Why Play By The (wine shipping) Rules?

Rules I was contacted recently by the owner of one of the most accomplished and successful Direct-to-Consumer wineries; a winery that has been able to secure the vast amount of their annual revenue from direct to consumer marketing and shipping. They asked me a simple question:

"Why should I continue to abide by the rules and regulations of the various states that allow licensed direct to consumer shipping?"

It was a legitimate question.

The fact is, as long as there are wineries that ship into states without paying for a permit, without undertaking and paying for the tasks associated with the required reporting to the states and without remitting required taxes to those states, those wineries that do these things and work via the letter of the law are put under a severe disadvantage. Why should they work under this kind of disadvantage?

With the exception of noting that its the law and that failing to ship wine under the letter of the law is not a legitimate act of civil disobedience, I couldn't come up with a really good reason why this winery owner should continue to act in obedience to the state laws and put their business at a disadvantage in the marketplace.

If you are a winery and you want to ship direct to consumer to, say, the 20 largest wine consuming states, it's going to cost you. It's going to cost you in paying for annual permits. It's going to cost you time and money to comply with the reporting requirements. It's going to cost you to arrange to collect and remit taxes that must be remitted to these states. Meanwhile, the lawbreakers are creating an unbalanced playing field and taking up residence on the light side of the equation.

They can do this because the fact remains that there is very little in the way of enforcement of the direct to consumer shipping statutes that exist in states that allow wineries to ship. Now, it's true that State liquor commissions really are misspending their resources if they are committing too much time and money to policing direct shipping since this method of distribution is one that doesn't lend itself to abuse by heaving imbibers or by under-aged drinkers. Nor is it the source of nuisance that brick and mortar bars and alcohol retailers can be. At least when it's done above board and according to the rules.

The State of New Hampshire, for example, is able to police its direct shipment in an efficient way by keeping good records and working with common carriers to see who is shipping and how current they are on their reporting and remittance of taxes. And they are able to do this without significant expenditures. Direct To Consumer shipping is, in fact, among the safest and easiest regulated distribution avenues.

Still there are wineries that break the rules.

But what my friend the winery owner pointed out, and which is absolutely true, is that if wineries want to be able to ship to every state in the union, what they need to do is demonstrate that this avenue for consumer sales lucrative for the state. And the best way to do that is to have each and every winery that wants to ship into a given state to register, pay for their permit and pay taxes to the state on the wines they ship in.

As winery associations and their allies go state to state asking for direct to consumer shipping privileges, they need to be able to show that this sales channel is a lucrative source of tax revenue that is not merely a case of trading in-state sales for out of state sales, a circumstance it decidedly is not. However, to show this they need to be able to point to other states where shipping rights have been granted and and revenue increased. This happens in significantly impressive ways only when the entire collection of wineries shipping direct do so in accordance with state laws that dictate both reporting and tax collection.

This goes to for wine retailers, who have seen a set of circumstances specific to their political disposition provide them with merely 14 states that allow legal retailer to consumer wine shipping.

I suspect my winery owner's lament was just that and I suspect he'll continue to play by the rules even though it puts him at a commercial disadvantage in the market place. He'll probably be just fine as he's is a remarkable marketer who knows the consumer mind and how consumers operate and because he provides exceptional customer service, the bedrock requirement of any good direct to consumer marketer.

But his (likely) rhetorical question remains a good one: If all are not going to, why should he play by the rules?


14 Responses

  1. El Jefe - May 17, 2010

    It’s not just the cost of complying with the rules for each state that I can ship to. I’m also at a disadvantage in the states that I either can’t ship to (because it’s illegal) or don’t ship to (because it’s too expensive relative to the return.) There are wineries shipping to prohibited states, and consumers don’t understand why I am not able to ship there, but that other guy does.
    Your point about showing shipping-prohibited states how it can work is very well taken, and is why I will continue to be a boy scout (at least in this matter ;).

