FTC Staff Comment to the Honorable William Magee et al. Concerning New York A.B. 9560-A; S.B. 606-A; and S.B. 1192 to Allow Out-of State Vendors to Ship Wine Directly to New York Consumers

1 This letter expresses the views of the FTC’s Office of Policy Planning, Bureau of Competition, Bureau of
Consumer Protection, Bureau of Economics, and Northeast Regional Office. The letter does not necessarily
represent the views of the Commission or of any individual Commissioner. The Commission has, however, voted to
authorize us to submit these comments.
2 See Swedenburg v. Kelly, 358 F.3d 223 (2d Cir. 2004) (upholding New York’s direct shipping regulations).
UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
Office of Policy Planning
Bureau of Competition
Bureau of Consumer Protection
Bureau of Economics
Northeast Regional Office
March 29, 2004
William Magee
Chairman, Assembly Agriculture Committee
Legislative Office Bldg, Room 641
Albany, NY 12248
John R. Kuhl, Jr.
Chairman, Senate Committee on Transportation
Legislative Office Bldg, Room 310
Albany, NY 12247
Dean G. Skelos
Deputy Majority Leader, Senate
503 State Capitol Bldg
Albany, NY 12247
Re: 	Assembly bill 9560-A, Senate bills 6060-A and 1192
Dear Chairmen Magee and Kuhl, and Deputy Majority Leader Skelos:
The staffs of the Federal Trade Commission’s Office of Policy Planning, Bureau of
Competition, Bureau of Consumer Protection, Bureau of Economics, and Northeast Regional
Office are pleased to respond to your requests for comments on New York Assembly bill 9560-
A, and Senate bills 6060-A and 1192. These bills would allow out-of-state vendors to ship wine
directly to New York consumers if the vendors comply with certain regulatory requirements,
such as labeling delivery packages and reporting sales to state authorities. In letters dated
February 10 and 25, 2004, you asked us to examine the bills, and specifically to discuss the
information regarding “the opponents’ arguments related to sales to minors and harm to the
three-tier system, as well as the proponents’ arguments regarding the positive impact for
consumers and state revenues.” 1 You also referenced pending litigation. 2

2
We believe that, if enacted, all three bills would enhance consumer welfare and allow
New York to meet its other public policy goals. By allowing interstate direct shipping, the bills
could allow New York residents to purchase a greater variety of wines at lower prices. Senate
bill 1192 would provide the greatest benefits by allowing both out-of-state wineries and retailers
to obtain out-of-state shipper’s licenses. In addition, by requiring vendors and common carriers
to comply with various regulatory requirements, similar to those adopted in other states, all three
bills would allow New York to limit shipments to minors and to collect taxes on out-of-state
shipments. Finally, the bills would remove one of the largest barriers to greater e-commerce in
the wine industry. We base our analysis on a recent FTC staff report that extensively analyzed
the direct shipping issue, and on the Commission’s testimony at a recent congressional hearing
(copies of both attached). A summary of our analysis is below:
C 	Variety. Direct shipping allows consumers to purchase many wines that are not
available in nearby bricks-and-mortar stores. An FTC staff study found that 15%
of a sample of popular wines available online were not available from retail wine
stores within ten miles of McLean, Virginia. Direct shipping also gives
consumers easier access to thousands of labels from smaller wineries.
C 	Prices. Depending on the wine’s price, the quantity purchased, and the method of
delivery, consumers can save money by having wine shipped directly to them.
Because shipping costs do not vary with the wine’s price, consumers can save
more money on more expensive wines, while less expensive wines may be
cheaper in bricks-and-mortar stores. The FTC staff study suggests that, if
consumers use the least expensive shipping method, they could save an average
of 8-13% on wines costing more than $20 per bottle, and an average of 20-21%
on wines costing more than $40 per bottle.
C 	Sales to minors. The states that permit interstate direct shipping generally report
few or no problems with shipments to minors. These states have generally
adopted less restrictive means of regulating interstate direct shipments, such as
requiring that package delivery companies obtain an adult signature at the time of
delivery. The pending bills contain these same types of safeguards.
C 	Taxes. Several states collect taxes on interstate direct shipments. States such as
New Hampshire have sought to achieve voluntary compliance through less
restrictive means, such as by requiring out-of-state suppliers to obtain permits.
Most of these states report few or no problems with tax collection.
C 	E-commerce. State bans on interstate direct shipping represent the single largest
regulatory barrier to expanded e-commerce in wine. Approximately half the
states prohibit or severely restrict out-of-state suppliers from shipping wine
directly to consumers. Many of these same states, however, allow intrastate
direct shipping, such as from in-state wineries and retailers.

