On August 23, 2010 the Kansas Department of Revenue issued Revenue Ruling, No. 19-2010-03 which states that taxpayers are not required to remit alcoholic beverages gallonage tax due and owing for the reporting period, if the amount is less than $5. The change in policy was made due to the administrative costs associated with processing payments of less than $5. The ruling does not exempt a licensed direct shipper from any reporting requirements. The reporting period for Special Order Shipper Licensees is one calendar year. Gallonage reports are due no later than January 15th of the following year.

The Special Order Shipping License is required for all offsite shipments to consumers in Kansas and requires wineries to use an approved age verification service and to pay enforcement tax and gallonage tax when applicable. The shipping license is not required for on-site sales. Any winery may ship to a Kansas consumer that purchases wine when visiting their tasting room. Applications and additional direct shipping information is available on the Wine Institute website.

-Annie Bones, State Relations, Wine Institute

Like sausage, the bill that started in Virginia was quite different from what passed. Most importantly, the new law allows wine shipments into Virginia from out-of-state shipper licensee through an “approved fulfillment warehouse.” The ABC is charged with developing regulations governing such approval. They will require the fulfillment warehouse to: 1) show ABC its home state license; 2) to maintain/give records that the ABC will describe; and (3) demonstrate it has a contract with a wine shipper licensee designating that fulfillment warehouse as its agent. Wine Institute will actively participate in the creation of these regulations, but it is unlikely they will be finalized before July of 2011.

The new law also creates a Virginia fulfillment warehouse license, as well as a Virginia “marketing portal” license. These two new licenses are available only to agricultural cooperatives (non-profit associations recognized by the Virginia Agricultural Cooperative Act of 5 or more growers within Virginia) operating under the direction and control of a Virginia wine shipper licensee. On behalf of wine shipper licensees, the fulfillment and marketing portal licensees can pack and ship wine for wineries/retailers, or solicit and receive orders for wine through an Internet site.

Virginia continues to permit wineries licensed as Virginia direct wine shippers to offer their wines to Virginians via their web sites. It also continues to allow retailers licensed as Virginia direct shippers to market their own inventory on a web site. However, the new law prohibits any marketing on web sites of wine not owned/possessed by the web site owner, unless done by a Virginia agricultural cooperative licensed as a marketing portal.

Unfortunately, the new law (resulting from HB 279, HB 630, SB 483 and SB 590) also raises the annual license tax for Virginia wine shipper licensees from $65 to $95. It will take effect on July 1, 2010, at which time Virginia ABC will begin to draft the regulations.

-Terri Cofer Beirne, Eastern Counsel, Wine Institute

However, the VA ABC offered two interim solutions for Wine Institute members until the law can be changed. Nothing in Virginia law currently prevents direct shipper licensees from obtaining two (2) direct shipper licenses with two different addresses, even though a second location is not owned or controlled by the licensee. Therefore, if a winery sends wine from BOTH their tasting room and a fulfillment warehouse, it can keep a current direct shipper license intact and secure a second one with the address of their fulfillment facility, from where wine can also be shipped. The Virginia direct shipper license application fee is $65 and the annual license fee is $65. Separate tax payments and reports associated with each licenses would have to be filed.

Additionally, if the winery sends ALL wine shipments into Virginia from a pick and pack warehouse with NO shipments originating in their tasting room, the winery’s Virginia direct shippers license could be changed to list the address of the warehouse from which ALL wine will be shipped. Wineries may make such an amendment to a current license by sending a letter on winery letterhead explaining the reason for the change and including the old and new addresses to Dallas “Burnie” Gaskill, VA ABC Licensing Technician at P.O. Box 1597, Spotsylvania, VA 22553-1597. Burnie can be reached by phone at (540) 538-7838 or e-mail at dallas.gaskill@abc.virginia.gov with questions. Such letter MUST include a copy of the state license issued to the warehouse making shipments on the winery’s behalf. The letter must also contain an e-mail address for the winery, where the amended license will be sent in an electronic format.