  2. Benito - May 17, 2010

    To build upon El Jefe’s point:
    There are wineries shipping to prohibited states, and consumers don’t understand why I am not able to ship there, but that other guy does.
    Tennessee just recently allowed limited shipping, with permits and annual fees. Before that, profound ignorance ruled the day, which made it difficult to get the laws changed. Many people refused to believe that it was illegal, or that there were legal circumventions. Among the excuses:
    – “Sure it’s illegal, but my wife was born in California so we’re exempt.”
    – “I paid for a tour of five wineries in Napa, and included in the price was a permit for lifetime shipping to Tennessee.”
    – “It’s OK as long as you don’t go above X cases.” (X was never the same number.)
    – “I’m grandfathered in. This law doesn’t apply to me.”
    Now that things have slightly opened up, people still don’t know what’s going on. They falsely believe that:
    – Shipping is fully open and legal from any state or country.
    – There are no case limits.
    – This also applies to beer and spirits.
    Sadly, what happens is that customer service personnel at honest wineries bear the brunt of angry, ignorant customers. When I visited Sonoma I stopped saying I was from Tennessee because of the painful wince I’d see on the face of the tasting room host.

  3. Bobby Cintolo - May 17, 2010

    Wineries and Wine merchants should play by the state wine shipping rules. If they do not it will eventually catch up with them. Corporate social responsibility is a prevalent topic of conversations in media, blogging, and the business world. Brand equity, awareness, and association are key drivers of influence and sales. Over the long term a major wine brand will cannot maintain the same level of respect and clout without following the rules.

  4. Marco Montez - May 18, 2010

    … because it’s the law. I rather say “no, sorry can’t ship there” than risk the chance of getting caught and loosing my winery permit. And when my customer tells me, “but X winery in MA ships to me”, I say “they must have a permit to do so and I don’t, I’m really sorry”.
    As a side note, I honestly haven’t figured out how a winery selling wines in the $14-$19 price range can legally ship direct to consumer and make any profit on it without making it ridiculously expensive to the customer. Between shipping, packaging, annual permits, and taxes, a $14 bottle of Chardonnay becomes really expensive. How many people are out there looking to buy and have shipped a full case of Massachusetts wine so that they can leverage the shipping cost? I’m guessing not many. It may just very well be that direct to consumer shipping isn’t fit for all wineries.

  5. Todd - May 18, 2010

    I now ship through a fulfillment service at the warehouse where I store my wine. It is only a dollar or two per bottle to use their permits. Not really a “severe disadvantage” compared to potential loss of license. And a lot better than putting it into three tiers.
    What I don’t understand is how people can ship wine without following the rules. Will FedEx or UPS ship it? Does the winery commit fraud at this level as well? My sense is that the number of wineries shipping without permits is overstated …
    I agree that states need to view simplifying their permitting and reporting requirements as a potential source of easy revenue and increased well-being for their citizens. Unfortunately, many states seem to want to make direct shipping as complicated as possible – increasing the burden on the winery and the state authority. (e.g., Why must I file a paper copy monthly to a state where I make only one or two sales per year?) The mindset of the liquor control boards needs to be brought into the 21st century.

    • Susan Weeden - June 5, 2015

      Hi Todd. May I ask what fulfillment house you are using that offers use of their permits for a fee? Is it Oregon Wine Services, by any chance? I am looking for an answer to this problem, and would love to hear who you are using. Many thanks.

  6. David Honig - May 18, 2010

    True for every business, profession, sport, or academic venture. Those who cheat have an advantage at the risk of getting caught. That, and personal morality, guide people’s behavior.

