New DtC Rules In Kentucky For Wineries and Distilleries

On April 13, Kentucky Governor Matt Bevin signed HB 400, a bill establishing new rules for wineries, distilleries, and package retailers to make direct-to-consumer (DtC) sales to Kentucky residents, and for the carriers fulfilling those orders. The bill has an emergency clause attached, which makes it immediately effective.

While the bill appears to be a big win for the Bluegrass State’s bourbon industry, it is as yet unclear what all effects the new rules will have on the DtC market. Indeed, there are a number of provisions whose application must still be worked out, nor is it certain whether industry members — particularly common carriers — will engage with the new system. Nevertheless, this does mark one of the biggest shifts regarding DtC rules in Kentucky in years.

 

What’s in the Bill?

HB 400 amends several sections of the Kentucky beverage alcohol code to provide greater ability for licensed wine and spirits manufacturers and package retail stores to sell and ship products directly to Kentucky residents.

For Distilleries:

The bill permits, for the first time, licensed spirit producers to initiate deliveries to Kentucky residents. Establishing DtC sales for distillers has become a major goal for the state’s Distillers Association. Visitors to distilleries along Kentucky’s famous Bourbon Trail have long complained about the prohibition preventing them from getting any spirits shipped back to their homes. (Of course, visitors could still personally carry away a limited amount of bottles from their visits).

Under HB 400, in-state and out-of-state distilleries will be permitted to ship spirits to Kentucky residents if:

  • They are properly licensed by the Kentucky Alcohol Beverage Control (ABC) department.
  • They ship no more than 4 ½ liters of spirits at a time, when the purchase was made by the Kentucky resident when on-site at the distiller’s location. (This volume limit will increase to 9 liters per purchase after January 1, 2021.)
  • They ship no more than 9 liters per month to a Kentucky resident who is a member of a subscription program or club set up by the distiller, as long as the enrollment in and payment for the club or subscription was arranged while the Kentucky resident was physically present at the distillery.
  • Only licensed common carriers or transporters fulfill the delivery, and the package is in a box clearly indicating that it contains alcohol, and an adult’s signature is collected at the time of delivery.
  • The shipment does not go a territory where such sales are not otherwise permitted.

For Wineries:

HB 400 provides similar permissions for wine producers as for distillers. These new provisions replace previous rules that permitted small farm wineries only (those producing fewer than 100,000 gallons of wine per year) to ship 2 cases of wine purchased on-site at a time.

Going forward, in-state and out-of-state wineries will be permitted to ship wine to Kentucky residents if:

  • They are properly licensed by the Kentucky ABC. Notably, HB 400 will apply to wineries of all sizes; the previous 100,000 gallon limit appears to be going away.
  • They ship no more than 4 cases of wine at a time, when the purchase was made by the Kentucky resident when on-site at the winery’s premises.
  • They ship no more than 1 case per month to a Kentucky resident who is a member of a subscription program or club set up by the winery, as long as the enrollment in and payment for the club or subscription was arranged while the Kentucky resident was physically present at the winery.
  • Only licensed common carriers or transporters fulfill the delivery, and the package is in a box clearly indicating that it contains alcohol, and an adult’s signature is collected at the time of delivery.
  • The shipment does not go a territory where such sales are not otherwise permitted.

For Quota Retail Package Licensees:

Interestingly, HB 400 also includes provisions that will permit package retail stores to make DtC shipments. Under the terms set out in HB 400, licensed package retailers may ship both wine and spirits to Kentucky residents if:

  • They are licensed by the Kentucky ABC, and at least 80% of their sales are made to Kentucky residents. This restriction appears to prohibit any out-of-state retailer from fulfilling DtC orders into Kentucky.
  • They ship no more than 4 ½ liters of spirits and 4 cases of wine at a time, when the purchase was made by the Kentucky resident when on-site at the distiller’s location. (This volume limit will increase to 9 liters of spirits per purchase after January 1, 2021.)
  • They ship no more than 9 liters per month of spirits and 1 case of wine per month to a Kentucky resident who is a member of a subscription program or club set up by the retailer, as long as the enrollment in and payment for the club or subscription was arranged while the Kentucky resident was physically present at the retailer.
  • Only licensed common carriers or transporters fulfill the delivery, and the package is in a box clearly indicating that it contains alcohol, and an adult’s signature is collected at the time of delivery.
  • The shipment does not go a territory where such sales are not otherwise permitted.

