Don’t Fear the Fulfillment House

Alex Koral | February 23, 2021

Recently, lawmakers in Tennessee introduced proposed legislation that would prohibit the use of fulfillment houses by direct-to-consumer (DtC) wine shippers for their sales to the state. If passed, this legislation could severely hamper the ability of DtC wine shippers to service the state, cutting off Tennessee consumers from accessing wineries of all sizes. 

However impactful this legislation might be on the Tennessee market for DtC wine shipping (and keep in mind that it is far from certain it will pass; most proposed bills die before coming to a vote), the proposed law speaks to a broader question about fulfillment houses and how they fit into regulations around shipping wine DtC. 

Tennessee regulators are far from alone in fearing fulfillment houses and seeking to restrict them, though this kind of outright ban is an extreme reaction. Much of this fear comes from misperceptions about what fulfillment houses are and what exactly they do in the context of DtC wine shipping. Better knowledge of who they are and what they do can lead to better rules and regulations that allow these invaluable services to operate in the DtC wine shipping market in a visible and compliant manner.

What Are Fulfillment Houses?

In a word, fulfillment houses are logistics centers. They are a service that wineries (and other alcohol suppliers) can use to store their products and can help with the process of bringing those products to purchasers when they are sold. They developed from storage warehouses, where suppliers could house their products before they were ready to be shipped. 

Since many suppliers can struggle to find the room to house all of their product on their licensed premises, such storage facilities are invaluable and have been critical to supporting three-tier distributions, keeping alcohol in bond before it could be brought to a distributor.

As the DtC market developed, many fulfillment houses realized that they were well suited to help facilitate shipments to consumers. They were already storing the wines that licensed DtC shippers were now sending across the country, and with their logistical expertise, they were able to build out services to also package wines for their winery clients and hand off those packages to carriers to bring to consumers.

Since they are a business that holds and controls alcoholic beverages, even if just temporarily, they are required to be licensed by the state in which they are located. In California,where many fulfillment houses are based to service the California wine industry, the license they must hold is the Type 14 Public Warehouse license. As with all alcohol licenses, they must attest to their scruples and commitment to complying with alcohol regulations in order to remain in good standing.

Fulfillment houses provide a critical service to wineries engaging in DtC shipping. Wineries of all sizes face challenges when building out a widespread shipping model, which requires lots of infrastructure and human resources to manage, from storage to packaging to maintaining a loading dock for carriers to pick up those packages. A winery wants to focus on what it does best: producing a great product and marketing it to consumers. Even if they have the room, logistics, and human resources to handle their own shipping, they find utilizing the services of a fulfillment house well worth it (just as many DtC shippers rely on the support of software services to manage their compliance and tax reporting needs).

If fulfillment houses are not permitted to service DtC shipments to a state, then many DtC shippers will choose not to ship to that state, severely hampering the ability of consumers to access the products they want. While DtC shippers will lose business from that state, it is ultimately consumers who will suffer.

Why Are Fulfillment Houses Feared?

Some of the consternation surrounding fulfillment houses comes from not understanding what they are. They are often labeled a third-party provider, which would imply they could be grouped with online marketplaces or other third-party sellers. Since it is generally impermissible for third-party services to directly sell alcohol or otherwise be involved in DtC shipping of wine, some regulators may look at fulfillment houses and think that they are actually selling wine, that they are marketing to and getting money directly from consumers. 

However, this is not the case. Fulfillment houses are merely logistical services; they do not “own” the wines they store, package, and help ship; they do not maintain marketplaces; and they do not make money from any individual sale of wine. They will only act on behalf of a licensed DtC wine shipper and then only to handle the logistics of getting a package of wine into the hands of a carrier. They serve to enable a licensed DtC wine shipper to manage and execute the shipment of wine sold by the licensed DtC wine shipper. They should not be confused with businesses that actually market and sell alcohol for DtC shipping, whether those be legitimate licensed DtC shippers or a third party marketplace that is operating in a legally dubious manner.

