You may remember reading our posts highlighting what to look for in the legislative season back at the beginning of 2013. Now that many legislative sessions are starting to come to a close, here is a quick check-in on this year’s legislative changes, all of which will be addressed in detail at the ShipCompliant Direct Wine Sales Virtual Seminar, scheduled for October 17th. Reserve your spot today for a complete update on the 2013 wine direct shipping world.
How did the Direct Shipping Bills Stack Up?
Pennsylvania and Massachusetts were the headlining states this year once again when it comes to opening up new states to direct shipping. Although neither state passed a bill prior to the summer recess, legislatures are back in session in both states and direct shipping remains a possibility.
Montana HB 402 will become law tomorrow (Tuesday October 1, 2013), effectively replacing the wine connoisseur’s license with a direct shipping “endorsement” available to Montana wineries and to out-of-state wineries holding a Foreign Winery License. Check out our previous blog post for more detailed information on obtaining this endorsement.
Arkansas Act 483, originally HB 1749, opened up limited direct shipping to the “Natural State” for wineries. The state is still finalizing how they will regulate this new law, which took effect mid-August, but this previous post provides a detailed summary of the Act.
Streamlined COLA Processing
The TTB continues to revamp their website and accept feedback from the industry. Review the status of the COLA Streamlining Accomplishments and Long-term Initiatives on the TTB website.
Existing Direct Shipping Laws, Reworked
Nebraska LB 230 passed and became effective on September 6, 2013. We highlighted the details on the bill that adds new restrictions to the wine direct shipping process.
North Dakota SB 2147 created two new licenses that will allow for wine direct shippers to utilize licensed common carriers and fulfillment houses. This bill took effect August 1, 2013.
Product Registration Updates
In Arkansas, HB 1480 became effective mid-August, and beginning October 15 suppliers will be able to register their products online under the new requirements outlined in this bill.
Reserve your spot today for a complete legislative update and more during the ShipCompliant Direct Wine Sales Virtual Seminar!
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.
As we like to do at the beginning of each year, we once again look into our crystal ball and offer you some informed prognostications as to what the world of wine direct shipping might have in store for the coming year. While we don’t see any negative trends impacting the compliance world in the next year, we do anticipate the continuation of certain trends of which we believe you should be aware.
Here are our picks for important compliance trends to keep a close eye on in 2013
1. Limited But Important Direct Shipping Changes
Wineries now enjoy the opportunity to ship into 40 states (including Washington D.C.). The remaining closed states are predominantly those that have given little hint of changing their policy. However, we once again have our sights trained on two states where we believe some opening in the direct shipping landscape might occur: Pennsylvania and Massachusetts.
Pennsylvania has considered direct shipping legislation for the past few years, but so far the direct shipping initiatives have become more or less attached to the heated battle over the privatization of the Pennsylvania Liquor Control Board (PLCB). The privatization battle will wage on concurrently with efforts to “modernize” the PLCB. Direct shipping is reportedly part of a six-point plan to modernize the state control system. A sticking point for direct shipping legislation will be how to deal with the 18% “Johnstown Flood Tax” that is applied to sales through the state system.
Massachusetts also saw a direct shipping bill in play in 2012 for the third straight year, but it went nowhere. This non-action occurred despite the fact that a 2010 Federal Appeals Court decision ruled the current wine shipping law in the state unconstitutional and despite Governor Deval Patrick’s stated support for direct shipping. We expect another tough battle in the Bay State over this issue in 2013.
2. Changes to COLA Processing at TTB
Over the past couple of years the TTB has given every indication that they are going to completely overhaul the process of obtaining Certificates of Label Approval (COLAs). It still remains a fact that one must get a federal pre-approval through the COLA process before bringing a new product to market. However, given the increase in new products and decreased budgetary resources at the TTB, this crucial federal agency is looking for ways to decrease the burden that administering the pre-approval of labels places on them.
Toward this end, TTB has taken steps to make it easier for suppliers to make adjustments to labels without applying for a new COLA. We expect the TTB to continue to move towards a more streamlined pre-approval process this year. This process will not happen overnight, but will force suppliers, wholesalers, and state agencies that depend on the COLA for different purposes to review and adjust their processes.
