States Get Friendlier to Direct Wine Shipping

But restrictions and reporting requirements for wineries still loom large, says ShipCompliant

by Paul Franson
ShipCompliant CEO Jason Eckenroth and vice president of compliance Jeff Carroll reviewed regulatory changes for direct shipping as well as direct-to-consumer wine sales statistics.
Boulder, Colo.—The number of states permitting direct-to-consumer shipments by wineries grew to 40 in 2012, a big increase from 31 in 2005, according to the firm ShipCompliant. Other, smaller legal obstacles to wine shipping were removed this year, too, as ShipCompliant speakers summarized in a recent web seminar.

Jeff Carroll, the company’s vice president of compliance, reviewed progress and remaining roadblocks state by state.

Virginia enacted third-party regulations to allow marketing by agricultural cooperatives, effectively prohibiting the use of marketers by direct shoppers. “I have no idea what that means,” admits Carroll, and neither does anyone else.

It also requires that fulfillment warehouses be approved by the Virginia Department of Alcoholic Beverage Control (ABC.) This requires submission of the fulfillment house’s home-state license and a copy of the contract between each direct shipper and the fulfillment house.

A temporary “additional shipping location permit” workaround will remain in place only until the existing extra licenses expire.

New Jersey
New Jersey opened May 1, 2012, to direct shipping, making it the only state to open this year. The existing law has some restrictions including a 250,000-gallon capacity cap for wineries to be able to ship to New Jersey, vexing corporate taxation implications and a costly $938 permit fee. Carroll says that as a consequence, only 43 licenses were issued this year.

New York
Beginning Jan. 1, 2013, out-of-state direct wine shipper licenses in New York may be renewed every three years for $375 per year. (Previously renewal was required every year.)

Idaho streamlined its direct-shipping application process beginning in November.

Wineries can now register their own labels in Connecticut, even if a national marketing company already registered the label. The cost is $200 per label.

Georgia now requires label registrations and excise taxes to be filed online. On the other hand, there was no action in 2012 in two important states:

The Massachusetts legislature did not fix the existing capacity cap, consumer aggregate rules and transportation issues that basically eliminate direct shipping to that state.

Carrier licensing requirements in Massachusetts mean that every individual UPS and Fed Ex truck must now be licensed.

At present, only wineries licensed as Pennsylvania farm wineries can ship wine directly to consumers. No direct-to-consumer wine-shipping bills were passed this year.

Carroll added that “direct” shipping to state stores is complex and expensive. “You can’t really ship into Pennsylvania,” he admitted. It also has an 18% “Johnston Flood” tax on top of the 6% sales tax.

Carroll also reported on shipping reports: He said the typical number of reports due for a winery shipping to all 40 states is 657 including 90 in January.

In Maine, the excise tax report is becoming an annual return beginning in 2013.

In Washington state, an annual filing option IS now available to wineries that file the LIQ-774, LIQ-778 or LIQ-870 and expect to sell less than 6,000 gallons in Washington per calendar year.

One of the biggest developments in the alcoholic beverage world this year was the privatization of sales in Washington. Effective June 1, 2012, sales of distilled spirits are no longer controlled by the state.

Subjects of current controversy include $150 million in spirit distributor license fees to be collected by March 31, 2013; higher retail costs to consumers and tax collection.

Other controlled states are watching what happens in Washington. In Pennsylvania, for example, several bills were introduced to privatize or modernize in 2011, but none passed.

In continuing positive news for wineries, the wholesalers’ HR 1161 “CARE” Act to return more control to the states, which could restrict direct shipping, appears a dead issue for now.

In significant news from the TTB, a new application form for label approval (COLA) has significantly loosened changes in labels that can be made without applying for a new COLA. These include graphics changes, vintage, alcohol content (as long as it doesn’t change the class of wine) and many others.

This partly results from TTB’s resources unable to keep up with the demand for more wine, malt and spirit label approvals. And because of this, the time to get approval dropped from 30 days in May to 11 in October.

Looking forward
The wine business can anticipate a number of positive steps in the next year, according to ShipCompliant:

In Massachusetts, Carroll expects bills introduced to fix existing capacity cap, consumer aggregate rules and transportation rules.

Bills to open Pennsylvania to direct shipping should be introduced.

In New Jersey, the legislature should consider a bill to remove the capacity cap.

In North Dakota, shipments from fulfillment houses are still prohibited.

We can expect more news from Virginia on fulfillment warehouse approvals.

Also expect further efforts from the TTB to streamline COLAs, including changing pre-approval requirements.

States also are expected to further clarification on third-party marketing. At present, California is the only state to define the relationship between the winery and the marketer, a subject explored in depth in the next part of the presentation.

Third-party marketers
ShipCompliant CEO Jason Eckenroth presented a discussion of California’s regulations for wineries working with third-party marketers. First, he pointed out that third-party sales aren’t direct shipping—or traditional three-tier. The same regulations may not apply.

The good news is that California’s ABC clarified and blessed arrangements it had suggested were illegal in the past, but that approval comes with a lot of conditions.

Eckenroth emphasized that wineries selling with third parties must understand the law well. In particular, the winery must control the whole process and be very careful how funds are spent.

The ABC defines a third party provider as one that is involved with:
• Placement of advertising
• Making recommendations to consumers
• Directing consumers to licensees
• Receiving orders and passing them on to licensees
• Processing payments
• Assisting with shipping arrangements.

However, the licensee must be in control. The buyer must be informed that the winery is the seller; the winery must ensure that compliance is followed; the winery must be able to accept or reject the order (a strange requirement), and the winery must maintain control of payment settlement and disbursements.

The winery licensee is responsible for the process.

It can pay “reasonable” marketing fees, but should control the placement and pricing of products.

The winery pays for services rendered including marketing, fulfillment, technology, etc. Specifically, the third-party provider cannot independently collect the funds, retain its fee and pass the balance on to the licensee.

Wineries must remember and ensure that they comply with all requirements. For example, third-party orders count against their volume limits and should be reported under their permits.

They must collect accurate sales tax based on the winery’s requirements. This can be a challenge for marketers.

The winery name should always be displayed in marketing and shipments, including “sold and shipped by…”

Some states have specific regulations for third-party marketers, including prohibiting them.

Eckenroth reminded wineries that the goal of using third-party marketers is generally to add customers. He says that about one-fifth of those who buy through third parties also buy direct.

Many marketers won’t share contact information beyond what’s required like shipping address, though they might with negotiation.

ShipCompliant is introducing features in its compliance software to help ensure full compliance when working with third parties.

Rules and regulations
Producing wineries (those with 02 licenses in California and the equivalent in other states) can ship to 44 states if the purchaser orders the wine at the winery. Wine club sales are not considered onsite, even if ordered (and even paid) in advance at the winery. Only Utah, Arkansas, Mississippi, Alabama and Pennsylvania prohibit these shipments.

Producing wineries can ship to 40 states for off-site sales via phone, Internet or mail, but some states create imposing restrictions, some of which virtually prohibit sales under current conditions.

This situation is a significant improvement over the past. In 2005, only 31 states allowed direct shipping compared to the current 40.

On the other hand, retailers—and this includes California 17/20 “virtual wineries”—can only ship to 14 states.

And reciprocity is over. There are no more reciprocal states.

Posted on 12.12.2012 - 12:06:35 PST
Great article and very concise update. As a point of reference when the first lawsuit challenging direct shipping restrictions was filed in August 1998, there were only 14 states that allowed direct to consumer sales and one of those states, Maine, was in the process of repealing its statute. That is a world of difference at the rate of about two states per year.
Bill Kinzler