3 Federal Trade Commission Act, 15 U.S.C. § 45.
4 FTC Staff Letter to Illinois Sen. Dan Cronin (Mar. 31, 1999), at http://www.ftc.gov/be/v990005.htm.
5 FTC Staff Letter to North Carolina Sen. Horton and Rep. Miller (Mar. 22, 1999), at
http://www.ftc.gov/be/v990003.htm.
6 FTC Staff Statement to the Commonwealth of Massachusetts Alcoholic Beverages Control Commission (June 26,
1996), at http://www.ftc.gov/be/v960012.htm.
7 Public Workshop: Possible Anticompetitive Efforts to Restrict Competition on the Internet, 67 Fed. Reg. 48,472
(2002). The workshop’s homepage is at http://www.ftc.gov/opp/ecommerce/anticompetitive/index.htm, its transcript
is at http://www.ftc.gov/opp/ecommerce/anticompetitive/021008antitrans.pdf, and all of the panelists’ written
statements are at http://www.ftc.gov/opp/ecommerce/anticompetitive/agenda.htm.
3
For these reasons, we believe that, if enacted, the bills would enhance consumer welfare
and allow New York to meet its other public policy goals.
Interest and Experience of the Federal Trade Commission
The FTC is charged by statute with preventing unfair methods of competition and unfair
or deceptive acts or practices in or affecting commerce.3 Under this statutory mandate, the
Commission seeks to identify business practices and regulations that impede competition
without offering countervailing benefits to consumers. In particular, Commission staff have
often assessed the competitive impact of regulations involving alcohol distribution. For
example, the staff has analyzed franchise laws that grant wholesalers preferential contract rights.
In Illinois, the staff examined a bill that would have prevented suppliers from terminating
contracts with wholesalers except for good cause, and suggested that the bill would harm
consumers by limiting suppliers’ flexibility in changing distributors.4 In North Carolina, the
staff noted that a bill that would have tightened exclusive territorial arrangements between
wineries and wholesalers would likely diminish consumer welfare.5 Another type of state
regulation deters wholesalers from cutting prices. In Massachusetts, FTC staff discussed the
consumer benefits of a proposal that would have repealed regulations requiring wholesalers to
post prices on a monthly basis and to adhere to those posted prices for an entire month. 6
FTC staff have also studied the direct shipping issue. In October 2002, the Commission
held a workshop to evaluate possible anticompetitive barriers to e-commerce in wine and many
other industries.7 At the workshop, FTC staff heard testimony from all sides of the wine issue,
including wineries, wholesalers, and state regulators. The staff also gathered evidence from
package delivery companies, the Alcohol and Tobacco Tax and Trade Bureau (“TTB”), and
regulators in states that allow direct shipping. Finally, FTC staff conducted the first empirical
study of a wine market in a state that banned interstate direct shipping. The study examined the
wine market in McLean, Virginia (“McLean study”), and compared the prices and choices that
consumers could find in area stores to those available online. The authors chose McLean as a
relevant retail area because the socio-economic status of many residents in McLean (and
northern Virginia, generally) made it likely that several local bricks-and-mortar outlets would

8 See Wine Report at 18 n.81. It is likely that, in larger markets, bricks-and-mortar retailers may offer somewhat
more choices, and that in smaller markets, bricks-and-mortar retailers may offer somewhat fewer choices.
9 FTC Staff Report, Possible Anticompetitive Barriers to E-Commerce: Wine (July 2003), at
http://www.ftc.gov/os/2003/07/winereport2.pdf.
10 See Prepared Statement of the FTC Concerning “E-Commerce: The Case of Online Wine Sales and Direct Shipment,”
Before the Subcommittee on Commerce, Trade, and Consumer Protection of the Committee on Energy and
Commerce, United States House of Representatives (October 30, 2003), at
http://www.ftc.gov/os/2003/10/031030ecommercewine.htm.
4
cater to sophisticated wine drinkers. 8 In July 2003 FTC staff issued a comprehensive report on
the direct shipping issue (“Wine Report”), 9 and in October 2003, the Commission testified at a
related congressional hearing.10
Analysis of Pending Bills
All three bills would allow out-of-state vendors to ship wine directly to New York
residents if those vendors satisfy certain regulatory requirements. Under Senate bill 1192, both
out-of-state manufacturers and retailers could obtain an out-of-state shipper’s license if those
vendors hold a license to sell or manufacture wine in another state, and if that other state affords
New York’s vendors reciprocal treatment. To obtain an out-of-state shipper’s license, vendors
must pay an annual fee of $125 and present New York’s state liquor authority with a copy of a
current license from the other state. A license allows vendors to ship wine directly to New York
residents who are 21 years or older.
Senate bill 1192 imposes several requirements on out-of-state shippers. In sending the
wine, the shipper must ensure that the delivery package has a conspicuous label noting that the
package contains alcohol and requires an adult signature for delivery, and the shipper must
require common carriers to obtain an adult signature at the time of delivery. In addition, the
shipper must provide the state liquor authority with annual reports that include, among other
information, the total volume of shipments into New York and the purchaser’s name and birth
date. The shipper must pay all state and local sales and excise taxes, keep records for three
years, and consent to New York’s jurisdiction for enforcement purposes. Finally, the bill gives
the state liquor authority the power to suspend or revoke an out-of-state shipper’s license.
Assembly bill 9560-A and Senate bill 6060-A have similar provisions, with a few
important exceptions. These bills would allow only out-of-state wineries, not retailers, to obtain
out-of-state shipper’s licenses, and in addition to a license, an out-of-state winery would have to
obtain a “certificate of authority” and a “registration as a distributor.” The bills also cap wine
shipments at two cases per month to any New York resident. 	Finally, the bills directly require
common carriers to verify the age of recipients.

