The past year demonstrated the continuation of certain trends and the emergence of another that we believe will carry forward in 2012. The trend of more states opening their borders to the direct shipment of wine from other states continued steadily. Maryland and New Mexico both opened their borders to permit-based direct-to-consumer shipping in 2011, a continuation of a movement toward regulated consumer access to wine that began in 2005 with the Granholm v. Heald Supreme Court decision. Tennessee also saw a change in their law in 2011 that made the entire state “wet” for direct shipments from wineries.

The past 12 months also saw an increase in new “Third Party Providers” that help wineries market their products to a broader collection of consumers. Either as flash sites, wine product advertisements, or multi-offer marketplaces, these new entries into the wine market were helped along by a new California Department of Alcoholic Beverage Control (ABC) Advisory that set down specific rules as to how suppliers and non-licensed Third Party Providers can work together compliantly.

Finally, 2011 demonstrated that various forms of privatization of the sale and distribution of wine and spirits in control states are an important trend to watch. The passage of Initiative 1183 in Washington State that took the sale and distribution of spirits out of the hands of the Washington Liquor Control Board was the most tangible example of the privatization trend.

What To Expect in 2012

Direct-To-Consumer Shipping
Winery-to-Consumer shipping laws will continue to be modernized in those now few states that continue to prohibit interstate shipping. We expect New Jersey, the most important wine consuming state currently outlawing interstate shipments, to pass legislation allowing some form of direct shipments to consumers. Currently, a bill working its way through the legislature would allow all wineries making up to 250,000 gallons annually to obtain a direct shipment permit. The capacity cap of 250,000 gallons will be a point of concern, but wineries should expect passage and should be prepared to ship to New Jersy consumers in 212. The bill, which has passed the senate, is expected to be voted on in the assembly before the close of session tomorrow, January 10th.

Massachusetts too has seen a number of direct shipment bills introduced over the past couple of years, but none have found their way to the Governor’s desk. Recently, however, Governor Deval Patrick put a spotlight back on the issue by saying in a radio interview that he would sign legislation that permitted direct-to-consumer wine shipments. 2012 may be the year that Massachusetts finally opens to direct-to-consumer shipping.

Finally, Pennsylvania, traditionally one of the states where alcohol sales and distribution is most tightly controlled, may see a move to allow direct-to-consumer shipping. As talk continues in that state to privatize wine sale and distribution, there has also been much talk and the introduction of bills to “modernize” the PLCB, including allowing direct-to-consumer shipping, opening up a state with big consumer potential for wineries.

Modernized Marketing
Digital marketing in the wine industry has been behind the curve due primarily to the massive amount of regulations that govern the industry on a federal and state level. It’s unlikely that the wine industry will see significant deregulation. However, it appears that some clarity is coming to the issues that have historically deterred modern marketing methods.

Late in 2011 the California ABC issued an “Advisory” that spelled out the conditions under which non-licensed Third Party Providers (TPPs) and suppliers must arrange their relationships in order to work together. In a nutshell, the California ABC made clear that wineries and other licensed suppliers must always be in control of the transaction from approving each transaction to controlling the flow of funds. (Read our blog post that explains these new rules). While adhering to the new California ABC rules can be a complex task and require very specific actions and programming on the part of licensed suppliers and non-licensed TPPs such as flash sites and community buying sites, we believe this new clarity represents an important development for suppliers and marketers that will yield interesting developments in 2012

We expect to see a rise in the number of TPPs. In addition, we expect other states to follow California’s lead in issuing rules and regulations for how licensees and non-licensed marketers can work together to help market wine to consumers in innovative ways.

Privatization
With Washington State paving the way in the realm of privatization of sales and distribution with the passage of Initiative 1183 in November, we predict the privatization trend to regain momentum in 2012. Most eyes are on Pennsylvania where serious discussions are underway concerning the privatization of the sale and distribution of wine in that highly controlled state. Virginia too has seen discussions in the past years concerning the merits of reforming its alcohol control system. Meanwhile, in Michigan a task force has been empowered to look at updating its alcohol beverage laws.

This slow moving trend toward privatization, if it continues and gains more momentum, could lead to significant changes in the area of wine sales and distribution and the compliance measures that suppliers must undertake.

Federal Action on Wine Sales and Distribution
In early 2011, with the introduction of H.R. 1161 (read our series on the CARE Act here) in the House of Representatives, it looked like supporters of federal legislation that would give states greater control over how they can regulate alcohol and overcome judicial rulings that have put limits on state powers, would push hard to see this bill passed. Yet, H.R. 1161 garnered fewer supporters in the House than a similar bill, H.R. 5034, gained in 2010. Furthermore, no hearing was held in the House Judiciary Committee on H.R. 1161 and no Senate sponsor was introduced.

