Over the past 7 years, there have been some considerable advances in direct shipping laws and regulations for wineries and consumers alike, but the road hasn’t been straight and narrow. As states work to adapt their laws amidst shrinking budgets while simultaneously balancing consumer demand and local business interests, a number of outstanding issues continue to be debated in the industry including state mandated production capacity caps, on-site requirements, and the emerging practice of partnering with third-party marketers.

ShipCompliant stays abreast of the ongoing legislative and regulatory changes and provides education and training for wineries to operate compliantly in this ever-changing, and sometimes confusing, environment. Every year for the past six years, ShipCompliant has brought together wine industry professionals, state representatives, direct shipping experts and business leaders to discuss ongoing changes at its annual conference, now known as DIRECT.

DIRECT 2012 is ShipCompliant’s 7th annual conference and will take place on June 14 at the Napa Valley Marriott. This conference is one of the industry’s leading forums for those involved in direct sales to hear the latest industry updates and new best practices. Wineries will learn ways to gain loyal customers and maximize profitability as well as hear industry experts address new and upcoming changes in the legislative regulatory landscapes.

Confirmed sessions include:

• State-by-State Legislative Updates
• The State of Direct Shipping by the Numbers: Who’s buying? Who’s shipping? What’s selling? Where’s it going?
• How to Build Sales Profitably and Compliantly with Third-Party Marketers
• Product Registrations and COLA Filings Done Fast & Easy
• Regulations and Compliance: Privatization, COLA rules and USPS Shipping
• The Future of the Wine Industry: The Vision of the Visionaries

See a complete list of sessions and speakers at www.shipcompliant.com/events.
Early-bird registration ends Friday, May 18th.

The historical metaphor of the “Fifth Column” is new to the world of wine marketing. As used by Rob McMillan and the authors of Silicon Valley Bank’s recent “State of the Wine Industry” report, it is a reference to the Spanish Civil War of the 1930s and the idea that “an ad-hoc group of loyalists emerging from within the city [of Madrid] who would rise up against the incumbent order”. Silicon Valley Bank uses the term to refer to a “group of wine businesses partnering with producers to sell direct”.

The Silicon Valley Bank report is referring to various companies in the wine industry that have been founded to support direct to consumer sales such as logistics, compliance, third party marketers and others companies that, taken together, provide suppliers with a support system for getting wine into the hands of consumers across the country.

From our perspective, another way of understanding the “Fifth Column” is the recognition that after many fits and start, innovations, failures, successes and the introduction of new technologies, the wine industry now has new paths to market by which new and old customers can be cultivated with confidence. We view the emergence of compliantly operating third party marketers as the final piece of the “fifth column” puzzle.

The first glimpse of the real value that third party marketers provide to the direct-to-consumer market came during the recent recession when these talented marketers were able to use private or “flash” sales, membership platforms and outstandingly executed e-mail marketing campaigns to help suppliers move through distressed inventory during a decline in demand. Third party marketers played a key role putting suppliers’ wines in front of motivated consumers.

While some people have predicted either the end of the road for these marketers as inventory has dried up and the recession wanes, or the end of firms that focus on discounting, we believe that the third party marketer is here to stay and will continue to play an important role not only in giving suppliers a new path to market, but in introducing brands to new customers.

Third party marketers, flash sites, and email marketers in a number of industries continue to thrive. In large part this is occurring because consumers have become accustomed to using these services and appear to be quite comfortable with either encountering singular products on a daily basis or allowing the products to “come to them” via trusted vendors and marketers. We see the same thing happening in the wine consumer world.

In fact, we are convinced that 2012 is the year that third party wine marketers will demonstrate not only their staying power but also their long term importance to the wine consumer and wine supplier that they bring together. We recommend that everyone working in the direct-to-consumer channel carefully read the new Silicon Valley Bank “State of the Industry” report with particular focus on their understanding of the “Fifth Column”. It explains what we are seeing put into practice: The formalization of a new channel to successfully cultivate new customers and sell more wine.

