Interstate Beer Distribution: What You Need to Know

A guide to expanding into new states

Foreward

For breweries looking to expand their sales into new markets, there are numerous rules and requirements that need to be followed and failure to do so can get in the way of developing that market or even block you from getting in there at all. A clear understanding of what is allowed where, what isn’t, and what’s required of your business by state and federal regulators is essential to successful market expansion.

Brewers have a ton of regulations to abide by; it’s true when you set up your brewery and it’s true when you want to sell into a new state—the importance then is recognizing what that new state requires.

How did we get here, anyway?

The 21st Amendment set up a national system where each state can establish its own individual rules for the sale, production, transportation, and consumption of alcohol within their borders. This means that when you do any of these activities in a particular state, you have to follow that state’s laws—and they can enforce these rules on any business engaging in these activities within state lines.

For every state you distribute into, there’s a whole new set of laws that you need to follow, adding to the intricacy of interstate distribution. This is where a lot of breweries can get caught—assuming that what is allowed in their home state automatically translates into permissible activity in new states.

beer-distribution
This is where a lot of breweries can get caught— assuming that what is allowed in their home state automatically translates into permissible activity in new states.

In-State and Out-of-State Distribution Permissions

Selling beer in your home state

Over the last few decades, every state has adopted rules that enable easier sales for in-state breweries. These can include on-premise sales at tasting rooms or at your production facility, self-distribution to local retailers and restaurants, giving samples away at your tasting room, and selling beer to-go from your tasting room. But these permissions almost always only apply to local sales, sometimes limited to just within the county where you’re located. States rarely grant these permissions to out-of-state breweries. Instead, when you begin selling across state borders, your brewery will operate within that state’s three-tier system. In doing so, your brewery can benefit from the services and direct connections that distributors bring to the table.

Interstate distributions

Home state permissions, like self-distribution and giving away samples, are almost never available when distributing out-of-state. And this requirement to sell through the three-tier system even applies to incidental sales or attending events. For example, if you want to sell your beer at a festival in a different state, you may have to get a license, register your brands, and get them to the festival through an in- state distributor.

beer-distribution-permissions

Varying State Laws

Similarities and differences among states’ laws

So when you’re selling into a new state, where do you look for the rules? Each state sets up its own alcohol rules, and each state has its own government organization that enforces these rules. These departments—like the California Alcoholic Beverage Control, the New York State Liquor Administration, or the Michigan Liquor Control Commission—are where you should look for the rules and compliance requirements.

On the one hand, there is plenty of commonality among states’ rules. They follow a similar pattern, from set-up (licensing and product registration) to implementation (distribution and franchises) to follow-up (reporting and taxes). But no two states’ laws are exactly the same—so even if you have a handle on one state, you’ll still need to learn the particularities of each additional state you enter.

Licensing

Getting licensed

The first step to distributing beer in any state is to get licensed. You will need to show you have a TTB-issued Brewer’s Notice and a production license from your home state in order to get the distribution license.

Similarly, almost every state has a specific license that they require out-of-state beer suppliers to have before the supplier can distribute their beer in that state. So, for every state that you want to distribute in, you’ll need to get another separate license.

If you’re selling into a state without a license, that is a clear and obvious violation, and one that a state will enforce very strictly. And if you subsequently apply for the necessary license, you will need to report that violation, which that state would not take a friendly view of, likely souring your chances to get that license.

As such, it’s critical to understand all the licensing requirements before entering a new state. While getting an out-of-state supplier’s license is not the most complex process (at least compared to getting your Brewer’s Notice), it can still be difficult and time-consuming since it can require providing a state with a lot of personal and corporate information.

Licensing watch-outs

It’s crucial you make sure you’re getting the right license. Every state calls their supplier license something different, and it can be easy to accidentally use the wrong form or check the wrong box. Make sure to review the state rules and see what is the appropriate license for out-of-state businesses and what permits the sale of beer to in-state distributors.

