Six years ago, I wrote my own State of the Union, Wine Shipping Edition, breaking down the 50 states and one district into tiers based on how expensive and difficult it was for us to send wine into each. Casual wine lovers might be surprised to know that not only are there some states to which we are prohibited from shipping wine, but that each state to which we can ship has its own laws, permits, fees, and reporting requirements. Managing this morass takes specialized software and still a big chunk time for one of the members of our accounting team, so it's far from the uniform, frictionless open market that Section 8 of the US Constitution promises:
"The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States;"
I mentioned in my post from 2015 that diving into the arcane details of these state laws only highlights the wisdom of the founding fathers and generations of Supreme Court justices in prioritizing the Commerce Clause, which protects the federal government's exclusive role in regulating interstate commerce. The 21st Amendment, which repealed Prohibition in 1933, as a side-effect sheltered states from the Commerce Clause's requirement to maintain an open, fair market for all players. This means that the wine market provides a glimpse into what a world absent the Commerce Clause might look like. We should all be thankful that most products we might want to buy don't have to face a similar regulatory nightmare. Our current map:
Below you can find an updated summary of what the world of DTC (direct-to-consumer) wine shipping looks like, from a winery's perspective, as we enter 2021, with states broken down into tiers based on the cost and ease of doing business there.
One thing that has changed since 2015 is that the playing field has been made harder to summarize by the rise of "economic nexus" statutes, driven by the 2018 Supreme Court ruling South Dakota v. Wayfair, Inc. This ruling said that states could require out-of-state companies to collect and remit sales taxes, whereas previous rulings had held that states could only comply tax collection and remittance from companies with a physical location (a "nexus") in that state. In practice, this has meant that states have begun to implement transaction thresholds, above which wineries have had to remit state (and sometimes local) taxes, but below which they don't. That annual threshold has tended to be somewhere around 200 shipments or $100,000. For us, we're over that threshold in places like Colorado, Illinois, and of course California, but not in Iowa, DC, or Minnesota (though we're getting close). So, the numbers below reflect the conditions for a winery of our basic size and profile. I've noted the states with current or upcoming economic nexus laws with asterisks (*) below, with some explanatory notes.
Tier I: The no-brainers (AK, DC*, MN*, MO*)
- Right now, there are three states and the District of Columbia that have neither permit fees nor significant reporting requirements. Thank goodness for them! But, 4 of 51 isn't a great percentage. All of the others make it more difficult or expensive to ship wine to customers who want it. It's also worth noting that the permit-free status of these states is a holdover from pre-Granholm conditions and it's unclear that continuing without required permits is constitutional. DC and Minnesota are "economic nexus" destinations. If you're large enough to trigger those thresholds, bump them up to Tier II. Missouri will join them as a nexus state next year.
- Total percentage of US population: 4.02%
- Total number of reports required annually: 2
- Total permit fees: $0
Tier II: Inexpensive and/or fairly easy (CA*, FL, ID, IA*, KS, MA, ME, MD, MI, MT, NC, ND, NY, OH, OR, WA, WI)
- There are an additional seventeen states with permit fees of $200/year or less and modest reporting requirements (0-24 times per year). These states include some big ones like our home state of California, Florida, New York, Oregon, and Washington, but even for the smaller ones, the number of orders that a winery would need to fill in order to pay for the annual investment is very reasonable. You'll notice that most of the major wine-producing states fall into this tier. The two states with potential nexus-triggered reporting include Iowa (a small enough market that most wineries won't hit the nexus threshold) and California (where wineries who are based here likely already have the infrastructure in place). If you're an out-of-California winery selling here, or a winery big enough to trigger Iowa's nexus status, they'd both probably move to Tier III.
- Total percentage of US population: 46.93%
- Total number of reports required annually: 178 (10.5/state avg.)
- Total permit fees: $1,225 ($72/state avg.)
