New case challenging state efforts to restrict federally authorized bonded transfers arguing preemption could have vast implications for states prohibiting alcohol transfers in bond between producers like breweries, wineries, and distilleries.
If you’re not following the excellent coverage of alcohol related issues over at Alcohol Law Review, you’re missing out. That wonderful blog recently brought attention to this state preemption case from Michigan where a group comprised of winery and cider makers are challenging a restriction on their in bond transfer of alcohol – authorized by federal law but arguably prohibited by Michigan law – as well as actions taken by the Michigan Liquor Control Commission in apparently prohibiting transfers or seizing product.
You can read the full complaint with exhibits here.
The important count – count I – alleges that the portions of the Michigan Liquor Control Code prohibiting these sales and bonded transfers of alcohol (MCL 436.1204a) which are otherwise authorized by portions of the Internal Revenue Code (26 U.S.C. 5362) and the Federal Regulations (27 C.F.R. Part 24), along with Michigan’s definition of “Manufacture” (MCL 436.1109(1)), are preempted as a matter of law by those provisions. Brewers looking to find some solace and perhaps similarly challenge state claims will note that the 2017 Tax Cuts and Jobs Act also amende the Internal Revenue Code to allow for transfers between breweries that do not share common ownership, so while this case specifically focuses on wine, beer and spirits (which also have similar authorization and procedure for transfer) may find compelling justification in the case, its argument and ultimate resolution for further action against similar state prohibitions on in bond transfers.
A companion brief filed in support of a request for a temporary restraining order details the legal argument. You can read the brief here. The brief argues that federal law controls the entire field of in bond transfers of alcohol and that the state cannot prohibit the in bond transfer because such transfers are expressly authorized by federal law and federal regulation. The argument relies on cases asserting that these in bond transfer laws are a direct exercise of congressional Commerce Clause power, and arguing that given this authority, the Supremacy Clause prohibits the actions taken by the state in attempting to restrict in bond transfers of alcohol.
The potential for a decision in favor of preemption has wide ramifications for producers in other states that find themselves restricted by statutes mandating certain contracting sale or transfer regimes or restricting them between like producers. Those interested in breweries, wineries, and distilleries obtaining and functioning under the full rights granted by the federal statutes and regulations should check in on this case over the upcoming months and may already find good use for the arguments and operative documents to the extent they find themselves restricted by state law from participating in federally authorized and regulated activities.