11 See Wine Report, App. A. The FTC's Bureau of Economics contributed to the Wine Report, and the McLean
study, which is attached to the report, has been published as Alan E. Wiseman and Jerry Ellig, How Many Bottles
Make a Case Against Prohbition? (Bureau of Economics, Federal Trade Commission, Working Paper No. 258,
March 2003).
12 See Wine Report at 24.
13 Bainbridge v. Bush, 148 F.Supp.2d 1306, 1311 n.7 (M.D. Fla. 2001), vacated on other grounds, Bainbridge v.
Turner, 311 F.3d 1104 (11th Cir. 2002).
14 Dickerson v. Bailey, 212 F.Supp.2d 673, 694-95 (S.D. Tex. 2002), aff’d, 336 F.3d 388 (5th Cir. 2003).
5
I. 	The Bills Would Allow Consumers to Purchase a Greater Variety of Wines
The bills would substantially increase the variety of wines available to consumers.
Through direct shipping, and particularly through the Internet, consumers can conveniently
purchase many wines that are not available in nearby bricks-and-mortar stores. The Internet
effectively expands the geographic market by allowing online vendors to compete nationally.
An individual online store may feature more products than many bricks-and-mortar retail
locations. More importantly, the total number of varieties available online may surpass the total
number available in bricks-and-mortar stores that are within a reasonable distance of a particular
consumer. As a result, direct shipping can give consumers convenient access to many more
wines, including popular labels. Using the Wine and Spirits list of the top 50 most popular wines
in America, the McLean study found that 15% of the wines available online were not available
from retail wine stores within ten miles of McLean. For the bottles that were unavailable in the
McLean vicinity, 8 out of 15 came from among the 20 most popular bottles.11 In addition to
popular wines, direct shipping also gives consumers access to thousands of smaller labels from
around the country.
Bricks-and-mortar retailers may not have the demand or shelf-space to justify keeping a
large variety of wines in stock. According to a trade association, domestic wineries produce
approximately 25,000 wine labels, and even in a large market like Illinois, only slightly more
than 500 of these labels are available through the three-tier system.12 Moreover, smaller
wineries may be unable to distribute their wines through the three-tier system. One court found
that Florida’s interstate direct shipping ban “has the practical effect of preventing many small
wineries from selling their wine in Florida. This result occurs because it is not cost-effective for
the smaller out-of-state wineries to acquire a Florida wholesaler.”13 Another court found that the
three-tier system “may lock most [out-of-state producers] out of any access to Texas markets,
even if they are willing to take on the additional costs. Such discrimination is especially felt by
small, family-run wineries with limited production.” 14
Consumers are likely to value having a variety of wines from which to choose. One wine
magazine, for example, reviews over 10,000 different wines annually. Similarly, an economist