Similarly, you may not see an available license. Alaska and D.C. do not require you to have a license to sell to local distributors—you still need to abide by their three-tier system, but you can engage with distributors without a license. Florida also does not mandate a specific license, though you still need to register with the state as the Primary American Source of your brand/labels.

And New York and New Jersey do not even offer an out-of-state supplier license. Instead, the only available license in these states is to become an in-state distributor, which can be very complex and costly (hint: it requires having a business headquarters in the state; so many out-of-state brewers instead find a New York or New Jersey wholesaler to act as an authorized brand dealer in their respective state).

Every state calls their supplier license something different, and it can be easy to accidentally use the wrong form or check the wrong box.
beer-glass-served

Product Registrations

Getting COLAs from the TTB

Product registrations begin at the federal level with obtaining a COLA (Certificate of Label Approval) from the Trade and Tax Bureau (TTB). Many small breweries may be unaware of this requirement, as COLAs are not required for the sale of beer that is sold solely within the borders of the state where it was produced. But once you start selling across state borders, it becomes an interstate sale which kicks in federal labeling rules.

Applying for a COLA can be done online, which the TTB will review within a week or two. TTB agents will thoroughly vet your labels for all required and prohibited information and approve them, or send them back for correction if they see anything out of place—which does happen about half the time. Having to resubmit a COLA application, often for something minor like improperly stating the volume size, can create a lengthy and hard-to-track process—editing and resending labels multiple times. To minimize these delays, research label requirements ahead of time or use an automated solution to track and submit registrations.

State product registrations and price posting

In addition to federal registrations, almost every state has its own product registration requirements to ensure 1) that they know what products are being sold through state-compliant distributors and 2) that they are properly labeled.

An aftereffect to product registrations is price posting. This helps ensure fair dealings and not favoring any one distributor. Where present, these price posting rules require you to regularly provide your listed prices to the state and give the state and your distributors a warning of price changes, which can restrict when a price change can become effective.

Product watch-outs

The TTB requires a lot of specific information in a specific format for label submissions, so frequent non- compliance results in rejections and send-backs. To avoid these delays, use tools like LabelVision and the TTB’s Beer Beverage Alcohol Manual (BAM) before submitting.

Some states are rather easy when it comes to registrations, merely requiring getting a copy of your COLAs. Other states are very complex and will do their own multi-week review of your labels. Often states also require the submission of supporting documents, like distributor territory assignments, authorization notices, and laboratory analyses.
sovos.com/shipcompliant

beer-distributor-relationships

Distributing

Distributor relationships

Distributor relationships are essential both for instate and interstate market access as they can be key allies in brand ambassadorship, advertising to retailers and engaging consumers. But, it’s also important to acknowledge that your beer is not the only one they sell. So it’s critical to have a solid, clear contractual agreement with your distributor(s) setting out clear and trackable expectations. In addition, you should see what you can do to support them and help them sell your products.

However, many states set out restrictions on where and how your distributor arrangements may operate. These can limit you to work with a single distributor in the entire state or perhaps one distributor in a given territory or just one distributor per brand. These agreements will need to be documented and likely shared with the state so they can police them.

It is also extremely important to recognize state franchise rules. These laws restrict your ability to terminate or renegotiate your existing distributor agreements. They can require you to provide clear, documented proof of good cause when you want to adjust or cancel an agreement, and can even limit what is defined as “good cause.” They can require you to give your distributor months to correct any problems, and even then not allow you to cancel. In a word, these franchise rules can lock you into a bad relationship with a distributor that doesn’t give your products the care and attention you want. Recognizing where these franchise rules exist and getting ahead of them by establishing clear and followable distributor agreements in written contracts is critical to avoid greater problems down the road.

beer-taxes-and-reporting

Taxes and Reporting

Excise taxes

Taxes are a large part of alcohol sales at both the federal and state level. As a brewery, you pay taxes on your production to both the TTB and your home state, but your interstate distributions are also taxed by every state you sell into. Generally, these excise taxes are paid by “the first party to own the product in that state,” meaning your distributor. However, there are a few exceptions (Wisconsin and Ohio for two) where you as the out-of-state supplier will need to remit to the state the appropriate tax money based on the volume of product you sold there.

