A new California law provides that any person currently licensed in California or any other state as a winemaker ("winegrower" per the statute), who obtains a wine direct-shipper permit, may sell and ship wine directly to a resident of California, who is at least 21 years of age, for the resident’s personal use and not for resale. This law was designed to deal with a U.S. Supreme Court decision that effectively invalidated many states’ restrictions on direct wine shipments. However, California’s supposed "cure" creates several new constitutional problems, primarily by imposing the state’s requirements on out-of-state businesses with which the state may not have constitutionally sufficient contacts.
If the direct shipment permit holder is located outside California, (1) an annual report disclosing the total amount of wine shipped into California during the preceding calendar year must be filed with the California State Board of Equalization ("SBE"), (2) the permit holder must pay to the SBE all sales and use taxes on all wine sold into California (all wine sold pursuant to a direct-shipper permit shall be deemed to be wine sold in California), and (3) the permit holder is deemed to have consented to the jurisdiction of the SBE, any other California state agency, and the California courts concerning enforcement of the new law and any related laws, rules or regulations.
The new law appears constitutionally infirm for a number of reasons. First, there is no provision for a credit against the California-use tax obligation for a sales tax that another state may impose on an out-of-state sale that is shipped into California. For example, a shipper of wine from New York may have paid a sales tax in that state on wine it ships into California; that shipper now faces a California-use tax on the full value of the wine. There are no complimentary credit provisions in the new law for sales taxes paid to other states, as are found in most sales and use tax regimes. This is clear discrimination against interstate commerce because out-of-state sellers are likely to be liable for higher taxes than in-state sellers, giving in-state sellers a competitive advantage.
Second, the new law makes the out-of-state seller liable for a use tax, where a use-tax liability is only properly imposed on a buyer. This is because the new law "deems" the sale to have taken place in California despite the fact that title to the wine may have passed out-of-state and the buyer paid for the shipping (i.e., the "FOB" is outof- state). This situation ignores commercial reality and is not only a technical violation of the use-tax law, but it also offends traditional constitutional concepts of due process of law.
Third, the new law "deems" an out-of-state seller, who otherwise has no connection with California (no "minimum contacts") to have consented to the jurisdiction of the California courts concerning enforcement of the new and any related laws. This again offends traditional constitutional concepts of due process of law.
This new law is touted as cleaning up California law to comply with a recent U.S. Supreme Court ruling when, in fact, it creates more constitutional problems than it solves.
This article is presented for informational purposes only and is not intended to constitute legal advice.