15 See See Daniel L. McFadden, Written Statement 2, at
http://www.ftc.gov/opp/ecommerce/anticompetitive/panel/mcfadden.pdf. On the importance of variety, see Thomas
B. Leary, The Significance of Variety in Antitrust Analysis, 68 A NTITRUST L.J. 1007 (2001). Some, however, have
determined that consumers already have enough choices. See Statement of Juanita D. Duggan Concerning “E-
Commerce: The Case of Online Wine Sales and Direct Shipment” 18, Before the Subcommittee on Commerce,
Trade, and Consumer Protection of the Committee on Energy and Commerce, United States House of
Representatives (October 30, 2003) (“The average retail store in most States carries between 300 and 500 different
wine brands at any given moment. Can you imagine selecting from that many toothpastes or contact lenses or
cars?”).
16 See generally Clifford Winston, Conceptual Developments in the Economics of Transportation: An Interpretive
Survey, 23 J. ECON. LIT . 57, 77 (Mar. 1985) (discussing costs of travel time).
17 See, e.g., Public Comments, American Bar Association, Section of Antitrust Law at 10, at
http://www.ftc.gov/opp/ecommerce/anticompetitive/comments/aba.pdf.
18 Dickerson v. Bailey, 212 F.Supp.2d 673 (S.D. Tex. 2002), incorporating Dickerson v. Bailey, 87 F.Supp.2d 691,
709-10 (S.D. Tex. 2000), aff’d, 336 F.3d 388 (5th Cir. 2003).
6
testified that “the value to consumers of direct wine shipments com[es] primarily from access to
wines that are not available in their communities.”15
II. 	The Bills Could Allow Consumers to Purchase Wine at Lower Prices
Depending on the wine’s price, the quantity purchased, and the method of delivery,
consumers can save money by purchasing wine online. Because shipping costs do not vary with
the wine’s price, consumers can save more money on more expensive wines, while less
expensive wines may be cheaper in bricks-and-mortar stores. The McLean study suggests that,
if consumers use the least expensive shipping method, they could save an average of 8-13% on
wines costing more than $20 per bottle and an average of 20-21% on wines costing more than
$40 per bottle. In addition, direct shipping lets consumers avoid the “cost” of spending time to
travel to a bricks-and-mortar store.16
Moreover, even if consumers choose to buy wine from a bricks-and-mortar retailer,
direct shipping still encourages price competition between online and offline sources. In states
that allow direct shipping, the Internet allows wineries and other merchants across the nation to
compete with local bricks-and-mortar retailers. The Internet helps consumers comparison shop
and lets suppliers compete in geographic markets that otherwise may be closed to them, perhaps
due to the three-tier system or franchise laws. 17 This competition likely forces down prices. One
court found that the ban on interstate direct shipping constituted “economic protectionism,
negatively impacting Texas consumers because of more limited wine selection and higher
prices.” 18 Likewise, a Nobel laureate in economics has explained how direct shipping benefits
consumers:
consumers benefit from free markets operated with the minimum government
regulation required for consumer protection. . . . The restrictions on direct

19 See Daniel L. McFadden, Written Statement 1, at
http://www.ftc.gov/opp/ecommerce/anticompetitive/panel/mcfadden.pdf.
20 Wine Report at App. A 25 n.22.
21 See Wine Report at 41.
7
purchase of premium wines and their interstate shipment that have been adopted
by a number of States are, I believe, another example of abuse of the regulatory
process to protect concentrated economic interests, going far beyond the
minimum regulations needed to maintain the integrity of taxation and to protect
minor consumers.19
Because all three bills permit direct shipping, all would increase competition and allow
consumers to find lower prices. Of the three bills, Senate bill 1192 would increase competition
the most by allowing out-of-state retailers, as well as wineries, to obtain out-of-state shipper’s
licenses. This additional competition likely would allow consumers to find even lower prices.
The McLean study found that “the lowest online prices overwhelmingly come not from wineries,
but from out-of-state retail outlets that have web-accessible inventories.” 20
To provide New York consumers with the greatest benefits, the bills should ensure that
licensing procedures for out-of-state vendors are not overly burdensome. For example, to ship
into New York, Assembly bill 9560-A and Senate bill 6060-A require out-of-state wineries to
obtain a “certificate of authority” and a “registration as a distributor” in addition to an out-of-
state shipper’s license. All three bills require out-of-state vendors to pay an annual fee of $125.
Such restrictions may constrain competition. Depending on the volume of purchases in a state,
even seemingly small fees can deter smaller wineries from shipping wine.21 In addition, some
states have created complex licensing procedures and regulations that deter suppliers and
package delivery companies from shipping wine to those states. Furthermore, all three bills
allow out-of-state vendors to obtain New York licenses only if those vendors are located in states
that afford New York’s vendors reciprocal treatment. This restriction will prevent some out-of-
state vendors from shipping to New York residents, thereby somewhat limiting competition and
consumer choice. To obtain the greatest benefits from competition, a policy should ensure that
permit procedures, fees, and regulations are reasonably calculated to meet the state’s legitimate
regulatory goals.
III. 	States that Permit Interstate Direct Shipping of Wine Generally Report Few or No
Problems with Direct Shipments to Minors
Although direct shipping can provide consumers with important benefits, policymakers
have expressed concern that direct shipping might exacerbate the problem of underage drinking.
As FTC staff recognized in the Wine Report and in other documents, underage alcohol use

