The twin pillars of being a state regulator are implementation and enforcement: figuring how new rules will work, and then making sure that everyone follows the rules. For those operating in a highly regulated market — such as the beverage alcohol industry — it’s critical to always stay on top of what state regulators are up to, so you know what’s coming down the road and which of your activities are now in the spotlight.
South Dakota’s regulators are currently quite busy indeed, working to determine how to implement a bevy of new rules regarding in-state and craft manufacturers, while also ensuring that industry members — particularly wineries making direct-to-consumer (DtC) sales into the state — are following existing rules. As a trusted source of regulatory information for the industry, we wanted to highlight what’s going on in South Dakota.
What’s New In The Mount Rushmore State?
Governor Dennis Daugaard had a busy time this March, signing almost a dozen bills amending the state’s beverage alcohol statutes. Many of these rule changes will act to liberalize some of the state’s regulations, following similar efforts by other states to reduce the burdens on the industry.
For instance, going forward, manufacturers and wholesalers will be permitted to create sponsorship agreements with charitable organizations (HB 1157), certain retailers can get licensed to make local deliveries (SB 143), and South Dakota residents may bring their own wine to consume at a restaurant (HB 1185).
But the biggest changes revolve around in-state manufacturers. A series of bills establish new and amended rules for malt beverage manufacturers (SB 173), distillers (HB 1313), and wineries (HB 1067 and SB 187).
Notably, many of these bills permit sales by the licensees for both on-premises and off-premises consumption, and some limited ability to self-distribute to local retailers. (Manufacturers in South Dakota should make sure to read these bills carefully to understand their respective permissions.)
These bills are set to become effective on July 1, 2018, leaving only a few months for South Dakota’s regulators to prepare. Anyone interested should make sure to keep their ears open for news from the South Dakota Alcohol Tax Division on how the interpretation and implementation of these bills is going.
DtC Wine Shippers Enforcement Notices
South Dakota was a recent addition to the DtC landscape, opening up just in 2016. Like most new states, there was a period of growing pains as the state worked out kinks in the reporting process (this lead to a requirement for wineries to report their package tracking numbers last year).
Now with two full years of DtC sales under its belt, the state recently sent out a reminder email to wineries underscoring five key rules that it needs wineries to follow:
DtC sellers are required to report their shipments quarterly, including remittance of state and local sales tax, the Occupational Tax, and wine excise taxes.
As the notice indicates, state regulators have found some inaccuracies in recent reports, such as failing to include all relevant tracking numbers and listing the purchase date not the shipping date. DtC wineries are reminded that if a purchase is shipped in more than one package, the tracking numbers for each package must be reported; in addition, the shipped date of each purchase should be reported, not the purchase date, otherwise the winery risks reporting the order in the wrong quarter. Errors in reporting can result in the state denying a winery’s renewal of their DtC license.
Third Party Fulfillment Services
South Dakota does permit wineries to use third-party fulfillment warehouses to facilitate their DtC sales to the state. However, wineries are reminded that each order a fulfillment warehouse ships must have originated with a properly licensed party.
That is, in order to ship its wines DtC to South Dakota residents, a winery must have its own license and cannot rely on a third party for any licensing or registration requirements.
Before any wine brand may be sold in South Dakota, it must be registered with the state. This includes all wines being sold DtC as well. The notice indicates that state regulators are actively comparing their brand listings and DtC reports to ensure that registrations have been done.
South Dakota charges $25 for an initial registration, and $17.50 for any additional labels. Registrations may be done online through Product Registration Online.
South Dakota is one of the roughly half-dozen states that explicitly requires all DtC licensees to verify the age of the purchaser before shipping any wine. Part of the recent notice is a reminder to DtC licensees that they must fulfill this requirement in order to stay in good standing with the state.
It should be noted that it is illegal everywhere to sell or provide anyone under 21 with alcohol; South Dakota, among other states, stands out because it establishes a specific process that DtC licensees must follow. In order to comply, a DtC licensee must either receive a facsimile of the purchaser’s state-issued ID, or use an approved online age verification service, like IDology or LexisNexis prior to shipping a DtC sale.
Age verifications can be a very complicated and costly process. For more information on what these requirements can entail, and how ShipCompliant by Sovos can help, please read this post.
Finally, the state notice reminds wineries that they are not permitted to sell wine to South Dakota residents at below the cost of production. As such, any offer for “free” wine is not permitted.
Operating in a highly regulated market can get quite complicated. Implementing and enforcing those regulations is no easier. But by staying aware of what’s going on and what’s upcoming, everyone can end up in a happier place.