Don’t let compliance hurdles stunt your DTC beverage alcohol aspirations

Businesses must be able to reach consumers where they are. In 2020, consumers were home and wanted to buy beer, wine, and spirits without leaving home. As a result, retailers and manufacturers that sold directly to consumers fared better than those that didn’t, at least in states where direct-to-consumer beverage alcohol sales were allowed.

Now that most COVID-19 restrictions are lifted and restaurants and bars once again allow on-premises consumption, people are eager to drink outside of the home. Nonetheless, ecommerce will continue to be an essential sales channel for beverage alcohol in 2021 and beyond.

Direct-to-consumer (DTC) sales of alcohol in the United States grew considerably in 2020. Though the rate of growth has slowed since the early days of the pandemic, IWSR expects online beverage alcohol sales to continue to rise: “After witnessing a value growth of over 80% in 2019–2020, the U.S. is poised to overtake China to become the largest alcohol ecommerce market in the world by the end of 2021.” 

Wine

Likewise, Silicon Valley Bank’s 2021 U.S. Wine Business Predictions and Observations predicts wineries with direct-to-consumer models will “finish 2021 with strong sales,” as will retailers with “existing online sales strategies.” It believes “many consumers will continue online wine buying in a post-COVID world” even as they return to in-person sales.

Online sales comprised about 2% of the average winery’s sales on April 1, 2020, before the effects of COVID-19 shutdowns hit. By November 1, 2020, the average winery’s online sales had jumped to 10%. While positive, Silicon Valley Bank (SVB) found much of that growth resulted from “passive online sales” (i.e., consumers seeking the brand went directly to the site). Therefore it urges businesses to up their ecommerce game to reach the “large numbers of consumers” that already or soon will prefer online shopping to in-person shopping.

In short, SVB believes online selling is “the change agent that will deliver the greatest transformation to wine sales over the next decade. Online sales might represent 20% of alcohol sales in the next decade or sooner.”

Where wine goes, beer and spirits follow

A $3+ billion-a-year business, wine leads the DTC space. However, it has an unfair advantage because breweries and distilleries face far more restrictions than their wine-producing counterparts. While most states allow wineries to make DTC sales, fewer than a dozen states permit DTC sales by breweries and distilleries.

Despite the restrictions, DTC sales of beer/cider and spirits also surged during the early days of the pandemic and continue to track higher than before COVID-19. 

And the restrictions are unlikely to last forever. 

An unexpected side effect of COVID-19 is that it inspired state and local governments to ease restrictions on beer and liquor sales: During the extended lockdowns, selling alcohol to go helped many restaurants and bars keep their doors open and lights on (restaurants usually aim to make about 30% of their revenue from alcohol sales). It went so well that numerous states have permanently authorized cocktails to go. Authorizing DTC sales of beer and spirits will surely follow, eventually.  

Indeed, South Dakota recently authorized certain direct shipments of distilled spirits. And several other states are also working to allow DTC online sales of beer or spirits, including California, Hawaii, Maine, Missouri, and Washington.

The more states allow DTC sales of beer and liquor, the more difficult it will be for producers and retailers to comply with varying DTC regulations and policies. Among other things, anyone selling to customers in multiple states will need to:

• Obtain all necessary licenses and permits
• Collect and remit all required taxes
• Verify the age of the consumer
• Respect alcohol and volume limits

It’s a lot.

Obtain all necessary licenses

Because alcoholic beverages are highly regulated, producers and sellers of alcoholic beverages generally must register with the federal Alcohol and Tobacco Tax and Trade Bureau (TTB), state Alcoholic Beverage Control (ABC) departments, and the state tax authority. It may also be necessary to register with local government agencies.

That’s the rule of thumb, but it’s important to remember that licensing requirements vary from location to location.

Collect and remit all required taxes

Once registered, anyone in the business of selling beverage alcohol is liable for all applicable taxes. These can include excise tax, markup tax, and sales and use tax.Rates vary by location and product and are typically based on the location where the consumer took possession of the product (e.g., the consumer’s home address).

The wave of economic nexus laws washing over the nation can and does impact DTC beverage alcohol sellers. Economic nexus laws base a tax collection obligation solely on a remote seller’s economic activity in a state — no physical presence is required. Thus, any seller that establishes economic nexus with a state must register with the appropriate state authorities and collect and remit all applicable taxes on their sales into the state.

Because alcohol is so heavily regulated, alcohol sellers were required to register with many states even before the advent of economic nexus; and once registered, a business must comply with all relevant state laws, including tax laws.

Nonetheless, economic nexus laws can impact a remote entity’s tax obligations. For example, Colorado doesn’t require out-of-state wineries to register unless they have economic nexus. After economic nexus took effect in Texas, out-of-state wineries had to start collecting and remitting local sales tax in addition to state sales tax. This overview of economic nexus in the beverage alcohol industry offers some good insights.

Verify the age of the consumer

One of the quickest ways to run afoul of regulating agencies is to sell or deliver alcohol to underage consumers. Age can be verified several ways. For example:

• Consumers must affirm they are at least 21 before placing an order online
• Consumers must show proof of age at the time of delivery
• Sellers must maintain validating records for a specific period

Interest in age verification has peaked since the sudden surge of online and delivery sales last year, and sting operations aren’t uncommon. If businesses are caught selling to minors, even unwittingly, the consequences can be dire.

Respect alcohol and volume limits

Alcohol producers selling directly to consumers must comply with requirements in all states, and these can vary. For example, wineries selling into Texas can sell no more than 9 gallons per person per month, or 36 gallons per person per 12 months. In Illinois, the cap is 12 cases per person per calendar year.

Similarly, some states limit the alcohol content of certain products. In Connecticut, cider cannot exceed 6% alcohol by volume, while in New Jersey, hard cider must contain at least 0.5% but less than 8.5% alcohol by volume. It’s critical businesses know what they can and can’t sell in every state.

The COVID-19 pandemic highlighted the need for beverage alcohol sellers to develop new sales channels. Selling online directly to consumers allowed many businesses to survive and even thrive in the face of an unprecedented situation.

States and businesses will likely be dealing with the lingering effects of COVID-19 for quite some time. A significant uptick in cases could lead to another round of business closures, or further interrupt supply chains. There could be unexpected drops in demand, or unforeseen spikes in sales. We just don’t know. 

But whatever the future holds, Avalara for Beverage Alcohol can help businesses in the industry meet it head on. A SaaS-based solution, it simplifies alcohol-specific taxes and regulatory compliance for wineries, breweries, distilleries, alcohol retailers and more.