States grapple with how to regulate fulfillment houses
Although fulfillment houses facilitate direct-to-consumer (DTC) sales for thousands of wineries across the country and around the globe, most states are just beginning to regulate them. Some are incorporating fulfillment houses into their systems of checks and balances through new regulatory and reporting responsibilities. In time, other states will likely do the same.
What fulfillment houses do
Fulfillment houses play a critical role for wineries, many of which lack the space to store product and the resources to ship directly to consumers nationwide. Wineries contract with fulfillment houses to store wine, prepare it for shipment, and pass it to the common carriers responsible for delivering it to consumers (e.g., FedEx and UPS). Where DTC sales of beer and spirits are permitted, fulfillment houses can perform the same role for breweries and distilleries.
Despite handling storage and “pack & ship” logistics, DTC fulfillment houses aren’t considered the retailer of the alcohol they store and distribute. They’re logistics centers. The manufacturers and retailers that use their services are the sellers responsible for collecting and remitting the applicable taxes. As their name suggests, fulfillment houses then pick and pack the orders.
Yet fulfillment houses do need to be licensed in the states where they operate because they handle alcoholic beverages — and all states closely monitor and strictly regulate alcohol sales.
Surge in DTC alcohol sales highlights role of fulfillment houses
From March 7 to April 18, 2020, as Americans adjusted to living under stay-at-home orders adopted to slow the spread of COVID-19, online alcohol sales grew by more than 230%. This rapid rise in DTC alcohol sales is inspiring states to scrutinize the role of fulfillment houses. States want to know who these businesses are and ensure they comply with alcohol regulations.
At least one state, Tennessee, has considered banning the use of fulfillment houses altogether.
The future of fulfillment houses in DTC sales
Fulfillment houses currently cannot make DTC shipments in Oklahoma: Wineries must ship their products directly from the address on their DTC shipping license. If Tennessee House Bill 0742 (Senate Bill 0705) were to become law as originally introduced, the use of fulfillment houses would be prohibited in Tennessee as well. However, as explained below, that likely won’t come to pass in Tennessee.
It should be noted that Oklahoma lawmakers didn’t set out to remove fulfillment houses from the DTC supply chain. It was a legislative oversight interpreted in the strictest sense by the Oklahoma Alcoholic Beverage Laws Enforcement Commission.
A similar oversight temporarily banned the use of fulfillment houses in Kentucky, where out-of-state producers of beer, wine, and spirits only recently won the right to ship directly to consumers. However, this was quickly corrected with the enactment of House Bill 415 on February 12, 2021. A holder of a direct shipper license may now use a third party to fulfill shipments into Kentucky, provided the third party holds a storage license or transporter’s license; fulfillment houses don’t need an alcoholic beverage license.
Tennessee may not ban use of fulfillment houses after all
The situation is different in Tennessee, where earlier this year lawmakers set out to deliberately ban the use of fulfillment houses.
Tennessee prohibits direct shipments by breweries, distilleries, or retailers, but licensed fulfillment houses currently do ship wine to consumers in the Volunteer State on behalf of licensed DTC shippers (i.e., wineries or winery direct shippers). Had HB 0742 become law as first introduced, wineries would have had to fulfill and ship orders themselves. Many would likely have foregone shipping to consumers in Tennessee instead.
Fortunately, after many in the wine industry voiced concerns over the proposal, lawmakers amended the bill. The amendment creates a fulfillment house license with a $300 application fee and a $300 annual renewal fee (plus $50 annually per warehouse location). Fulfillment houses could ship wine on behalf of wineries or winery direct shippers that are licensed to make direct sales in Tennessee. In addition, fulfillment houses would be required to:
- Verify the licenses of wineries and winery direct shippers
- Maintain records of all transactions
- Submit quarterly reports to the Alcoholic Beverage Commission
Amended HB 0742 has been approved by the Tennessee House and Senate. If enacted, it’s unclear how many fulfillment houses would apply for the new license, though lawmakers estimate at least two fulfillment houses would seek and be approved for it. The impact on state revenue is expected to be minimal.
Fulfillment house license requirements in other states
Tennessee wouldn’t be the only state with a special license or reporting requirements for fulfillment houses.
Lawmakers in Alabama are favorably inclined toward Senate Bill 138, which would allow wineries to ship directly to consumers in the state and create a license requirement for fulfillment houses. On April 29, 2021, the Senate unanimously approved an amended version of the bill, and only five members of the House voted against it. To become law, the measure now needs the signature of Gov. Kay Ivey, who in early April signed a bill allowing direct-to-consumer deliveries of beer, wine, and liquor.
In Virginia, fulfillment houses must obtain written approval from the Virginia ABC for each winery they represent. Illinois requires fulfillment houses to file annual reports detailing shipments to Illinois consumers, so the ABC can check it against reports filed by DTC licensees.
Fulfillment houses may facilitate sales into New Hampshire once they obtain approval from the New Hampshire Liquor Commission; they must then submit monthly reports to the commission detailing the name and address of the seller, the carrier tracking number, recipient name and address, and more.
North Dakota requires each fulfillment house to obtain a logistics shipper license, as Tennessee is proposing.
Kansas explores fulfillment house license
Kansas is also looking to establish a special license for fulfillment houses, for a one-time license fee of $50 (plus $50 per location). Under House Bill 2252, the holder of a fulfillment house license may provide services for the warehousing, packaging, and shipping of alcoholic liquors produced by, and belonging to, a special-order shipping licensee.
The Kansas measure would require a fulfillment house licensee to submit monthly electronic reports to the state, rather than quarterly. The measure was approved by the House and is now being considered by the Senate, which adopted a motion to accede on March 30. The Kansas Legislature is adjourned until May 3, 2021.
Fulfillment houses are already allowed to ship wine to consumers in Kansas. The proposed license and reporting requirements would simply help the state track who’s selling and shipping what.
Expect more states to adopt new licensing requirements for fulfillment houses
If states haven’t much wrestled with the question of fulfillment houses before now, it’s because it’s a relatively new issue that state ABCs are exploring further. And in California, where most fulfillment houses are based, regulators simply consider them to be working on behalf of the licensed wineries.
As states come to grips with the impact of ecommerce on existing alcohol shipping laws, more are likely to follow the lead of Kentucky, which explicitly allowed the use of fulfillment houses, or Tennessee, which licensed their use. This will authorize fulfillment houses to become the third leg in a three-legged system of reporting checks and balances:
- Wineries report their sales and shipments
- Fulfillment houses report the orders they fulfill for the licensed manufacturer or retailer
- Common carriers report their deliveries, with a signature ensuring the recipient was at least 21
The future is full of opportunities for online alcohol sellers. Avalara for Beverage Alcohol can help ensure tax compliance doesn’t stand in the way of growth. Contact Avalara's Beverage Alcohol team to learn more
It’s here! Read Avalara Tax Changes 2022
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.