If you are licensed to ship wine into the Commonwealth of Virginia, you likely received the following letter last week from the Virginia ABC.
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.
On Friday, CA ABC issued an advisory to respond generally to the explosion of service providers that enable wineries to outsource one or more components of their D2C and D2T channels.
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.
Industry Advisory Unlicensed Third Party Service Providers The Department has received numerous inquiries regarding the participation by licensees in programs operated by unlicensed Third Party Service Providers. These programs often involve the operation of Internet websites through which consumers may purchase alcoholic beverages. While there are many different components to the various programs, the regulatory concerns remain consistent. The Department has neither approved nor disapproved any of these programs and this Industry Advisory is intended to provide guidance under existing law as to some of the most common issues that typically present themselves to aid licensees in evaluating whether to participate in such programs. For purposes of this Industry Advisory, “Third Party Service Providers” includes persons or businesses operating Internet websites for the purpose of promoting, marketing, or selling alcoholic beverages. Such persons or businesses are often referred to as “marketing agents”, “compliance agents”, “agents of the consumer”, “agents of the winery”, “agents of the retailer”, “fulfillment operators”, “logistics providers”, “affiliate marketers”, or similar descriptors. While many Third Party Service Providers engage in activities that do not require licenses issued by the Department (such as, for example, simply producing and maintaining a website operated by or for a licensee, or providing back-office compliance services), many are engaging in activities for which a license is required. June 2009 Following are the statutory provisions typically implicated and the regulatory concerns of the Department: • Business and Professions Code section 23300 prohibits the exercising of license privileges without holding a license authorizing such privileges. Business and Professions Code section 23355 authorizes the exercising of license privileges only by the person to whom the license is issued at the premises licensed by the Department. Business and Professions Code section 23025 defines the “sale” of alcoholic beverages to include any of the following: o Any transaction whereby title to alcoholic beverages is transferred from one person to another for consideration; or o The solicitation or receiving of orders for alcoholic beverages; or o The delivery of alcoholic beverages pursuant to an order therefore. The Department’s position is that any Third Party Service Provider soliciting orders of alcoholic beverages for or on behalf of licensees is engaged in the “sale” of alcoholic beverages and must hold a license issued by the Department. “Solicitation” includes transactions often described as an “offer to purchase” by the consumer. The Department does not consider independent delivery services, acting pursuant to the express direction of licensees, to be engaged in the “sale” of alcoholic beverages pursuant to this provision. • Business and Professions Code sections 25500 and 25502 prohibit suppliers of alcoholic beverages (manufacturers, distributors and importers) from giving anything of value to on-sale and off-sale retail licensees (respectively). In addition, Rule 106(f) prohibits cooperative advertising by suppliers and retailers. Business and Professions Code section 25503(h) prohibits suppliers from paying for the privilege of placing advertising on or in a retail premises—such payment need not be to the retail licensee directly. It can be extremely problematic for suppliers and retailers to be involved in the same program through which alcoholic beverages are sold to consumers, as the platform (website or otherwise) will often be financed, in whole or in part, by suppliers with a benefit to retailers, or retailers will necessarily receive benefits from advertising or purchase order submission via the platform. Business and Professions Code section 25600 and Rule 106 prohibit the giving of any premium, gift, or free goods in connection with the sale or distribution (including marketing) of alcoholic beverages, except as expressly permitted. The Department has observed that many programs operated by Third Party Service Providers will include enticements or inducements to order alcoholic beverages, such as free shipping or free items with orders. • • • June 2009 • Licensees may only sell alcoholic beverages to consumers that they actually own at the time orders are received. As to retail licensees, to do otherwise could result in a consignment sale between the retailer and supplier(s); as to other licensees, it may result in the licensee exceeding their license privileges. See, generally, Business and Professions Code sections 23355, 