Common Carriers Respond to State Scrutiny By Requiring Proof of DtC Licenses

In many ways, the Direct to Consumer (DtC) market for wineries has never had it better. The number of states that prohibit it is down to just a handful, and the states that do allow it are easing up on some onerous compliance requirements, including package label rules and reporting frequency.

But as the DtC market expands, there comes added scrutiny. State regulators want to ensure that the DtC sales that are coming across their borders are legitimate, legal sales. As a result, common carriers are heightening their policies of requiring proof of an active DtC shipping license before they will contract with businesses to deliver packages containing beverage alcohol.

A key focus of this scrutiny is on ensuring that only properly licensed entities are engaging in DtC sales. Since common carriers can be liable if they deliver a package containing alcohol that didn’t come from a licensed party, states will often threaten them with fines or other penalties when they cannot go after the unlicensed party. This may occur because that party is in a different state, it can be quite difficult for the state to bring an action against them. This has led Common carriers to escalate their policy of requiring proof of licensure before agreeing to carry packages containing beverage alcohol.

This has long been a policy of the common carriers, but its increased enforcement has caught some in the DtC market a bit off guard. However, by ensuring that a license check is done, common carriers are demonstrating their commitment to a compliant and legal DtC market. Ultimately, this should benefit all of us who want this market to succeed.

Why Are Common Carriers Asking For My DtC License?

In order to operate a brewery, winery, or distillery, you need a license. In order to operate a bar or liquor store, you need a license. You are permitted to do only those activities that are expressly permitted by that license. If you exceed those permissions, you risk fines and loss of license.

This principle of licensure extends into the DtC market. 43 of the 45 states that currently allow winery DtC sales have a unique license that is required in order to receive orders from a customer in that state and then fulfill that order by shipping it to that customer via a common carrier. (Both Alaska and Minnesota allow limited DtC shipment without requiring a permit, but both did consider permit bills in 2017 and are likely to require them soon.) If you want to sell into all 45 states, you will need 43 different licenses. (This also affects non-supplier DtC participants; for instance, common carriers often need to be licensed themselves.)

Each state imposes its own restrictions on who can receive licenses for DtC sales. For the most part, these licenses are limited to only wine producers who have an active Wine Producer license from the TTB and an active wine manufacturing license from their home state. Seven states also allow beer producers to get a DtC license; three states allow spirit producers to get a DtC license (North Dakota, Nebraska, New Hampshire); about four states allow importers to get a DtC license (New Hampshire, Nevada, West Virginia, and Wyoming); and 10 states allow out-of-state retailers to get a DtC license.

Every state is enabled by the 21st Amendment to set up its own, unique set of beverage alcohol regulations, including setting rules about DtC licenses. This, however, can cause a lot of confusion for market participants. Not only is there so much to know, it’s possible to not know how much there is to know.

Through the efforts of organizations like Wine Institute and Free the Grapes!, many wineries are largely aware of this complexity. However, a number of other market participants may not be as aware.

At ShipCompliant, we frequently hear from off-site retailers (i.e. liquor and wine stores) looking to become active DtC sellers. They are aware of the successes of the DtC market, and want to enjoy some of that success themselves. Many states do allow local retailers to receive orders from in-state customers and fulfill them, either through a common carrier or with their own vehicles. So they often will assume that this privilege extends to receiving and fulfilling orders from out of the state, without realizing that in order to sell into those other states, they have to follow the laws of those other states. However, unless the retailer actually has a DtC license from that other state, selling into that state is illegal.

States are reporting lots of sales coming improperly from unlicensed entities. When a state sees that some DtC orders are improper, it increases scrutiny on all DtC sales. Common carriers are a lynchpin in the DtC market, and so often become the target of states’ scrutiny. Several states have threatened common carriers with fines and other penalties, unless they can ensure that they are only fulfilling beverage alcohol orders coming from properly licensed businesses.

This increased attention has led common carriers to increasingly require physical proof of a valid DtC license before they will establish a new or renewed contract for receiving packages. For compliant businesses, this should be a relatively minor ask — just provide a copy of your active, valid license for every state you want to contract with a common carrier to deliver to.

