This blog was last updated on July 18, 2022
The three-tier system is the most prevalent way that spirits are sold in the United States. We have compiled a comprehensive state-by-state guide that outlines the complex requirements distillers must keep in mind when expanding into a new state. In this blog, we will break down the main regulatory and tax rules that distillers distributing in different states have to comply with.
Licensing
When entering a new state, the first step is almost always to get licensed to sell to in-state wholesalers or approved to sell to the state’s control board. It’s important to pay attention to the specific requirements needed for a supplier license, as they vary. The price to obtain a supplier license can range from free to thousands of dollars per year. In addition, some states also require spirits suppliers to have $100,000 held in a bond.
Registration
Liquor labels contain critical information that identifies the contents and producers of the product, and because of this they are highly regulated by the federal and state governments. After obtaining a COLA, it’s time to get state specific, as nearly 40 states have their own product registration requirements with some requiring yearly renewal. Many states also collect distributor information to manage franchise restrictions, such as documenting the approved territories for distributors or establishing a record of existing relationships in case a party wants to adjust their agreements in the future.
Control States
In control states, government agencies take over one of the standard “tiers” of the three-tier system. Most often, state agencies will act as the wholesaler. In 13 jurisdictions, the state also manages or operates retail stores. All states that utilize the control system apply it to sales and distribution of spirits products.
There are some key differences between selling to a private business and selling your product to the local government. A license may not be necessary when selling to control boards, though you must still be recognized as a potential supplier by the state.
The key difference is that you must “list” your products with the state, convincing them of the value and marketability of your products, much like you might otherwise do with a private wholesaler in other states. This listing process can be complicated and involve additional steps to accomplish. As part of listing, you may need to use a registered in-state representative when submitting quotes to the state. States will only accept quotes during specific time periods, and each product category will need to meet specific criteria.
Selling into a control state may seem like a headache but interacting directly with a state agency can have its perks. Because a supplier will list their products directly with the state, they will not need to file a brand/label registration for those products beyond the listing process. Further, the state does not need to receive regular shipping reports on those distributions because sales are already distributed directly by the state agency.
Filing and reporting
Each state has their own excise tax requirements, reporting and deadlines. Excise taxes are calculated using the volume of alcohol being sold and are levied at both the federal and state levels, meaning that high ABV spirits are taxed more heavily than say, a hazy IPA. By knowing your excise tax, you can properly set prices in the state.
Generally, excise taxes are paid by the “first party to own the product in a state,” which typically implies the distributor. But that is not a universal rule, so spirits producers distributing interstate should be aware of any situation where they would be required to remit excise tax themselves.
Many states require suppliers to file follow-up reports that outline their sales to in-state wholesalers. These reports outline what was sold, when and to whom on a monthly basis. Some states require copies of all invoices, while others simply want to know the total volume sold. By keeping tabs on the specific requirements in each territory you do business, compliance doesn’t have to be a behemoth.
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For more information on the common distribution rules – and how each state applies them, check out our Distribution Rules By State page.
