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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.

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.

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.

Before you begin the process for Illinois electronic filing, you will need your Illinois Business Tax number (IBT), your PIN, your payment information, and you will of course need to know how much tax you owe. You should have received your PIN when you registered with the Illinois Department of Revenue. If you have not received your PIN, or do not know what it is, you can contact the Department of Revenue at 217-782-6045, and they will provide you with your PIN.

To start electronic filing for the ST-1, click here, and then click “start filing.” To begin electronic filing for the RL-26-W, click here, then click, “Start Using Webfile.” You can save progress and view submitted reports up to a year after submission.

For expedient processing, an applicant should submit a copy of its state liquor license along with the Out-of-State Winery Shipper’s License application. An applicant must also submit the brand registration form (for brands not already registered with the state) prior to, or simultaneously to the submission of the application. In addition, a winery must register for sales and excise tax. An accelerated tax permit approval process is available for those wineries which have a distributor in state. In any event, and with time running out, electronic submissions will be approved faster than those send via conventional mail. See our previous post for more detailed instructions and a checklist for the application process with links to forms.

Also, as a reminder, Georgia will open up on July 1st, and Wisconsin will begin their new permit system on October 1st. We’ll have the full details of the application process in both states as they become available.

Application for State of Illinois Winery Shipper’s License – Direct-to-Consumer Application

California wineries should select option F, “OUT-OF-STATE WINERY SHIPPER’S LICENSE” as type of license being applied for.

The application process separates wineries into 3 classes based on the total number of gallons manufactured annually. The cost of the annual license for each class varies. Class 1 wineries have a $150 license fee and produce less than 250,000 gallons annually. Class 2 consists of wineries producing more than 250,000 gallons but less than 500,000 gallons annually. The license fee for Class 2 is $500.00. Class 3 wineries have a $1000.00 license fee and manufacture 500,000 gallons or more annually.

A copy of the applicant’s state manufacturer’s liquor license (Class 02 Winegrower’s license) must be submitted with the license application.

The license must be renewed annually.

Registration Statement (For Brand Registration)

Brands not already registered with the Commission must be registered prior to, or simultaneously with, the direct shipper application filing. The brand registration requirements are fulfilled by submitting the Registration Form and copies of all federal label approvals for products being shipped into Illinois.

• In the first column titled Name, Address, City etc., write “N/A” If sales are only made to consumers.
• In the second column titled Trade-Mark Brand, or Name of Item, list brands not already registered with the Illinois Liquor Control Commission.
• In the third column titled Geographical Territory, write “Illinois”.
• In the fourth column titled Time Period, write “Until further notice”.

Note: If brands are already registered, you do not need to complete this form.

Self -Distribution

Class 1 wineries who will not produce more than 25,000 gallons annually may apply for self-distribution privileges by completing the “Self-Distribution Exemption” form. Wineries qualifying for the self-distribution exemption may not sell more than 5,000 gallons to retail licensees in Illinois each year. Wineries producing more than 25,000 gallons annually, including all Class 2 and 3 wineries are not eligible to self-distribute in Illinois.

Bond

Applicants must obtain a bond for the amount of $1000 or 2x their estimated monthly tax liability, whichever is greater, up to a maximum of $100,000. (See RL-26-W, Step 2: “Figure your tax due” for alcohol content breakdown with corresponding excise tax rates to estimate monthly tax liability.) Form RL-1, Liquor Tax Statement of Liability must be submitted with the bond paperwork. In addition you will need to submit one of the following:

• Form REG-4-A “Financial Responsibility Bond”
• Form REG -4-D “Financial Institution Irrevocable Letter of Credit Bond”. or
• a cashiers check to cover the cost of a Certificate of Deposit that the Illinois Department of Revenue will purchase for you.

Applications to Register to Pay Sales and Excise Taxes

Illinois requires applicants to register their business with the Illinois Department of Revenue (IDOR). You do not need a separate application to register to pay the Liquor Tax. IDOR will automatically register you to pay this excise tax using the application you submitted to receive your wine shipper license. The license certificate you receive from the Illinois Liquor Control Commission will contain your liquor license number as well as an Illinois Business Tax Number (IBT). This IBT must be used to file and pay liquor tax. However, you will need to complete a separate application to register for the sales/use tax that you will need to file and pay.

IDOR will automatically send you a request for an application once you have been registered for the liquor tax or you can register online. You may register by visiting the IDOR website or by completing and mailing in Form REG-1. Applications submitted electronically will be processed significantly faster than applications submitted by mail. When completing Form REG-1, Step 3, question 11, write “Direct Wine Shipper”. When completing Step 3, question 13, applicants should select “sales to Illinois Consumers” and “Liquor at Retail” as type of business. *IMPORTANT: WAIT UNTIL AFTER YOU RECEIVE YOUR SHIPPER’S LICENSE BEFORE FILING THE REG-1 TO AVOID LICENSING COMPLICATIONS.*

Once the application is processed you will receive an Illinois Business Authorization Certificate of Registration. Your Sales/Use Tax Account Identifier Number will be listed on the certificate. Keep track of the number because it will be needed on sales/use tax payment forms.

Note: Do not confuse your identification numbers. You will receive a Liquor License number, an Illinois Business Tax number (IBT), and a Sales/Use Tax Account number. The Sales/Use Tax Account Number is sometimes also referred to as an IBT number. However; this number is different from the IBT number that is used to pay the liquor tax.

