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.

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.

Excise Taxes Rise in Two Direct Shipping States

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.

Sales tax rate decrease in North Carolina

From the North Carolina DOR notice

The North Carolina General Assembly enacted legislation that reduces the general State rate of sales and use tax from 4.5% to 4.25% effective December 1, 2006 and from 4.25% to 4% effective July 1, 2007. Therefore, effective December 1, 2007 2006 the general State rate of sales and use tax will be 4.25%. Effective July 1, 2007, the general State rate will be 4%. Items subject to the general State rate of sales and use tax are also subject to any applicable local rate of sales and use tax. All counties levy a 2.5% local sales and use tax; Mecklenburg County also levies an additional .5% local tax for public transportation.

Clarifications on Direct Shipping Laws

The enforcement and interpretation of various state laws for Direct-to-Consumer wine shipments continue to evolve. Following are three recent updates that wineries should be aware of.

Connecticut: Wineries of any size are eligible to apply for an Out-of- State Shippers Permit in CT. The cost of the permit is $250 and there is a $100 filing fee. Wineries producing 100,000 gallons a year or less that have an approved Out-of- State Shippers Permit are allowed self-distribution privileges in addition to shipping direct-to-consumers.

Georgia: Wineries shipping direct-to-consumers in Georgia are not required to pay sales tax, unless they have a nexus (an office or employees) within the state. The Special Order Direct Shipping License in GA does not trigger a sales tax requirement.

North Carolina: Wineries that have an approved Direct Shippers Permit for NC are allowed to ship direct-to-consumers throughout the entire state, including dry counties. Direct-to-consumer shipments are legal in the 4 dry counties because the transaction is not taking place outside of the restricted area.