This bill, opposed by all supplier organizations and by retailers, has another year to gain more support and move through the legislative process. Most in the industry are taking a wait and see attitude on H.R. 1161 to determine its fate, but it seems unlikely that the bill will move on to President Obama’s desk in 2012.

Finally, federal legislation is moving forward concerning the United States Postal Services, and it could have long-term effects on the wine industry. The new bill moving forward is the 21st Century Postal Service Act 2011. If enacted as currently written it would allow the United States Postal Service to deliver wine to consumers and compete with Federal Express and United Parcel Service.

As always, ShipCompliant will continue to watch the political and regulatory landscape throughout the coming year and will work to keep you up-to-date on important changes that impact your ability to market and sell wine.

Maryland

Marylanders have long awaited a bill that would allow direct wine shipments into the Old Line State. This past Tuesday, both the Senate and the House acted on all three direct shipping bills proposed in the current session. The Economic Matters Committee both withdrew HB 234 and passed as favorable, HB 1175. SB 248, the counterpart to HB 234 (introduced not long after the Direct Wine Shipment Report by Maryland’s Comptroller, in support of winery direct shipping), was also passed as favorable, but includes amendments, touted as a “compromise”, which removed in-state and out-of-state retailers’ ability to ship direct to consumers. Additionally, the customer volume limits are now set to 18 liters per household per year (down from the original 24 cases per individual per year, as was initially introduced), the permit cost has increased to $200.00 per year, and the bond security increased to $1000.00. As introduced, HB 1175 also made no allowances for direct shipments from retailers. The Senate and House bills are scheduled to be presented for a third reading today on the floor of the House. Amendments concerning a new study on retailer shipping and the ability of Maryland retailers to ship Kosher wines to Marylanders will likely be introduced on the House floor.

New Jersey

If direct shipping legislation passes this year, New Jersey could open up to wineries for direct shipments for the first time. S 766 and counterpart A 1702 would allow permitted wineries to ship up to 24 cases annually. S 766 passed the Senate on 2/4/2010. The Assembly bill remains in the Regulatory Oversight and Gaming Committee, which is chaired by the bill’s lead sponsor, Assemblyman John J. Burzichelli. Burzichelli is also the lead sponsor of another, less desirable, direct shipping bill (A 3897) that would impose a capacity cap of 250,000 gallons on direct shippers. A3897 is also waiting for a vote in Committee. It remains to be seen if the recent Freeman decision will complicate the bills that are on the table.

Florida

Florida is currently open to direct shipments from wineries. The state’s previous direct shipping legislation was found to be unconstitutional under Granholm and was overturned in a 2005 court ruling under Bainbridge, et al. v. Turner. For the fifth time in six years, direct shipping legislation is being considered in Florida (no bills were considered last year). As introduced, HB 837 and counterpart SB 854 would allow wineries (not retailers) to ship directly to consumers. The bill contains severely onerous restrictions that would prevent most wineries from obtaining a permit or shipping into the state, including a 250,000 gallon production volume cap (capacity cap), bond, and a mandate to give wholesalers a year’s notice that the winery plans to direct ship.

HB 837 was voted on and determined “favorable” by the Business & Consumer Affairs Subcommittee on March 22, 2011, and is now in the Government Operations Appropriations Subcommittee.

Massachusetts

There are several problems with Massachusetts’ existing unworkable direct shipping laws. The 30,000 capacity cap restriction was found to be unconstitutional by the First Circuit Court in 2010, but other statutes regarding customer aggregate volume limits and carrier licensing remain in effect, and need to be updated in order to truly open the state to direct shipping. HB 1029 and HB 1883 would address these issues and would allow permitted wineries to ship wine to consumers. Both bills were referred to the Joint Committee on Consumer Protection and Professional Licensure in February, and still have a ways to go before becoming law.

Indiana

Currently, only wineries that have not had a relationship with a distributor in the past 120 days can obtain an Indiana direct shipping permit, and wine can only be shipped to Indiana residents who have previously visited the winery in person. Two bills in the current legislative session aim to remove these restrictions and open up direct shipments in Indiana to many wineries that are currently unable to get a permit. HB 1081 would remove the requirement for an initial face-to-face transaction, as well as remove the restrictive wholesaler relationship provision in the law. A similar bill, HB 1132, was also introduced in January of 2011, but has been amended to become a study “concerning the viability and efficacy of instituting a policy to permit the direct shipment of wine to consumers in Indiana.”

Rhode Island

Rhode Island remains closed to offsite direct wine shipments. SB 170 would create a direct shipping permit and allow shipments of up to 24 cases of wine per year, per resident from permittees. On March 23, 2011 the Senate Special Legislation Committee recommended the measure be held for further study.

