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Arizona Tax Reporting Set for 2015 Simplification

In May of 2012, Governor Jan Brewer established the Transaction Privilege Tax Simplification Task Force in order to identify ways the current complex sales tax code could be simplified in the hopes of reducing tax filer stress and increasing tax-filer compliance. The conclusions of this task force, available in full in the Final Report, led to the creation and subsequent passage of HB 2111. HB 2111, which goes into effect January 1, 2015, calls for all licensing and taxes to be paid and reported through a single online portal.

This change, outlined in more detail in Section 42-5015 of the bill, will be an especially welcomed change to how Transaction Privilege Taxes (TPT) are reported. Currently cities are split between 73 “program” cities, where the state collects the tax, and 18 “non-program” cities, where cities are responsible for collecting the tax. For licensed wine direct shippers who remit applicable taxes to several locations, this can result in an overwhelming set of tax filing requirements. The state will release more information regarding the new online platform throughout 2014. ShipCompliant clients should stay tuned for announcements that will further outline the changes as well as subsequent updates that will ease the transition in their account to the new “one-stop-shop” process. All updates to clients will take place well in advance of the January 1, 2015 effective date.

Is the Marketplace Fairness Act Fair for Wineries?


In short, yes, for a couple of reasons:

1. Wineries already pay sales tax in most states
2. The vast majority of wineries will likely be exempt from the law

So what is it, exactly?

Senate Bill S. 743, more commonly known as the “Marketplace Fairness Act“, is a pretty simple bill that would give states the ability to require out of state businesses that have “remote sales” in excess of $1 million annually to remit sales taxes. Each state would be able to opt in to the Act, but only after they have simplified their tax structure, either by joining the Streamlined Sales and Use Tax Agreement or to follow the steps outlined in the bill to simplify their sales tax requirements.

Will it pass?

With broad bi-partisan support, S. 743 passed out of the Senate with a vote of 69 to 27. However, a tough battle is expected in the House, and therefore the Marketplace Fairness Act has a long way to go before it is enacted with a signature from President Obama. Amazon.com is supporting the bill (presumably because they would like to move forward with their plans to build warehouses in each state to support same-day shipping), while eBay is one of the main voices in opposition.

What will it mean for wineries?

A lot hinges on the definition of “remote sales”. Keep in mind the fact that state legislation to allow wine shipments typically includes a provision that also requires wineries to register for and pay sales tax. As it stands in the Senate version, and based on our interpretation of the current language, sales by wineries to states where they are already required to pay sales tax would not be counted when considering the $1 million threshold for remote sales.

Based on some quick analysis, there are a few hundred wineries in the US that ship more than $1 million worth of wine to consumers each year. BUT, if you include sales only to those states (Alaska, Colorado, D.C., Florida, Iowa, Kansas, Minnesota, Missouri, New Hampshire, Oregon, and Wyoming) that do not require wineries to pay sales tax, then we estimate that less than 25 wineries would exceed the $1 million cap. In other words, the vast majority of the 7,000+ wineries in the US would be exempt from this law.

Wineries are already accustomed to calculating, collecting, and remitting sales taxes in most states. So, for those wineries that would not be exempt from this law, it would probably not be that big of a deal to add a few more states (initially the states of Iowa, Kansas, Minnesota, and Wyoming) to the list of states to which they would be required to remit sales tax. They already have the technology and processes to do so.

The bill would take effect, at the earliest, on October 1st, 2013. Once effective, the 22 “Streamlined” sales tax states would begin requiring sales tax for remote sellers with over $1 million in sales. After that, each of the remaining 28 states would choose whether to opt in to the Act and start requiring sales tax from remote sellers.