3. Privatization and Modernization
While it is probably too early to pass judgment on the recent move in Washington State voters to privatize the state liquor control system, it can be said with some assurance that other states currently involved in one way or another with alcohol sales will look closely at privatization. A move in Pennsylvania to privatize alcohol sales has been underway and debated for a couple years now with the governor behind the effort. Other control states are also looking to modernize their control systems to add more value for their constituents and to get out ahead of privatization pushes.
Larger retailers tend to support privatization, while wholesalers and small retailers are typically wary. All eyes are on the ongoing transition in Washington State.
4. Regulating Third Party Providers (TPPs)
Last year we predicted that more Third Party Providers (unlicensed marketers using their reach to advertise wine products) would get into the business. With both Amazon and Facebook now doing just this, we have pretty clear evidence that third parties are investing in the wine vertical. The key to opening up the TPP landscape was the Advisory by the California Alcohol Beverage Control issued in 2011 that laid out the special method by which TPPs and suppliers had to structure their relationships.
Other states are now looking closely not only at the California model but are also considering exactly how to regulate and enforce this new advertising channel in their own states. We expect to see other advisories and clarifications coming from states addressing how TPPs and suppliers can work together compliantly.
Finally, if states take a position similar to California’s view of the marketplace channel, we would not be surprised to see other niche players enter this vertical, helping suppliers to reach a larger wine buying audience.
5. Revisions to Direct Shipping Regulations
Since the Granholm Supreme Court decision in 2005, numerous states somewhat quickly addressed and changed their direct shipping laws and regulations. After seven years with new regulations, many states we believe will revisit their laws and make adjustments.
In some cases we see changes in the capacity caps that currently restrict the size of the winery that can ship direct. In other cases, we would not be surprised to see some states lift restrictions on how fulfillment houses ship into their states as well as changes to report and tax filing regulations. The hope is that these changes make both compliance reporting and state agencies more efficient while also giving the state agencies the tools they need to maintain a level playing field.
6. Changing the Product Registration Process
For decades, state product registrations have been done with paper. As more and more products enter the marketplace, state response times have slowed. This has been exasperated by budget cuts to various state regulatory agencies in the wake of the recession and state budget deficits. The response has been to work to bring state product registration into the 21st century by allowing them to be submitted online and responded to online.
ShipCompliant’s own PRO (Product Registration Online) system has been adopted by a number of states to help speed up and make more efficient the product registration process, driving improvements in efficiency both for suppliers and the state agencies. We expect the pace of implementing online product registration to increase in 2013 for the same reason it initially was instituted in a number of states: budget cuts, efficiency efforts and modernization pushes. This will also be accelerated by TTB’s push to redefine the concept of a COLA, which is currently a resource that states depend on as part of their state label approval processes.
Since 2005 when the Granholm v. Heald Supreme Court decision opened the floodgates for direct wine shipping legislation, questions about whether direct shipping would harm local businesses, would hurt tax revenue and would lead to a significant increase in minors accessing alcohol have been posed. It has been rare that these and other questions are answered with official studies and reports.
Now we have one and the conclusions are very good for direct shippers, local businesses, the state and consumers.
A recently issued report by the Maryland Comptroller’s office that studied the first year of direct shipping in that state since passage of a law that opened Maryland for winery-to-consumer shipping reveals that direct shipping has not only been a success, but it has been beneficial to consumers, to wineries, to state tax coffers and has had no negative impact on local businesses.
We expect this new report will play a key role in the coming debate to open up other states for direct shipping, particularly Massachusetts and Pennsylvania.
Entitled “Study on the Impact of Direct Wine Shipment” and required under the legislation that legalized winery-to-consumer shipping in 2010, the Maryland Comptroller’s report covers 6 Issues:
- Permits issued
- Volume of wine shipped
- Impact on in-state sales
- Revenue from taxes and fees
- Administration costs
- Availability of wine to Maryland consumers
The report showed that by the end of fiscal year 2012, 629 direct shipping permits had been issued to wineries. Just over 20,756 cases of wine had been shipped to Maryland addresses according to the Comptrollers report. Taken together, the permit fees along with Sales and Use tax paid on the wine shipped accounted for $693,000 in state revenue.
By contrast, the Comptroller’s report estimates that at most $138,000 was incurred by the state to administer the direct shipping program and the Comptroller estimates that going forward the costs to administer the direct shipping program will decrease.
Another concern that came up during the direct shipping debate in 2010 was that wines shipped into Maryland would negatively impact local businesses. These concerns did not come to pass. According to the Comptroller’s report, wholesalers in Maryland actually increased the amount of wine sold in the state during the report’s period by 3.61% over the previous 12-month period.