Tennessee

Pending legislation in Tennessee would open up the entire state to direct wine shipments, eliminating the “dry” areas of the state that wineries are not allowed to ship wine into. The bill is currently on the calendar in both the Senate and the House.

Pennsylvania

At a hearing on March 22, 2011, the Liquor Control Board asked that the legislature “modernize” the liquor code. As part of the modernization, the PLCB asked that direct wine shipments to consumers’ doorsteps be allowed. Pending legislation (HB 110) would allow for a workable permit system. Thus far, the bill has yet to move out of the House.

Direct shipping permits for Michigan are renewable on May 1. The annual renewal cost for the Michigan Permit is $100; the same as the initial permit fee. For those wineries that do not have a direct shipping permit for MI now is good time to consider applying. Licenses are valid from May 1 – April 30 and the $100 fee is not prorated.  The permit allows wineries to ship up to 1,500 9-liter cases to Michigan consumers.  Brand registration is required. This can be completed through the MLCC’s online label registration program for no fee. Sales tax and excise tax must be paid and reports must be filed.

New Hampshire

New Hampshire has updated its direct shipping permit application. The updated application is now available on Wine Institute’s website along with the instructions. Please be sure to complete the application in its entirety and attach all required documents. Incomplete applications will be returned.  Applicants will be happy to note that there is no permit fee. Approved shippers are allowed to ship up to 60 containers of not more than 1 liter each to each consumer during a calendar year. Monthly reports and tax payments are required.

Tennessee

The Tennessee Alcohol Beverage Commission has updated their ”Direct Shipper Application Requirements – ABC” document posted on the TN ABC and Wine Institute websites. The original version of the document did not include the “Wholesale Gallonage Letter” requirement. The Wholesale Gallonage letter is one of 2 documents issued by the TN Department of Revenue that wineries must submit with their application. The second document is the “Certificate of Registration for Sales and Use Tax.”  While the application on the TN Department of Revenue website says a bond is required, a bond is not required for wineries. For the TN DOR wholesale gallonage and sales and use tax application form, go to:  http://www.state.tn.us/revenue/forms/general/f13005_1.pdf.   Licenses are valid 1 year from the date issued and the annual license fee is $150.00. There is also a 1 time non-refundable application fee of $300.  Additional information about the application process is available on the Wine Institute website. Wineries may also contact Sharon Loveall at the TN Alcoholic Beverage Commission with any questions about winery direct shipping permits at 615.741.1602, ext. 141

By Annie Bones, State Relations – Wine Institute

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.

If you are at all interested in the shipping and distribution of wine, this is an excellent resource that is well worth reading.  You can view the most recent version of the document anytime by visiting the ShipCompliant Blog and clicking the link located under “Compliance Resources”, or by visiting CorbinCounsel.com and clicking on the home page link, “Notes on Wine Distribution.”

Click Here to View NWD Release 32

The first step in the direct shipper application process is registering to pay taxes, by submitting an “Application for Registration” to the Department of Revenue. The “Application for Registration” form must be completed by hand (Do Not file online version of the application.) Direct Shippers should select “Wholesale Gallonage” and “Sales and Use Tax” in section 1 and describe their business activity as “direct shipping” in section 15. Direct Shipper’s are not required to post a bond.

Once the Department of Revenue has processed the application for registration the direct shipper applicant should receive two documents: a “Certificate of Registration” and a letter confirming the tax registration process has been completed. Do not submit the Direct Shipper License application to the Alcoholic Beverage Commission before receiving these documents. The confirmation letter issued by the Department of Revenue must be submitted with the Direct Shipper License application. Direct shipper license applicants must pay a one time non-refundable fee of $300.00 and an annual license fee of $150 to the Tennessee Alcoholic Beverage Commission before receiving their license. Payment totaling $450.00 should be included with the application packet. In addition, the following documents should be submitted with the direct shipper’s license: copies of contracts with common carriers shipping wine to Tennessee consumers (also known as “Alcohol Shipping Agreement”), a copy of the applicant’s organizational document, and a copy of the applicant’s federal basic permit.

The direct shipper’s license is valid for 1 year from the date of issue. Direct shipper’s must file reports, pay a state sales tax of 9.25% and pay excise tax. The Department of Revenue will send the appropriate reporting forms and instructions to licensees based on their filing status. The application forms and instructions are available on the Wine Institute website. Wineries should remember that shipping to consumers in Tennessee without a license is classified as a felony. Should you have any questions please contact Wine Institute’s State Relations Department at 415-356-7530 or abones@wineinstitute.org.