At A Glance: Arizona Direct Wine Shipments – Why Size Does Matter in the Grand Canyon State

Arizona

Permit Required

  Producers Retailers
Onsite
Offsite

Complexity: Hard

Summary Wineries that possess a Domestic Farm Winery License and produce less than 20,000 gallons per year are permitted to ship off-site and on-site direct shipments, with no volume restrictions; privilege and excise tax are required. If a winery does not possess a license or produces more than 20,000 gallons per year, they will be limited to sales made to consumers physically visiting the winery only; volume limits apply.
Approved & Active Carriers FedEx and UPS both ship to this state.
Shipping Rules Tax:  Wineries holding a Domestic Farm Winery License are required to pay local privilege and excise tax. Privilege tax rates, similar to sales tax, range from 6.6% – 11.725%, depending on the shipping destination. An excise tax of $0.84/gallon must be paid monthly. Non-licensed wineries shipping on-site orders only are not responsible for paying tax on wine shipments.
  Permit:  Wineries that produce less than 20,000 gallons a year and possess a Domestic Farm Winery License may make unlimited direct shipments to Arizona residents. Wineries that produce more than 20,000 gallons or do not hold a Domestic Farm Winery License are not permitted to make off-site shipments in Arizona. Wineries which fall into the latter category (non-licensed, over 20,000 gallons) however, may make on-site shipments to consumers, and may make subsequent shipments within a calendar year of the the on-site visit, as long as the wine was purchased while the purchaser was physically present at the winery.
  Customer Volume Limit:  Licensed wineries may make unlimited shipments to Arizona Consumers. Orders placed at a non-licensed winery are limited to two cases per individual per calendar year.
License Requirements To be eligible to make unlimited off-site and on-site shipments, wineries that produce less than 20,000 gallons a year must first obtain an Out-of-State Domestic Farm Winery License at the cost of $300 ($100 initial application fee plus $200 for the license). Licenses are good for one year from date of issue; half-year licenses are also available for a reduced price. To ship limited on-site shipments only, no license is required.
History Arizona officially opened to on-site direct shipping in 1999. In 2002-2003, the state passed SB 1073 allowing Arizona residents visiting a winery, either in-state or out-of-state, to ship one case of wine per year to their homes. In 2003, volume limits were increased to 2 cases per year. After the Granholm v. Heald decision in 2005, Arizona modified its direct shipping laws to address concerns that out-of-state and in-state producers were not being treated equally. Governor Janet Napolitano signed into law SB 1276 in 2006, which opened the state to limited direct shipping and self-distribution.
Litigation / Legislation In 2008, an Arizona federal district court ruled that the required visitation to a winery without a license did not violate the Granholm decision of 2005. In Blackstar Farms v. Oliver, Blackstar Farms presented the argument that the on-site visitation rule was a limitation that favored in-state producers, based on the argument that an Arizona resident was more likely to visit an in-state winery than to travel out of state to order wine products. The courts ruled in favor of Oliver (the state’s Liquor Licenses and Control director at the time) using the “accident of geography theory,” meaning, simply because it is less likely that an Arizona resident will visit a California winery, does not mean out-of-state producers are being discriminated against. In another case filed by Blackstar Farms in 2006 (Blackstar Farms v. Morrison), Blackstar Farms challenged the existing 20,000 gallon volume cap for farm wineries. The courts ruled in favor of Morrison, the states LLC director, and the volume cap was left in place; the 9th U.S. Circuit of Appeals rejected Blackstar Farms’ appeal in April, 2010, leaving the cap in place.
 

Side Note: For suppliers interested in selling to retailers (self-distribution), Arizona law permits holders of a Domestic Farm Winery License that produce less than 20,000 gallons per year, unlimited shipments to Arizona retailers.

Hidden Costs of Direct Shipping Licensing

Before jumping into a direct shipping program in a new state, wineries should consider their current prospect list, market potential, shipping difficulty and costs. When it comes to calculating start-up costs to enter a new state, there is often more than meets the eye. In addition to license fees, wineries may need to budget for a number of “hidden” fees including bonds, label registration fees and other application fees.