The report also examined of the issue of wine availability in the wake of the direct shipping legislation and determined there was “a positive impact on product availability and consumer choice.”
The Comptroller compared used the 2011 Wine Spectator Top 100 wines as a measure of consumer access to wine. It found that of the 56 Top 100 wines that could be available to consumers (44 imported wines on the Top 100 list are not eligible to be shipped by domestic wineries) 53 were available, 13 of which would not have been available had direct shipping been prohibited.
The Comptroller ends his report with very good news:
There have been no incidents of access to underage persons reported to the Office of the Comptroller. Additionally, there have been no significant complaints specific to the law or its implementation from the industry, permit holders, or consumers in the 17 months since the law took effect which may be an indicator of its effectiveness.
This is the first major report issued by a state agency measuring the impact of a new direct shipment law and the results are both encouraging and a reminder of the positive impact that direct shipment can have not only for consumers, but also for the state and for businesses. We believe the Maryland Comptroller’s report on direct wine shipping will be widely shared and read, particularly in the upcoming Pennsylvania and Massachusetts legislative sessions.
When H.R. 5034 (also known as the Comprehensive Alcohol Regulatory Effectiveness, or “CARE” Act) was introduced on April 15, 2010, the opposition responded quickly and forcefully. Supplier organizations were united in their opposition to the bill, referring to it as the “wholesalers monopoly protection bill”. Even the California State Legislature issued a resolution, SJR 34, that urged Congress not to pass H.R. 5034.
Proponents of the bill, including the National Beer Wholesalers Association (NBWA) and the Wine & Spirits Wholesalers of America (WSWA) claimed the proposed legislation was necessary to protect state-based regulatory systems from “attack” (i.e., legal scrutiny under the U.S. constitution), claiming that “25 states have faced challenges in federal courts to their authority to regulate alcohol and their ability to maintain a licensed system of alcohol controls” since 2005.
Following months of intense debate, heated rhetoric, and an incredible amount of public relations and lobbying activity on both sides, the House Judiciary Committee did not schedule the bill for a hearing until after the August congressional recess. During the recess, Representative Bill Delahunt, lead sponsor of H.R. 5034, sent a letter to House Judiciary Committee Chairman John Conyers Jr., introducing new text in an what he terms effort to “perfect the language”, following “concerns about unintended [sic] consequences of the language as written”.
To help clarify the changes from the original version of H.R. 5034, we put together a redline document that highlights the revisions. The main change is the removal of section 3c, which established the presumption of validity and shifted the burden of proof in legal actions involving the regulation of alcoholic beverages. Like the original bill, the new version would immunize state laws that effect non-facial discrimination, such as capacity caps and in-person purchase requirements, if the discrimination were not proved to be “intentional”.
To better understand the revisions and the corresponding responses, we spoke with individuals from each of the tiers (the “three-tier system” includes suppliers, wholesalers and retailers) that are on the front lines of the debate.
Wholesaler organizations laud the new version as meaningful change. “While the proposed changes to the legislation address a narrower set of deregulatory concerns than the original legislation, it is certainly a step in the right direction,” says Karin Moore, Vice President and Co-General Counsel at WSWA. “The new version clarifies that the Granholm holding prohibiting facial or intentional discrimination against out-of-state producers remains the law of the land by incorporating the exact language used by Justice Kennedy in that landmark decision. The new language clearly and unequivocally confines itself to dormant Commerce Clause challenges, and addresses many of the concerns raised by opponents of the bill.”
Cary Greene, Chief Operating Officer & General Counsel at WineAmerica, sees broader implications. “There are many cases other than Granholm that elucidate how states can regulate interstate commerce in alcohol. As revised, 5034 would undermine or reverse dozens of court decisions. By scrambling settled case law, 5034 will cause years of re-litigation to try and figure out exactly what the new limits are. The fact is courts have not done anything to jeopardize core Twenty-first Amendment powers. State laws run into Constitutional trouble when they try to do something underhanded like fix prices or give an unfair market advantage to certain licensees or products. 5034 allows states to blatantly discriminate against out-of-state products without any concern for Twenty-first Amendment core purposes. From a policy standpoint, I’m not sure why that would ever be a good thing.”
