Concord, Calif.—Steve Gross, vice president of state relations for the Wine Institute, reported on changes to state laws and shipping regulations at the Direct to Consumer Wine Symposium on Jan. 14. “It was a year with a lot of ministeps” and not many big changes, he said.

Gross noted that the direct-to-consumer (DtC) wine business now amounts to nearly $2 billion, according to Wines Vines Analytics and ShipCompliant. “That’s the reason we’re getting more scrutiny. We’ve especially seen more enforcement in Illinois, New York and Michigan.” This includes cease-and-desist letters sent to shippers and carriers, and he warned that other states are looking to step up enforcement.

Illinois qui-tam lawsuits
The most vexing efforts have probably been the qui-tam lawsuits filed in Illinois by attorney Steven Diamond. He sued wineries and retailers over tax on freight. Unlike many states, Illinois’s rule on whether sales tax is due on freight is confusing.

For example, if a winery offers the option to pick the wine up, no tax is due—even though it’s not practical for most Illinois consumers to pick up the wine at a winery in California.

In the case of Diamond, the attorney ordered wine, and then sued if the winery didn’t charge sales tax. The state attorney general dismissed suits against retailers after determining that the law didn’t apply to them.

The suits against wineries continued, however, and some wineries paid fines to end them. The Wine Institute and individual wineries sued the Illinois attorney general and state Department of Revenue in July. The DOR issued proposed clarifying rules in August, and many of the suits have been dismissed.

The industry is waiting for new DOR rules and action on the litigation. In the meantime, Gross recommends wineries watch out for orders from Diamond. “This has cost a lot of wineries a lot of money,” Gross said. “It’s a big deal to those involved.”

Action against retailers
In other enforcement action, the New York State Liquor Authority sued retailer Empire Wine for breaking other states’ laws by shipping wine to places where such shipping is not allowed.

State lawmakers passed legislation to prevent the SLA from acting against Empire Wine, but Gov. Andrew Cuomo vetoed it in December. Other states are watching the effort and could follow suit.

Of course, privileges for retailers are different from those for bonded wineries. Retailers can ship wine to only 14 states and the District of Columbia: Alaska, California, Idaho, Louisiana, Missouri, Nebraska, Nevada, New Hampshire, New Mexico, North Dakota, Oregon, Virginia, West Virginia and Wyoming (with restrictions).

California wine companies holding 17/20 permits are considered retailers by other states.

In some states, notably Michigan, wholesalers have initiated shipping stings. Michigan Beer and Wine Wholesalers issued an RFP for a shipping enforcement program in January 2016.

The Michigan Liquor Control Commission is conducting stings and audits. The state has a unique requirement for a label on the outside of each wine shipment. It must contain DTC license number, order number, name and address of the individual placing the order and the name of the designated recipient (if different) on the top panel of the shipping container.

Many wineries didn’t include this label, and carriers were included in the stings.

Third-party providers
Gross added that regulators continue to examine the role of third-party providers, non-licensed entities that facilitate winery shipments to consumers. Such providers are as varied as the Wall Street Journal, Amazon.com, FedEx, Facebook, Copper Peak Logistics and ShipCompliant.

“Most third-party providers are following the rules and can help you to reach new markets if you (the winery) have the correct licensing,” Gross said. “But remember: No one else can ‘hold’ the licenses to allow a winery to ship into another state unless the winery is selling the wine to them and they hold a retail license.”

States looking at carriers
More states are requiring common carriers to file reports, and more emphasis is being put on reviewing these reports. Gross said that 22 of 43 DtC shipping states and the District of Columbia now require common carrier licenses for DtC: Connecticut, Indiana, Iowa, Kansas, Louisiana, Massachusetts, Maryland, Missouri, Nebraska, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oregon, South Dakota, Texas, Vermont, Virginia and West Virginia.

Gross also noted that though it doesn't directly impact wineries, delivery services have been getting a lot of attention.

