Shipping alcohol direct-to-consumer (DtC) means juggling compliance rules across a wide range of regulatory systems.

There are the familiar alcohol rules—getting the right licenses, registering brands, verifying consumer ages, and tracking how much each consumer can buy. But one issue is particularly troublesome for DtC shippers: sales tax.

Part of the problem is that sales tax is complicated on its own. The United States has more than 12,000 sales tax jurisdictions, each with its own rate to track, collect, and report.

But for many DtC shippers, the hardest question is also the most basic: when do I owe sales tax on my shipments?

The short answer comes down to one word: nexus, which simply means “connection.” As established under Federal principles, a state can only require a business to collect sales tax from customers and pay it to the state (known as “remitting”) when the business has a sufficient connection to the state that doing so is “fair.” This fairness test is the general standard the Supreme Court has set for when states can impose sales tax obligations on businesses.

This still gets tricky for DtC shippers because 1) there are several types of nexus, and 2) each state’s rules must be reviewed separately. Below, we break down the types of nexus that matter for DtC shippers and how they affect sales tax obligations from state to state.

What are the different types of nexus?

Physical presence

Physical presence is the most basic form of nexus. It simply means a business has a direct, tangible connection to the state. In the 1992 case Quill v. North Dakota, the Supreme Court ruled that physical presence was the only way a state could require a business to collect sales tax.

At first, physical presence meant where a business actually operated — where it had a storefront or headquarters. But as ecommerce grew and states looked for more tax revenue, the definition stretched to cover almost any property or activity in the state: employees, inventory temporarily stored there, and, briefly, even internet cookies on residents’ computers.

Economic nexus

Even a stretched physical presence test couldn’t keep up with the internet era, however, and states continued to worry about lost tax revenue from online sellers like Amazon, even though consumers technically still owed “use tax” (the sales tax equivalent for out-of-state purchases) and Amazon itself had a physical presence in more and more states.

This came to a head in the 2018 case South Dakota v. Wayfair, in which the Supreme Court overturned Quill. The Court ruled that physical presence was no longer the only way to establish nexus and that the broader “fairness” standard would apply going forward. The Court also spoke favorably of the South Dakota law at issue, which required businesses to collect sales tax if they made more than $100,000 in sales, or 200 transactions, in the state each year.

Although Wayfair did not require it, South Dakota’s “economic nexus” rule has become the national standard with every state with a sales tax having adopted a revenue threshold for determining sales tax liabilities. (Most states have since dropped the 200-transaction test as fundamentally unfair.)

As a result, to know whether they must collect sales tax in a state, businesses now need to look at both their physical footprint there (property and employees) and their annual sales into the state, with $100,000 as the common (but not universal) threshold.

DtC shipper nexus

DtC alcohol shippers, however, are a special case — and not just for the obvious reasons. They are also subject to a third kind of nexus: “DtC shipper nexus.”

DtC shipper nexus applies only to DtC alcohol shippers, as it comes from the state laws that make DtC alcohol shipping legal in the first place.

Here’s how it works: to ship alcohol directly to a state’s consumers, a winery, brewery, distillery, or retailer must get a special license from that state’s alcohol regulator. But one condition of getting that license is having an active sales tax account with the state’s Department of Revenue.

In legal terms, the shipper has “waived its nexus defenses” — it has voluntarily agreed to owe sales tax in exchange for the license. Put simply, if a business wants to ship alcohol into the state, it must collect and pay sales tax on those shipments just like an in-state business. Few tax departments use (or would even recognize) the term “DtC shipper nexus”; it is the label Sovos ShipCompliant uses to describe this arrangement, but it accurately speaks to this DtC shipper obligation.

DtC shipper nexus isn’t universal, though, as several states either don’t make it a license condition or impose a lighter obligation that grows if the shipper has additional nexus in the state.

What does this mean for a DtC alcohol shipper?

In short, states can use three different nexus standards to require a DtC alcohol shipper to collect sales tax — two that apply to all businesses, and one unique to DtC shippers.

A DtC shipper will have physical presence nexus in its home state and anywhere else it has a physical footprint  —such as additional production facilities, sales staff, or long-term storage.

It will also have DtC shipper nexus in most states it ships to. There are some notable exceptions, but when entering a new state, a DtC shipper should assume it will owe the same sales tax as a business physically operating there.

In the states without DtC shipper nexus (or where it carries a lighter obligation), DtC shippers owe sales tax only if they meet one of the standard nexus tests.

The states without DtC shipper nexus — where a DtC shipper owes sales tax only if it has physical presence or economic nexus — are:

• Alaska (local tax only)
• Colorado
• District of Columbia
• Florida
• Iowa
• Kansas
• Minnesota
• Missouri
• Wyoming

Note that Kansas does not apply sales tax to alcoholic beverages, but its 8% Enforcement Tax does apply to DtC shipments. Wyoming charges a 12% Markup fee on all DtC shipments, with sales tax only attaching if the shipper has economic nexus.

Illinois and Louisiana are also worth noting. In both states, DtC shipper nexus covers only the state-level use tax, not local (city or county) taxes. That means DtC shippers pay a lower rate than other businesses — until they cross the state’s economic nexus threshold, at which point local taxes apply too.

Of course, there is much more to sales tax compliance, including tracking rates and understanding how each state treats different products. But for DtC alcohol shippers, the primary concern with sales tax compliance is simply recognizing when they have an obligation in the first place.

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