol is determined by each individual state, but no state can violate another state’s laws via the transportation of alcohol. While some states permit DTC shipments, others impose bans or limitations requiring consumers to purchase alcohol through licensed retailers within their state. Under Tennessee law, it is illegal to ship liquor directly to consumers from outside the state without first obtaining a license from the Tennessee Alcoholic Beverage Commission (TABC).
The lawsuit, filed in the U.S. District Court for the Middle District of Tennessee in Nashville July 14, seeks to immediately stop “the flow of illegal liquor shipments” through a preliminary and permanent injunction against the companies.
Between late 2022 and early 2023, Tennessee agents placed orders for spirits from Bottle Buzz, Cask Cartel, The Liquor Bros, My Bev Store, Prime Time Liquors and Wooden Cork. In some cases the state issued a cease and desist letter, urging companies to stop shipping alcohol into the state, according to the complaint, but orders were still fulfilled. Other stores didn’t receive cease and desist letters, but shipped spirits to state agents.
“These shipments circumvented the state’s three-tier alcohol licensing system that protects consumers in Tennessee by monitoring the manufacture, distribution, and retail sales of all alcohol through state licensure,” the Attorney General’s Office said in a news release.
The state is seeking monetary damages under state law and an injunction to prevent future shipments under the 21st Amendment Enforcement Act, which was also used in July 2020 in Ohio against seven out-of-state shippers, and again in Michigan. The law allows state attorneys general to bring civil actions for injunctive relief against anyone believed to be illegally importing or transporting alcohol within the state.
“We see letters from states sent to third party providers and retailers often, but more often than not, we see those states immediately shut down,” said Ryan Malkin, principal attorney at Malkin Law, a Florida-based legal firm serving the alcohol and cannabis beverage industries, and counsel for the American Craft Spirits Association. “However, shipments witnessed by Tennessee investigators continued according to the complaint so there may be more cases like this, especially if other states see Tennessee being ultimately successful.”
Malkin added that it will be interesting to see the defendants’ responses and whether any address their use, in some cases, of the “title theory.” That’s where the title to the product takes place in the state where the retailer is located, as if the consumer is at the store, and the common carriers are operating on the consumer’s behalf to ship from, say, California to Tennessee.
“The thing is a lot of times consumers say they want the product and they agree to take the risk and people ship it, and so this basically takes away the consumers right to get the product that they want,” said Sean O’Leary, a liquor lawyer based in Chicago.
Malkin added that if distilled spirits producers had the same privileges as U.S. wineries, “it would certainly help to curb some of this interstate shipping by retailers.”
Advocates against direct-to-consumer shipping, such as the Wine and Spirits Wholesalers of America, argue that the 21st Amendment ensures proper collection of federal and state taxes, product integrity, and restriction of alcohol purchases to drinkers of legal age.
Both lawyers caution that brands should certainly be mindful of interstate shipping rules even if they are not shipping directly.
“Many brands direct orders to third party providers and, as a brand, you want to offer compliant solutions to avoid being part of an investigation if a retailer utilized by a third party provider ships in violation of applicable state laws,” Malkin said.
Brands and retailers are so focused on selling products, however, that they might not be aware of complex legal requirements in each state, said O’Leary.
“They gotta get educated on it or hire someone who is educated,” he said.