• Less than 1,000 gallons – $63
• Between 1,000 and 2,500 gallons – $125
• Between 2,500 and 30,000 gallons – $250
• Between 30,000 and 50,000 gallons – $375
• Between 50,000 and 250,000 gallons – $938

In addition to the listed winery license fees, New Jersey will make out-of-state wineries work hard for entry into the 40th U.S. state to allow direct shipping. The latest information indicates out-of-state wineries must: 1) register their business with the Secretary of State ($125); 2) register their business with the Division of Taxation for payment of state sales and excise taxes; 3) post a beverage tax bond (ranging from $1,000 to $1,000,000 depending on anticipated sales); and 4) submit the license application with the fee, outlined above, to the New Jersey Alcoholic Beverage Control (NJ ABC). New Jersey also requires all products shipped into the state to be brand-registered at a cost of $23 per label.

In an unanticipated twist, corporate laws in New Jersey require any foreign (non-New Jersey) corporation that secures a license from a state agency (for example, a wine shipper’s license from the NJ ABC) to establish nexus with the state. With this nexus, out-of-state winery licensees must also annually file corporate income tax and pay a minimum of $500/year, depending on gross revenues. Partnerships are also subject to a tax of $150/partner/year and annual filing. All wineries applying for the license should be aware that they are subject to this requirement.

On top of direct shipping capabilities for Out-of-State Wineries, with the payment of an additional fee (from $100 to $1000 depending on annual production), licensees may ship directly to New Jersey retailers. Common carriers are not allowed to ship these orders to retailers, and price posting is required on products for sale to retailers. Additionally, licensees have the option to open up to 16 tasting rooms within New Jersey for a fee of $250/site.

Here are the forms referenced in New Jersey’s checklist and instructions, in order of appearance:

• Register for taxes
• Obtain a Beverage Tax Bond
• Complete the Out-of-State Winery License Application
• For each label, complete the Brand Registration Application (Instructions)
• Bi-monthly, file the Alcoholic Beverage Tax Return with Supplemental Schedule

We realize that the application process in New Jersey is a little daunting, so ShipCompliant has already geared up EasyWineLicensing.com to facilitate the licensing process. Visit www.easywinelicensing.com before May 15th with the coupon code “EWLNJ” and save 35% off ShipCompliant service fees to obtain a New Jersey direct shipping license.

In the quickly evolving world of third party wine marketing, it’s important that marketers and licensed sellers work together in such a way that puts the licensed seller in full control of all aspects of each transaction. One of the most important elements of control is the concept of acceptance.

Why Acceptance?

The fundamental concepts behind third party marketing are quite simple on the surface: A third party provider (TPP) places and merchandises products from licensed wineries on its website, mobile application or platform, then solicits requests from consumers who would like to purchase the products, and passes the request on to the licensee for final sale and fulfillment.

Below the surface, the process can be much more complex. Technology has advanced to a point where almost all aspects of third party sales can be completely automated. For example, all of the following functions can be completed in real-time within seconds of the consumer actually clicking the button to complete/submit their order:

• Third Party Providers (TPPs) can dynamically display product information that licensed sellers have authorized for placement
• Inventory levels can be fully synchronized and reserved
• Sales tax can be calculated precisely based on the licensed seller’s tax preferences
• A comprehensive compliance check can be run against the licensed seller’s permits and volume from other channels
• Consumer age can be affirmed and validated
• Credit card funds can be authorized and reserved
• Orders can be released to the licensed seller’s preferred fulfillment location

In the past, many of these steps were typically carried out through some combination of phone, fax, snail mail, carrier pigeons, smoke, and mirrors. But today, as TPPs increasingly look for a world-class quality of service for their customers, automation and efficiency are paramount.

At the core of compliant third party marketing is the notion that licensed sellers are always fully in control of all aspects of each transaction. Although one could probably argue that the order-acceptance process could also be established contractually, we believe that it’s important for the licensed seller to always have an option to interrupt the automated flow so that they have every confidence in the orders that are fulfilled on their behalf, prior to payment capture and fulfillment.

Another significant consideration is that regulatory agencies place tremendous importance on this step. In its October 2011 Advisory on the issue of Third Party Providers the California Department of Alcoholic Beverage Control wrote, “The licensee responsible for the sale must be clearly identified and must ultimately control the transaction, including any decisions concerning acceptance or rejection of such orders.” It makes sense that regulators want to ensure that there is a licensee involved that they know is in control and that they can hold accountable for orders that are shipped into their state.

