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State of the States: 2016 Banner Year for DTC Shipping

by Erin Kirschenmann
January 13, 2017

The direct-to-consumer (DTC) shipping business is booming, and 2016 proved to be one for the record books. The latest Sovos ShipCompliant/Wines & Vines DTC shipping data showed that both value and volume of wine shipped across the country soared: Volume rose 17.1 percent to reach more than 5 million cases and the value of those cases increased by 18.5 percent, worth nearly $2.33 billion.

While wine shipped directly to the consumer still makes up a very small part of all wine sold in the United States, it’s still a significant jump and proof that winery efforts to work directly with their customers and lobbying efforts to make shipping into difficult states easier is paying off.

Pennsylvania finally opened up its doors to shipments in August 2016, which allowed wineries across the country access to nearly 5 percent of the U.S. population. Following a rather long fight with legislators over the Jonestown Flood Tax (which would charge an 18 percent tax on any wine shipped into the state in addition to the 6 percent state sales tax), it was finally agreed that at $2.50/gallon plus 6 percent sales tax with additional local tax rates would suffice. Since the new rules took effect in August, more than 700 licenses have been issued—a majority of which were for California wineries. A 36 case per winery per customer maximum was also implemented, a win for Steve Gross, vice president, state relations for Wine Institute. “We literally came back year after year trying to get this passed, and that work has paid off,” he said. “We know there was pent up demand from Pennsylvania customers.”

Now, Kent Nowlin, general manager at Sovos, predicts that Pennsylvania will crack the annual top 10 list of states shipped to in 2017, when a full-year’s worth of data will be available.

Nowlin’s discussion of the results at the 10th annual Direct to Consumer Wine Symposium was followed up by Gross’ annual “State of the States” report—some of the strides made in simplifying and streamlining reporting and restriction requirements directly affected the amount of DTC shipping.

It all bodes well for continued development of winery DTC efforts, though Gross did warn that state alcohol commissions and governments are paying closer attention to winery and common carrier (FedEx and UPS) compliance, issuing more notices and cease-and-desists to those in violation. With that warning in mind, Gross said that 2016 was mostly a great year.

In Arizona, the efforts of the Wine Institute and Free the Grapes successfully removed the on-premise requirement for wineries producing more than 20,000 gallons. Those wineries wishing to ship to Arizonans will need to apply for a new license and abide by a case maximum phase-in of shipments—what Gross calls a legislative compromise. In 2017, wineries are allowed to ship no more than six cases to an individual. That number will increase to nine cases in 2018 and in 2019 and beyond, wineries are allowed to ship no more than 12 cases per individual. For those wineries producing less than 20,000 gallons, there are no changes—with the correct permit those businesses can ship an unlimited number of cases to any one person.

“This was a very good win,” said Gross. “I think that will really pump up the amount of wine shipped into Arizona.”

Since allowing shipments into the state in 2015, sales of wine to Massachusetts customers has increased 42 percent in volume according to the DTC Shipping Report. While fantastic news for the individual winery and industry, Gross mentioned that wineries might be owed money by the government—something he jokingly said he never gets to say. Owing to a “typo” on the tax filing form, there may have been some wineries paying a $1.10 per gallon tax when the correct rate was just $0.55 per gallon. New and corrected tax forms are now available, but those wineries which paid the incorrect higher rate will need to file amended excise tax returns, and sooner than later. A separate amended return for each tax period is required for reimbursement.

The Fight Against Common Carriers

Gross warned that a number of states are working toward more transparency and regulation regarding shipments from common carriers--something that all wineries should be aware of and remain in compliance with in order for DTC shipping to remain a viable business channel. Below are some of the new laws.

The Wine and Spirits Wholesaler Association made big push in 2016 to clamp down on “illegal” shipping of wine into Illinois and as a result, the state liquor commission sent out a number of cease-and-desist letters to retailers and wineries without proper licenses. Going forward, wineries using fulfillment houses must include a designation of any fulfillment house to make shipments on its behalf. Those fulfillment houses then need to file annual reports with the state of Illinois—essentially a series of double-checks that include new felony provisions and penalties for violators.

“These are serious issues you need to be sure you're handling properly,” said Gross.

Wholesalers are attempting to crack down on common carriers in Michigan as well, and S 1088 was signed by the governor last week. The bill lets Michigan retailers ship to Michigan residents via common carrier, but prohibits out-of-state retailers from doing the same. Gross believes that there will be a lawsuit filed by out-of-state retailers arguing against this provision. It also removes the requirement of winery license and invoice numbers on the exterior of the box, but does now require inclusion of Michigan-specific registration numbers on the invoice. This doesn't become effective until March 29, so those shipping into the state must abide by "old" labeling requirements until then.

South Dakota now requires the tracking number of every shipment made into the state on reports. “Get used to this," Gross said. "This is the one item that can help them connect winery to fulfillment house to common carriers. Both the carriers and wholesalers into state are paying attention to this. I'm pretty confident you're going to start seeing that in other states.”

WSWA and local affiliates are looking to pass legislation in every state that requires carriers to report every package shipped into a state. The Wine Institute is working with FedEx, UPS and the WSWA to address the concerns and be sure that any legislation passed is workable for carriers, wholesalers and wineries.

"If they make it a felony to do basic things in a state, carriers won't be willing to ship into states," he said. "Carriers are watching to make sure they’re not shipping illegal packages. Wineries need to do their part and only make legal shipments and follow all the rules."

Other States

In California, wineries must now provide a Proposition 65 warning on alcohol beverage packages that use metal or glass containers, synthetic corks, plastic liners in bags, plastic liners in screw caps and can linings warning against the reproductive dangers of BPA. For DTC shipping, this means all California customers must see a warning on the website at some point before the purchase is completed.

In 2008, Louisiana law said that wineries could not directly ship brands that were available via wholesaler in the state. When new leadership came into the ATC in 2016, they interpreted the law as “you can’t ship anything into the state.” After some discussion, the rules are back to how they were in 2008, except wineries with a wholesaler in the state now need a second license. The ATC started enforcing the license rule this month.

New legislation signed in North Carolina will transition the state from a monthly to an annual tax/reporting schedule, something a number of states have started doing in recent years.

For more information on all state activities, visit www.freethegrapes.org
 

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