Changes in states
First, Gross reminded the audience that no legal shipping is allowed to Utah, Oklahoma, Mississippi or Alabama (except to state liquor stores). The only way to ship to Pennsylvania is to get a local farm winery license, and no carriers can ship to Kentucky.

In good news, shipping to South Dakota is legal as of Jan. 1. Wineries must apply for tax and shipping licenses online and pay a $100 annual fee. There’s a 12-case limit per consumer, and age verification and label registration is required. Sales and excise taxes are payable quarterly. FedEx is shipping to South Dakota, and the UPS application is pending. “It’s not a big market, but it’s now legal,” Gross said.

Massachusetts, however, could be a very big market. It opened Jan. 1, 2015, and is building slowly. Instructions and applications are on the state’s Department of Revenue website. The agency has also clarified previously conflicting tax information. The correct tax for table wine is 55 cents per gallon. Wineries that paid the incorrect higher rate can file amended excise tax returns. A separate amended return for each tax period is required.

Local taxes are now due in Arkansas.

Connecticut no longer has any dry towns.

Hawaii does not have a statewide alcohol agency. The County of Hawaii is now issuing two-year permits.

Indiana has removed its requirement for an initial face-to-face order for direct shipping. It now allows use of standard age verification services, and the surety bond has been removed. A DtC shipper may now sell 5,000 cases per year (up from 3,000). The permit for 1,000 cases or less is still $100, but a tiered structure rises to a $500 cap at 5,000 cases. Its wholesaler restriction remains in place. If a winery has a wholesaler, it can’t ship to consumers.

FedEx resumed shipments into North Dakota after clarifying legislation was passed.

Wyoming now allows wineries to ship up to four cases of wine per household. Authorities have limited DtC shipments to only those wines not listed for sale with the Wyoming Liquor Division, but they are working to correct this.

Gross said that a lot of his team’s effort is to simplify red tape:

Arizona now requires out-of-state wineries to report their annual production 30 days after the end of the calendar year rather than the state’s fiscal year for off-site sales. This is for wineries less than 20,000 gallons with a DtC shipping permit.

Iowa has replaced monthly reporting with semi-annual reporting.

In Louisiana, wineries must get a DtC shippers permit from the Office of Alcohol and Tobacco Control before selling wine into the state. Previously, they only had to register with the state Department of Revenue.

Maryland changed the frequency of reporting dates.

Oregon is moving winery DtC reports from monthly to quarterly.

Hopes for 2016
DtC bills failed last year in Pennsylvania, Delaware, Mississippi, Oklahoma and Alabama.

This year, the Wine Institute (WI) and its allies are pushing to pass DtC shipping in Pennsylvania as part of the privatization/modernization discussion, or as a separate bill. The state is currently considering a flat 12% tax rate (instead of 24%), and the PLCB is supporting the effort again this year.

In Arizona, WI is working on a new bill for wineries producing more than 20,000 gallons to obtain DtC shipping permits.

WI hopes to pass a bill in Delaware this year. Currently, shipping is prohibited except for the federal on-site rule: Wineries are allowed to ship what a consumer could carry (an unlimited amount in Delaware) when the purchase occurs at the winery. The consumer must pay excise tax.

In New Jersey, they’re pushing a bill to address shortcomings of an existing law, including removing the 250,000-gallon capacity cap and eliminating a requirement that corporations and LLCs pay corporate taxes.

In Illinois, Gross and his allies will continue working with local interests to clarify the sales tax on freight that is currently being litigated.

What’s in the future?
Gross has a number of goals for state efforts to expand direct shipping:

• Continue to try and open new states and protect existing states
• Continue to “improve” existing shipping laws:
• Remove on-site and capacity caps.
• Remove onerous paperwork requirements.
• Simplify reporting and frequency of reports.
• Streamline permitting and registration procedures.
• Work with carriers and states to ensure reporting procedures work.