Arizona's Liquor Laws Face Legal Challenge Over Interstate Sales

Liquor laws are weird in a lot of states, but Arizona’s laws are weird in ways that affect businesses more than consumers. Their alcohol regulation operates under a "three-tier" system, which mandates a separation between producers, wholesalers, and retailers. This system is designed to prevent market domination by suppliers and curb excessive alcohol sales through aggressive marketing.
Under this framework, wine must pass through Arizona wholesalers before reaching retailers and consumers. Retailers must have a physical presence in the state and purchase their products from Arizona-licensed wholesalers. This structure ensures that all alcohol sales are subject to state oversight, including on-site inspections and compliance with tax regulations. The system also includes specific statutes that mandate that all liquor be shipped to a wholesaler and held for 24 hours before being sold to retailers.
Over three years ago, these laws were challenged on the theory that they unfairly restricted out-of-state retailers from directly selling to Arizona consumers.
They Wine'd Up in Court
In 2021, a coalition of wine enthusiasts and an online wine retailer filed a lawsuit in federal court against Arizona state officials. They challenged the constitutionality of laws that prohibit out-of-state wine retailers from selling and shipping directly to Arizona consumers, claiming that it violated the dormant Commerce Clause.
The plaintiffs consisted of Thewinetobuy.com, a Florida-based wine retailer, and Arizona residents Reed Day and Albert Jacobs, who were both wine collectors. Defendants include the Director of the Arizona Department of Liquor Licenses and Control, the Chair of the Arizona State Liquor Board, and the Attorney General of Arizona, all sued in their official capacities.
Plaintiffs’ Arguments
The plaintiffs asserted that Arizona’s regulations violate the Commerce Clause of the U.S. Constitution. They argue that the state’s laws unfairly discriminate against out-of-state retailers, shielding local businesses from competition and limiting consumer access to a broader selection of wines. Arizona law permitted only in-state retailers to sell and ship wine directly to consumers. Out-of-state retailers were barred from obtaining the necessary licenses to engage in such transactions, effectively excluding them from the Arizona market.
The plaintiffs contended that these restrictions are not justified by the Twenty-first Amendment, which grants states the authority to regulate alcohol. The plaintiffs argued that Arizona could achieve its regulatory goals through nondiscriminatory alternatives that do not impede interstate commerce. Christopher J. Zachar, representing the plaintiffs, emphasized the economic and consumer impacts of the current laws. “Arizona consumers are being denied access to a wide array of wines available in other states, often at more competitive prices,” Zachar stated.
The plaintiffs sought from the court a declaratory judgment that the laws in question were unconstitutional and requested a permanent injunction preventing their enforcement. The plaintiffs did not seek to disrupt the state’s ability to tax wine sales or regulate alcohol safety, but rather to open the market to out-of-state competition.
Plaintiffs Lose in Lower Court
The trial court ruled in favor of the state government defendants, finding that Day and Jacobs had a standing issue while also holding that the system's requirements did not discriminate against out-of-state retailers and were supported by legitimate state interests.
The plaintiffs have since appealed to the 9th Circuit, arguing that the district court erred by upholding the law without properly considering the Commerce Clause or applying the standards set by the Supreme Court (Granholm v. Heald and Tennessee Wine & Spirits v. Thomas)
They contend that this discrimination against interstate commerce is not justified by the Twenty-first Amendment because the state failed to show that banning out-of-state shipments is reasonably necessary to protect public health or safety. They argue that Arizona could still achieve its regulatory goals without imposing such restrictions, suggesting that the state could enforce its laws on out-of-state entities that wish to sell alcohol within its borders.
Wine Wars Wage On
The defendants and amici doubled down on their various rebuttals, contending that the physical presence requirement does not discriminate against out-of-state entities but is essential for maintaining a regulated and accountable alcohol distribution system within the state.
They assert that the Twenty-first Amendment gives each state the authority to regulate alcohol within its borders, allowing them to develop unique systems tailored to their specific needs and preferences. This includes the power to require physical presence for wholesalers and retailers to effectively enforce state laws.
The physical presence requirement is justified as a public health and safety measure, they say. It helps prevent issues like counterfeit alcohol and ensures compliance with state-specific regulations, which vary significantly from state to state. Defendants argue that Arizona, like other states, cannot effectively enforce its alcohol laws on transactions that occur entirely outside its borders. The physical presence requirement ensures that all alcohol sold within the state is subject to its regulations, maintaining the integrity of its three-tier system.
The plaintiffs also challenge Arizona's exception that allows for direct shipments from wineries, claiming it undermines the state's justification for the physical-presence rule, as it shows the state can regulate alcohol sales without such stringent requirements. The defendants argue that this exception does not undermine its three-tier system because it is minor and manageable, with federal oversight providing additional regulatory support.
Decision to Come
At oral arguments, the attorney for the defendants argued “An in-state retailer can get a license and sell online and make home deliveries. There’s no way that an out-of-state retailer can do that.” One of the judges, U.S. Circuit Judge Danielle Forrest, pushed back, pointing out that big stores like Walmart and Sam’s Club have set up storefronts in Arizona just for the purpose of getting a license in the state.
The judge also asked why Arizona can’t just require out-of-state retailers to acquire an Arizona license and abide by Arizona rules and regulations without having a physical storefront in the state. The defendant’s attorney replied that having a physical storefront is a better motivation for companies to follow state requirements.
The judge further inquired why Arizona couldn’t instead require out-of-state retailers to buy from licensed wholesalers. The defendants’ answer to this was that Arizona would have much less enforcement power over such wholesalers, who are subject to strict inspection requirements in the state.
“Arizona doesn’t have to justify the reasons for its laws if it's not discriminatory,” the defendant’s attorney added. Indeed, we can expect the outcome of the upcoming ruling to hinge largely on the discrimination piece.
Related Resources:
- Do I Need a Lawyer to Get a Liquor License? (FindLaw's Law and Daily Life)
- How To Open a Liquor Store (FindLaw's Learn About the Law)
- Commerce Powers Under Article I of the U.S. Constitution (FindLaw's U.S. Constitution Pages)