22 See id. at 26-38; FTC, Self-Regulation in the Alcohol Industry: A Review of Industry Efforts to Avoid Promoting
Alcohol to Underage Consumers App. A, pp. iii-iv (Sept. 1999), at
http://www.ftc.gov/reports/alcohol/alcoholreport.htm.
23 See Wine Report at 26-40.
24 See id. at 32 (chart summarizing state responses), App. B (letters from state officials). See also Wall Street
Journal, Editorial, The Carafe is Half Full, W ALL ST . J., July 3, 2003, at A10 (arguing that teenagers are not
interested in expensive wines, and that “[t]hirty states allow wine shipments within their borders without a surge in
teen drinking”).
25 Id. at App. B (New Hampshire letter).
26 See id. at App. A.
27 See id. at App. B (California testimony; letters from New Hampshire and Wisconsin).
28 See id. at notes 47-50 and accompanying text.
8
imposes significant costs, in both human and economic terms.22 In the context of the direct
shipping of wine, however, the evidence shows that the states that permit interstate direct
shipping generally report few or no problems with shipments to minors.
A. 	Evidence from States That Allow Direct Shipping
FTC staff contacted officials from many states that allow interstate direct shipping and
asked them whether they had experienced problems with shipping to minors. These states
generally report few, if any, problems with direct shipping to minors. Most of them do not
believe that interstate direct shipment of wine to minors is currently a serious problem, although
several of them believe that it is possible for minors to buy wine online. None of them report
more than isolated instances of minors buying or even attempting to buy wine online. 23 State
regulators uniformly expressed greater concern about underage access to alcohol through
traditional avenues.
The state officials offered many possible explanations for their experiences. Several state
officials opined that minors are more interested in beer and spirits than wine. 24 New Hampshire
concluded that minors are less likely to purchase wine online because of the extra expense of
ordering over the Internet.25 This conclusion corresponds with the McLean study, which found
that when transportation costs are included, lower-end wines are more expensive when
purchased over the Internet than through the three-tier system.26 Minors would have to pay a
hefty premium, from 33-83%, to purchase a bottle of wine costing less than $20 online and have
it delivered to them via 2 nd Day Air. Similarly, several state officials also commented that, based
on their experience, minors were much more likely to buy alcohol through offline sources than
over the Internet.27 In a 2002 survey, large percentages of high school students, from 68-95%,
said that it is “fairly easy” or “very easy” to get alcohol. 28

29 See Testimony of Irene Mead 196, at http://www.ftc.gov/opp/ecommerce/anticompetitive/021008antitrans.pdf.
30 Linda A. Fletcher et al., Alcohol Home Delivery Services: A Source of Alcohol for Underage Drinkers, J. STUD.
A LCOHOL 61: 81-84 (2000).
31 The National Academy of Sciences cites this study, and only this study, for the proposition that “[s]urveys of
underage purchase of alcohol over the Internet or through home delivery show that small percentages (10 percent) of
young people report obtaining alcohol in this manner.” See Reducing Underage Drinking: A Collective
Responsibility 174-75 (2004). As noted in the text, however, the cited study does not discuss the Internet or sales
from out-of-state vendors.
32 See Wine Report at 35.
9
Of course, the fact that states have received few complaints about direct shipments to
minors does not establish that minors are not purchasing wine online. As noted by a Michigan
Assistant Attorney General, minors who buy wine online are unlikely to report their purchases to
the authorities, and neither the package delivery company nor the supplier may know or care that
they are delivering wine to a minor. 29 FTC staff cannot rule out the possibility that minors are
buying wine online undetected by state officials.
Nevertheless, the staff is aware of no systematic studies assessing whether direct
shipping increases alcohol consumption by minors. FTC staff found only one study that might
address the impact of direct shipping of wine on underage drinking. This study examines the
impact of “home delivery” of keg beer and other alcohol on underage drinking from such
traditional retailers such as local liquor stores.30 Although the study raises important issues of
concern, it provides little information upon which to assess interstate direct shipping of wine.
The study does not specifically address online sales, interstate direct shipment via package
delivery companies, or wine. For example, one of the study’s key findings is that “[o]utlets
providing delivery services were more likely to sell keg beer.” Moreover, the study itself states
that “data presented here do not reveal the frequency of delivery use or whether delivery
purchases served as a primary source of alcohol,” and the study does not assess whether home
delivery or direct shipping increases underage alcohol consumption above the level that would
occur without those channels.31
The data from state compliance checks, or stings, in theory could provide additional
evidence on the impact of interstate direct shipping on underage drinking. Several states have
conducted stings on interstate direct shipments of wine. Typically in these stings, states provide
a minor with a credit card to see whether the minor can purchase wine online, and whether the
supplier or package delivery company will refuse to deliver it to the minor. These data,
however, are also inconclusive. Stings and anecdotes have shown that minors are able to buy
wine online, but there are not enough data from which to conclude that minors can buy wine
more or less easily online than offline. For instance, Michigan found that “[a]bout one in three
websites contacted” (roughly 33%) agreed to sell alcohol to the minor with no more age
verification than a mouse click, and that UPS delivery people did not properly verify the
recipients’ ages.32 On the other hand, New Hampshire has run compliance checks in the past but

