Here is what wineries need to know if they plan to sell wine online for the first time.
By Kelly Martin
E-commerce wine sales makeup 23% of the total revenue in the U.S. DTC wine market. More wineries and licensed retailers selling wine online has brought more attention to the category – and that attention has brought stricter regulation of an already highly-regulated product category. Here is what wineries need to know if they plan to sell wine online for the first time.
Licensing / Permitting
The Granholm v. Heald Supreme Court Case from 2005 really changed the industry from a regulatory perspective, as it created the opportunity for wineries to ship across state lines. For a winery to ship DTC across state lines, many states require a winery direct DTC permit (this is in addition to the federal and state permits required). Additionally, many states will require wineries to hold a bond that will guarantee future tax payments.
Tax Obligations
Along with all the permits required, most states require wineries to apply for sales tax applications because the state does not want to lose out on the revenue that they would make if the wine was going through the three-tier system. Tax obligations vary from state to state. Some states only collect sales tax, others charge an additional alcohol tax, and still others charge an excise (or wholesale) tax. Another tax obligation that wineries need to be aware of is economic nexus – which requires remote sellers to collect sales tax in certain states once a predetermined sales threshold is met.
Understanding Compliance
After you understand your tax obligations, you need to understand compliance rules. Compliance dictates what products, how much and to which regions a winery can ship wine direct to a consumer.
Most states require that only wines produced by your winery can be shipped into the state, and they all need to be registered products. Beyond that, there are a few major areas of compliance that wineries need to be aware of:
- Dry Areas: Some states, such as West Virginia, Kentucky and Florida, may have certain areas (cities, towns, etc.) where alcohol sales are not allowed, dating back to the repeal of Prohibition.
- Volume Limits: Certain states have limitations on the quantity of wine that is shipped either into the state as a whole, and/or to a specific address. For example, Michigan has a 1,500 aggregate case limit per year, and Kansas has a limit of 12 standard cases per individual or address per year.
- Age Verification: A major concern when alcohol DTC was first introduced was the sale of alcohol to minors. Due to this, some states will require the use of a third-party online age verification service. This helps protect the winery from any fines associated with selling to individuals under the legal drinking age.
Accurate Reporting
After you’ve understood your tax and compliance obligations, you also need to report it back to the state. Compliance is typically regulated by a beverage alcohol agency, which is, in many cases, separate from the taxation agency within the state. This means you can run afoul of two different agencies if your reporting isn’t accurate. Each state will have different reporting requirements and timelines for various taxes.
Licensed carriers (UPS and FedEx) are also required to report their shipments. If there is a discrepancy between what the carrier reports and what the winery reports, it is the winery’s responsibility to demonstrate to the regulator that it was an error. This type of audit can be incredibly costly and time consuming, and result in fines or the loss of a winery’s direct shipping permit if they are found to be at fault.
Avoid the risk by reporting all shipments, sales and taxes accurately and on time.
Recent Enforcement
As DTC becomes more frequent and normalized following the pandemic, some states have become especially focused on enforcing compliance rules. Michigan, Kansas, Missouri and Massachusetts have recently cracked down on age verification, volume limits and “wines of own production” laws. North Dakota has been increasingly stringent on reporting and views the carrier’s reports as the source of truth when comparing carrier reports with winery reports.
Technology Can Help
The pandemic brought a massive DTC boom that settled into a new normal that brought more regulation. The reality is that mastering the massive tangle of regulations and compliance requirements endemic to selling alcohol online takes time and money, while also taking the focus off what matters most: customer acquisition, satisfaction and retention. Investing in a turnkey, technology-driven DTC solution can save time, money — and headaches.
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Kelly Martin
Kelly Martin is the chief compliance officer of Drinks Holdings, Inc. where she is responsible for beverage alcohol compliance and regulatory affairs. She ensures that DRINKS, grocer-retailers and other partners expertly navigate complicated state beverage alcohol laws as they offer transactional and subscription Direct to Consumer (DTC) wine programs. DRINKS operates a proprietary Wine as a Service (WaaS) platform, the only ship-to-home solution that empowers both digital and brick-and-mortar retailers to market high quality wine for delivery around the United States.
