Folks in Illinois are quite litigious when it comes to occupation and use (aka sales) taxes on transportation or delivery (aka “shipping”) charges. Back in 2006, Wal-Mart was hit with a class action for collecting tax on shipping where no tax was allegedly due. In more recent years, over 200 retailers have been sued by a Chicago attorney for not collecting tax on shipping.
So, should you collect and remit tax on shipping charges, or should you not collect or remit taxes on shipping? If only the answer were so black and white. Important considerations, as you will find in the regulations, cases, and articles listed below, are whether the shipping charges are stated separately in your checkout process and on your invoices, whether the shipping charged to the consumer exceed the actual cost of delivery, and whether you provide the customer an option to pick up the wine at the winery.
The goal of this post is not to provide legal advice, as the decision to collect and remit taxes on shipping in Illinois is based on several different factors and your own individual circumstances are important in determining taxability based on those factors. Instead, our aim is to share as much information as we can so that the industry is armed with the facts of the situation and can make informed decisions. We will continue to update this post with documents, resources, and other information that we find. If you come across something that is relevant, please post it in the comments section below or email us at firstname.lastname@example.org.
1) Illinois Regulations: Title 86 Part 130 Section 130.415 Transportation and Delivery Charges
If the seller and the buyer agree upon the transportation or delivery charges separately from the selling price of the tangible personal property which is sold, then the cost of the transportation or delivery service is not a part of the “selling price” of the tangible personal property which is sold, but instead is a service charge, separately contracted for, and need not be included in the figure upon which the seller computes his Retailers’ Occupation Tax liability. Delivery charges are deemed to be agreed upon separately from the selling price of the tangible personal property being sold so long as the seller requires a separate charge for delivery and so long as the charges designated as transportation or delivery or shipping and handling are actually reflective of the costs of such shipping, transportation or delivery
2) Illinois Department of Revenue General Information Letter: ST 13-0025-GIL 05/28/2013 LIQUOR TAX
Under the Liquor Control Act of 1934, out-of-state wineries who are going to sell wine directly to Illinois residents must complete an Application For State Of Illinois Winery Shipper’s License (“Direct Shipping Permit”), which I have enclosed for your convenience. Further, a licensee who is not otherwise required to register under the Retailers’ Occupation Tax Act must register under the Use Tax Act to collect and remit use tax to the Department of Revenue for all gallons of wine that are sold by the licensee and shipped to persons in this State.
3) Illinois Compiled Statutes: 235 ILCS 5/5-1 (from Ch. 43, par. 115)
A winery shipper licensee must pay to the Department of Revenue the State liquor gallonage tax under Section 8-1 for all wine that is sold by the licensee and shipped to a person in this State. For the purposes of Section 8-1, a winery shipper licensee shall be taxed in the same manner as a manufacturer of wine. A licensee who is not otherwise required to register under the Retailers’ Occupation Tax Act must register under the Use Tax Act to collect and remit use tax to the Department of Revenue for all gallons of wine that are sold by the licensee and shipped to persons in this State.
4) Booze Rules Blog: Illinois Qui Tam Lawsuits – Private Enforcement of a State Claim: A Bonanza for Plaintiff’s Lawyer and a Rip-Off of Retailers
5) Brann & Isaacson: Some Good News for Retailers Regarding False Claims Act Issues
6) Illinois Supreme Court: Nancy Kean vs. Wal-Mart Stores, Inc.
7) Tax Analysts: Illinois Rules Against Chicago “Whistleblower” in False Claims Case
8) Tax Analysts: Qui Tam Troubles, Part 1: An Illinois Informant With No Inside
9) Tax Analysts: Qui Tam Troubles, Part 2: A Relator Seeking to Second-Guess Audits
10) Crain’s Chicago Business: State blows the Whistle on this Whistleblower
11) Cook County Circuit Court: Schad Diamond and Shedden v. National Business Furniture LLC
In the increasingly fast pace of wine, malt and spirit law and compliance, more and more states are recognizing the importance of doing more with less, optimizing processes, and going green. Over the last two years alone, seven states have begun using PRO (Product Registration Online) to accept online label registrations from licensees. For labels registered through PRO in these states, we’ve seen registration time-to-approval drop from weeks or even months to days, and in some cases just a matter of hours! It’s not surprising that states and licensees alike are swapping out traditional registration forms sent via snail mail for electronic registrations transmitted instantaneously and approved in short order.
Since it’s beginning in 2012, PRO has improved the registration process by making label registration move quickly and easily for licensees and state administrators alike. We’ve worked with licensees – covering over 4,000 wholesale brands – to learn what we can do to make registrations less frustrating and time consuming. We also learned about what users can do to make registrations accurate 100% of the time to ensure minimal delays or rejections.