Tier III: Moderate expense or requirements (AZ, CO*, GA, IL*, IN, NV, NH, NM, PA, TX, VT, VA)
- Once you get to the next tier of twelve, a small winery would be excused for starting to run cost-benefit analyses before springing for the permits. Some permits start to get expensive in this tier, like Illinois' $350/year or Vermont's $330/year. Others are less expensive, but have difficult reporting requirements, like Georgia and Nevada (36 reports/year each). Colorado would be in Tier II except for the nexus requirements, which are pretty arcane. If you're small enough not to trigger the statute, move it down a tier. Illinois is probably Tier III even if you don't trigger the nexus, with separate excise tax reporting required for the city of Chicago. But even with their added challenges and expense, there are some pretty large-population states in this tier, and most wineries choose to ship to all or nearly all of them.
- Total percentage of US population: 30.72%
- Total number of reports required annually: 289 (24/state avg.)
- Total permit fees: $2,063 ($172/state avg.)
Tier IV: Difficult or expensive enough to be a real question (HI, NE, SC, WV)
- At this point, we get to four small states with difficult requirements, to the point that it's not worth it for many wineries to bother. Permits cost as much as $500/year (Nebraska) and $600/two years (South Carolina). West Virginia charges $250/year and requires the submission of 36 reports. And Hawaii requires you to get separate annual permits from each county, at a total cost of $324, and to submit 25 reports. With limited rewards, these costs tend to feel disproportionate.
- Total percentage of the US population: 3.14%
- Total number of reports required annually: 78 (19.5/state avg.)
- Total permit fees: $1374 ($344/state avg.)
Tier V: Compliance Headaches (KY, OK, SD, TN, WY)
- This next tier of five states aren't hugely expensive, but each has at least one unusual requirement. These include South Dakota's requirement that you register every label you're planning to ship into the state at a cost of $25/label/year, Oklahoma's prohibition from using fulfillment houses (so everything must be shipped from the winery location), and very low per-person or per-household import limits: 1 case/month and 3 cases/year maximum per person in Tennessee, and 4 cases/year per household in Wyoming. I could have added Minnesota in here as well, with its 2 cases/customer/year limit, but it's otherwise so easy (no permit, no reporting) that I left it in Tier I. Kentucky is the newest state to pass a direct-shipping law, and is still working out the kinks. It will probably end up in Tier II, but for now, it's like Oklahoma and not allowing wineries to use fulfillment houses, instead requiring that they ship only from their winery. A headache.
- Total percentage of the US population: 5.10%
- Total number of reports required annually: 68 (13.6/state avg.)
- Total permit fees: $550 ($110/state avg.)
Tier VI: Extremely Difficult/Expensive (CT, LA, NJ)
- Connecticut is a shipping state for many wineries, but its expenses and challenges are significant. First, it's a costly permit, at $315/year, and requires 36 reports to be filed annually. Second, you must register each label you propose to sell in the state at a cost of $200/label, renewable every 3 years. At Tablas Creek, we sold 28 different wines direct last year (different wines, not different vintages). That would require a $5600 investment, adding $1866 to the already-considerable annual $1295 cost of permit and reporting. And finally, you can't have different label registrants for wholesale and direct sales. So, if you're like us and sell our wines to our Connecticut distributor through an agent (ours is Vineyard Brands) we couldn't register the same wines ourselves for direct sale.
- Louisiana, at $400 and 36 reports/year, would be the most expensive state in Tier IV even if it didn't add the extra hurdle of requiring you to choose between selling a wine direct and selling it through wholesale. But it does, and that pushes it over the edge for us. There used to be more states with "distributor exclusivity" requirements like this, but Louisiana is the last one left.
- How does New Jersey make direct shipping difficult? Let me count the ways. The permit is the country's most expensive at $938 and there are 29 reports to submit annually. There is a significant bond wineries have to post. There are registration fees of $150 per partner per year, an issue for a winery like ours owned by two families, each with several owners. Receiving a permit means that we have established a nexus with the state of NJ and are liable for paying an annual corporate income tax of at least $500. Plus there's a capacity cap of 250,000 gallons (around 100,000 cases) to ship that we fall under, but many wineries don't.
