1. Wineries already pay sales tax in most states
2. The vast majority of wineries will likely be exempt from the law

So what is it, exactly?

Senate Bill S. 743, more commonly known as the “Marketplace Fairness Act“, is a pretty simple bill that would give states the ability to require out of state businesses that have “remote sales” in excess of $1 million annually to remit sales taxes. Each state would be able to opt in to the Act, but only after they have simplified their tax structure, either by joining the Streamlined Sales and Use Tax Agreement or to follow the steps outlined in the bill to simplify their sales tax requirements.

Will it pass?

With broad bi-partisan support, S. 743 passed out of the Senate with a vote of 69 to 27. However, a tough battle is expected in the House, and therefore the Marketplace Fairness Act has a long way to go before it is enacted with a signature from President Obama. Amazon.com is supporting the bill (presumably because they would like to move forward with their plans to build warehouses in each state to support same-day shipping), while eBay is one of the main voices in opposition.

What will it mean for wineries?

A lot hinges on the definition of “remote sales”. Keep in mind the fact that state legislation to allow wine shipments typically includes a provision that also requires wineries to register for and pay sales tax. As it stands in the Senate version, and based on our interpretation of the current language, sales by wineries to states where they are already required to pay sales tax would not be counted when considering the $1 million threshold for remote sales.

Based on some quick analysis, there are a few hundred wineries in the US that ship more than $1 million worth of wine to consumers each year. BUT, if you include sales only to those states (Alaska, Colorado, D.C., Florida, Iowa, Kansas, Minnesota, Missouri, New Hampshire, Oregon, and Wyoming) that do not require wineries to pay sales tax, then we estimate that less than 25 wineries would exceed the $1 million cap. In other words, the vast majority of the 7,000+ wineries in the US would be exempt from this law.

Wineries are already accustomed to calculating, collecting, and remitting sales taxes in most states. So, for those wineries that would not be exempt from this law, it would probably not be that big of a deal to add a few more states (initially the states of Iowa, Kansas, Minnesota, and Wyoming) to the list of states to which they would be required to remit sales tax. They already have the technology and processes to do so.

The bill would take effect, at the earliest, on October 1st, 2013. Once effective, the 22 “Streamlined” sales tax states would begin requiring sales tax for remote sellers with over $1 million in sales. After that, each of the remaining 28 states would choose whether to opt in to the Act and start requiring sales tax from remote sellers.

Though the bill’s statement of intent indicated that only manufacturers (wineries) would be able to obtain a license, after amendments to the bill, retailers were added back in and will be eligible for the Nebraska direct shipping license. So, at the end of the day (following a confusing set of hearings and deliberations) currently licensed wineries and retailers will both be able to continue to ship to Nebraska consumers, but with added complexity and requirements.

Direct shippers will see several marked changes to rules and licensing processes. Here’s a quick breakdown of these and other requirements in the new law – additional descriptions follow below:

Under current regulations, it was somewhat unclear whether or not direct shippers were required to register to pay sales taxes, though most direct shippers did. The establishment of nexus under the new law could also mean that, in addition to requiring sales tax registration (common for direct shipping law), there is a potential to trigger additional tax obligations. Brand listings will be required as part of the licensing process, and wineries (but not retailers) must notify their Nebraska distributors carrying the listed brands of the manufacturer’s intent to apply for a direct shipping license. If a Nebraska manufacturer or wholesaler volunteers not to sell certain products within Nebraska’s borders, direct shippers would also not be allowed to sell those products under the new law. Furthermore, direct shipper applicants will have to notify the Nebraska Liquor Control Commission of any violations of direct shipping laws of any other states and any violations in the state in which the shipper is domiciled.

Many of the new laws will require clarification as to how currently licensed direct shippers should proceed in order to remain licensed and compliant – for example, will existing licensees have to notify distributors of their existing direct shipping license on Sept 6, or will this new requirement take effect once their current license expires in April? As we get closer to the September effective date, we will notify our clients and readers of any published guidelines or additional information.