23393, 23394, 25502, and 25503(a). Management decisions, pricing decisions, controlling the distribution of funds, and profiting from the sale of alcoholic beverages are considered fundamental privileges of a licensee. As such, if any such decisions are made by nonlicensees, or if non-licensees share in the profits from the sale of alcoholic beverages, violations of Business and Professions Code sections 23300 and 23355 may occur. o Service fees are not, in and of themselves, improper. However, the Department does have significant concerns when fees are based upon a percentage of the sale of alcoholic beverages. The Department does draw a distinction between sharing in the profits from the sale of alcoholic beverages and nominal transaction fees charged by independent financial service providers (such as credit card companies and banks). While financial service providers may typically charge a transaction fee based upon a percentage of the sale, such a fee is generally de minimus and is otherwise unrelated to the sale or promotion of the product. Moreover, unlike many Third Party Service Providers, such financial service providers are otherwise uninvolved in the program and have no vested interest in the promotion or sale of alcoholic beverages. • In evaluating any proposal involving Third Party Service Providers, licensees should consider the entirety of the program and the respective roles of the various participants. Violation of the above statutory provisions may subject a licensee to discipline, even if all prohibited activities are conducted by a Third Party Service Provider. If you have any questions regarding this advisory, please contact the Department’s Trade Enforcement Unit at (916) 419-2500. June 2009
Governor Phil Bredesen signed Senate Bill 166 into law today. With the passage of the bill, Tennessee will legally open its doors to winery direct shipping on July 1, 2009. Tennessee prohibited direct shipments from out-of-state wineries long before the landmark Granholm case. Even onsite shipments of wine were disallowed when the Attorney General issued an opinion on the matter in February 2009. Attempts to pass direct shipping legislation in the past years have failed, unaided by a Tennessee wholesaler campaign against the bills during the 2008 legislative session. However, with the Governor’s signature, in-state and out-of-state wineries alike now have access to Tennessee wine consumers. Direct shippers can expect to pay an annual license fee of $150 (an initial application fee of $300 is required for new applicants) and remit monthly sales and gallonage taxes. Some less positive aspects of the new laws include a 3 case annual shipping limit from a winery to a consumer and restrictions on who can obtain the direct shipper’s license—retailers, unfortunately, are among the excluded.
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.
Tennessee, one of 13 states that still bans direct-to-consumer shipping, took steps towards ending that association on April 13, 2009 when the Senate-approved Senate Bill 166, which allows direct shipments of wine. Currently, anyone who transports wine into Tennessee by bypassing the three-tier system is committing a felony (see Section 57-3-401.b of the Tennessee Code) an act that bill sponsor Senator Paul Stanley says is already widely committed. Due to this continuous violation of existing law, Senator Stanley calls SB 166 a “common-sense bill.” Senate Bill 166 requires out-of-state wineries to obtain a $300 licensenon-refundable application fee and $150 annual permit fee and also sets a shipping limit of 3 cases per calendar year per individual consumer.
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.
Wineries with a valid direct-to-consumer shipping permit may now ship to consumers in Landaff, New Hampshire. The city of Landaff voted to end its status as a dry town effective immediately. Four dry cities remain in New Hampshire: Brookfield, Ellsworth, Monroe and Sharon. Wineries are prohibited from shipping wine to consumers in dry regions in New Hampshire. More information about shipping wine directly to New Hampshire consumers can be found by visiting the Wine Institute website.
The Indiana Alcohol and Tobacco Commission is now enforcing the statutory citation concerning the initial face-to-face transaction requirement in Section 7.1-3-26-6. The face-to-face requirement originally became effective on July 1, 2006, but was later stayed by the Court on August 24, 2007. However, the stay has expired and it is recommended that direct shippers comply with face-to-face requirement. Indiana consumers may only receive off-site shipments if they have visited the winery and completed an on-site transaction. Indiana consumers who have not completed a face-to-face transaction with the direct shipper are no longer eligible to receive wine shipments. Additional information about direct-to-consumer shipping regulations can be found by visiting http://www.wineinstitute.org/initiatives/stateshippinglaws and clicking on the state of Indiana.