By Alex Koral
Direct-to-consumer (DtC) alcohol shipping compliance is a complex network of moving parts, many of which are, by design, hidden from the public. As part of this network, fulfillment houses are a key piece of the process that have historically operated in the background but have recently become a topic of debate.
Thanks to Americans’ increased need for remote sales during COVID-19 lockdown, DtC shipping experienced unprecedented growth in 2020. For instance, DtC wine shipments grew by 27%, the largest ever year-over-year increase. However, the increase in sales has also drawn the attention of state regulators, with a notable focus on fulfillment houses and scrutiny of their role in the alcohol shipping process.
Though fulfillment houses only operate under the explicit direction of a licensed shipper, they often appear to regulators as unlicensed entities in the DtC market, which brings up legitimate fears of possible sales to minors or lost tax revenue to the states. For legislators, who may not fully understand the shipping process but are stoked by these fears, fulfillment houses present a ripe target for additional, but unnecessary, regulation. For example, this year we’ve seen headlines like “Tennessee Legislators Aim to Limit Winery Direct Shipping Sales” and “States Grapple With How to Regulate Fulfillment Houses.” The increased legislative activity has thrust fulfillment houses into the industry spotlight, while the rise in DtC alcohol purchases has made their role more relevant to consumers as well.
The Confusion Around Fulfillment Houses
DtC alcohol shippers often lack adequate space to house their products or the logistical ability to ship to customers across the country. That’s where fulfillment houses come in – helping their customers bridge these gaps while allowing them to focus on what they do best: producing, marketing and selling alcohol products. Beyond the DtC market, fulfillment houses frequently also serve as in-bond warehouses for wineries to store their product before distributing it to wholesalers, again providing valuable storage and logistics services that wineries may lack at their licensed premises.
When a fulfillment house fills an order on behalf of a producer, the package often lists the return address of the center where the shipment originated, rather than the licensed shipper. This can, in turn, spark concern from regulators that an unlicensed third party is responsible for the shipment, seemingly then an illegal shipment. Some regulators may look at fulfillment houses and think that they are actually selling wine — marketing to and getting money directly from consumers — which is never the case.
Without a full understanding of their role in alcohol shipping, restrictive legislation could potentially hamper fulfillment houses’ operations, hurting the alcohol DtC shipping industry and even causing loss of revenue at the state and local level.
Recent State Regulations
Fulfillment houses were a target for some lawmakers in a year where legislative sessions included more proposed changes to alcohol sales and distribution than we’ve seen since Prohibition. For example:
- Alabama became the 47thstate to legalize winery direct shipping on May 13 (effective August 1, 2021). Alabama requires DtC licensees to work only with fulfillment houses that are properly licensed by the Alabama ABC Board for DtC shipping.
- Kansas signed a bill into law on May 26 that requires fulfillment houses to be licensed in the state, keep records of all shipments for at least three years and submit monthly transaction reports.
- Tennessee enacted similar regulations when Gov. Bill Lee signed a bill that requires DtC shippers to only ship themselves or through licensed fulfillment houses, which will become effective January 1, 2022. Under these requirements, fulfillment houses will also be required to file quarterly reports of shipments they serviced.
Tracking Numbers Dispel Confusion
While DtC shipping requirements vary widely from state to state, one piece of information appears to offer all states a better way of regulating operations moving forward: the shipment tracking number. When both the carriers and the DtC shippers are required to report a shipment’s tracking number, it can identify the licensed source of each shipment and dispel the erroneous concern over illegal shipments from fulfillment houses.
Shipping tracking numbers are a singular data point that all parties of the DtC shipping network have on hand, and when regulators compare reports already required from carriers and the licensed shippers, they can use the tracking numbers to verify that the shipments reported are legitimate. The tracking number ensures a licensed DtC shipper claims responsibility for every shipment, without placing additional burden on the fulfillment houses.
Don’t Fear the Fulfillment House; Do Follow the Rules
Requiring reporting of tracking numbers would be a minor change in the already complicated world of alcohol shipping compliance, where wineries, breweries, distilleries and retailers must comply with each individual state’s regulations for direct-to-consumer shipping. While it is an absolute necessity, compliance can be a major burden. As such, there are a range of options for handling compliance – from hiring someone internally to do it manually, to working with a compliance consultant, or leveraging software tools that streamline the process.
2020 saw record-breaking growth in DtC shipping, and all predictions point to increased competition in online alcohol purchases made directly from wineries, craft breweries and spirits producers. Now is the time to find the best partner to help reduce risk, lessen the burden of compliance, accelerate bringing products to market, and enable revenue growth in the ever changing world of beverage alcohol compliance.