The issue of retailers entering the DtC market has been particularly contentious recently, so it is rather notable that Kentucky is entering the fray. Since only local, Kentucky-based retailers can get the necessary license to make DtC shipments, the state could be setting itself up for legal challenges, as such a restriction butts against the Interstate Commerce Clause doctrine as applied in the 2005 Granholm decision. (For a longer take on retailer DtC rules and how Granholm may apply read here.)

For Transporters:

One of the driving reasons that Kentucky has historically been effectively closed for DtC sales, despite the prior allowance for Small Farm Wineries, has been the risk of felony charges that carriers faced if they shipped any package containing alcohol to a region designated as “dry” (no alcohol sales permitted) or “moist” (alcohol sales restricted, but not entirely banned). A felony penalty can be a very serious consequence, which no carrier (such as FedEx or UPS) had ever been willing to risk.

HB 400 does still clearly state that deliveries of any alcoholic product to any territory in the state that prohibits such sales is absolutely prohibited. However, HB 400 also provides that properly licensed common carriers and transporters and their employees may not be held liable for a delivery to a prohibited territory when fulfilling a consigned order.

Further, HB 400 provides that wineries, retailers, and distilleries can use a written representation from the purchaser that the delivery address was in a territory that permitted the sale as an absolute defense to any charge of an impermissible shipment. That is, if the shipper can get the purchaser to state in writing that they can buy the product at the delivery address, the shipper can claim they were acting in good faith if it turns out that that was not the case. The form that this written statement needs to take, though, is unclear.

 

What does all this mean?

Whether these provisions will really change things for the Kentucky DtC market remains to be seen.

One of the biggest uncertainties is whether any tax obligations will attach to these new DtC permissions. It is currently unknown whether an out-of-state DtC seller would be required to collect and remit any excise, wholesale, or sales tax for their sales to Kentucky residents. We hope to receive clarification on this soon and will notify you on what we find.

Looking beyond the tax issue, we have yet to see whether any carrier will make a move to accept packages going to Kentucky. They have been dealing with a crackdown in a number of other states in recent years, so it is uncertain how they will approach the Kentucky market, especially when the state has historically been so restrictive.

Limiting all purchases, even subscribing to a club, to only on-site orders may also be a barrier, though there is an interesting history to such a rule in Kentucky. A similar rule applied originally to the rules permitting DtC sales for Small Farm Wineries. However, in a 2006 case (Church Hill Vineyards v. V. Lavoyed Hudgins), the U.S. District Court for the Western District of Kentucky ruled that an on-site-only restriction was unconstitutional, as it effectively prevented Kentucky residents from accessing approximately 99% of U.S. wineries. How the ABC will proceed with the on-site-only restrictions in HB 400 remains to be seen.

Further, HB 400 is not a panacea for Kentucky distillers. It is a fundamental rule for the DtC market that a shipper must follow the laws of the state into which they’re shipping. Currently, only a handful of states (North Dakota, New Hampshire, Nebraska, and the District of Columbia — and now Kentucky) permit shipping distilled spirits to residents in their borders.

So the vast majority of out-of-state visitors to the Bourbon Trail will still be disappointed when they ask to have a few bottles of Kentucky bourbon shipped home. Changing this will require a nationwide effort to change DtC rules regarding spirits; essentially something like the efforts that Free the Grapes! and Wine Institute have worked on over the last few decades.

Still, HB 400’s passage should be seen as a positive step for the beverage alcohol industry. Kentucky has taken steps to open itself up to the DtC market, removing a number of restrictions that had been a major barrier to Kentucky residents enjoying all the wine they wanted. If, going forward, carriers do accept orders to Kentucky and suppliers move to get licensed, we could expect the state to quickly jump up the ranks of DtC destination states.

As things develop, including how the ABC reacts to these new provisions, we at ShipCompliant by Sovos will make sure to keep you informed.

 

Want to learn more about trends in the direct-to-consumer shipping channel? Download the 2018 Direct-to-Consumer Wine Shipping Report.

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