33 See id. at App. B (New Hampshire letter).
34 See id. (noting a success rate of 30% in bricks-and-mortar stings); Letter from Tina Schultz, National Alcohol
Beverage Control Association, to FTC 2-4 (Jan. 31, 2002) (citing state statistics).
35 See Wine Report at App. B (letters from Nebraska, New Hampshire, and Wyoming).
36 See Wine Report; NAS, Reducing Underage Drinking: A Collective Responsibility 174-75 (2004).
10
did not report any problems with interstate direct shipping to minors. 33 Moreover, the bricks-
and-mortar sting data show comparable results. These stings typically find that minors are able
to buy alcohol between 15-30% of the time. In Michigan, minors were able to buy alcohol 55%
of the time after showing a valid Michigan license that identified the customer as a minor.34
Ultimately, there are little data indicating whether a retail clerk is a more or less reliable
gatekeeper than a common carrier’s delivery person. Of course, efforts should be made to
minimize underage purchases of alcohol, both online and offline, and New York’s bills
incorporate safeguards against direct shipping to minors.
B. 	Less Restrictive Regulatory Tools
Many states have decided that they can prevent direct shipping to minors through non-
discriminatory, less restrictive means than a complete ban. For example, some states have
applied the same types of safeguards to direct shipments that already apply to bricks-and-mortar
retailers, such as requirements that package delivery companies obtain an adult signature at the
time of delivery. 	In addition, several states, including Nebraska, New Hampshire, and
Wyoming, require out-of-state suppliers to register and obtain permits (a permit can be
conditioned on the out-of-state supplier’s consent to submit to the state’s jurisdiction). None of
these states reported any problems with interstate direct shipping to minors. 35
New York’s bills contain these types of safeguards. In sending the wine, the shipper
must ensure that the delivery package has a conspicuous label, and the common carrier must
obtain an adult signature at the time of delivery. In addition, the shipper must register with the
state and consent to jurisdiction within New York for enforcement purposes. Finally, the bills
give the state liquor authority the power to suspend or revoke an out-of-state shipper’s license.
Notably, New York’s bills contain all of the safeguards recommended by both the National
Academy of Sciences, which recommended “tightening access” rather than banning interstate
direct shipping, and FTC staff. 36
To the extent that minors do buy wine online, some argue that they lack adequate
enforcement tools against out-of-state suppliers. They contend that the states cannot readily
inspect the records of out-of-state suppliers, and that because of jurisdictional constraints, “there
is no easy way to shut [out-of-state suppliers] down if violations occur.” They also argue that
out-of-state suppliers have little incentive to prevent sales to minors, in part because of
enforcement difficulties, but also because individual states can only punish out-of-state suppliers
with the loss of a small part of their market, not the loss of a license. They note that, in contrast,

37 See Wine Report at 29-30.
38 27 U.S.C. § 122a (2002); Letter from Sheryl L. Walter, Acting Assistant Attorney General, U.S. Department of
Justice, to Hon. Dennis Hastert, Speaker, U.S. House of Representatives 2 (May 3, 2001); Bolick v. Roberts, 199
F.Supp.2d 397, 442 (E.D. Va. 2002) (addendum), vacated on other grounds, Bolick v. Danielson, 330 F.3d 274 (4th
Cir. 2003).
39 Letter from James M. Goldberg, counsel for NABCA, to Jonathan Rusch, Special Counsel for Fraud Prevention,
U.S. Department of Justice 2 (Mar. 19, 2001), attached as an enclosure to the Walter letter.
40 Id. See also Wine Report at App. B (noting that Illinois could use the Act).
41 ATF, Industry Circular No. 96-3, Direct Shipment Sales of Alcohol Beverages (Feb. 11, 1997), at
http://www.atf.treas.gov/pub/ind_circulars/ic_96-3.htm.
42 N.H. R EV. STAT . A NN. § 178:14-a(VIII) (2000).
43 LA. R EV. STAT . A NN. § 26:359(G) (West 2001).
11
they can readily inspect in-state wholesalers and retailers on-site, run compliance checks, and
punish violators with the loss of a license, fines, and other penalties.37
States, however, have a variety of legal remedies against out-of-state suppliers that ship
to minors. The Twenty-First Amendment Enforcement Act gives state attorneys general the
power to bring civil actions in federal court for injunctive relief against out-of-state suppliers
that violate the state’s liquor laws.38 At the time the law took effect, in 2000, state authorities
agreed that the Act would help them enforce their laws against out-of-state suppliers. The
National Alcohol Beverage Control Association (“NABCA”), an association of state regulators,
stated that the Act would “provide state governments with an effective tool to use in preventing
the illegal interstate flow of alcohol beverages, some of which finds its way into the hands of
underage drinkers.” 39 NABCA also said that the Act would help states “overcome the
jurisdictional hurdles” in enforcing their laws.40 Finally, TTB, which has authority to revoke a
winery’s basic permit, will assist states in combating significant violations of state law. 41
States also can request assistance from other states’ alcohol agencies. New Hampshire
will punish suppliers licensed in New Hampshire if another state proves that the supplier is
shipping wine illegally into that state.42 Likewise, when officials in Louisiana learn of a
violation, they have a duty to notify both TTB and the state that licensed the violator, and to
“request those agencies to take appropriate action.” 43
Overall, the evidence shows a few clear results. States that permit interstate direct
shipping have adopted various procedural safeguards and enforcement mechanisms to prevent
sales to minors. These states generally say that direct shipping to minors currently is not a
serious problem, and that they have received few or no complaints about direct shipping to
minors. The McLean study suggests that an interstate shipping ban primarily deprives
consumers of access to lower-cost sources of high-end, expensive wines, and to a larger variety

