Looking back at 2021, there’s been many—even if subtle—shifts in the beverage alcohol direct-to-consumer (DtC) space. More states are opening options for DtC shipping, specific regulations and restrictions have been adjusted, new economic nexus rules will affect how wine shippers collect and pay required sales taxes, and third-party shipping options have the potential to buck the system.
Wine Industry Advisor asked Regulatory General Counsel for Sovos ShipCompliant, Alex Koral, what he believes are the biggest 2021 DtC lessons learned and what the wine industry can expect moving forward into the New Year.
Here’s his analysis.
Expansion of DtC shipping permissions to other product types:
There were several unsuccessful attempts to change states’ laws in 2021, but beer and spirits producers who want to ship DtC are still stymied by laws that prohibit their presence. Those efforts will almost certainly carry forward into 2022, as customers’ expectations for having everything shipped to their doorstep certainly isn’t going anywhere. Beer and spirits producers are well aware of the wine industry’s success from DtC shipping. They want in on that market.
Continued pressure from states to regulate and control existing DtC markets:
As DtC shipping has expanded, state regulators have also increased their scrutiny of the market. There are widespread rumors about shipping by unlicensed parties, missed taxes, and sales to minors, which are real concerns for the regulators even if the solutions they use (ongoing investigations into licensed and tax-paying shippers, and constraints on their logistics services) aren’t necessarily tuned to meet those concerns.
In May, two states made changes on fulfillment house regulations that would impact DtC wine shipping. Tennessee Governor Bill Lee signed HB 742, which included new restrictions on the wines that a licensed DtC shipper may sell and ship DtC to Tennessee residents. Additionally, a bill provision discussed new record retention and quarterly reporting requirements on winery direct shipper licensees. Lawmakers will increase this pressure in 2022 and future years, through additional audits and reviews of licensed shippers and by imposing additional regulations and restrictions on the use of third-party services like fulfillment houses.
The USPS Shipping Equity bill:
A bipartisan bill introduced in May would lift a Prohibition-era ban that prevents the USPS from shipping wine and other alcohol directly to consumers. The USPS Shipping Equity Act would expand service to places that only the Postal Service serves, like remote and rural areas. It will also give producers more options for shipping alcohol, which could reduce costs and help them meet demand. However, whether the bill will actually pass in 2022, and then how the USPS would establish an alcohol shipping service remain uncertain. Even with the new law in place, USPS and alcohol shippers would still have to comply with local and state laws.
Retailer DtC shipping lawsuits:
One of the biggest open questions in beverage alcohol jurisprudence these days is whether the 2005 Granholm ruling, which opened up the national market for DtC shipping by producers, applies also to other tiers, particularly retailers. The Idaho Alcohol Beverage Control (ABC) division’s legal team reviewed the state’s existing DtC laws and determined that out-of-state retailers have no permission to ship any beverage alcohol products DtC in Idaho. Previously Idaho’s laws had been interpreted to establish a “reciprocal” retail DtC relationship, permitting retailers to ship DtC to Idaho residents as long as those retailers were in a state that granted Idaho retailers similar shipping permissions.
There is a good argument that Granholm’s anti-discriminatory principles should apply equally to retailers, which would prohibit states from establishing DtC shipping permissions for only in-state retailers; however, so far no appellate court that has heard a case on this claim has agreed with that argument. Whether future courts will come to a different conclusion, or if the Supreme Court will intervene to set out a national ruling, remains to be seen.
Third-party marketplaces and DtC shipping:
A slew of new marketplaces and other third-party services for suppliers and retailers to sell remotely to consumers have popped up in the last few years. However, whether and how these services can legally operate is unsettled. Many states have added new licenses and laws for some of these services to settle these questions—though there has been a focus on services for local retail delivery, like Drizzly.
When it comes to marketing and sales platforms for DtC shippers, there are a tremendous number of legal constraints that could limit the spread of these services (and close down others), such as tied house restrictions on paid-for advertising and (electronic) shelf placements, the collection of money related to a sale of alcohol (which has a number of interesting and complicating knock-on effects regarding sales tax collection), and issues about who holds licenses for shipping.
Alex Koral is a Regulatory General Counsel for Sovos ShipCompliant. He actively researches beverage alcohol regulations and market developments to inform development of Sovos’ ShipCompliant product and help educate the industry on compliance issues. Alex has worked with the company since 2015, after receiving his J.D. from the University of Colorado Law School.