Members can contact Annie Bones at abones@wineinstitute.org or at (415) 356-7530 with additional questions. Terri would also be pleased to talk more about this situation and can be reached at (804) 301-5505 or tbeirne@wineinstitute.org.

-Terri Cofer Beirne, Eastern Counsel, Wine Institute

§ 4.1-209.1. Direct shipment of wine and beer; shipper’s license.

Any winery or farm winery located within or outside the Commonwealth may apply to the Board for issuance of a wine shipper’s license that shall authorize the shipment of brands of wine and farm wine identified in such application…..Any person located within or outside the Commonwealth who is authorized to sell wine or beer at retail in their state of domicile and who is not a winery, farm winery, or brewery may nevertheless apply for a wine or beer shipper’s license, or both, if such person satisfies the requirements of this section.

§ 4.1-203. Separate license for each place of business; transfer or amendment; posting; expiration; carriers.

A. Each license granted by the Board shall designate the place where the business of the licensee will be carried on. ….a separate license shall be required for each separate place of business……

In summary, the position of the Virginia ABC is that ONLY wineries and retailers licensed by their home states are eligible to receive a Virginia direct shippers’ license which permits the conduct of business (aka the shipment of wine into Virginia) ONLY at and from the business address listed on their license.

Because of widespread industry concerns, however, the Virginia ABC staff is willing to consider drafting a clarifying circular.  While they are not expected to change their interpretation of current law, as part of this clarifying circular, they are willing to consider delaying the effective date of this ruling until April 1, 2010.  By this time, the Virginia Legislature will have had an opportunity to change the law to resolve this problem for wine shippers nationwide.  The Virginia ABC has suggested they will support the legislative change necessary to enable certain, but not all, third party providers to participate in the direct shipments of retailers and wineries to Virginia consumers.

Update: We will keep you posted as we continue to work with the Virginia ABC on this matter. Please consider their current circular in effect until another one is issued.

Terri Cofer Beirne, Eastern Counsel, Wine Institute

TO: All Virginia Licensed Shippers
FROM: Francis J. Monahan, Director, Bureau of Law Enforcement
SUBJECT: UNAUTHORIZED PRACTICES
DATE: July 22nd, 2009

In state and out of state Virginia shipper licensees may only sell and ship authorized alcoholic beverages from their licensed address through approved common carriers. Licensees may not contract with third parties such as fulfillment warehouses, marketing companies, or other businesses to receive or ship orders for them.

All orders must be received directly by the licensed shipper, at their licensed location, by their employees. Orders must be shipped through approved common carriers from their licensed location, by their employees.

Any licensee in violation is subject to being fined and/or having their license suspended or revoked.

If you have any questions you may direct them to: Enforcement@abc.virginia.gov.

Common practice for wineries in many states is to contract with third party shippers that are also known as "fulfillment houses" and "third party logistics" (3PL) providers. This memo has caused a minor panic in the industry because many wineries, especially in California, use fulfillment houses to pack and ship wine based on orders that winery employees receive. The circular would suggest that such practice is in violation of Virginia law even if orders are taken legitimately by employees of licensees, at their licensed location, and shipped through approved common carriers.

The circular also recommends that licensees not contract with “marketing companies, or other businesses to receive or ship orders for them”. According to the memo, “all orders must be received directly by the licensed shipper, at their licensed location”.

Wine industry representatives are working with the Virginia ABC to get further clarification on the recent circular. Please stay tuned, and we will update you as we learn more.

Virginia ABC Circular

Activities Requiring Licenses: The Department describes when third party providers require a license. In CA a license is required when a business sells (transfers title), solicits a sale or delivers alcohol pursuant to an order. (B&P Code 23025) If interpreted according to its plain language, the definition of sale would require the following types of businesses to obtain licenses to sell wine: delivery companies, credit card companies that offer wine to certain cardholders, banks with loyalty programs, florists that offer wine through retail partners, airlines, and many more. To avoid opening Pandora’s box, ABC offers some exceptions. ABC allows a delivery company under the express direction of a licensee to operate without a license. The Advisory does not offer the same exception for a website that makes an offer to sell at the direction of a licensee. However, if a website merely publishes an offer made by a winery this would not be a solicitation by the web provider. If ABC were to hold otherwise, every media publication in California accepting winery advertisements would require a license. The Advisory does make clear that when selecting a marketing service provider, the winery or licensee must retain control of business decisions and core operations such as pricing, making offers, transferring title and directing delivery.