How can I get started?
Need to register labels in Arkansas, Colorado, Illinois, Kansas, New Mexico, South Dakota, or Washington? Getting started is easy. ShipCompliant users have PRO already integrated into their accounts, and are utilizing end to end workflows including TTB COLA submission and state subsequently automated registrations to multiple states. Outside of a ShipCompliant account, PRO is available by visiting www.productregistrationonline.com.
Where will I be able to register electronically next?
Well, we can’t spill the beans on this yet, but we’re working with quite a few states that have gotten feedback from you, raving about PRO in the existing states. We’re looking to have a new PRO state (or two) in the next couple months. (Hint) one sported a boxing legend and the other produced two brothers with one of America’s finest inventions. Okay, maybe you can guess the states… In the world of compliance, who needs more time-consuming and tedious forms to fill? Questions? Have a state you’d like to see adopt PRO? Contact us.
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.
You may have seen reports about a recent U.S. Congressional subcommittee hearing on “Legal Issues Concerning State Alcohol Regulation.” The hearing was important for anyone concerned about direct-to-consumer wine shipping since a primary question was whether federal courts should be stripped of their authority to strike down state alcohol laws that discriminate against out-of-state businesses—the very issue at the heart of the Supreme Court’s decision in Granholm v. Heald.
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The hearing followed a reportedly aggressive lobbying campaign by the National Beer Wholesalers Association (NBWA). The common speculation is that NBWA is concerned that large retailers and global brewers are trying to put beer wholesalers out of business, and that litigation over self-distribution—Costco v. Hoen and a recent lawsuit in Illinois over whether Anheuser-Busch can obtain a wholesaler permit—is a particular threat to their state monopoly pricing power. The undertone of the NBWA effort is that the industry needs to return to a simpler time when the 21st Amendment meant what the wholesale tier thought it did, before the Supreme Court had a chance to weigh in and reset the balance.
While the wine industry has not always benefitted from court decisions, the federal circuits and the Supreme Court have for more than 40 years consistently sought to weigh the interests of states and the market carefully when examining state alcohol laws. Under this court precedent, states have broad authority under their police powers—their ability to protect the public—and the 21st Amendment to regulate the movement and sale of alcohol beverages. But they cannot use state power to discriminate against interstate commerce or to protect in-state monopoly behavior. Despite NBWA’s apparent beliefs to the contrary, there is no evidence that courts have abused their power of judicial review in any way that would justify the blunt reconfiguration of the relationship between federal and state law.
Not that all the state regulators who testified at the hearing would agree. The chairman of Michigan’s Liquor Control Commission offered completely unsubstantiated testimony that because of litigation, direct shipping is a free for all, allowing out-of-state wineries to deliver wine into Michigan on the “honor system,” and resulting in the loss of millions in uncollected tax revenue. This position is questionable since in the wake of Granholm states have more aggressively regulated shipping and have established comprehensive systems of licensing and compliance.
Apart from the fact that state licensing systems make it easier for states to determine whether alcohol is contraband—wine can only be shipped by licensees—Michigan has at least two substantial hammers to ensure their state direct shipping laws are followed. The 21st Amendment Enforcement Act allows states to file for federal injunctions against out-of-state businesses that ignore their laws, and Alcohol Tobacco Tax & Trade Bureau (TTB) policy provides TTB authority to punish federal basic permittees, such as wineries, that violate state law.
Whether the subcommittee hearing will lead to legislation is anyone’s guess. But should a new federal law along the lines sought by NBWA come to fruition, the impact could be substantial for winery direct-to-consumer shipping. States would be free to rewrite their laws to discriminate against out-of-state wineries and subsidize local monopoly behavior. Such a federal law would be an open invitation to roll back the gains wineries have spent nearly two decades fighting to achieve.
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.
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.
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.
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.
On September 1, 2009, excise tax rates for wine will increase in Illinois and North Carolina.
Governor Pat Quinn approved Illinois House Bill 255 on July 13, 2009. The bill increases Illinois’ excise tax on wines from $0.73 to $1.39 per gallon of wine under 20% ABV. An updated tax form for Direct Wine Shippers to report sales made on or after September 1, 2009, is already available on Illinois’ website.
Excise tax increases on alcohol were included in North Carolina’s budget bill this August. Starting September 1, North Carolina’s excise tax rates on wine will increase from $0.21 to $0.2634 per liter for wines 16% ABV and under; and from $0.24 to $0.2934 per liter for wines 16% and 24% ABV. The B-C-786 is used by licensed wine shippers use to report sales of wine and report taxes. Thie new report is not yet available online, but check North Carolina’s website on September 16 for the updated form.
As part of both states’ tax legislation, malt beverages and distilled spirits taxes will also increase next month.