Winery Shippers are required to file and pay state sales tax and excise tax on all shipments to IL consumers. The state sales tax is 6.25%; payment schedules will depend on the estimated amount of total sales. Local sales tax is not required.

Excise taxes must be filed and paid every month, including months in which 0 shipments occurred. Once your Winery Shipper’s License has been issued, the IDOR will mail you tax form RL-26-W “Liquor Direct Wine Shipper Return.” Winery Shippers have the option of filling the form electronically on the IDOR Website or by mail. Winery Shippers who choose to file and pay electronically will receive a discount of 2% if their return and payment are filed and paid on time. This discount is not available to those that use the paper method.

Click here for a printable PDF version of the Illinois Out-Of-State Winery Shipper’s Application Checklist.

Annie Bones, Wine Institute

The application process separates wineries into 3 classes based on the total of gallons manufactured annually. The license for each class varies. Class 1 wineries have a $150 license fee and produce less than 250,000 gallons annually. Class 2 consists of wineries producing more than 250,000 gallons but less than 500,000 gallons annually. The license fee for Class 2 is $500.00. Class 3 wineries have a $1000.00 license fee and manufacture 500,000 gallons or more annually. A copy of the applicant’s state manufacturer’s liquor license (Class 02 Winegrower’s license in CA) and copies of all federal label approvals must be submitted with the license application. Brands not already registered with the Commission must be registered prior to, or simultaneously with, the direct shipper application filing. Class 1 wineries may apply for self-distribution privileges by completing the “Self-Distribution Exemption” form. Class 2 and 3 wineries are not eligible to self-distribute in Illinois.

Once the Illinois Winery Shipper’s License is issued, the Illinois Department of Revenue will mail the permit holder the Liquor Direct Shipper Wine Return Tax form. Excise taxes must be paid monthly and there is a $1000.00 bond requirement. The permit holder has the option to pay excise taxes electronically or by mail. Permit holders are responsible for paying sales tax. The Department of Revenue has not published instructions for sales tax registration at this time. As soon as the information becomes available it will be posted on the Wine Institute website. Should you have any questions please contact the Wine Institute State Relations Department at 415-356-7530.

Annie Bones | State Relations | Wine Institute

The fundamental question is whether the decision in Granholm v. Heald that said states must treat in-state and out-of-state wineries evenhandedly should also apply to in-state and out-of-state retailers. R. Corbin Houchins recently made two posts (September 18th and October 5th) that do an excellent job of highlighting the legal questions that come into play when attempting to extend Granholm to retailers. In his October 5th post, Mr. Houchins indicates his disagreement with the reasoning of the recent and important Arnold’s Wines v. Boyle opinion, which upheld discrimination against out-of-state retailers in New York.

There is a very interesting recent article, with substantial background materials for lawyers who do not practice in the subject area, on FindLaw.com titled “The Fight Over State Laws Favoring In-State Alcohol Purveyors: Do Such Laws Violate the Dormant Commerce Clause?” that also examines the important ruling in Arnold’s Wines. This article is definitely worth reading.

The Court has had to examine the intersection between the dormant Commerce Clause idea and the Twenty-First Amendment a number of times. Two years ago, in the seminal case of Granholm v. Heald, the Court appeared to send a message that while the Twenty-First Amendment may indeed empower states in some ways, it does not trump the anti-discrimination, anti-balkanization norm of the Commerce Clause.

The federal district judge in the recent Arnold case in New York properly acknowledged the importance of Granholm. Nevertheless, the judge held that Granholm’s ban on state discrimination against out-of-staters applied only to state laws regulating producers of alcohol, not laws (such as the one at issue in the recent New York case) that regulated wholesalers or retailers.

The New York judge’s interpretation of Granholm is, I believe, in error.

The Arnold’s Wines case will likely impact current (Texas, California) and future (Illinois?) cases in the battle over retail to consumer shipments and could possibly end up in the Supreme Court, where a favorable decision could potentially open the legislative floodgates for retailers as Granholm did for wineries in 2005.

Illinois Governor Rod Blagojevich yesterday signed House Bill 429 which goes into effect June 1, 2008. The new law dramatically expands consumer choice for winery-to-consumer purchases made by Illinois wine consumers. Under the new law, wineries in all 50 states may purchase a permit to ship. Under the old law, wineries in just five states, including Illinois, were allowed to direct ship to Illinois consumers. The trading network of states with so-called ‘reciprocal’ wine shipping arrangements has decreased from a dozen to just five: New Mexico, Wisconsin, Iowa, Oregon (changes to permit law in January 2008) and Illinois (changes to permit law in June 2008).

“The new law is a boon for winery-to-consumer shipments, and long overdue, but unfortunately it corks out-of-state retailers. An amendment, widely supported by Illinois consumers and Free the Grapes! would have allowed out-of-state retailers the same privileges as wineries. It was defeated by powerful Illinois retailers and wholesalers,” said Jeremy Benson, executive director, Free the Grapes!, a winery-consumer grassroots coalition.

Read the full press release here.

HB 429 will allow Illinois retailers to ship to consumers, but will prohibit out of state retailers from doing the same. This will almost certainly be challenged by the Specialty Wine Retailers Association, who will seek evenhanded access to shipping directly to Illinois consumers.

For more information on HB 429, please see our previous post.