44 See, e.g., LA. R EV. STAT . A NN. § 26:359(B)(1); N.H. R EV. STAT . A NN. § 178:14-a(V); NEV. R EV. STAT . § 369.462.
45 See Wine Report at App. B (Nebraska letter).
46 See id. (North Dakota letter).
47 See id. (New Hampshire letter).
12
of all wines. FTC staff has seen no evidence indicating whether higher prices for these types of
fine wines would curtail consumption significantly either among the general populace, minors,
or problem drinkers. There is, therefore, apparently no empirical evidence that bans on interstate
direct shipping promote temperance. Because New York’s bills contain the same types of
recommended safeguards as those adopted by states that allow interstate direct shipping and
report few problems, it is likely that New York will experience few, if any, problems with direct
shipments of wine to minors.
IV. 	States that Permit Interstate Direct Shipping of Wine Generally Report Few or No
Problems with Tax Collection
Some states also have adopted less restrictive means of protecting tax revenues while
permitting direct shipping, such as by requiring out-of-state suppliers to obtain permits and to
collect and remit taxes.44 New York’s bills incorporate these types of requirements. Of these
states, most report few, if any, problems with tax collection. Nebraska, for example, reports that
they “have also not, as yet, had any problems with the collection of excise tax[es].” 45 North
Dakota reports that “Taxes are collected. No problems to date that we are aware of.” 46
To the extent that states have problems with out-of-state suppliers, they have addressed
the problem in less restrictive ways than banning all interstate direct shipping. New Hampshire,
for example, works with out-of-state suppliers:
[T]he State of New Hampshire Liquor Commission collects an 8% fee on all
shipments into the State of New Hampshire. When the NH Liquor Commission
discovers an improper shipment we contact the company and inform them of the
laws in NH. Once the company learns of NH laws they normally get a permit or
stop shipping into NH. The NH Liquor Commission is working with out-of-state
supplier[s] and encouraging them to obtain a permit. 47
Furthermore, to the extent that out-of-state suppliers fail to comply voluntarily, states can report
problems to TTB or other states, or use the Twenty-First Amendment Enforcement Act. On the
other hand, there is no evidence showing that states must ban interstate direct shipping, rather
than adopting a less restrictive alternative, to raise revenue.
Finally, regardless of whether states permit or prohibit interstate direct shipping, there is
no reason to believe that legalized direct shipping would increase tax evasion. It is unlikely that

48 See id. at 39-40.
49 See, e.g., Virginia Postrel, A Look at Wine Sales over the Internet Shows the Price of Some Regulations in the
Name of Consumer Protection, N.Y. TIMES, July 17, 2003, at C2 (criticizing bans on interstate direct shipping as a
barrier to e-commerce).
50 At the workshop, FTC staff examined potentially anticompetitive barriers to e-commerce in many other industries:
auctions; automobiles; caskets; contact lenses; cyber schools; online legal services; real estate, mortgages, and
financial services; retailing; and telemedicine and online pharmaceutical sales. See Workshop Homepage, at
http://www.ftc.gov/opp/ecommerce/anticompetitive/index.htm.
51 Swedenburg v. Kelly, 358 F.3d 223, 228-29 (2d Cir. 2004).
13
states would increase illegal interstate direct shipping by creating procedures that would allow
out-of-state suppliers to ship legally and pay taxes. Michigan, for example, reports that many
out-of-state suppliers ship wine illegally into Michigan, and that those suppliers do not pay taxes
to Michigan. Michigan, however, already prohibits out-of-state suppliers from shipping wine
into Michigan, and out-of-state suppliers that ship into Michigan are already breaking the law.
By legalizing direct shipping and requiring shippers to pay taxes as a condition for receiving a
license, states could allow interstate direct shipping from out-of-state suppliers that comply with
the law. If suppliers who currently ship illegally continue to ship illegally, then the level of tax
evasion would remain unchanged, but if some suppliers who currently ship illegally decide to
ship legally, then tax evasion would fall. Moreover, if interstate direct shipping increases overall
commerce in wine, overall tax revenue could rise.48
V. 	The Bills Would Promote E-Commerce and Interstate Commerce
The Internet lets consumers purchase an unprecedented array of goods and services from
the convenience of their homes. Consumers can find thousands of goods, from thousands of
suppliers around the country, and have those goods delivered to their doors. State bans on
interstate direct shipping represent the single largest regulatory barrier to expanded e-commerce
in wine. In states that ban interstate direct shipping, the bans prevent consumers from
conveniently purchasing wine from suppliers around the country. 49
The direct shipping issue has broader implications for interstate e-commerce. In many
industries, including many professional and financial services, states require that potential
suppliers maintain a physical office within the state, or that they hire state residents. 50 Under
current New York law, for example, out-of-state wineries can obtain a license to distribute and
sell alcohol in New York only if they “comply with the licensing requirements of [New York]
Law, including establishing and maintaining a physical presence in New York.” 51 These
requirements ostensibly allow states to maintain tighter regulatory control over the supplier, but
they also significantly raise the cost to online suppliers to doing business within a particular
state. They deprive online suppliers of one of the main efficiency benefits of e-commerce, the
ability to provide goods and services over large distances without the need for a substantial, far-
flung physical presence. They also demonstrate how seemingly neutral restrictions can deprive
online firms of a legitimate competitive advantage. State physical presence laws apply equally