Bonds

Some states require wineries to obtain a bond in order to secure a direct shipping license. A bond is a written guaranty, purchased from a bonding company (usually an insurance firm or a surety company), to guarantee that all taxes due will be paid to the state. If there is a failure to pay, the bonding company will make good up to the amount of the bond.

Bonds for direct shippers range from $500-$1500 depending on the state, but premiums, or out-of-pocket costs, to wineries typically average around 10% of the total bond price, or $50-$180 out-of-pocket on an annual or biannual basis. Different bonding agents may quote different rates, so it pays to shop around.

Connecticut, Idaho, Illinois, Indiana, Kansas, Texas and Wisconsin all require that wineries secure a bond before submitting your license application. For wineries that ship 40,000 gallons or more annually, Oregon issues a bond document after the license application has been received but before the license is issued. Wineries that ship less than 40,000 gallons to Oregon annually can apply for a bond wavier.

Label Registration

Several states require brand or label registrations for direct shipping. Ohio, a state that 26% of direct shippers have in their program, requires wineries to register all the labels that will be shipped into the state for a one-time registration fee of $50 per label.

If that sounds pricey to you, consider Connecticut who charges $200 per label and requires labels to be re-registered every 3 years if they are still actively shipped into the state.

Georgia, Michigan, New York, North Carolina and Virginia do not charge a fee though label or brand registration is required in these states.

Application Fees

Some states may require business, Secretary of State or tax registration, or other one-time application fees. This varies from state to state and depends on how your business is structured. Wineries that start shipping to Arizona, Connecticut, Hawaii, Kansas, Maine, Michigan, North Carolina, Ohio, Tennessee, Virginia or Wisconsin may encounter one or more of these fees.

License, bond, label registration and application fees all factor into the true break-even costs of shipping to a new state. The key to ensuring a profitable direct shipping program is to research thoroughly in order to avoid getting caught off-guard with unexpected costs.

Notes on Wine Distribution v.32

The latest version of “Notes on Wine Distribution”, by R. Corbin Houchins, is now available. Release 32 includes updates on legislation, litigation and general discussions on available distribution channels for wine. This release includes substantial changes, including new sections on age and identity, facial neutrality, and logistical support services, as well as updates to state summaries in Arizona, Delaware, Kansas, Kentucky, Maine, Maryland, Massachusetts, Montana, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Tennessee, Texas, Virginia, Washington, and Wisconsin. Read about these and other updates that affect the way wine is sold and shipped within the United States.

If you are at all interested in the shipping and distribution of wine, this is an excellent resource that is well worth reading.  You can view the most recent version of the document anytime by visiting the ShipCompliant Blog and clicking the link located under “Compliance Resources”, or by visiting CorbinCounsel.com and clicking on the home page link, “Notes on Wine Distribution.”

Click Here to View NWD Release 32

Arizona Clarifies On-Site Shipping Law

Following our May 6th submission, Wine Institute received further clarification from the Arizona Department of Liquor Licenses & Control regarding their continuing interpretation of the on-site sales law. Wineries may ship up to 2 cases of wine per Arizona consumer per calendar year as long as the consumer purchases the wine while physically visiting the winery. The wine paid-for by the consumer may then be shipped at anytime during the year to a residential or business address. The purchased wine may be broken down into multiple shipments during the year. No off-site orders are permitted at any time except by wineries holding a direct-to-consumer permit*. If Arizona consumers wish to have additional wine shipped to themselves in subsequent calendar years, they will need to physically visit the winery each and every year. There continues to be no reporting, tax or permit requirements under the “on-site shipping law.”

*The rules and requirements for wineries producing up to 20,000 gallons of wine in a calendar year with an approved direct-to-consumer permit/self-distribution license are different. Please visit the Wine Institute website for additional information about shipping to Arizona or contact Annie Bones, State Relations Coordinator, Wine Institute at 415-356-7530 or abones@wineinsittute.org.

Annie Bones, State Relations – Wine Institute