The Nuts and Bolts

An easy way to implement an acceptance mechanism is for the TPP to send an email with the order requests to the licensee for their review. Licensed sellers can then review the order details, and will likely consider the following when evaluating whether or not they would like to accept or reject the order:

• Compliance: Has this order request been checked for compliance, and aggregated against my other order sources (my winery website, wine club, tasting room, and phone orders)? Has the consumer’s age been affirmed and/or validated using an online age verification service.
• Pricing: Are the prices for the requested items within the predetermined ranges I established with this TPP?
• Inventory: Do I have sufficient inventory for these items to fulfill this request?
• Advertising Fee: Is the advertising/customer acquisition fee (if applicable) for this order request within the predetermined range that I established with this TPP?
• Sales Tax: Has the appropriate amount of sales tax been collected based on my tax preferences in the destination state?

If the answer to all of these questions is yes, then the licensee should have no reason to reject the order requests, and can therefore feel comfortable accepting them. Once the requests are accepted by the licensee, the orders can be released to the designated fulfillment location, and payment can be captured (note: payment should ideally be authorized at the time of transaction, but captured after acceptance and fulfillment).

The acceptance email can be implemented in a way that batches order requests over set periods of time (daily, twice/daily, every 4 hours, etc.). Each licensee may have different preferences about both the timing of the emails (during local business hours, for example), and the review period (4 hours, 8 hours, etc.), based on their desired level of control. This preferences-based method of acceptance is what we implemented into ShipCompliant’s MarketPlace platform, as we believe it provides a good amount of flexibility for licensed sellers.

In summary, the relatively straightforward process of creating an acceptance mechanism can really go a long way towards establishing the most important regulatory requirement for working with TPPs — licensee control. As wineries more and more look to work with TPPs that complement their brand and their direct to consumer strategy, relying on a robust and consistent acceptance mechanism becomes increasingly important.

For most small and medium sized wineries, the path to increased sales, increased margins and brand growth is direct-to-consumer sales. Yet, we recognize that the wine industry is at the tail end of the market expansion that resulted from state-based regulatory changes that came in the wake of the 2005 Granholm v. Heald US Supreme Court decision. When and if Pennsylvania and Massachusetts open their borders to direct to consumer shipping, all significant states will be open to producing wineries for direct-to-consumer sales.

WHAT NEXT?

We believe that after all the significant states open to direct-to-consumer sales, the next and most important opportunity for wineries to expand direct sales and attract new customers will result from the expansion of TPPs.

First, we want to be clear what we mean by a TPP. Flash and private sales sites, community buying operations, product advertising platforms, collective tasting rooms, multi-brand company websites, and other online wine marketers make up this category. This sector of the market has been limited, as many potential TPPs have stayed away from the wine industry because of regulatory uncertainty.

That uncertainty is diminishing and new opportunities are emerging.

NEW REGULATORY GUIDELINES ON THIRD PARTY PROVIDERS

The most important development that will lead to reduced uncertainty in the realm of online wine marketing was the issuance of guidelines in November on licensee (winery and retailer) and TPP interaction by the California ABC. This set of guidelines described the process by which funds need to be transferred and controlled, how wine offers must be structured, and how acceptance and fulfillment of orders must be undertaken in order for the collaboration between licensed wineries and importers and TPPs to be considered compliant with California ABC regulations and state laws.

In short, the CA ABC wants to ensure that the licensee is in full control of all aspects of each transaction, and that the licensee will ultimately be held accountable for any actions by the third party that is soliciting order requests on their behalf. It’s worth noting that this advisory is obviously California-specific. However, it serves as a great framework for other states to contemplate the issues of third-party marketing and hopefully each state will take a similarly collaborative approach.

While complex, this new set of guidelines by the California ABC does put in place a path to growth and innovation in the online wine marketing arena. This opening for Third Party Providers and online marketers could not have come at a better time. There are notable signs of recovery in the wine market. Additionally, the oversupply of grapes and bulk wine that has plagued the industry for the past few years appears to have dried up. The combination of fewer states left to open up for direct shipping and the need for small and medium sized wineries to continue to increase their customer base means that there is great potential for innovative marketing approaches.