For businesses that have been operating improperly in the DtC market, this has been a bit of a wakeup call. Some shakeout is inevitable as non-compliant businesses become aware of existing rules, and refocus their business on where they can sell compliantly.

The result of these efforts should be a strengthened DtC market. If there are fewer improper sales going on, there should be a decrease in state scrutiny, relieving some pressure on compliant DtC sellers. DtC sellers who take pains to be compliant, through licensure, order reviews, tax remittance, and proper reporting, should be vindicated for their efforts.

It is also possible that DtC privileges could be further extended to breweries and distilleries, or even retailers. One of the reasons the DtC wine market has been so successful is that customers demand quality, including rare products that aren’t normally available in their local markets. If they cannot find them available anywhere online, as improper actors who used to fulfill these orders are removed from the market, they may decide to engage politically and demand their local legislatures to open the market up.

Ultimately, this increased scrutiny underscores how important it is to be compliant in the beverage alcohol industry, and the DtC market in particular. States are tasked with overseeing public safety, and will take necessary steps they deem fit to ensure that happens. By shoring up the ranks of the compliant actors, the DtC market at large can prove it conforms to the principles of a safe and productive beverage alcohol industry.

 

Learn more about how ShipCompliant can keep you current with state regulations. Request a ShipCompliant demo today!

5 Comments

  1. kathy

    what are the small wineries supposed to do? Most of out business was dtc orders, we make less than a thousand cases of wine a year, we cannot afford to purchase all the 43 dtc licenses. we may ship 2 cases a year to some state , why pay $250 for a license for 2 cases. Is there a solution?

    Reply
    • Alex Koral - Product Compliance Manager

      Hi Kathy,

      Thanks for the comment. Unfortunately, there may not be an easy answer out there. Getting licensed is a requirement to ship DtC to most states, and therefore it has to be taken as a cost of doing business. As the post notes, Minnesota and Alaska currently do not require licenses. Then there are states that have no cost (Missouri, for one) or relatively cheap licenses (Idaho, Montana, Kansas, Nevada, New Mexico, and Oregon all offer $50 annual licenses), which you may want to consider. But for the more expensive states, you will need to evaluate if it’s worth the cost of licensing to do business there (plus other compliance costs, such as filing reports and collecting and remitting taxes). This does also only apply when you are having the wine orders shipped back to a customer through a common carrier. Visitors to your winery who purchase on-site can still take it back themselves in their luggage — though this isn’t necessarily convenient, it is a way you can still sell to them. You can also have your customers reach out to Free the Grapes!, which is the leading consumer advocacy organization for DtC wine. There they can contact their local legislators and argue to expand DtC rules, including cheaper licenses and more privileges for small wineries, like yours. If you do find a solution that works for you, we would love to hear about it and let others know how to succeed compliantly.

      Reply
  2. Ellen Forrest

    I have more of a question than a comment: If the fulfillment houses that offer our-of- state shipments hold DTC permits for each state, will each winery who used their services also need to get their own licensing? and will the carriers require these licenses from each winery / importer?

    Reply
    • Alex Koral - Product Compliance Manager

      Hi Ellen,

      Thanks for the question. Yes, it is our understanding that each winery will need its own license for each state it is shipping to. Generally, DtC licenses are only available to wine producers, and a license is required for each entity that is receiving orders and having them shipped — even if they use a third party fulfillment house. We put on a webinar earlier this year, which went over the issue of operating under someone else’s license and the potential compliance problems that can bring up (including rules against shipping wine that you do not produce yourself). One of the reasons for the crackdown from the states is that they are finding lots of orders coming from fulfillment houses, but not recognizing them as licensed businesses, and so thinking those orders are non-compliant. This has led to the focus on ensuring a properly licensed entity (the winery) is verifiably behind every order being shipped. So, yes again, common carriers will be requesting licenses from every business that will be shipping wine directly, or having wine shipped through a fulfillment house.

      Reply
  3. Jim Waite

    Your comment concerning fulfillment houses is interesting. Here, in Walla Walla, there is a fulfillment house that advertises they have all the licenses needed to ship and they relieve the wineries of that burden. There is also a Pak and Ship type place that will ship wine just about everywhere. I often wondered how they were able to do that legally.

    Reply

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