New Jersey stands alone after Ohio removes DTC production cap
Wineries producing 250,000 gallons or more per year will be able to ship directly to consumers in Ohio starting September 28, 2021. New Jersey will then be the only state in the nation with a production cap on direct-to-consumer (DTC) sales.
New opportunity for midsize and large wineries in Ohio
With the enactment of House Bill 110, wineries with an annual production of at least 250,000 gallons (about 106,000 cases) will soon be able to apply for a new S-2 direct-to-consumer (DTC) permit in Ohio. The S-2 permit has an initial fee of $250 and an annual renewal fee of $100.
Like their smaller counterparts, S-2 permit holders must:
- Collect all applicable taxes on DTC wine shipments in Ohio, including the Cuyahoga County wine and mixed beverages tax, and remit the tax to the Ohio Department of Taxation
- Deliver wine shipments by a common carrier that holds an H permit (the common carrier must verify the recipient is at least 21 years of age)
- Report all DTC shipments in Ohio to the Division of Liquor Control annually
- Ship no more than 24 cases per household per year
As Ohio will maintain jurisdiction over permit holders, audits and enforcement efforts will be overseen by the Division of Liquor Control.
New permit for small wineries
Little will change for wineries currently shipping into Ohio under the S permit. However, instead of the S permit currently required, wineries producing less than 250,000 gallons of wine per year will need an S-1 permit to ship to consumers in Ohio on and after September 28, 2021.
The S-1 permit is slightly different from the S permit: Brand owners for U.S. importers of beer or wine and their designated agents that were previously eligible for the S permit are not eligible for the S-1 permit; but beer manufacturers based inside and outside of Ohio are eligible for the S-1 permit.
Tax requirements for large and small wineries
For the most part, H.B. 110 requires both in-state and out-of-state S-1 and S-2 permit holders to pay Ohio’s 30-cent-per-gallon excise tax on wine shipped directly to Ohio consumers. This is a change: Prior to the enactment of H.B. 110, Ohio-based S- permit holders weren’t required to pay the 30-cent-per-gallon tax. (The excise tax for wine with an alcohol content of >14% – 21% is 98 cents-per-gallon, and the rate for sparkling wine is $1.48 per gallon. Wine shipped to Cuyahoga County is also subject to the 32-cents-per-gallon Cuyahoga County Wine excise tax.)
Both S-1 and S-2 permit holders must pay the additional 2-cent-per-gallon tax that supports the Ohio Grape Industries Fund. Yet both in-state and out-of-state permit holders that manufacture 500,000 gallons of wine or less per year are exempt from state excise tax under H.B. 110 for that year. This is also a change, as the exemption currently applies only to Ohio-based wine manufacturers producing no more than 500,000 gallons of wine per year. Wine Institute provides additional details.
Ohio will further clarify tax obligations for S-1 and S-2 permit holders as well as fulfillment houses when it promulgates the rules.
New provision for fulfillment houses
H.B. 110 authorizes wineries large and small (aka, S-1 and S-2 permit holders) to use out-of-state fulfillment houses to facilitate deliveries into Ohio. As the fulfillment house is considered an agent of an S-2 permit holder, the permit holder is liable for violations committed by the fulfillment house with respect to wine shipped on its behalf. Like the wineries themselves, fulfillment houses shipping to consumers in Ohio must register with the Division of Liquor Control and report all shipments into the state annually.
Fulfillment houses are essentially logistics centers that store wine for wineries, prepare it for shipment, then pass it to common carriers. Though they aren’t considered the retailer of the wine orders they fulfill, they do need a license to operate in states where their use is permitted. Beyond that minimal requirement, many states don’t regulate fulfillment houses.
That’s changing. Increasing DTC sales are causing states to scrutinize and more closely regulate fulfillment houses. Most will likely follow the lead of Kansas, Kentucky, and Tennessee, which recently passed laws authorizing the use of fulfillment houses.
New Jersey stands alone
With the enactment of Ohio HB 110, New Jersey is the only state left with a production cap on DTC wine shipments: Out-of-state wineries producing more than 250,000 gallons of wine per year are prohibited from shipping directly to consumers in the Garden State. The pressure is on for New Jersey to open the DTC market to wineries of all sizes.
Eliminating the production cap would expand consumer choice in New Jersey, and perhaps provide more affordable options. It would also expand New Jersey’s tax revenue. Opening the market to large wineries could generate between $3 and $4.4 million in revenue (taxes and fees) per year for New Jersey in the short term, and up to $6 million annually after four years. Conversely, the production cap is estimated to have cost the state $30 million in tax revenue since 2012.
A similar production cap in Massachusetts was found to have a “discriminatory effect on interstate commerce” in 2008 because it prevented the direct shipping of “98% of out-of-state wine to consumers” while allowing all wineries in Massachusetts to sell directly to consumers in the commonwealth (Family Winemakers of California v. Jenkins). As a result of the ruling, Massachusetts eliminated its production cap. Yet despite the ruling, both Ohio and New Jersey clung to their production caps.
The COVID-19 pandemic underscored the need for DTC shipping, as ecommerce offers a safe alternative for in-person shopping. Now that Ohio has eliminated its production cap, all eyes are on New Jersey. A measure seeking to eliminate New Jersey’s production cap (A1943/S2683) has thus far not gained much traction, but both the House and Senate have held informational hearings about the bills; these usually are a good indicator of progress. All pending legislation must be acted upon by the end of this year.
Automating tax collection and remittance can help wineries of all sizes streamline compliance in Ohio and other states. Contact Avalara to learn more.
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