Direct Wine Shipping, Fulfillment Houses and Regulatory Overreach

Posted by Tom Wark on Jul 11, 2021

While I’m sure it exists somewhere, I can’t think of a more intrusive regulatory bureaucracy than the one that governs alcohol in the United States. Since its inception in the 1930’s following Repeal, it has only grown and grown. I think what has grown with it is the tolerance for intrusion by the regulated.

Part of the problem with the outsized alcohol regulatory structure is that with the states being given the burden of regulating alcohol inside their borders with the passage of the Twenty-first Amendment, the various chapters of alcohol law have been gamed, added to and complicated by sectors of the industry wanting codified protection from competition, but also by some attorneys and regulators that have come to believe more laws and more regulation means more job safety and more self-importance.

Take, for example, the recent moves by states and other third-party organizations to regulate fulfillment houses. We now have laws in three states that govern, regulate and issue permits to out-of-state fulfillment houses. The theory is that by overseeing these businesses, states can better track the wines being shipped into the state.

It’s a power grab. And like so many power grabs, it’s a duplicative effort that doesn’t advance or protect any real interest other than those doing the regulating.

Alex Koral, Senior Regulatory Counsel for ShipCompliant-Sovos, recently penned an article at Wine Industry Advisor that perfectly explained how lawmakers and regulators across the country have come to believe there is a necessity to license and regulate fulfillment houses:

“Though fulfillment houses only operate under the explicit direction of a licensed shipper, they often appear to regulators as unlicensed entities in the DtC market, which brings up legitimate fears of possible sales to minors or lost tax revenue to the states. For legislators, who may not fully understand the shipping process but are stoked by these fears, fulfillment houses present a ripe target for additional, but unnecessary, regulation. For example, this year we’ve seen headlines like “Tennessee Legislators Aim to Limit Winery Direct Shipping Sales” and “States Grapple With How to Regulate Fulfillment Houses.” The increased legislative activity has thrust fulfillment houses into the industry spotlight, while the rise in DtC alcohol purchases has made their role more relevant to consumers as well.”

Alex’s well-reasoned and rational explanation of why lawmakers and regulators in various states are making a play to bring fulfillment houses into their regulatory orbit is correct in every respect. But there is more than fear going on.

In general state regulators don’t like the direct shipping of wine that has spurred the need for wineries and retailers to use fulfillment houses. They generally view direct shipment as an attack on their regulatory systems. Direct shipping falls outside the three-tier system and the tied house laws regulators exist to defend and enforce.

But the middle tier is also behind the move to regulate fulfillment houses. Wholesalers, who as it turns out have literally nothing to do with, for, or about the direct shipment of wine, want to make the practice as tightly regulated as possible. They have been urging lawmakers to pass these unnecessary and undoubtedly unconstitutional laws.

For example, it was members of the alcohol wholesale tier that convinced the venerable Uniform Law Commission to embark on what is now more than a year-long effort to reign in fulfillment houses that work with direct shippers by writing a draft law the ULC hopes all states will adopt.

Founded in 1892, the Uniform Law Commission has a mission to “provide states with non-partisan, well-conceived and well-drafted legislation that brings clarity and stability to critical areas of state statutory law.”

In the case of fulfillment houses, the ULC is attempting to craft a law that asserts a state has the right to regulate an out-of-state fulfillment house that neither does business in the state nor derives income from the state that would assert its jurisdiction. They are still in the process of writing this draft law that, once approved by the ULC, will be delivered to every state legislature with the recommendation they add the language to their alcohol laws.

As Koral notes in his piece for Wine Industry Advisor, the effort to nail down who is shipping what into a state is easily achievable through the use of tracking numbers, rather than the licensing of Fulfillment houses and requiring they submit monthly reports to every state their winery and retailer clients ship to.

I’ve sat in the meeting of the ULC as its members and other observers discuss this tactic. The members of the drafting committee have been told not only the adverse effect such a regulatory reach will have on these companies, but also that they would lose a lawsuit that will inevitably be filed challenging the constitutional right of states to assert such jurisdiction. Doesn’t matter. The drafters are dead set on towing the wholesalers’ line that fulfillment houses are nefarious entities helping direct shippers hide what they are doing. It is a cynical position to take. Yet they take it nonetheless.

There has not yet been a lot of push back against the claim that states may assert jurisdiction over businesses that do no business in the state that passes the fulfillment house licensing laws. Part of this lack of pushback is due to the fact that alcohol companies and those that service them have become so accustomed to being jerked around by lawmakers and regulators that they now factor it in as a cost of doing business. Moreover, often the jerking around is being done by a state regulatory agency that exists in a state where companies don’t reside, making it doubly difficult to push back.

I and some others will be very happy to push back against the ULC’s cynical draft law aimed at fulfillment houses. There will be trade associations that will be more than happy to support lawsuits against this regulatory overreach. The hope is that the fulfillment houses will join the fight and also push back.