  7. Wineaux Dude - May 19, 2010

    What about this:
    A Federally/State Licensed Winery taking the “bull by the horns” and just going ahead and shipping their out-of-state Customer’s Wine Order to a Federally/State Licensed Winery in their Customer’s home State.
    Similar to how Firearems are shipped from Seller to Buyer, when residing in different States (but always between FFL Permit holders).
    And to compensate the receiving Winery, just assess a $10 to $20 Handling Fee to be paid directly to the receiving Winery at the time the out-of-state Winery’s Customer picks-up their order.
    No extra grief (a whole lot LESS grief, in fact!!!) for the Shipping Winery and some in-house face-to-face contact with potentially a new Customer for the receiving Winery.
    Why not?
    It works VERY well for Firearms, very well!!!
    Each Licensed Winery is already being tracked, regulated, and monitored by the Feds and by the respective State.
    So would that work?
    I think it would…

  8. Blake Gray - May 19, 2010

    I think some wineries should continue to break the rules. Eventually they have to hope they get caught.
    Shipping laws need a cause celebre. The issue is too arcane for average Tennesseeans to understand, as is well detailed above.
    But if some grandma with a medical condition gets busted because she was trying to buy a Cabernet from the winery she visited while on her second honeymoon, that will do wonders for the cause.
    You can’t have a test case without rule breakers.

  9. Paul Mabray - May 19, 2010

    Here is an interesting exercise. In certain states you can get access to the number of permits issued by the state. Two years ago we asked the NY ABC how many permits had been issued. The answer was just a little over 450. At that time there were over 5000 wineries in the US. Hmmmnn.

  10. Mark's Wine Club - May 19, 2010

    I should probably stay away from this one, but it would be nice if the states (yes even the relative few that allow 3rd party wine clubs to ship to their residents) to have something along the lines of a standard process. The reporting and continued requirements for a winery or other wine related business (especially at start up) are a major barrier to entry to the market.
    We don’t mind the paperwork….but it would be nice if everyone was allowed to play by the same rules. Using a fulfillment service or having the “Title in transferred in California” clause at payment shouldn’t really be good enough if permits are available. (Todd please note, I understand your choice and would do the same if available…)

  11. Ian Griffith - May 19, 2010

    The argument to ignore the legality of interstate shipping is even stronger for a retailer, especially when your local customers include commuters from neighboring states. There are so few states offering a legal channel for retailers that include permits and tax collection that I’m not even sure that argument is convincing. While a winery offers a unique product, a retailer is reselling wine that competitors, local and out of state, can also sell; this is a different level of competition. Yes, retailers would prefer to be completely law abiding and operate on a level playing field, but the field isn’t level. In many states the largest retailers clearly ship to more than 14 states with no consequences, why would another store in the same market limit their access to the same customers?

  12. Tom Lynch - May 20, 2010

    Clearly, there is no financial incentive to comply with all of the difficult, expensive, and complex laws, and there is plenty of incentive to NOT comply. The states make this more difficult than it needs to be. But the problem is not with the laws. The problem is with people.
    I’ve talked to several other importers who simply ship to all of the 34 states UPS ships wine to, without following any of the regulations. Like decisions about running stop signs when you’re late, there are always some who will do the selfish thing and break the law because they care more about their personal benefit than they do about doing the right thing. Your friend should do the right thing because it is the right thing. The fact that others lie, cheat, and steal (and lets call their behavior what it is – greedy lying, cheating, and stealing) doesn’t mean he should.
    It is a damn shame there are a lot of small wineries and importers who have no problem justifying illegal behavior to themselves and others. But at the end of the day I’d rather lose a little bit of business by doing things the right way than gain a little bit of business by cheating. I hope your friend, any many other good people, continue to do the right thing simply because it is the right thing.

  13. The Grumpy Winemaker - May 23, 2010

    Florida has the ideal system. Ship a case to FL, download a form and fill it out and send it with a check at the end of the month. No shipping to FL that month, no report. No yearly license either.
    California recently subpoenaed UPS for Washington winery shipping records to the late great state. Wineries that didn’t comply with CA’s ridiculous requirements got caught and were required to post the $500 cash, collect sales tax based on local option, pay wine taxes etc. (yes, Californians know good wine when they taste it.)
    We all have Senator Moron or is it Mormon Hatch (R)Utah for the license jerking ability by the feds.
    Bonair Winery complies with all shipping regulations as best we can read them. We get crap because not all wineries do, but if you lose your license, you need to find a job. Not easy in today’s job market.

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