A NEW SERIES OF BLOG POSTS ON THIRD PARTY PROVIDERS

We believe that great innovations in wine marketing will come via collaborative marketing efforts between TPPs and wineries that will help reach new and larger numbers of wine buyers. With this in mind, we are planning to publish a series of blog posts that focus specifically on the issues surrounding Third Party Providers and how licensed sellers can work with them efficiently, compliantly and profitably. We look forward to generating discussion on this important issue and further clarifying this new landscape for wine sales and marketing.

We’ll start the series with some of the questions that we addressed at the NABCA Legal Symposium, but also would love to hear what your biggest questions are. If you have questions, comments, or suggestions, please email us at blog (at) shipcompliant.com .

• Wine with an ABV of 14% or less – $0.204/gallon
• Wine with an ABV over 14% – $0.408/gallon
• Sparkling wine – $0.516/gallon

The updated rates are in effect for the current quarter (December – February), and the next payment is due on March 15th.

Texas Form C-240

The bill also allows for both in- and out-of-state winery self-distribution and tasting rooms, two issues that New Jersey was compelled to address due to a 2010 lawsuit (Freeman v. Corzine) that ruled the state was acting unconstitutionally by allowing in-state wineries to sell wine through distribution methods unavailable to out-of-state wineries.

Direct Shipping Details:
Once S3172 is signed by the Governor, New Jersey, a state that has prohibited direct wine shipments, will join 38 other states in allowing limited amounts of wine to be shipped to its residents. The bill gives licensed Farm and Plenary wineries the ability to ship, and allows out-of-state wineries producing less than 250,000 gallons per year to apply for an “Out-of-State Winery License”. The fee for the Out-of-State Winery License is one of the most expensive direct shipping licenses in the country at $938 per year (the same annual fee paid by in-state wineries). All licensed wineries may ship up to twelve nine-liter cases to a New Jersey consumer per year. Sales and excise taxes must be paid.

Self-Distribution Details:
For an additional fee, New Jersey Farm, Plenary, and Out-of-State Winery licensees may self-distribute (sell wine directly to New Jersey retailers). After recent amendments to the bill, however, wineries are restricted from shipping to retailers via common carrier. It is yet unclear what this means for the self-distribution privilege, specifically for wineries that are not in close proximity to the state. The additional fee for self-distribution ranges from $100 to $1000 per year, depending on the production volume of the winery.

Tasting Room Details:
S3172 will allow out-of-state wineries to operate tasting rooms within New Jersey. Out-of-state wineries may operate up to 16 tasting rooms, while in-state wineries may operate up to 15 tasting rooms in addition to their licensed premise; Farm, Plenary, and Out-of-State Winery licensees must pay a $250 fee for each tasting room location. New Jersey wineries are currently able to operate tasting rooms and joint tasting rooms. The bill, however, removes the ability for wineries to operate joint tasting rooms, which is a disadvantage for out-of-state wineries.

The opening of New Jersey to direct wine shipments is a major accomplishment and will open up one of the last significant marketplaces that prohibit direct shipment of wine. Both New Jersey and out-of-state wineries are expected to benefit from the change in the law, as well as New Jersey wine consumers. If signed by the Governor, the law would go into effect on the first day of the fourth month following enactment (May 1, if enacted in January). When specific regulations concerning license applications and reporting are issued, ShipCompliant will notify its clients and the industry.

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.

- The ShipCompliant Crew (from left to right): Timothy Clayton, Mike Liedtke, Sarah Werner, Andy Grauch, Jim Agger, Robb Dye, Eddie Ermoian, David Dango, Kent Nowlin, Chris Kalmbach, Patrick Barratt, Pawel Smolarkiewicz, Jamie Jimenez, Lisa Bookwalter, Alex Umbhau, Jeff Carroll, Betsy Hansen, Mike Taylor, Luke Eckenroth, Mark Hayes, April Capil, Colin Neilson, Barclay Bates, Mackenzie Latham, Sam Sexson, Michelle Few, Emily Sheehan, Michael Pritchard, Jason Eckenroth