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!
Pennsylvania, along with Massachusetts, remains one of the two remaining key states that wineries and consumers both hope to see open for direct wine shipping. The possibility that this could be the year for direct shipping coming to the Keystone State remains quite real, depending on what happens when lawmakers return to the capital in the fall to consider a number of wine bills still on the table.
In June, House Bill 121 sponsored by Representative Curt Sonney passed the House and was delivered to the Senate for consideration. This is the second year that a shipping bill successfully moved through one half of the Pennsylvania General Assembly. Last year a bill passed through the Senate, but was held up in the House where the issue of direct wine shipments became conflated with the effort to privatize the state’s liquor distribution system.
Despite the fact that both a House and Senate version of privatization included direct shipping provisions, it is expected that HB 121, or another separate bill, such as Senate Bill 101, will be considered independently of privatization in the fall. However, HB 121 does have some problematic provision. For instance, as currently written HB 121 would require direct shippers to impose both a 6% sales tax on all wines as well as the state’s “Johnstown Flood” tax of 18% on top of the retail price of the wine. Such a tax burden could make the direct shipment channel prohibitive for many consumers. Senate Bill 101 compromises on this issue and creates a more palatable 12% “direct wine shipment tax” instead of the full 18% Johnstown Flood tax.
Still, optimism is currently running high that some form of direct shipment will be enacted this years as indicated by a recent article in the Pittsburgh Post Gazette that support for direct shipping has bi-partisan support. The Post-Gazette article also reported that direct wine shipments have the support of the Pennsylvania Liquor Control Board (PLCB) as well as the influential United Food and Commercial Workers Local 1776, the union representing state liquor store employees.
It appears then that despite the ongoing struggle and battles over privatization, 2013 may very well be the year for wine shipments to Pennsylvania. We’ll monitor developments in Pennsylvania and report any significant movement on the various direct shipping bills as they occur.
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 the snow melts here in Boulder, it’s time for a status update on the direct shipping bills we expected to see in 2013, as well as other notable legislation.
1. How are Direct Shipping Bills Stacking Up?
Massachusetts has seen six direct shipping bills introduced this session, and though there hasn’t been much movement yet, HB 294 has the most promise – especially since former New England Patriots quarterback Drew Bledsoe has recently announced his support for this direct shipping bill.
Pennsylvania currently has three direct shipping bills under consideration: HB 121, SB 36, and SB 101. Only HB 121 has moved out of committee, but all three bills are being considered as part of the privatization push in the state. These bills will move forward if and when an agreement is reached on which portions of the modernization efforts are going to be moved independently from one another. Currently, all three of these bills include the very high “Johnstown Flood Tax” rates – 18% to 24%. The Wine Institute is working to negotiate a lower tax rate before passage of any of these three bills occurs.
Montana, which is effectively closed to direct shipping because of the problematic “connoisseur’s license” system, should see a change when HB 402 is made law. The legislation would replace the wine connoisseur’s license with a direct shipping “supplement”, available to Montana wineries and to out-of-state wineries holding an Importer License. Breweries, however, would still be subject to connoisseur license regulations. HB 402 has passed both the House and Senate, and is on its way to the governor’s desk for his expected signature.
Arkansas’ House and Senate passed HB 1749, a very restrictive direct shipping bill sponsored by the Speaker of the House. The bill was signed by Governor Mike Beebe on March 21, 2013, turning it into law. Act 483 will open up “direct shipping” to Arkansas consumers by wineries that obtain a $25 annual permit. All orders must be placed in person, at the winery; internet orders will not be allowed. Additionally, permit holders may only ship one case per calendar quarter to an individual’s residence only, state sales taxes and excise taxes must be paid, and a special label provided by the ABC at the cost of no more than $10 per label must be on all shipments.
In Delaware, HB 60 was introduced on March 21, 2013; this bill would allow wineries to ship 12 cases annually under a new $100 permit program. Excise taxes would be paid quarterly, and carriers would be required to obtain a permit as well.
A direct shipping bill was introduced in South Dakota earlier this legislative session, but SB 100 has been tabled for the year.
2. COLA Processing at TTB Shifts to Electronic
In keeping with their word to streamline the label submission and approval process, the TTB has revamped their website and included several helpful resources on their labeling page, including a table with up-to-date information on label processing times. Additionally, on February 1, 2013, the TTB began processing paper COLA submissions in the same way they process electronic submissions; paper submissions are scanned into the system and the TTB will notify applicants of approval or rejection via email, if an email address is listed on the application. Industry Circular Number 2012-03 contains more detailed information on this change. We expect more changes to the COLA process as the year progresses. Jeff Carroll of ShipCompliant will be moderating a panel called “COLA Changes on the Horizon” at the NCSLA annual conference in June.
3. Pennsylvania’s Privatization and Modernization
The latest news on modernization centers on HB 790 – a bill that calls for and addresses privatization of the sale of alcohol in the state of Pennsylvania. Though there are several accompanying bills that supplement Pennsylvania’s privatization plan, this bill is leading the charge for ending Pennsylvania’s status as a control state. HB 790 addresses how the state should make the changeover to private distribution & retail sale of alcohol, what should occur in the interim, and what should be the end result of a privatized system. Currently, this bill has passed the House and is awaiting action in the Senate.
4. Third Party Marketing
Two bills were introduced to limit third party marketing in Maryland: HB 1420 and SB 990. These bills contained the following language: “An order may not be transmitted to the holder of the direct wine shipper’s permit by a retailer, a wholesaler, or any other third party, including a marketplace site on the internet in which sellers offer products to customers.” Following a hearing on SB 990, the author has withdrawn the bill, and the author of the House bill no longer intends to move HB 1420 forward either. Defeating both of these bills took a great deal of work by lobbyists working in Maryland on behalf of the wineries and the third party companies.
5. Existing Direct Shipping Laws, Reworked
Nebraska currently allows wineries and retailers to apply for a direct shipping license. LB 230, a bill that would add restrictions to the current process, originally contained language to eliminate access of direct shipments from retailers including online retailers. However, after two amendments, the bill creates a direct shipping license for both wineries and retailers. If passed, wineries (but not retailers) would be required to “identify” the brands they will ship to Nebraska consumers, and submit “notification to wholesalers of intent to direct ship” any brands that are also sold to Nebraska wholesalers. Both wineries and retailers would be subject to a status of nexus (likely requiring payment of corporate income taxes) and monthly excise tax reports (currently an annual filing). As of March 15, this bill is in Committee. Wine Institute is opposing LB 230.
SB 15 in Indiana was intended to help wineries that direct ship into the state, but fails to address all of the existing direct to consumer limitations. The bill would remove the “previous visit” requirement by consumers before direct shippers can send wine shipments. However, a new requirement to obtain a faxed or scanned copy of the consumers identification would be required. Also, wineries with a wholesale relationship are still not eligible for the direct shipping license in this bill. For these reasons, Wine Institute is opposing the bill at this time. Currently in Senate Committee.
6. Product Registration Updates
In Arkansas, HB 1480 would become active on July 1, 2013 if implemented, and would require all wineries to register their brand labels and label extensions at a fee of $15 per label per container size. Additionally, wineries producing over 250,000 gallons annually would have to register as a supplier and submit an annual permit fee of $50. This bill is currently out of committee and in the House with a recommendation of “do pass”.
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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.