52 See Prepared Statement of the Federal Trade Commission on Efforts to Combat Unfair and Deceptive Subprime
Lending, before the Senate Special Committee on Aging 4-8, February 24, 2004, at
http://www.ftc.gov/os/2004/02/02242004subprimelendingtest.pdf.
53 See, e.g., The Associates, No. 1:01-CV-00606 (N.D. Ga. 2001); First Alliance Mortgage Co., et al., No. SACV
00-964 DOC (Eex) (C.D. Cal. 2000); Mercantile Mortgage Co., No. 02-5079 (N.D. Ill. 2002).
54 Cf. Swedenburg, 358 F.3d at 237-38.
14
to in-state and out-of-state firms. In reality, though, these requirements impose disproportionate
costs on online firms by diminishing or eliminating one of their advantages. Moreover, online
firms, unlike bricks-and-mortar firms, may not enjoy the full financial benefits of maintaining an
in-state office, because only part of their client base will reside in any particular state.
On the other hand, there is little evidence that in-state office requirements are necessary
to advance consumer protection goals. For instance, there is little evidence that in-state office
requirements reduce the incidence of consumer fraud by “fly-by-night”operators who deceive
consumers and then disappear. FTC staff have ample experience demonstrating that deceptive
lending can harm consumers, particularly for low-income and unsophisticated borrowers.52
There is, however, no necessary correlation between a lender’s propensity to deceive consumers
and the presence or absence of in-state offices or personnel. In a number of the most significant
deceptive lending cases brought by the Commission, the lenders operated in-state offices. 53
Physical presence is not necessary to ensure accountability. 54 Nor is the issue of
enforcement unique to wine. As with catalogue sales or online sales of other products, a variety
of general laws and regulations protect consumers and provide legal remedies. Consumers can
use general contract and tort law, as well as other specific state consumer protection laws and
federal laws, to seek legal redress against out-of-state suppliers. State enforcement agencies can
use a variety of legal tools, such as the Twenty-First Amendment Enforcement Act and
cooperation with other states’ enforcement agencies. Moreover, federal agencies, including the
FTC, TTB, and Department of Justice, have authority to bring enforcement actions against
sellers who violate the law. At best, physical presence requirements are an expensive, inefficient
means of getting an incremental increase in regulatory authority. At worst, if extended to other
industries, physical presence requirements could seriously imperil the growth of e-commerce.
Finally, your letter asked us to comment on arguments regarding “harm to the three-tier
system.” The FTC’s statutory mandate, of course, is to promote competition and consumer
welfare, not producer welfare. Having said that, the evidence suggests that expanded e-
commerce would improve market conditions by giving wineries (including New York wineries),
the first tier of the system, extra distribution outlets. Moreover, expanded e-commerce likely
would not spell the end of bricks-and-mortar wholesalers or retailers. Because of shipping costs,
consumers generally can find lower prices for less expensive wines in bricks-and-mortar stores.

55 See Daniel L. McFadden, Written Statement 2, at
http://www.ftc.gov/opp/ecommerce/anticompetitive/panel/mcfadden.pdf (“If direct interstate wine shipments were
reopened, I would foresee some competitive pressure on distributors and retailers, primarily from direct wine sales to
large retailers, but no substantial restructuring of the industry. I find it particularly sad that the anti-interstate
shipping legislation that has been passed is so disproportionate in its negative impact on consumers relative to the
very modest protection it provides to traditional distributors and retailers”).
15
In states that permit interstate direct shipping, such as California and Illinois, wholesalers and
retailers continue to enjoy the bulk of sales. 55
Conclusion
Based on an extensive review of the evidence, FTC staff believes that, if enacted, any of
the bills would enhance consumer welfare and would allow New York to meet its other public
policy goals. FTC staff also believes that Senate bill 1192 would provide greater benefits to
consumers than Assembly bill 9560-A or Senate bill 6060-A, because that bill would allow both
out-of-state wineries and retailers to obtain out-of-state shipper’s licenses.
Respectfully submitted,
Todd J. Zywicki, Director
Office of Policy Planning
Susan A. Creighton, Director
Bureau of Competition
Howard Beales, Director
Bureau of Consumer Protection
Luke M. Froeb, Director
Bureau of Economics
Barbara Anthony, Director
Northeast Regional Office