Together, Cabernet Sauvignon, Pinot Noir, Red Blends, Chardonnay and Zinfandel represent 70% of the total volume of wine shipped and just over 80% of the value of all specified varietal wines shipped from winery to consumer. This line up of dominant direct-shipped wines is somewhat similar to the dominant wines in the overall wine market where Cabernet, Chardonnay and Pinot Noir are also in the top five varietals.

But take a look what happens when you compare the top five wines shipped direct to the consumer and the top five wines sold in the larger retail marketplace, and when you look at their share of total volume.

The direct shipping channel is a much less varietally diverse sales channel than the overall retail marketplace. In fact, some wines that play a key role in the overall marketplace only show up as a blip in the direct shipping channel. In 2012 Moscato held a 6% share of total sales volume in the overall retail sector. In the direct shipping channel, it accounts for a mere .1% of volume. This should be a reminder to wineries and retailers that every sales channel is different. Anyone that has enjoyed success in 3-tier distribution and is considering direct shipping, or vice versa, should review their product mix ahead of marketing efforts.

Beyond those varietals that dominate the direct shipping space, there is the equally important question of which varietals are trending up and trending down in popularity.

In 2012, only four varietals showed a significantly greater increase in shipments than the overall channel average of 7.7%: Rose, Sparkling Wines, Chardonnay and Pinot Noir. It’s important to note that the data we’ve looked at over the past three years has shown a fairly strong correlation between increased sales and movement in a varietal’s average price. When a varietal’s average price goes up, sales tend to go down and vice versa. What we are looking for are examples of varietal wines where shipments have increased despite a price increase or a slowdown in sales despite a price decrease.

Clearly, we have a winner here. Pinot Noir is on the ascent in the direct shipping channel. In 2012 the wine not only increased in average price per bottle, but it significantly increased in volume sales. This in turn led to Pinot Noir seeing a whopping 19% increase in sales value. The majority of this growth is found in Sonoma, where shipments of Pinot Noir increased by 27% on an average price per bottle that increased by 4.2%.

On the tumbling side of the scale, three wines saw a significant decrease in the volume of wine shipped in 2012 over 2011: Riesling, Merlot and Cabernet Franc. Again looking the change in price per bottle a story unfolds.

Merlot is not only losing pace in its shipments, but in its average price per bottle. In Napa specifically, the average price per bottle of Merlot fell a whopping 12.4% (more than any other varietal from the region) and volume dropped by 11.2%.

For more complete data on the varietal make-up of the direct shipping channel, including how various specified varietal wines perform on a regional basis, download the 2013 Direct Wine Shipping Report today!

• Register as a Foreign Winery or Importer. Many wineries already hold this license as it allows a winery to sell to a Montana distributor (cost of license is $0 to $400 annually, depending on volume sold in Montana; no-cost product registrations are required as part of becoming licensed)
• Apply for a $50 annual direct shipping endorsement
• Supply to Montana the name and address of any utilized fulfillment warehouses
• Submit written acknowledgement of contracting only with common carriers that agree to deliver wine only to individuals who are of age and who provide a signature upon delivery
• Ship no more than 18 cases of wine annually to an individual consumer (up from 12 cases/year)
• Submit excise tax and shipment reports by the 15th of every month

While Montana’s regulations for direct wine shipments are changing, the connoisseur’s licensing system remains in place for shipments of beer from out-of-state breweries. UPS and FedEx, however, do not accept shipments of beer or spirits for delivery to consumers.

We will keep you informed of any updates from the Montana Liquor Control Division regarding the endorsement process once the details become available.

Wines & Vines segregates the population of wineries in America by total production volume. You can see a breakdown here:

When we classify wineries in these tiers, we see can see stark differences in sales channel mix as size increases.

For instance, smaller facilities are much more dependent on the direct shipping sales channel. In limited production vineyards, over 10% of business is sourced through direct-to-consumer sales. Many of these wineries depend on tasting rooms, events, websites, and word of mouth to sell their vintages every year.

Medium and large wineries, who typically enjoy a broader reach due to vast distribution networks, depend much less on direct-to-consumer sales. Seems logical, right?