Tied House Risks: Beyond the cautions on unlicensed sales, ABC reminds wineries that they cannot pay retailers for advertising. Wineries cannot pay online storefronts licensed to sell as retailers for loading content, posting any material, or any advertising whatsoever. The retailer only can receive money from its markup and sale of the wine products. In some instances, the winery can pay for additional services such as age verification and compliance services.

Nothing is Free: ABC reminds industry that no free goods or premiums may be provided in connection with the marketing and sale of alcoholic beverages. This includes free shipping. Shipping may be included the price but it cannot be offered as free shipping.

Consignment Sales: Federal and state beverage alcohol laws prohibit consignment sales. Attempts to improve inventory management through just in time logistics can be problematic for innovative service companies. A licensee must sell alcoholic beverages to which they have title. Inventory cannot be returned if unsold. Any just in time delivery solutions should be carefully examined to ensure that the transaction is not a disguised consignment sale.

The web of federal and CA law is full of traps for the unwary. ABC’s advisory identifies many of the traps without offering solutions. Businesses must examine the totality of the circumstances and ensure that the essential elements of each transaction and control of these elements rest with licensees.

This analysis was authored by Susan Cagann, Special Counsel at Farella Braun + Martel LLP.  Susan will be speaking on the subject of marketing and retail agents at ShipCompliant’s Compliance Seminar and Users Conference June 11th in Napa, CA.

Re-posted with permission from Farella Braun + Martell

CABC – Advisory Third Party

Although retailers will not be among those celebrating on July 1, the passage of SB 166 is a huge victory for many direct shippers. Governor Bredesen’s signature signals a radical change in the state’s stance on wine sold through the direct shipping channel: Tennessee is the first state to reverse its stance on direct shipments for wine since Vermont in 2006. The effective date of this legislation is less than a month away, however, there is no word, yet, on when all necessary forms will be available, so stay tuned.

During the Senate Committee hearings, there was lengthy questioning regarding enforcement mechanisms to ensure out-of-state wineries are in compliance. Senator Tim Burchett also voiced concerns about the lack of jurisdiction that the Tennessee Alcohol Beverage Commission has over out-of-state wineries, to which committee chair Senator Bill Ketron responded with a quote from Section 1.C.2 of the bill, which states that applicants must, “execute a consent to jurisdiction and venue of all actions… in the state of Tennessee.” Senator Ketron also noted other enforcement mechanisms such as a clause that makes direct shipping without a permit a Class (E) Felony. Primary Sponsor Senator Stanley addressed the doubts about enforcement and compliance by pointing to many other states that have successfully instituted and enforced direct shipping laws. In addition to mentioning the success of other direct-shipping states, bill supporters also noted that SB166 could bring in an estimated $10 million in additional annual revenue.

The approved version of the bill was passed in the Senate by a 22-8 margin with two amendments, imposed by the Senate Finance, Ways and Means committee. The first amendment reduced the total annual wine shipments allowed to one resident to 27-Liters from the original 108 Liters per year, with a one case per month limit. The second amendment was apparently inserted with no specific purpose except to appease the three-tier distribution system by stating that nothing in the direct shipping bill is meant to “diminish the three-tiered scheme.” The Senate-approved version of SB 166 also requires wineries to report the appropriate sales and gallonage taxes, and direct shippers must keep records of all shipments in case the Tennessee Alcoholic Beverage Commission requests such information. Now that the bill has moved through the Senate, it awaits discussion and approval by the House Government Operations Committee.

In February, Tennessee’s Attorney General chose to level-down by banning all direct-to-consumer shipments and transports of wine for personal use. Only two months later, however, the passage of SB 166 in the Senate demonstrates willingness to accommodate consumer demand by opening up the state to direct shipping.

Annie Bones, State Relations – Wine Institute