How Compliant Is ‘Three-Tier DtC’ Alcohol Shipping?

Alex Koral
January 24, 2022

As the direct-to-consumer (DtC) beverage alcohol shipping market continues to grow, spurring more interest in the market, there has been a recent rise in, as it’s called, “three-tier DtC shipping” services.

In this arrangement, a beverage alcohol supplier—a winery, brewery, distillery, importer or other supplier who might be looking to establish their own DtC program—works with one of these services to fulfill DtC orders across the country. The supplier will distribute their products through a partner wholesaler to a retailer who will make and fulfill the sale, which is how the process gets called “three-tier compliant.” The supplier also will market their products themselves and allow consumers to enter in orders, making them also “DtC,” though the retailer is still the party responsible for the sale and fulfillment.

While this arrangement may seem advantageous—a ready means for a supplier looking to enter the DtC market to avoid the complicated business of getting licenses, policing orders and remitting taxes—there are some very real unanswered questions about these “three-tier DtC” programs, importantly, how compliant they are in the end. They have the sheen of compliance and the vouchsafes that because a distributor is involved, they must be compliant. Yet any supplier who signs up for one of these services without doing due diligence and investigating how they operate, and how they are legally fulfilling their DtC orders, remains at risk for being party to a potentially illegal operation.

Here are some of the key considerations suppliers should keep in mind as they look into these services.

Are you three-tier compliant?

DtC shipping of alcohol can be very complicated and require managing a number of compliance requirements. However, that doesn’t mean that three-tier distributions are free and easy from a regulatory perspective, particularly if it involves selling across state borders. Anyone signing up for a “three-tier DtC” program will need to make sure that they are in compliance with all relevant three-tier distribution laws (Read up on those laws for wine and beer).

This means getting any necessary licenses, meeting any brand/label registration requirements in the state, properly bringing products to distributors, and filing follow-up reports, even possibly paying excise taxes. Many “three-tier DtC” programs can make it seem as simple as signing on the dotted line, but suppliers should ensure they can legally bring their products to the distributors and retailers who will be making the final sale to consumers.

There is another major concern with “three-tier DtC” programs that have so far been wholly unaddressed by this developing industry. Namely, how do they manage the lingering tied-house concerns that may arise if a supplier is directing their consumers to purchase from a specific retailer?

Laws at both the state and federal level prohibit a wide range of cross-tier collusions, including the “provision of things of value” from a supplier to a retailer. While the laws vary depending on the state and product type at question, directing consumers to buy from a specific retailer is a fairly common thing of value in the eyes of regulators. If a supplier is privileging one particular retailer by signing up for their “three-tier DtC” program, which the supplier then advertises and offers to consumers, it is hard to see how that is three-tier compliant.

It is possible that these “three-tier DtC” programs have resolved these tied-house concerns, and a supplier using them only needs to worry about their own three-tier compliance obligations, but if they have, they do not publicly address tied-house laws.

Is the “three-tier DtC” program DtC-compliant?

The greatest value these programs advertise is that a supplier can avoid the bother of DtC regulations or logistics. The supplier, then, is relying on the retailer who will fulfill the orders to manage that bother, which does leave open the often unanswered question: how are the retailers themselves making the DtC shipments?

Some retailers may be relying on their ability to make local deliveries. However, those rights are not available in every state (if the retailer even has a licensed premises in every state), and often enough those local delivery options are more limited than those retailers may claim. For instance, in Texas, a retailer can only deliver within two miles of the corporate limits of their city or county, blocking statewide deliveries. And while many states have adopted more robust shipping and delivery options for retailers during the COVID crisis, they are far from universal.

More concerning, there are plenty of “three-tier DtC” programs that seem to operate from a single retail location, often based in a large state like California, Florida or New York. This retailer may be getting product properly through their local three-tier system, but how then do they ship an order to a consumer in a different state? While there are several states that do permit out-of-state retailers to make DtC shipments to their consumers, it is still rather restricted, and many of the largest states are not open for such shipments.

A supplier that signs up for a program to ship nationally from a retailer located in one state needs to ask themselves, what is three-tier compliant about a California retailer shipping to a consumer in Texas?

Trust, but verify

In the ongoing fights over direct-to-consumer shipping of alcohol, wholesalers are often the first to bring up potential compliance concerns. As such, the prospect of so-called “three-tier DtC” shipping, with the wholesaler imprimatur, may seem very attractive. That stamp of approval, though, hides a great number of questions and concerns about how compliant “three-tier DtC” actually is.

It is well established in beverage alcohol jurisprudence that the three-tier is “unquestionably legitimate.” (North Dakota v. United States, 495 U. S. 423, at 432.) That does not mean, though, that just because a sale involves the three-tier system, it is also inherently legitimate.

Suppliers looking to sign up for these services therefore need to thoroughly vet and understand both their own ongoing compliance liabilities and how the “three-tier DtC” program works to make sure it is actually legally permitted to make the sales it is making. Asking lots of questions, not taking the program’s word for it, and seriously considering the potential risks in signing up for one of these programs are all necessary steps a supplier needs to take.

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Alex Koral

Alex Koral is Senior Regulatory Counsel for Sovos ShipCompliant in the company’s Boulder, Colorado office. He actively researches beverage alcohol regulations and market developments to inform development of Sovos’ ShipCompliant product and help educate the industry on compliance issues. Alex has been in the beverage alcohol arena since 2015, after receiving his J.D. from the University of Colorado Law School.
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