Tennessee bill would ban the use of fulfillment houses for DTC wine shipments
A bill making its way through the Tennessee Legislature would make it illegal for fulfillment houses in the United States to ship wine to Tennessee consumers on behalf of licensed wineries. If House Bill 0742 or its companion Senate Bill is 0705 enacted, wine drinkers in the Volunteer State could soon be unable to purchase wine from their favorite wineries.
This bill caught wineries and consumers by surprise. If enacted, it could take business away from licensed fulfillment houses that do exactly what they’re authorized to do: Store wine on behalf of licensed wineries and ship it on their behalf via common carrier directly to consumers in Tennessee and other states. At this point, the motivation behind the bill is unclear.
What is a fulfillment house?
Wineries typically don’t have the capacity to store much wine on premises, or the bandwidth to ship wine directly to customers in various states. Instead, they use fulfillment houses — licensed entities that store the wine, prepare it for shipment, and make sure it gets to a common carrier. The use of fulfillment houses by U.S. wineries is pervasive.
Individual wineries or retailers handle the sale of the wine and collect all taxes due. The direct-to-consumer (DTC) fulfillment house handles the necessary shipping and legal logistics: picking and packing the wine, identifying the contents as alcohol, and arranging the delivery with a common carrier such as UPS or FedEx. Fulfillment houses are also known as third-party logistics companies. In California, they’re often called public warehouses.
Fulfillment houses provide valuable services for wineries, many of which don’t have the capacity to make DTC shipments themselves. Since they often have multiple locations throughout the country, they can cut down the length of time from order to delivery. They can also help keep shipping costs down.
Using a fulfillment house helps ensure alcohol won’t fall into the hands of minors. Fulfillment houses are required to use common carriers for delivery, and common carriers are required to obtain signatures on all alcohol deliveries. Fulfillment houses maintain records of deliveries and verification of the recipient’s age.
It’s estimated that over 60% of wine shipped DTC in Tennessee went through a fulfillment house before COVID-19 dramatically increased DTC wine orders nationwide.
A fulfillment house is not a third-party provider
Fulfillment houses are often mistakenly conflated with third-party providers, or TPPs. However, there are important distinctions between the two. Perhaps the most important difference is that fulfillment houses must be licensed, while TPPs are not.
The California Department of Alcoholic Beverage Control defines TPPs as “unlicensed entities that are involved with the promotion, marketing, and facilitation of sales of alcoholic beverages by licensees over the internet.” As such, TPPs typically do one or more of the following:
- Advertise alcoholic beverages
- Make recommendations to consumers
- Direct consumers to licensees
- Receive orders from consumers
- Pass orders to licensees
- Process payments on behalf of licensees
- Assist with shipping arrangements
What will change if HB 0742 becomes law?
Licensed wineries will no longer be able to ship wine directly to consumers in Tennessee through licensed fulfillment houses. Any wineries found doing so may be subject to a fine, suspension, or revocation of license or permit.
Many wineries that rely on fulfillment houses to make DTC shipments in Tennessee and other states will likely stop selling directly to consumers in Tennessee. So long as the use of fulfillment houses remains legal in other states, it would be cost prohibitive to continue doing business in Tennessee: It doesn’t make sense to develop an in-house process simply to sell directly into just one state.
HB 0742 was authored by Representative William Lamberth, the majority leader. It has the support of local wholesalers and retailers, who were disappointed in the loss at the Supreme Court in the Tennessee Wine & Spirits Retailers v. Thomas case. Enacting it would significantly reduce the available options for Tennessee wine lovers.
Learn more about the direct shipment of alcohol in States where breweries, distilleries, retailers, and wineries can ship DTC.
The 2021 sales tax changes report
Review sales tax updates and trends, plus get a forecast of what’s to come.
Stay up to date
Sign up for our free newsletter and stay up to date with the latest tax news.