TERRE HAUTE — Indiana’s wineries and wine wholesalers are locked in a legal and legislative battle over how Hoosiers can legally buy wine in the state.

One recent casualty in this war was Rockville-based Terre Vin Winery, said the winery’s owner, David Gahimer. Gahimer closed Terre Vin at the end of 2006. New legislation passed in Indianapolis last year was “almost 100 percent” of the reason the winery closed, Gahimer said.

The Indiana Legislature “cost us 42 accounts in one day,” Gahimer said of a law passed last year that prohibited small wineries from skipping wholesalers and selling directly to retailers.

“The final [law] was not good for the industry,” Gahimer said. “We cut our losses and quit.”

The legislative battle between wineries and wine wholesalers, which had been simmering for years in Indiana and elsewhere, exploded across the country in 2005. In the spring of that year the Supreme Court ruled that states that allowed in-state wineries to ship directly to consumers had to allow out-of-state wineries to do the same. The court’s decision was based on the Constitution’s commerce clause, which prevents states from discriminating against out-of-state products. Indiana’s Alcohol and Tobacco Commission (ATC), however, reacted to the court’s ruling by banning all direct shipping to consumers, whether in-state or out-of-state.

“That [ATC decision] cost Oliver [Winery in Bloomington] a quarter-of-a-million dollars and two employees’ jobs that day,” Gahimer said.

“It’s true,” said Bill Oliver, president of Oliver Winery, although he said it may have really only been one and a half jobs that were lost.

An Indiana judge later overturned the commission’s move, allowing the wineries to begin shipping again, but only after months of delay and a legal battle.

The ATC decision was not very damaging to Terre Vin Winery, Gahimer said. Rather, his business was harmed when the General Assembly essentially banned a winery’s ability to sell directly to retailers.

The Legislature “completely took away our ability to wholesale,” Gahimer said. His winery was selling wine in as many as 56 different retail outlets at one time, he said.

Distribution system lauded and loathed

Indiana’s wine business, as is the case in many states, flows through what is known as the “three-tier” distribution system, something that has its roots in the era of alcohol prohibition, according to Compliance Service of America, an Oregon-based consulting firm that deals with beer, wine and spirits regulation.

Under this system, alcohol producers are required to sell their products to licensed distributors who then sell to licensed retailers who then sell to consumers. About 97 percent of all wine sales in the United States go through wholesalers before reaching consumers, according to the Wine Institute, a California wineries lobby group.

“You can see what happens to the price of wine” after going through this system, said Frank Siegler, a business consultant in Minnesota who is trying to end the three-tier system, which he calls “monopolistic.”

The three-tier system “really makes it difficult for small producers,” agrees Jim Butler, owner of Butler Winery in Bloomington.

But wine wholesalers, such as Monarch Beverage Co. and Olinger Distributing, both in Indianapolis, argue that the three-tier system helps state governments keep tabs on the sale and distribution of alcohol. They and other defenders of the system say it helps keep kids from getting alcohol, allows for reliable excise tax collection and prevents what the Wine and Spirits Wholesalers of America Inc. (WSWA) calls “illegal trafficking” of alcoholic beverages and “market manipulation.”

“Every day there are retailers being suspended” or having their licenses revoked for selling to minors, being a public nuisance or not paying their licensing fees or taxes, said Jim Purucker, executive director of the Wine and Spirits Wholesalers of Indiana (WSWI). Wholesalers “are the gate-keepers,” he said, allowing the state to efficiently enforce its tax and underage drinking laws. Opening up the system to 7,000 to 10,000 producers would make the job of collecting state excise taxes “enormous,” Purucker said.

Not all agree ‘three tiers’ a buffer to illegal sales

The 21st Amendment, which ended prohibition in 1933, gave states the ability to regulate the import and transportation of alcohol within their borders. Some states created government-owned wholesaler and even retail systems; others, such as Indiana, adopted a three-tier system to control alcohol sales and distribution and to prevent what they feared would be monopolies in production, distribution and retail sales of alcohol.

“The system was designed to make it more difficult for the supplier to engage in anti-competitive practices … and makes it easier for the state to enforce” its laws, said Douglas W. Metz, managing director of the Wine and Spirits Wholesalers of America, speaking to a California legislative committee in 1996.

The three-tier system encourages “moderate, legal consumption” of alcohol, according to Indianapolis-based Olinger Distributing’s Web site.

The ability of a winery to ship wine directly to a consumer seems particularly threatening to supporters of the three-tier system.

“It’s a huge loophole around that three-tier system,” Purucker said. The current system ensures “face-to-face” transactions between buyers and sellers of alcohol. “An unlicensed UPS man” delivering alcohol to a home amounts to “a huge breach of the confidence that’s in the system today about underage access,” he said.

“We don’t buy … those arguments” about underage access or excise tax collection, said Allen Olson, a founder of VinSense, a new Indiana-based consumer lobby group fighting to loosen the state’s wine distribution laws. He said about 34 states allow direct-shipping of wine and “none of them report any problem.”

Olson and other opponents of the three-tier system say virtually all alcohol that reaches kids has already passed through the three-tier system. Young people get alcohol from their parents’ liquor cabinet, have an adult buy for them or obtain it through shoplifting, they say.