- Total percentage of the US population: 5.18%
- Total number of reports required annually: 101 (33.7/state avg.)
- Total permit fees: $1653 ($551/state avg.)
Tier VII: Almost entirely prohibited (AL, AR, DE, MS, RI, UT)
- Three states (Arkansas, Delaware, and Rhode Island) allow a winery to ship with few hurdles and minimal reporting requirements if a customer purchases wine at a winery, but won't allow the same customer to order wine by phone or email from home. The logic written into the laws is typically couched in the guise of ensuring that only of-age buyers can purchase, but given that common carriers routinely check ID's in the 40+ states that allow direct shipping, it doesn't pass critical muster and is better understood as local protectionism.
- Three other states (Alabama, Mississippi, and Utah) allow customers to order wine from a winery, have it shipped to a state-licensed store, where taxes are collected, and then the wine released to the customer. It's slow and expensive, because it requires the customer to request and complete a state "special order" permit before shipping, and while the taxes aren't massive in Alabama, they're a whopping 88% in Utah. Mississippi's permit program is brand new, and may not be workable as initially published. In all three cases, the process is cumbersome enough that the Wine Institute still lists the three states as "prohibited".
- Total percentage of the US population: 4.92%
Every winery has a different breaking point. For us, it comes in the middle of Tier V. We've decided that 41 states (everything in Tiers I-IV, plus Tennessee and Wyoming) warrant the expense of the annual permits and the reporting. Kentucky will come on line soon to be our 42nd, and I'm going to take another look at South Dakota now that we have a full team in our accounting department. That leaves 8 states that we either can't ship to, or have found that the requirements to do so are unreasonable. At what cost? Shipping to the 43 "shipping" states in Tiers I-V costs a total of $5,212 in permit fees plus the time and expense of preparing and filing 615 reports each year. Figure an hour for each report, at $25/hour ($15,375) for a total expense of $20,587. But for that cost, we can ship to 89.9% of the US population. Available tools (like SOVOS ShipCompliant and Avalara) provide a savings over the labor of preparing the many individual reports and are indispensable for wineries looking to ship to a broad swath of states, but still come with a cost.
Why are there some states that have made it so difficult or expensive that they're choosing to give up the state income that direct shipping would provide? The reasons vary, but mostly fall into one of two camps. Either they're making it difficult for religious or cultural reasons (think the deep south, or Utah) or they've crafted their laws in a way that protects distributors from as much competition as possible. This occurs because alcohol distributors (which are all state-licensed) see direct shipping as a threat to their businesses and are also some of the largest donors to state legislative campaigns.
So, while wine in America is not sold in a free and open market, most of that market is at least accessible to most wineries with some effort and expense. And if we're a long way from the Supreme Court's 1949 ode to the Commerce Clause of the US Constitution in H.P. Hood & Sons vs. Du Mond, the relevant text of which is below, we're at least making incremental progress:
"Our system, fostered by the Commerce Clause, is that every farmer and every craftsman shall be encouraged to produce by the certainty that he will have free access to every market in the Nation… Neither the power to tax nor the police power may be used by the state of destination with the aim and effect of establishing an economic barrier against competition with the products of another state or the labor of its residents."
- If you're interested in diving into the state-by-state regulations, the Wine Institute's Direct Shipping Laws for Wineries page is a great place to start.
- Thank you to Jeff Carroll, GM of Avalara for Beverage Alcohol for his feedback on this topic and particularly for his explanation of the growing challenge that economic nexus laws will pose.
- If you'd like to get involved in the push for more open direct shipping laws, the nonprofit Free the Grapes, on whose board of directors I serve, has information, resources, and templates for contacting state representatives.