“The problems with HR 5034 remain significant, despite the changes to the language,” says Tom Wark, Executive Director of Specialty Wine Retailers Association. “Discrimination against out of state products would still be allowed on a number of levels and consumers are bound to be hurt by this legislation. Significantly for retailers, HR 5034 would strip wine retailers and merchants everywhere in America of their protection under the Constitution’s Commerce Clause from discriminatory state laws. It has happened only one other time in American history that an entire industry lost its Constitutional guarantee of free and open markets based on the constitutional principle of non-discrimination. Wine merchants would be catastrophically disadvantaged by H.R. 5034.”
A hearing in the House Judiciary Committee will take place at 11:00 ET this Wednesday, September 29th. This is an important hurdle in the process of moving legislation through Congress. Expert witnesses will testify in front of the full committee on Wednesday, and many parties will also provide written testimony to debate both sides of the bill. Barring technical difficulties, the hearing should be available via live webcast. Click here to watch the webcast (RealPlayer required).
So, what are the chances that H.R. 5034 will pass? Well, it’s important to note that the bill has 146 (not an insignificant number) co-sponsors from both parties in the House. On the other hand, supplier organizations continue to be unified in their opposition (Click here to view the joint opposition letter issued by the Brewers Association, WineAmerica, Distilled Spirits Council of the United States, Wine Institute, Beer Institute, and National Association of Beverage Importers on the revised 5034). We hope to learn a lot more in the hearing on Wednesday.
If H.R. 5034 moves through both chambers of Congress (no companion bill having yet been introduced in the Senate) and is signed by President Obama, not much would change overnight. Despite numerous reports that it would mean the end of direct shipping, it would not change current state laws that allow direct shipping. It would likely be an uphill battle to completely repeal existing direct shipping laws in most states. However, H.R. 5034 would open the door in states like Florida, New Mexico, and Massachusetts, where the direct shipping laws are in flux because of court cases and Granholm issues, for new state laws that introduce non-facial discrimination such as caps on production capacity (proposed for the last several years in Florida and recently nullified as unconstitutional in Massachusetts) or in-person purchase requirements. It would also provide discriminatory options for the remaining holdout states, such as Maryland, if their resident consumers’ support for direct shipment should become effective. With potentially greater long-term significance, it would tilt the field decidedly against extension of Granholm’s nondiscrimination principle to interstate retailing by non-producing shippers and to interstate wholesaling.
On 1/14/10 the First Circuit Court of Appeals in Boston ruled in favor the plaintiff in the Massachusetts FWC v. Jenkins litigation. The ruling affirmed the lower court’s order that struck down the capacity caps and wholesaler exclusions which are included in the Massachusetts direct-to-consumer shipping statute and prevented over half of the wineries in the United States from being eligible to ship to MA consumers. On 4/12/10 the state announced that they will not be seeking an appeal to the Supreme Court, thus leaving this decision as the final law in the 1st Circuit. Despite the favorable ruling, obstacles continue to make shipping to consumers in MA problematic.
One very serious problem with the existing law not addressed during the FWC v. Jenkins litigation is an aggregate volume limit of 240 liters (26.67 cases) per household per year. The 240 liter volume limit refers to the total amount of wine each household can receive from all licensed direct shipper each year. It is not possible for a winery to track the amount of a wine each household receives via direct-to-consumer shipments, yet the licensed shipper is liable for any shipments that cause a household to exceed the 240 liter volume limit. The Massachusetts Alcoholic Beverages Control Commission (ABCC) has not provided any guidance on how to comply with this rule.
The licensing requirements for common carriers (FedEx and UPS) pose a second problem for direct shipping to MA. MA has extremely onerous licensing requirements that are difficult for common carriers to comply with. At this time, NO common carriers have approved MA for INTERSTATE* direct-to-consumer shipping. Only FedEx Ground services MA on a limited basis, and has a license for INTRASTATE** direct-to-consumer wine shipments. The common carriers provide updates on their wine shipping status on the respective websites www.fedex.com/us/wine and www.ups.com/wine.
Legislation was drafted and introduced during the 2010 legislative session that to address the problems with common carrier licensing requirements and direct-to-consumer shipping. However the legislature was primarily focused on election year issues and adjourned without passing the bills. It is anticipated that similar legislation will be introduced in 2011.
*INTRASTATE -Commerce having an origin, destination and entire transportation within one state
**INTERSTATE-Commerce that involves transportation of goods from one state to another
–Annie Bones, State Relations – Wine Institute