Seller Beware: Use Your Own License

Alex Koral | March 5, 2020

This last January, in partnership with Wine Vines Analytics, we published the latest of our annual Direct-to-Consumer (DtC) Wine Shipping reports, showcasing a market that readily reaches $3 billion in annual revenue. Yet throughout the tremendous growth we have seen in the DtC wine shipping market over the last decade and more, at least one thing has remained constant: the challenges of getting and remaining compliant with the multitude of state rules. 

Over the years, Sovos ShipCompliant has remained committed to enabling DtC wine shippers to handle their compliance needs; nevertheless, we have never been shy to acknowledge that it is not easy. With the difficulty inherent in knowing, tracking and following the myriad rules, including licensing requirements, shipping volume limits, and tax collection and reporting, it is no wonder that some DtC wine shippers will leap at any offer that promises to eliminate those barriers. 

It is particularly striking, then, that one of the most fundamental aspects of a DtC wine shipper’s compliance burdens comes up often as a barrier to entry: the need to get licensed in every state you ship to. In response, we’ve seen an increasing number of businesses that claim that they can handle all of the licensing needs for wineries looking to get into or expand DtC wine shipping. They are not offering to assist a winery in getting the required licenses, which is fairly common and benign. Instead these businesses are telling wineries that they have licenses for DtC wine shipping in all available states and that the winery can utilize the business’s own licenses by contracting with them.

This seems to resolve a major hurdle that many wineries, particularly smaller ones, face—a solution many are eager to adopt. However, as with so many things, if something sounds too good to be true, it just might be.

Yes, You Do Need Your Own License to Ship Wine

While we cannot comment on every business model out there, nor are we looking to single out any one particular business claiming that wineries can ship under their licenses, the landscape is fraught with risk, which any winery that contracts with such a business should be aware of.

So, this is a warning that any such claim—that you can ignore the compliance requirements associated with DtC wine shipping and rely on a third-party to handle everything for you—should be taken with a huge grain of salt. And whenever anyone tells you that you don’t need your own license, that should be a huge red flag.

Perhaps the most fundamental rule when it comes to modern sales of alcohol is that the seller needs to have an appropriate license (with a few, very rare exceptions). We see this at the retail tier, where every bar and liquor store needs a license to operate—and if their license only permits the sale of malted beverages, they’d better not have a cocktail service. 

It is the same for DtC wine shipping. Depending on the state, there are rules that restrict who can receive such a license for shipping wine DtC. And even once they get a license, rules limit how much they can sell, where they can ship to, and what products they can sell. Failure to meet these requirements is the definition of non-compliance, which brings great risk of fines, penalties, loss of other licenses, and even criminal charges.

What’s Wrong With Selling Under Someone Else’s License?

There are a few general problems with selling under someone else’s license, which depend on who is standing out as the seller of record for a DtC wine sale.

Firstly, if the winery, which originally produced or bottled the product and holds the necessary product registrations, is going on record as the seller, if it’s their name on a website or tasting room, if the consumer will call them out as whom they purchased from, then they need the appropriate license to make and fulfill that sale. When state investigators look into such a sale, they will aim to verify that the party the consumer references has a license. If the winery, as the seller of record, cannot furnish their own license—if they tell the state that it was fulfilled under a third party—that is a clear violation and the winery should expect cease and desist letters in short order.

A different problem pops up in the alternative case, when the third party manages the consumer experience. Here the third party has a ready marketplace that consumers can purchase from, and all the winery needs to do is provide the wine. The problem with this case is that to sell an alcohol product, you need to own it in your own right. You can do this by either being the original producer or bottler or an authorized Primary Source (like an importer), or you need to have properly purchased it. That is, the third party either needs to be an “owner” of the wine or a legitimate retailer.

If they are acting as a retailer, they first need an appropriate retail license issued by their local regulatory agency. Then they need to have purchased the wine from an authorized distributor which itself purchased the wine from the producer, and then they face a truncated map for DtC selling. Currently only 15 states allow some form of retailer DtC wine shipping (which is different from local deliveries by retailers). It is possible for a licensed wine producer, who holds a Basic Permit and a local production license, to purchase wine from another producer for resale, but they would be similarly limited in the states they can ship to, as many restrict DtC shipping to only products produced or bottled by the shipper.

The other way that some businesses attempt to circumvent these restrictions is to require in their contracting with wineries that the winery cede an ownership share to the third party business. That is, they will force their way into the winery’s group of owners. Under this logic, the third party would technically own the wines being shipped, and so, if they hold DtC shipping licenses, they can sell and ship the contracting winery’s wines. But this brings up some readily apparent potential problems.

For instance, it is unclear whether the winery really knows what is happening. The ceding of an ownership share may seem like just another among many other terms and conditions, and so the winery may not be aware that they’ve just handed over a percentage to a third party.

But beyond that, there are some very real and potentially drastic regulatory issues with this approach. Even if the winery knows this ceding of ownership shares is happening, and even if they are fine with it (after all, they say, it’s just one or two percent), this dispersion of ownership must be reported to many regulatory bodies.

The federal Tax and Trade Bureau is currently very active in issuing enforcement actions, many of which treat this exact issue: failure to disclose even minor changes in ownership and other corporate actions. And depending on a state’s rules, it may have to be reported to licensing boards for all production and distribution licenses the winery otherwise holds. 

And further—which is where it gets particularly scary—this has the mark of tied house violations written all over it. Such tied house rules can severely restrict when and how one licensee can also have shares in other licensed entities. They generally restrict cross-tier ownership (like being a producer and also owning retail stores), but depending on the state, they can apply to other shared ownership arrangements. 

If a regulator were to see that a single business suddenly has a share of dozens or scores of wine producers, even if it is just a small percentage at a time, that could be call for further investigation. And the investigation would not stop with the third party, but would extend to all the wineries who have engaged with them.

Within the industry, this stance is widely shared. When we reached out to our partners at Wine Institute on this issue, Vice President of State Relations Steve Gross noted, “As we work with regulators in all of the legal shipping states, a constant refrain is the need for each winery to hold their own licenses to do legal DtC shipments. I’m aware of no state that has authorized a system whereby a licensed winery can avail themselves of another entity’s license in order to access DtC markets. Unless the winery has sold the wine and it is then being sold and shipped by a licensed DtC retailer, states are working to trace violations back to the winery that provided the wine for shipment.”

This all leads to the conclusion that wineries should not be blithe about their compliance obligations. States set up specific rules for DtC wine shipping, and they expect them to be followed rigorously. Attempting runarounds in order to avoid compliance headaches will only lead to greater trouble down the line.

Tend Your Own Garden

There is no doubt that the DtC wine shipping market is extremely attractive. For smaller wineries especially, who often struggle to get the attention of distributors outside of their home state, DtC shipping presents a fantastic method of establishing a national presence and servicing their dedicated consumers wherever they live. 

As with so many other areas, a desire to get into something good can lead someone to look for ways to cut corners. But, also as with so many things, doing something by half measure leads to greater problems and complications. And unlike, say, buying a store-bought cake rather than making something from scratch, failure to comply with the rules for DtC wine shipping can lead to very real, and very serious, consequences.

Anyone entering this market quickly realizes that compliance can be difficult. It involves costs and processes that many would prefer to avoid. At the end of the day, the ability to make DtC shipments of wine is a privilege, not a right, and enjoying that privilege comes with the responsibility of following the rules as they exist, not as you might like them to be. 

 

If you’re ready to reduce the burden of compliance, request a demo today.