A Guide to Direct-to-Consumer Taxes for Brewers and Distillers

Introduction

Brewers and distillers entering the direct-to-consumer (DtC) shipping market face a variety of regulatory requirements. These include licensing, managing individual consumer purchasing limits and arguably the most difficult, keep up with state tax obligations.

Now, brewers and distillers are no strangers to dealing with taxes. Taxing alcohol production and sales is one of the most fundamental of alcohol regulations out there. And any producer of alcohol in the U.S. has to remit excise taxes on what they make both to the federal Trade and Tax Bureau (TTB) and to their home states.

Taxes on DtC shipments present a unique challenge, as they require the shipper to recognize and manage a tax burden that is much broader than if they were solely selling through a state’s three-tier system. This extends to both a state’s excise taxes, based on the volume of sales made, and a state’s sales taxes, based on the value of sales made.
DtC-Taxes-Beer-Flight

Why Are Taxes Different in the DtC Market?

The primary difference between taxes in the DtC market and taxes in the three-tier system is that in the three-tier system there are more parties involved to spread out the tax burden.

In the three-tier system, excise taxes are generally paid by the “first party to own” the product in a state, so when a supplier distributes their product into a state, that “first party to own” will be their wholesaler. Then the product goes to a retailer who makes the final sale to the consumer, and is then responsible for collecting and remitting the state’s sales taxes.

A DtC sale removes both wholesalers and retailers, so there are no additional parties to manage the state’s tax burden.

States are concerned with creating fairness between DtC sales and three-tier sales so neither channel has more of a tax advantage. They also don’t want to miss out on tax revenue from DtC sales that would have been collected if the product was sold through the three-tier system.

As states created their rules for allowing DtC shipping of alcoholic beverages, they were sure to build in tax liabilities on DtC shippers. So if a winery, brewery, distiller or retailer enters a state’s DtC market, they have an equal tax burden (sales tax and excise tax) to the three-tier system.

DtC-Taxes-Canning-Line

What Does This Tax Burden Look Like For DtC Shippers?

Excise Taxes

Brewers and distillers are liable for paying excise taxes to both the federal government and to the state where they have their production facilities.

These taxes are a set value based on the total volume amount of beer or spirits sold, such as $0.10 per gallon of beer or $2.50 per gallon of spirits sold. The specific tax amounts vary among states and product types.

These excise taxes that are due to a state should be baked into the stated price of the beer or spirits sold. Unlike sales tax, excise taxes may not be collected on top of the price and a seller who does not account for the tax they need to remit will end up earning less money than they initially intended. So, if someone were to sell a gallon of beer for $10, then per the above scenario, ten cents of the $10 they receive should be remitted to the state; but an unwary seller would end up with ten cents less personally they expected—which, if they sell several thousand gallons, could really add up.

While brewers and distillers are liable for federal and home state excise taxes, as the producers and “first to own” parties of their products, it is generally their distributors who must manage the excise taxes on their interstate three-tier sales. But as they enter the DtC shipping market, they will have to assume that burden and learn to manage excise tax payments in many more states.

The excise tax filings for DtC shippers are often much less rigorous than excise tax filings for the TTB or a producer’s home state. Generally, remitting excise tax payments 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.
DtC-Taxes-Checking-Computer

Sales Taxes

Sales taxes are due only on the final sale to the end consumer, so brewers and distillers may not have to deal with them in the normal course of their business. In three-tier distribution, the final sale to the consumer will be made by the licensed retailer. But in a DtC sale, that retailer is removed and so the DtC shipper has to manage the local sales tax liability.

DtC shippers are usually required to hold a DtC shipping-specific license issued by the state they want to ship into. In turn, states have required that, as a condition for getting that DtC shipping license, the prospective DtC alcohol shipper “voluntarily” register as a sales tax collector in that state. So a brewery or distillery either could continue to not have a sales tax burden in a remote state or they could make DtC shipments of their products into that state, but they could not do both.

While this might seem like a bit of a heavy-handed tactic, it did create parity between DtC shippers and local alcohol retailers. But it also meant that DtC shippers had to manage a complicated, multistate sales tax burden.

How to Manage Sales Taxes

Sales tax rules and rates can vary wildly across the country.

Sales taxes are determined at the location where the sale occurs, where the consumer takes possession of the goods they’ve purchased.

