It’s an exciting time for brewers and distillers entering the DtC shipping market. The wine industry has been utilizing this market for years, growing it to a $3.7 billion industry annually. But, this opportunity comes with added concerns and regulatory requirements. From licensing to managing restrictions on how much an individual consumer can purchase in a given period of time, these requirements must be complied with to engage in this market.
Taxes are one of the most basic aspects of beverage alcohol regulation, and so it’s no surprise that they make up a lot of DtC alcohol shipping regulation and compliance. DtC shipping creates a unique sales scenario requiring the shipper to recognize and manage a tax burden that is more complex than if selling through the three-tier system. This extends to both a state’s excise taxes and sales taxes.
Three-tier and DtC sales tax differences
The three-tier system has more parties involved so the tax burden is spread around, where a DtC sale excludes wholesalers and retailers so it absorbs all the tax burden.
In the three-tier system, excise taxes are generally paid by the “first party to own” the product in a state. When a supplier distributes their product into a state, that “first party to own” will be their wholesaler. And the retailer who makes the final sale to the consumer, is then responsible for collecting and remitting the state’s sales taxes.
In order to ensure they don’t lose out on tax revenue and are creating fairness between the DtC market and the three-tier system, states have created rules for allowing DtC shipping of alcoholic beverages by building in tax liabilities on DtC shippers.
If a winery, brewery, distiller or retailer were to enter a state’s DtC market, they would have the same tax burden as they would if they were selling through the state’s three-tier system, both excise and sales taxes.
Excise taxes for DtC shippers
When brewers and distillers enter the DtC market, they will need to manage excise tax payments in many more states. But, the excise tax filings for DtC shippers are often less rigorous than excise tax filings for the TTB or a producer’s home state.
Filing generally entails recognizing the total volume that has been shipped DtC, calculating that against the relevant state’s excise tax rates, and filing the return with taxes paid on time. Many states will also require the DtC shipper to provide summaries detailing all of their orders in that period, such as the name and address of who they shipped to and how much that consumer purchased. But instituting good order tracking practices or using a service like Sovos ShipCompliant that specializes in alcohol taxes and remittances, this burden can be easily managed.
Sales taxes for DtC shippers
With three-tier distribution, the final sale to the consumer will be made by the licensed retailer. But in a DtC sale, it eliminates the retailer, so the DtC shipper has to manage the local sales tax liability.
They have this liability because most states require prospective DtC alcohol shippers to “voluntarily” register as a sales tax collector in that state—and if they don’t, they won’t receive the DtC shipping-specific license needed to ship into that state. This combined with varying state sales tax rates can create a complicated, multistate sales tax burden for DtC shippers.
Once the seller (DtC shipper) has calculated and collected the correct amount of sales tax from their consumers, they must then file the appropriate returns and remit all of the taxes they’ve collected to the state. Notably, in recent years many states have adopted specific filing processes for remote sellers as they’ve adopted economic nexus rules. But it can still be complicated for a remote seller to manage sales tax filings in states where they don’t have physical presence.
For a more in-depth review of the tax burden for brewers and distillers shipping DtC, read our whitepaper, A Guide to Direct-to-Consumer Taxes for Brewers and Distillers.