-Annie Bones, State Relations – Wine Institute

The application states that direct shippers may only ship to wet areas within the state; a condition that may make the state slightly less available than initially anticipated. This requirement is different than those of other states such as Florida, New Hampshire and New York, where clearly defined dry areas are prohibited from shipping. Major cities such as Memphis, Nashville, Knoxville, and Chattanooga are all considered wet areas that are open for shipping.

Tennessee direct shipping license applications are available by directly contacting the Tennessee Alcoholic Beverage Commission at (615) 741-1602. The license requirements and application can also be viewed online. Wineries that prefer a full concierge service for obtaining their license can order online through easywinelicensing.com.

To obtain a direct shipping license, wineries must first register with the Tennessee Department of Revenue. Once this step is complete, wineries pursuing a direct shipping license must submit the following to the State of Tennessee ABC:

• License application (available from state)
• $450 fee ($300 one-time application fee + $150 licensee fee, payable upon approval of application)
• Copy of Certificate of Registration for Sales & Use Tax
• Copies of all contracts with common carriers that will ship wine to Tennessee residents
• Copy of the applicant’s organizational document (e.g. corporate charter or articles of organization)
• A copy of applicant’s Federal Basic Permit

Tennessee direct shipping licenses expire December 31 of every year, and renewal applications must be postmarked by January 9 of the following year to avoid a $250 citation.

Licensed wineries can ship a maximum of one case per month and up to three cases annually to Tennessee residents. Retailers are still prohibited from direct shipping to Tennessee.

TN Cities With Liquor Store and Counties

As of today, Kansas residents have direct access to up to twelve cases of wine per address from licensed wineries per year. Kansas special order direct shipping license applications are available online. After registering with the Secretary of State for $36, wineries must submit proof of business tax registration, a $50 license fee, a $50 application fee with their license application as well as post a $750 bond.

Nearly one month ago on June 5, Tennessee Governor Phil Bredesen signed Senate Bill 166 into law to open Tennessee for direct shipping on July 1. Tennessee ranks in the top 25 wine consuming states.

Both state licenses are available for order with full concierge service through easywinelicensing.com.

North Dakota Excise Tax Decreases
Beginning today, sparkling wine will be taxed at $0.50/gallon, down from $1.00/gallon.

Nevada State-Wide Sales Tax Increase
Effective July 1, Nevada has increased its Local School Support Tax from 2.25% to 2.6%; a 0.35% increase in state-wide sales tax. This new tax will be collected at a local level. Also, the 0.25% Collection Allowance, scheduled to increase back to 0.50%, remains in effect for sales and use taxes collected.

Local Tax Increases
The following local tax rates are effective today:

• In Arizona, the city of Kearny has increased its retail and use tax rates from 2.5% to 3.0%
• In California, voters in Los Angeles County approved a new 0.50% district tax increasing their tax rate to 9.75% (including the 8.25% state tax rate). Also, the City Council of Laguna Beach located in Orange County voted to repeal the 0.50% Temporary Transactions and Use Tax prior to its scheduled end date, lowering their tax rate to 8.75%
• In Georgia, the counties of Camden, McIntosh and Wayne will increase their local tax rates by 1%, making the total local option tax 3.0%
• In Washington, sales and use tax within all of Wahkiakum County will increase one-tenth of one percent. The new rate will be 7.6%

Ohio Electronic Filing
For Ohio Sales and Use tax semi-annual filers, the January – June return is the first return that is required to be filed online. There are two filing methods available to direct shippers to report Ohio sales taxes electronically:

1. Express Data Entry – Upload a .CSV to the Ohio Business Gateway (OBG), and make any final adjustments on the OBG’s website
2. eForms – Enter tax calculations step-by-step into Ohio’s web application

If you can’t decide which filing option is right for you, view a comparison of the different filing options (please note that TeleFile is not available for direct shippers). If you have any questions about the requirement, please visit Ohio’s Department of Taxation website, or call the Ohio DOT at 800-282-1784.

Kansas SB 212 was signed into law by Governor Kathleen Sebelius on April 10. Wineries interested in avoiding the hassle of the application process can purchase the license at www.easywinelicensing.com.

Licensed wineries will be able to ship up to 12 cases of wine per year to Kansas residents. To obtain a Kansas direct shipping license, wineries must pay a $50 license fee, a $50 registration fee, and post a $750 bond.

Tennessee will also open for direct shipping on July 1, although the paperwork has not yet been finalized.  Tennessee’s license is available for pre-order pending the state’s posting.

Although retailers will not be among those celebrating on July 1, the passage of SB 166 is a huge victory for many direct shippers. Governor Bredesen’s signature signals a radical change in the state’s stance on wine sold through the direct shipping channel: Tennessee is the first state to reverse its stance on direct shipments for wine since Vermont in 2006. The effective date of this legislation is less than a month away, however, there is no word, yet, on when all necessary forms will be available, so stay tuned.