But sales tax rates can also be set at the state, county, city or special district level, meaning that the appropriate tax rate can change depending on which side of the street the sale is made at — or there could be a single rate that applies to all addresses in the state. If you sell from one or two physical retail locations, that’s not that hard. But if you are shipping to hundreds or thousands of addresses in many different states, managing the tax burden becomes extremely complicated.

It is critical for a business to make sure that they are collecting the correct sales tax where the sale occurs. Collecting the proper amount of tax from the consumer at the time of purchase is key, as undercollection requires the seller to remit the tax due to the state out of their pocket and overcollection is a form of theft — taking money from the consumer they weren’t authorized to take.DtC-Taxes-Working-in-Brewery

It is also critical that the seller remit all taxes they’ve collected to the state as that is technically the state’s money. Ultimately, states see a sale made and demand a certain percentage of that sale. But to not penalize sellers for their transactions, states permit sellers to assess the tax due from customers on top of the agreed upon price for the transaction.

Once the seller 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.

Depending on the state, the filing process can be more or less complicated. This all depends on how many tax jurisdictions a state permits. For instance, a state like Michigan, which only levies a single rate across the entire state, will be fairly straightforward, maybe a few pages; a state like Colorado, which maintains hundreds of separate tax jurisdictions with their own rates and rules, requires extremely large returns detailing sales to each of those jurisdictions.

Many states have recently improved their tax filings by moving them to online systems. These electronic filings can be extremely helpful to businesses, as they do not need to manually fill out potentially dozens of pieces of paper every month and mail them in. But there is still a sliding scale in how these electronic filings work; some have fully searchable spreadsheets and others just allow uploads of paper forms.

In recent years many states have adopted specific filing processes for remote sellers as they’ve adopted economic nexus rules. These filings attempt to remove some of the complexity that comes with managing sales tax rules in an outside state. Largely this is designed to manage taxes in states with numerous and varied local tax rates, which may alarm an out-of-state business.

DtC-Taxes-Beer-Steins

Unique Tax Scenarios for DtC Shippers

Most tax requirements for DtC shippers involve managing the excise and sales tax burdens in all of the states they ship to. But these requirements are not universal, and unique tax considerations can apply to DtC shippers.

For example, the District of Columbia has a sales tax rate of 6% on general retail sales made there. But sales of alcoholic beverages are instead taxed at a rate of 10.25%. D.C. is one of the few regions that does not impose a tax burden on remote DtC shippers. So this unique tax rate will only matter to a DtC shipper if they have economic nexus in D.C. (i.e., if they make more than $100,000 in annual revenue there). But once they have the tax liability, DtC shippers must make sure they collect and remit the appropriate tax.

And then there are some states like New Hampshire, which permit the DtC shipping of all alcoholic beverages, but then have unique tax rules. As a control state, the New Hampshire government directly manages all three-tier distributions of wine and spirits, so they don’t impose an excise tax on them; instead it adds a markup fee to wines and spirits it distributes.

To make up for the lack of a wine or spirits excise tax, New Hampshire requires all DtC shippers to instead collect and remit an 8% markup tax on their sales to the state. This 8% markup looks and acts like a sales tax, in that it can be collected from the consumer at the time of purchase and is tacked on in addition to the stated price of the beer, wine or spirits sold.

While these unique DtC shipping-specific taxes are rare, they are important to recognize and for a DtC shipper to manage.
DtC-Taxes-Serving-iPad

Taxes Are Here to Stay

Taxes are one of the most basic aspects of beverage alcohol regulation, so it’s no surprise that they make up a lot of DtC alcohol shipping regulation and compliance. Because of the unique sales scenario for DtC shippers, the tax burden that might otherwise be managed by wholesalers or retailers in a three-tier distribution will fall to the DtC shipper.

As more brewers and distillers become engaged in the DtC shipping market, they will have to recognize and learn how to manage their additional tax liability in the states they will ship into. Brewers and distillers already have to manage their federal and home state excise tax burdens, along with any sales taxes for sales made at their tasting room or other physical shops. While handling this in additional states may require more work, ultimately this burden is manageable.

And of course, services like Sovos ShipCompliant are here to help brewers and distillers manage their DtC tax burden, by providing address-specific sales tax rates for time of purchase collections and offering a full suite of sales and excise tax reporting needs by DtC shippers. 

See how Sovos ShipCompliant can help you manage your DtC shipping taxes today.