Part of this confusion likely stems from how an individual package of DtC shipped wine may be labeled. If the package is coming from a fulfillment house, it will likely use the fulfillment house’s shipping address as the return address on the label. It may appear from just looking at the package label that the fulfillment house was responsible for the shipment; a regulator would see such a label, not recognize the return address as belonging to any licensee, and believe that it is an illegal shipment coming from an unlicensed party even though the fulfillment house only shipped that package under the direction and authority of a licensed DtC shipper. 

How Do States Regulate Fulfillment Houses?

Fulfillment houses have long been seen as an easy target for regulators and parties that, for whatever reason, seek to hamper DtC shipping of alcohol. As such, if Tennessee does enact this new legislation to restrict fulfillment houses, it would hardly be alone.

Currently, fulfillment houses are also prohibited from servicing DtC shipments of alcohol to Oklahoma and Kentucky. Both states’ DtC laws require the product to be shipped only from the premises address listed on the DtC shipper’s license (notably, these are the latest two states to adopt laws permitting interstate DtC shipping of alcohol and their restrictions on fulfillment houses are more a matter of how the states interpreted their DtC laws as opposed to explicit bans, as Tennessee is working towards). 

This has restricted the ability of many DtC shippers from entering those markets, and both states’ laws have been targeted for reform by advocates for DtC shipping of alcohol. In fact, at nearly the same moment as the proposed Tennessee legislation was introduced, a bill in Kentucky, HB 415, was put forward that would permit the use of fulfillment houses in DtC shipments to the state as state lawmakers there recognize the critical support that fulfillment houses bring to the DtC market.

Other states have implemented less draconian measures that seek to regulate fulfillment houses, but still allow them to operate. Both Virginia and North Dakota require fulfillment houses to become licensed in those states before they can facilitate DtC shipments there. Illinois recently began requiring DtC licensees to provide a list of their fulfillment houses when applying for a new or renewed license, and requires fulfillment houses to file a regular report on what shipments they’ve serviced to the state.

While state regulators may have some consternation about fulfillment houses, and question their activities in the DtC alcohol shipping market, there is a world of difference between regulating them and outright prohibiting them. Fulfillment houses, like most participants in the beverage alcohol industry, recognize the need for regulations and will follow their parameters. If they are not permitted to work in a state, they will not facilitate shipments there. But blanket bans will only hurt consumers as DtC shippers will stop operating in that state. Such bans will also do little to stop actual illegal shipments by unlicensed sellers and other businesses that are willing to operate outside of the law.

What’s a Better Way?

While requiring fulfillment houses to get licensed or otherwise be catalogued in the states they ship to, there is actually a fairly simple way for states to better monitor shipments of alcohol in their borders and where legal shipments of alcohol are coming from.

Many states require DtC shippers and carriers to provide regular reports, detailing the shipments they’ve made recently. These reports include lots of data about a shipment, including the name and address of the recipient, date of delivery, whether a signature was collected, and even the contents of the package (though this is only known and provided by the shipper, not the carrier). 

While some data will be shared between a shipper’s and a carrier’s reports, states can often struggle to entirely match them up to show who exactly was responsible for each shipments a carrier reports. But for every shipment made, there does exist a single, unique data point that would be known, and could be reported, by both carriers and the DtC licensee: the shipment tracking number. 

By requiring all DtC shipping reports to include the tracking number for each shipment (and also by adopting electronic spreadsheets for reports, which can be easily sorted and searched), states can readily monitor DtC shipments into their states and verify the licensee behind each shipment. In this way, they can remove the confusion that could arise when a fulfillment house’s address is reported as the source of a shipment; since a licensed DtC shipper would indicate they are responsible for the shipment with that tracking number, the state can be assured that it was a legitimate shipment by a licensed party that has properly complied with the state’s regulations and tax requirements.

Everyone in the beverage alcohol industry knows that it is heavily regulated, and fulfillment houses are no exception. However, there is a wide spectrum of options for states to regulate fulfillment houses, and measures like requiring the reporting of tracking numbers or for DtC licensees to identify their fulfillment houses are much more amenable than outright bans. Indeed, outright bans, like what Tennessee is proposing and what Kentucky is trying to do away with, will only hurt consumers as wineries and other licensed DtC shippers of alcohol will exit those markets when they find their critical partners in DtC shipping banned by law.

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