Despite a rash of recent articles and social media posts suggesting that the days of shipping of alcohol are over, the fact is that little has changed. Well, Missouri scaled back its rules governing out-of-state retail shipments, but that is hardly national news. “Really, nothing has changed in the direct-to-consumer regulatory landscape in recent months,” says Jim Agger, the vice president of business development and marketing at Wine Direct. Rather, according to Matt Mann, Wine Direct’s general counsel, “there has simply been heightened scrutiny by the state regulators, including in Illinois, Michigan, and New York.”
Wineries often use fulfillment companies, like Wine Direct, in the interests of efficiency. Rather than managing each individual order and shipping a case from, say, California to the East Coast, a winery will turn to a company like Wine Direct, which will warehouse and manage the logistics on its behalf, as it does for numerous wineries at its various warehouses around the country.
A state may see a sale coming in from Wine Direct rather than a winery, and that could raise a red flag. Adding to the heightened scrutiny, distributors remain opposed to direct-to-consumer sales, explains Alex Koral, industry outreach adviser at ShipCompliant by Sovos. The increased state scrutiny has led FedEx and UPS to examine their relationships with alcohol shippers—namely, wineries and alcohol retailers. “UPS and FedEx are saying they want to be more compliant,” says Koral, “and they are being much more active in ensuring they are only delivering from properly licensed entities.”
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Despite the additional scrutiny regarding alcohol shipments, online shopping is undoubtedly the new norm. Direct-to-consumer shipments of alcohol amounted to $2.33 billion in 2016, according to Wines & Vines. Meanwhile, online sales for all goods, including alcohol, exceeded $341 billion during the same period, according to the Census Bureau. Alcohol is certainly lagging—partly because of regulations, and partly because of expectations.
“Amazon Prime has [set off] a seismic shift,” says Agger. “People want fast and free.” The weight of full bottles of alcohol, combined with added alcohol shipping fees and requirements—such as requiring an adult’s signature—results in rising carrier rates. The Congressional bill (HR 4024) that was introduced in October 2017 to allow the United States Postal Service to mail alcohol could reduce some shipping fees, but the bill’s movement has been quite slow. However, it is the three-tier system in the U.S.—which requires (with only some exceptions) that the producer sells his or her product to an in-state wholesaler, who in turn sells it to an in-state retailer, who then sells it to a customer—that differs so dramatically from the way sales work with most products.
The Supreme Court in Granholm opened things up somewhat, holding that it’s a violation of the Commerce Clause if a state permits in-state wineries to ship direct to consumers but restricts out-of-state wineries from doing the same. The decision, though, was limited to domestic wineries. That’s why the most favorable interstate shipping rules are for U.S. wineries.
Currently, 44 states permit some interstate direct-to-consumer shipping of alcohol, according to Wines & Vines and ShipCompliant by Sovos. The states that do not allow it are Utah, Mississippi, Alabama, Oklahoma, Rhode Island, and Delaware. Kentucky permits direct-to-consumer sales but has steep penalties for delivering to a dry district, so most shippers avoid it. Meanwhile, seven states allow out-of-state breweries to make direct-to-consumer sales. They are Nebraska, Ohio, Virginia, New Hampshire, North Dakota, Vermont, and Oregon as well as the District of Columbia. Three states allow out-of-state distilleries to make direct-to-consumer sales: Nebraska, New Hampshire, and North Dakota.
The retail side is a bit more limited, though consumers can certainly go online and find plenty of retailers willing to ship alcohol directly to their door, regardless of interstate rules. Although most states allow some form of intrastate retail shipments (sometimes only in the retailer’s vehicle), only 13 permit out-of-state shipments. Three states (California, Idaho, and New Mexico) are reciprocal, meaning that each allows the others’ retailers to sell into the state.
Ultimately, the onus is on the shippers. “You need to check with the state you are shipping to and from,” says UPS spokesperson Dan McMackins. That’s why Drizly, Thirstie, and similar apps are so successful. They use a network of retailers around the country. “The delivery apps are like a fourth tier,” says Colin Spoelman, the owner of Kings County Distillery.
To be clear, these websites and apps are not liquor stores but unlicensed marketing companies. In general, these sites work the way FTD does with flower shops. A consumer visits the website or uses the app to place an order. The website or app immediately sends the order to a retailer, one of a number in the consumer’s local area. The retailer is asked electronically whether it would like to accept and fulfill the order. After acceptance of the order, payment goes to the retailer—not the third-party website or app. Then the retailer packages the product and delivers it to the consumer. In return for marketing products and driving consumer traffic to a retailer, the website or app takes a licensing fee from the retailer.
For many retailers, third-party marketing companies were a game changer. Rather than spending funds on marketing locally, a retailer can have incremental sales simply by being located in an area where consumers want alcohol delivered directly. According to Drizly’s CEO, Nick Rellas, orders from Drizly can represent anywhere from 5 to 50 percent of a retailer’s sales. Certainly, for some retailers, that’s a much needed additional income.
Editor’s note: Nothing in this article is intended to be—and should not be—construed as specific legal advice.
Dispatch
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Ryan Malkin is principal attorney at Malkin Law, P.A., a law firm serving the alcohol beverage industry. Nothing in this article is intended to be and should not be construed as specific legal advice.
