Updates in Direct Shipping Legislation

Montana will reopen Oct. 1, DtC shipments shot down in other states

by Paul Franson
DtC direct to consumer wine shipment
Direct-to-consumer wine shipment is permitted in blue states and prohibited in red states. States with red and blue stripes are awaiting a legislative solution following court ruling regarding DtC wine shipping
Napa, Calif.—Among the many sessions at Direct 2013, ShipCompliant’s eighth annual conference, perhaps none was more interesting than the Direct Shipping Legislative Update from Steve Gross, director of state relations for the Wine Institute.

He pointed out the dramatic changes that have occurred since (not long ago) the direct shipping of wine to consumers was illegal almost everywhere. Today, 39 states representing 89% of the adult U.S. population allow direct shipping under at least some conditions; two others are about to allow it, and many of the others seem likely to open within the next few years.

Gross has helped open many of these states in his role with the California wine industry lobbying group, though he joked, “I can’t retire until all the states turn blue (in his map of legal direct-shipping states, above),” though realistically, he never expects that to happen (Utah is hopeless, he said).

Most wineries are small, and they tend to view direct shipping as simple, something similar to how, decades ago, winemakers delivered wine like milk to their customers in California’s Italian immigrant communities.

Unfortunately for the wine business, however, wine regulators see it as a big issue, with companies like Amazon.com, UPS, FedEx, flash sites, newspaper wine clubs and even Facebook becoming part of the picture.

Recent studies by ShipCompliant and Wines & Vines have demonstrated the huge success of direct shipping to consumers. (Direct shipments now exceed exports, for example.) But with the success comes increased scrutiny of reporting by shippers and carriers, the role of fulfillment houses and other third-party providers, retailer-direct shipments and renewed attention to potential use of winery capacity caps for control.

It’s not just a matter of complying with state laws, either. A bulletin from the Alcohol and Tobacco Trade and Tax Bureau (TTB) in 2012 reminded industry members that compliance with state laws and regulations is a condition of maintaining a Federal Basic Permit. Wineries that flaunt state rules could lose their federal permits and the ability to make wine.

Gross summarized recent changes, noting that two states are opening to direct shipping this year: Montana and Arkansas.

Montana regulations
Montana actually is “reopening” after earlier plans didn’t work out. It was the only state licensing consumers, and that has ended. Now, starting Oct. 1, “registered” wineries must get a $50 endorsement if they are already in the state’s three-tier system. If not, registration is free for up to 60 cases per year, with a charge of $400 for more than 2,000 cases.

Each customer can only receive 18 cases per year. The winery must notify the state if it uses a fulfillment house.

In contrast to Montana’s simple approach, Arkansas includes onerous provisions that may discourage direct shipment. As of Aug. 16 (but realistically, not until late in the third quarter of 2013), wineries will be able to ship with a $25 permit and payment of excise and state sales tax (but not local taxes).

However, customers can only ship wines they order in person at the winery (not through clubs), can only get one case per calendar quarter, have to affix a sticker they buy from the ABC for up to $10 and can only take delivery at home, not at their workplace or other locations.

Retailer shipments
In general, direct shipping is only allowed for wineries, not retailers or “virtual” wineries that are considered distributors and detailers under law.

Some states have opened shipping to others in 2013. North Dakota once again allows fulfillment houses, but they must be reported.

Nebraska has actually made things worse: Wineries must now report sales and pay taxes monthly instead of annually, and wineries must notify their wholesalers when obtaining a DTC permit (a red flag if there ever was one). The state also has a $500 permit charge, the highest in the nation, and that money goes to promote the state’s tiny wine industry. Gross, a native of the state, pointed out that if wineries didn’t renew, the state might change its policies if they’re not raising any money.

In addition, although the Wine Institute believes that paying sales tax was already required, Nebraska added “nexus” language that it believes clarifies the sales tax requirement. This could be a problem; New Jersey is interpreting that to require payment of state corporate taxes, though that’s in court.

Some states turned down relevant bills introduced in their legislatures:

• In Maryland, an effort to block “internet marketplace” sales failed to pass.
• In Texas, an effort to redefine “winery” in order to block “retailers” operating as “Texas wineries” failed to pass.
• Rhode Island, Delaware and South Dakota did not pass permit bills.

Ongoing efforts
Some states, including the two largest remaining markets, also saw activity.

There’s a strong move in Pennsylvania to privative or at least modernize the state’s sale of alcoholic beverages. Gross anticipates DtC shipping to be included in this effort or as a separate bill. He is working to get the tax rate below the existing proposal of 18% Flood Tax (passed to pay for damage from the Johnstown Flood of 1936) plus the 6% sales tax.

The Wine Institute also hopes to remove the 250,000-gallon capacity cap for winery production in New Jersey and fix the tax nexus issue for wineries. The minimum corporate tax is $350. It’s the only state trying this, and fewer than 100 wineries have applied for permits after a year (compared to 600 in Maryland), so the law needs work.

Massachusetts has always been an enigma. A liberal state with plenty of wine lovers, its politics are famous and distributors are powerful.

By coincidence, a popular former quarterback for the New England Patriots, Drew Bledsoe, owns Doubleback winery in Walla Walla, Wash. He participated in an intense campaign in the state, organized by Jeremy Benson of Free the Grapes!, which resulted in extensive publicity to the issue.

With so many states now open to direct shipping, Gross and his staff are concentrating on trying to open the remaining states (South Dakota, Oklahoma, Mississippi, Alabama and Delaware) and protect existing states.

He’s also nibbling away at impediments such as on-site and capacity caps, onerous paperwork and reports and streamlining permitting and registration procedures, including moving it online.

Finally, he’s working with carriers and states to insure reporting procedures work.

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