If we take a look at growth by winery size, we can come to some more groundbreaking conclusions.

The first thing you may notice when we separate volume by tiers is the dominance of “small” wineries in direct shipping. In fact, 51% of all cases shipped through this channel come from wineries producing between 5,000 and 50,000 cases annually. It is astonishing that these wineries represent only 5% of total production, yet take such a commanding lead in this channel.

What is even more interesting, perhaps, is rate in which larger wineries are growing their direct sales channels. It seems as though the previous success of direct-to-consumer shipping has awoken the sleeping giants, who are posting gains that outpace their smaller brethren.  These results are similar to those found in our 2012 Direct Shipping Report, so we don’t see this trend going away anytime soon.

You can take a look at our analysis of this and other figures in the 2013 Direct Shipping Report. Click here to download it today!

We’ll be rolling out more conclusions over the next few days, so stay tuned to the blog for more fun facts!

The model, built to project the totality of winery direct-to-consumer shipments, provides a vivid picture of this important distribution channel.The report is based on millions of anonymized transactions in our ShipCompliant Direct software that ultimately led to direct shipments from January 2012 through December 2012. Using the comprehensive Wines & Vines database of all 7,400+ wineries across the United States, these transactions are the basis to project total shipments from all United States wineries using multiple stratifications including location of winery, annual production of winery and destination of shipment.

1. Direct shipping is growing (in volume and value)
According to our data, American wineries have been shipping more wine every year. Direct-to-consumer orders reached a new high of over 3.1 million cases in 2012, representing a 7.7% increase from 2011, and a 17.7% increase from 2010. That equates to over 72 bottles sold per minute, or 1.2 bottles sold every second! It’s not just the volume that’s growing; the average price of a bottle of directly-shipped wine has also risen over 5% in the past two years, which leads us to record sales of over $1.465 billion in 2012.

These figures show that the direct shipping market is quickly becoming a more important (and more profitable) distribution channel for wineries than in years past.

Expand your direct shipping footprint; order licenses for new states here!

2. Direct shipping is outpacing other sales channels

If we compare the annual sales of the direct shipping market to the U.S. Export figures released in February by the Wine Institute, we find that the 2012 value of domestic direct shipping ($1.465 Billion) exceeded the value of wines exported from the United States to Europe, Asia and the rest of the world. In addition, the average price of a direct shipped wine is 26% more than the average bottle of wine exported from the the U.S.

3. More reliance on the fall and winter seasons

The fall and winter rush at wineries is showing no signs of slowing down. Our data from 2012 shows a remarkable skew towards the last four months of the year, and is approaching a level of dependence that usually is only seen by the inflatable Santa Claus lawn ornament industry.

Our research has also shown that the last quarter of the year saw 37% of total sales in 2012, and September sales of direct wine jumped 26% year over year. This should be a call to action for your business– if you aren’t focusing the majority of your energy into fall and holiday season, you should be.

This is just a sample of our findings. We’ll be analyzing additional elements of the report in the coming days. In the meantime, check out the entire report by clicking the link below.

Click here to download the 2013 Direct Shipping Report today!

The National Conference of State Liquor Administrators, Incorporated (NCSLA) will assemble June 24-28th on the island of Oahu at the Sheraton Waikiki Resort in Honolulu, Hawaii for its 2013 annual meeting and conference. Serving as conference host is the Honolulu Liquor Commission.

The annual conference theme is “Evolve, Adapt, Endure.” Our business agenda will cover a number of diverse issues that demonstrate the need, application and importance of this philosophy.

What does the future hold for the ubiquitous Certificate of Label Approval—the “COLA”—that single piece of paper upon which every alcohol beverage sold in America depends for its legitimacy and that state liquor authorities also use for their regulation of alcohol sales and distribution? A panel of distinguished regulatory and industry professionals will explore the answers to that very question on Wednesday morning, June 26th, at the NCSLA 2013 conference.

This important panel was created in response to the TTB’s current, ongoing and substantial overhaul of the label pre-approval process. Because suppliers, wholesalers, marketers, vendors, state agencies, and others depend on the COLA for different purposes, any changes being made by TTB to this critical tool will have a substantial impact on how the alcohol beverage industry brings products to markets and regulates those products.

