Tennessee Set to Impose Regulations on Fulfillment Houses in DtC Wine Shipments

Alex Koral
May 12, 2021

On May 6, 2021, Tennessee Governor Bill Lee signed HB 742 into law, establishing a slew of new provisions affecting the direct-to-consumer (DtC) shipping of wine in the state. These provisions, however, will not become effective until January 1, 2022.

While the bill does impose several new restrictions and requirements on businesses involved in DtC wine shipping in the state, particularly fulfillment houses, the most harrowing elements of the bill as originally drafted were removed.

What is Included in HB 742?

As originally drafted, HB 742 was focused solely on prohibiting DtC wine shippers from using fulfillment houses when making shipments to Tennessee residents. Such a restriction would have severely impacted the ability of wineries to fulfill orders to consumers in the state. As such, it is extremely welcome that an outright ban was not part of the final bill signed into law.

However, the amendments that did happen to HB 742 through its passage included several additional provisions that will apply to both licensed DtC shippers and the fulfillment houses they utilize. These additional provisions include:

  • New restrictions on the wines that a licensed DtC shipper may sell and ship DtC to Tennessee residents. As provided for in HB 742, winery direct shippers may only ship wine brands that are owned by or licensed to the shipper and that must be either produced directly by the wine shipper, or produced or bottled exclusively for the wine shipper under an existing written contract. This kind of “not of own production” law is a common restriction on DtC wine shippers, but it is unfortunate that Tennessee has decided to limit the access of Tennessee consumers to more wines that are not commonly distributed in the state.
  • New record retention and quarterly reporting requirements on winery direct shipper licensees. While DtC wine shippers are currently required to regularly remit Tennessee sales and excise taxes on their shipments to the state, HB 742 adds additional reporting that winery direct shippers will be required to file. Under these provisions, winery direct shippers will be required to file a quarterly shipping report, in a form and manner to be determined by the Tennessee Alcohol Beverage Control Commission (ABCC). These new reports must provide data detailing each of their shipments in the reporting period, including:
    • The name, address and license number of the fulfillment house used, or the name of the common carrier used, if the winery direct shipper did not use a fulfillment house;
    • The date of each shipment;
    • The carrier tracking number for each shipment;
    • The quantity, price and product type of each wine shipped; and
    • The name and address of the recipient of each shipment.
  • New permissions for two or more licensed winery direct shippers to sell and ship their wine in coordination with each other, allowing for the wines of more than one licensee to be packaged and shipped together. This will require that the wines are packaged and shipped together from a single licensed fulfillment house and that each winery direct shipper involved is individually licensed and compliant with their separate compliance and tax requirements. Generally, DtC wine shipments are limited by a one-licensee-per-package restriction, so this is a rather novel provision adopted by Tennessee, and one that hopefully other states will similarly favor in the future.
  • New licensing and reporting requirements on fulfillment houses involved in DtC wine shipping. These provisions are in many ways the centerpiece of HB 742, and certainly they have received the most attention. As originally proposed, HB 742 would have entirely prohibited the use of fulfillment houses in DtC wine shipping. While these new requirements will certainly have an impact on DtC wine shipping in Tennessee, at least the state did not go with that nuclear option. Fulfillment houses are defined in HB 742 as any entity other than a winery, wholesaler, common carrier, or other licensed supplier, that takes physical possession of wine and manages logistics on behalf of a winery direct shipper to fulfill orders to Tennessee residents. Under the new provisions, fulfillment houses involved in fulfilling DtC shipments to Tennessee must:
    • Receive a license issued by the Tennessee ABCC. This license will cost $300, plus $50 for each additional location from where it may ship wine into Tennessee. The license must be renewed annually. Applicants for a fulfillment license must agree to consent to jurisdiction in Tennessee, enabling the state to bring action against them in the state for any violations of state law that they may have engaged in.
    • Agree in writing to only service licensed winery direct shippers and work with compliant common carriers.
    • Ensure that all packages containing DtC shipped wine are properly labeled to indicate that they contain alcohol and signature of a person aged 21 or older is required.
    • Verify that the wineries they service are properly licensed by the Tennessee ABCC.
    • Retain records for three years and file a quarterly shipping report, in a manner and form to be determined by the ABCC, that will include the following data:
      • The name, address and license number of the fulfillment house used, or the name of the common carrier used, if the winery direct shipper did not use a fulfillment house;
      • The date of each shipment;
      • The carrier tracking number for each shipment;
      • The quantity, price and product type of each wine shipped; and
      • The name and address of the recipient of each shipment.

State regulators are increasingly concerned about perceptions of illegal DtC wine shipments, and they see fulfillment houses as an unregulated part of the DtC wine shipping market upon which they can impose new regulations. This view does overlook the fact that fulfillment houses are required to hold licenses in the state where they are located in order to store and hold wine on behalf of wineries (so they are actually not “unregulated” entities), and that they only make shipments under the explicit direction of wineries and make no sales themselves. Fulfillment houses by and large respect the central role they provide in enabling the legal DtC wine shipping market and already do much to ensure they only fulfill shipments on behalf of parties licensed to make those shipments.

Nevertheless, because of the critical role that fulfillment houses play in the DtC wine shipping market, they are apt to abide by the regulations that a state may impose on them, especially as directly challenging them would likely be a long and difficult fight, where compliance might just be the easier path. It is likely, though, that following Tennessee’s success in passing these provisions, other states will look to establish their own requirements on fulfillment houses.

All of these provisions will not become effective until January 1, 2022, so there will be plenty of time to further parse what is provided for in HB 742 and prepare to comply with the new restrictions and requirements.

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Author

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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