It’s also important to note—something that even larger breweries forget—that you should not pay excise taxes to your home state on beer that you distribute out-of-state. As such, your exports and interstate sales should be deducted from your total local production so you only pay home state excise taxes on your beer that is actually consumed in your home state.

Shipping reports

Beyond excise taxes there are general shipping reports to file. Almost every state that you ship into will require you to provide follow up reports indicating what you sold into the state, when, and to whom. This is how the state verifies their tax collections from distributors. These reports can range from very simple, like a single statement on total volume, to more complex, like a thorough summary of all your invoices in a given period of time.

Direct-to-Consumer Shipping

The direct-to-consumer (DtC) shipping of beer is a developing topic with growing interest. DtC shipping of beer—where consumers purchase it over the internet or at a taproom and then the order is fulfilled through a service like FedEx or UPS—is generally not allowed. Currently only Alaska, Nebraska, Nevada, New Hampshire, North Dakota, Ohio, Pennsylvania*, Oregon, Vermont, Virginia and Washington, D.C. allow interstate DtC beer shipping. (*Pennsylvania will only issue a DtC beer shipping license to businesses that hold a wholesaler or off-premises retail license in their home state.)

However, the temporary COVID-19 relaxations have brought a new look to these rules, and questions whether states might adjust them. Several states have issued emergency provisions allowing local DtC shipping of beer (actually, these provisions don’t “allow” such shipments, but they indicate the state will not prosecute local brewers who violate otherwise effective prohibitions during the emergency). But these are temporary provisions, and making them permanent will require each state’s legislature to change their statutes. And once these laws are amended, breweries will need to abide by the rules that govern DtC shipping of wine—like licensing, shipping volume limits, expanded tax requirements, and using specific shipping services.

beer-canning-line

The Importance of Compliance

Consider compliance with federal and state laws the baseline of success. Failure to follow federal and state beverage alcohol regulations can have a variety of consequences—most commonly monetary penalties, but in severe situations it can lead to a loss of license.

Penalties and other unwanted consequences

Not prioritizing compliance can quickly snowball into numerous consequences. For example, delayed licensing or product registrations due to an incorrect filing can mean having to hold off on future sales, hindering your growth. It can be quite costly to have your production team, sales department, and everyone else held up because you need another few weeks to get a COLA.

Fines are a relatively common penalty that states and the TTB are imposing on brewers who violate the rules. While many recent high-profile fines have focused on trade practice violations, a fine of a few thousand or tens of thousands of dollars for repeatedly selling without registering a brand/label would not be unthinkable.

While extreme, the loss of a license is another potential consequence. If you lose a license, you’ll forfeit all permissions associated with that license. Losses of licenses can compound on each other, so if you have a history of violations and losing licenses in other states, that could be reason for your home
state to take away your production license—meaning you would have to close down all operations. That history will also severely restrict your ability to get future licenses (it will reflect poorly on your background checks). So, while these penalties may not have the vigor of jail time, they could easily lead to a premature exit for you from the beer industry if not careful.

Consider compliance with federal and state laws the baseline of success.

Protect yourself with information

There is a lot of growth and opportunity in the market for breweries who want to distribute their beer. But, before entering it’s important to evaluate your brewery’s current operations, future goals and financial abilities.

Expanding into new markets can be an exciting time, but there are a lot of rules and nuances that could impede a brewery’s development. Knowing the rules when it comes to distribution permissions, distributor relationships, state laws, licensing requirements, product registrations, taxes and reporting, and compliance is crucial to success. Protect yourself and your brewery’s operations by remaining informed and compliant during expansion.