Attendees of “COLA Changes on the Horizon” will be brought up-to-date on the pace of change to the COLA process, hear informed discussions of the implications of potential changes in the COLA process and have the opportunity to join the discussion and ask questions of the panelists.

Serving as moderator is Jeff Carroll, Vice President, ShipCompliant. His panelists include: Susan Evans, Executive Liaison for Industry Matters, Alcohol and Tobacco Tax and Trade Bureau; Deborah Ringo, Senior Regulatory Manager, Diageo North America; and Debbi Beavers, Licensing Supervisor, Kansas Alcoholic Beverage Control Division.

The panelists, in collaboration with NCSLA, will be conducting research and collecting feedback on this important topic in advance of the conference. Feedback is welcome and can be sent to COLApanel@shipcompliant.com.

Start making your plans NOW to come to Honolulu, Hawaii from June 24-28, 2013 for this year’s annual meeting of the NCSLA! Registration is open now so visit www.ncsla.org for details and register early to take advantage of the lowest rates! Watch for more exciting updates on the NCSLA 2013 Annual Conference to be broadcast in the coming weeks.

About National Conference of State Liquor Administrators, Incorporated:

A national organization of state alcohol beverage regulators, founded June 19, 1934, in Chicago, Illinois, whose purposes are to promote the enactment of the most effective and equitable types of state alcoholic beverage control laws; devise and promote the use of methods which provide the best enforcement of the particular alcoholic beverage control laws in each state; work for the adoption of uniform laws insofar they may be practicable; promote harmony with the federal government in its administration of the Federal Alcohol Administration Act; and strive for harmony in the administration of the alcoholic beverage control laws among the several states. Visit www.ncsla.org for more information.

North Dakota notified direct shippers that wine shipments could only be shipped from the licensee’s premises back in April of 2010. Fulfillment houses, from which almost half of all direct shipments originate, were not allowed to ship on behalf of the licensee, despite the fact that California considers fulfillment houses with public warehouse licenses (Type 14) to be an extension of the winery’s premises. With the passage of this bill, licensed wineries and retailers will once again be able to use this much valued function of wine shipping.

North Dakota isn’t the only state to restrict the use of third party and shipping services —

• Virginia imposed restrictions on shipments from fulfillment houses in 2009, but established regulations to allow it last November. Virginia now requires out-of-state fulfillment houses to become approved, submit signed winery-fulfillment house contracts to the state, and remit periodic shipment reports.
• New Hampshire enacted a bill in 2011 that not only created a common carrier license, but also created a “black list” of unauthorized shippers from which FedEx and UPS cannot deliver without penalty.

New regulations and laws in New Hampshire, Virginia and North Dakota give these states additional resources and tools to track shipments, enforce direct shipping rules and collect tax on all shipments.

In addition to becoming licensed, fulfillment houses and common carriers wishing to ship wine into North Dakota will be required to report shipments on a monthly basis and will be subject to penalties if they fulfill and/or ship orders from unlicensed warehouses or suppliers. Also, licensed direct shippers will be required to report their use of fulfillment houses in preparing direct shipments. The Alcohol Tax Section of the North Dakota Office of the State Tax Commissioner has already begun drafting license application and reporting forms and plans to make these available ahead of the August 1 effective date in order to give potential licensees time to review the new requirements.

Until the new law takes effect, out-of-state direct wine shippers should continue to ship from their licensed premises. As the August 1 date gets closer, we will keep our clients and readers informed of specifics related to the new regulations.

It seems that some vendors are being automatically switched to monthly payments in the state’s automated collection system. If you receive a Maryland Sales & Use delinquency/penalty letter telling you to file monthly reports, do not follow their instructions and change from quarterly payments. Instead, contact Patricia Anthony in the Licensing & Registration Division at (410) 260-7532. And do NOT contact the Sales & Use Division as the letter might suggest.

Terri Cofer Beirne, Eastern Counsel, Wine Institute