“They want it now,” said Russ Bridenbaugh, a wine journalist who filed the first lawsuit challenging the ban on direct shipping of wine. Kids are not going to order wine from a California winery and wait two weeks for it to arrive, he said.

“There’s absolutely no serious research that indicates that teens will use the Internet to buy wine,” Olson said.

Beverage groups lobby both sides of the aisle

Lobbyists are heavily involved in the wine battle in Indiana. One indicator of just how involved might be the level of campaign contributions given to Indiana politicians by wine and spirits wholesalers. According to the Indiana Secretary of State’s Division of Elections, Monarch Beverage Co., the largest wine and spirits wholesaler in Indiana, has contributed nearly $89,000 to Indiana politicians, Republicans and Democrats, since 1997. Olinger Distributing has donated over $99,000 during that same time period and National Wine and Spirits Inc. of Indianapolis contributed more than $125,000.

Indiana’s wineries, on the other hand, have donated a total of just more than $2,000 since 2001. The bulk of that came from Oliver Winery last year, according to Election Division documents.

“Wineries are not as well organized” as wholesalers, Butler said. Wholesalers are organized at a national level, he said.

Wine Industry sees resurgence

There were 33 commercial wineries in Indiana in 2006, according to the Indiana Wine Grape Council. Nearly 900,000 tourists visit Hoosier wineries annually, the council notes, contributing around $33 million to the state’s economy.

Indiana also a has a rich history of wine making.

“Indiana was the first state to have a commercially successful vineyard,” said Jeanette Merritt, marketing director of the Indiana Wine Grape Council at Purdue University. Prohibition “killed” that industry in 1920, she added, but it was reborn in the early 1970s when state law was changed to allow wineries to sell wine direct to consumers in winery tasting rooms. That legislation, an effort of William Oliver Sr., “was what re-started the industry” in the state, Merritt said.

Indiana law now allows wineries to have up to three tasting shops in the state; however, most wineries only operate a sales office at the main winery location, Merritt said.

“It’s a growing industry,” Merritt added. In 1989 Indiana wineries produced just 36,000 gallons of wine. In 2006 that had grown to three-quarters of a million gallons, she said.

Future sales could hinge on court decisions

There are around 5,200 wineries in the United States today, many of them are “mom and pop” operations, such as the former Terre Vin, said Minnesota-based consultant Siegler. Terre Vin produced about 6,500 gallons of wine each year, Gahimer said, compared with the state’s oldest and largest winery, Oliver, which expects to produce 600,000 gallons of wine this year, according to Sarah Villwock, the winery’s promotions director.

Indiana allows consumers to have wine shipped directly to their homes, but only after making an initial, face-to-face visit to the winery from which they plan to order.

“This [requirement] is obviously a burden” to a Hoosier wishing to order wine directly from California or other far away states, Bridenbaugh said. Wholesalers offer about 10,000 different wines, he added, but California has 100,000 different wine labels alone. “That leaves 95 percent of the wines out there that people can’t get,” he said.

Olson’s VinSense, which launched its Web site, www.vinsense.org, Friday in Bloomington, is like a number of other wine consumer groups that have emerged around the country in the years since Florida made direct-to-consumer shipping of wine a felony in 1997, according to the Arizona State University business school Web site.

The 2005 Supreme Court decision banning discrimination against out-of-state wineries was initially seen as a victory by the wineries and the consumer groups, but now battles are being waged in the different state legislatures — including Indiana’s. Other challenges to the three-tier system, such as a federal lawsuit filed by retail giant Costco to allow retailers to buy directly from producers (skipping wholesalers completely), could bring about even greater change.

In Indiana, the General Assembly wrangled in 2006 primarily over two different bills, one favored by wineries and the other by wholesalers. The result was a compromise package of bills that left both sides “equally happy or unhappy,” WSWI’s Purucker said, although he said he was not sure what changes in the law Indiana’s wholesalers would seek.

“In the art of compromise I think the Legislature did a pretty good job,” Purucker said.

In addition to the Costco case, “a new crop of litigation is fermenting across the nation” regarding wine shipping laws and regulations, according to a recent article in the National Law Journal. One such case, filed in a federal disrict court in southern Indiana, challenges the requirement that customers wanting wine shipped to their homes first must go to the winery from which they want to order.

James Tanford, an Indiana University law professor who has brought more than 20 suits on behalf of wineries, argues that the in-person requirements for ordering wine discriminates against wineries in distant states, the National Law Journal reports.

Little legislative action is expected in 2007, observers on both sides of the debate have said, but wineries and consumer groups seem less happy with the status quo than the wine wholesalers.

“We have a system where we passed laws … at the end of prohibition [and] ever since [new laws] have been tacked on like Band-Aid on top of Band-Aid,” Butler said. “It’s a very convoluted system. Most of the legislators do not understand it.”

The “web of confusion” created by the shipping requirements in the state have precluded shipping as a cost-effective option for Hoosier wineries, Bill Oliver said. “It’s a tangled up mess right now.”

Arthur Foulkes can be contacted at (812) 231-4232 or arthur.foulkes@tribstar.com.