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Federal appeals court rules Michigan can impose separate regulations on out-of-state alcohol retailers
Federal appeals court rules Michigan can impose separate regulations on out-of-state alcohol retailers

The US Court of Appeals for the Sixth Circuit ruled Tuesday that Michigan is allowed under the Twenty-first Amendment to impose separate regulations on out-of-state alcohol retailers. This includes a ban on direct alcohol shipments to consumers.

Michigan recently amended its Liquor Control Code to allow in-state retailers to deliver directly to consumers through state-licensed “third party facilitators” or common carriers. Lebamoff Enterprises, a wine retailer in Indiana, and several Michigan wine consumers filed suit, alleging that the new law violates the Commerce Clause and the Privileges and Immunities Clause.

The court held that the Twenty-first Amendment permits Michigan to treat in-state retailers differently from out-of-state retailers. Michigan can permit its retailers to offer at-home deliveries within the state, while denying that opportunity to an out-of-state retailer that does not have a Michigan retail license.

Michigan has a three-tier system, in which alcohol producers, as the top tier, are forbidden from selling directly to retailers or consumers. Producers must sell to wholesalers located within the state, which are the second tier. Wholesalers are the in-state path through which all alcohol passes, and it is at this point that states can control the amount of alcohol sold through price controls, taxation and other regulations. Michigan imposes minimum prices and prohibits wholesalers from offering volume discounts or selling on credit, and the state is the wholesaler in liquor.

In-state wholesalers then sell only to in-state retailers, as the third tier, who make the final sales to consumers. Businesses at each tier must be independently owned, and no business can operate on one more than one tier level.

The court found that differential treatment of out-of-state deliveries “was necessary to preserve the three-tier system and the regulatory objectives it served.” By opening up the state for direct deliveries from out-of-state retailers, Michigan would be subject to alcohol that either passed through out-of-state wholesalers or no wholesaler. This would leave “too much room for out-of-state retailers to undercut local prices and to escape the State’s interests in limiting consumption.”

Michigan cannot set the prices set by out-of-staters due to the extraterritoriality doctrine, which bars state laws that have the “practical effect” of controlling commerce outside of their borders. Therefore, the court concluded that the only way for Michigan to achieve its regulatory objectives and to preserve the three-tier system was to impose separate regulations.