What DtC Shippers Should Keep in Mind About Third-Party Services

Alex Koral
January 11, 2022

As interest in the direct-to-consumer (DtC) alcohol shipping market has grown, a number of third-party servicers have popped up promising to support the market. These services range from marketing platforms to online storefronts to logistical support, everything that a winery, brewery, distillery or other prospective DtC shipper will need to deal with once they’ve come to grips with the myriad regulations they will need to abide by.

However, as sweet as the promises these services make sound, a DtC shipper can’t rely just on promises. It is critical for the DtC shipper to thoroughly vet and understand how their third-party services work so that they can avoid any undue risks and liabilities. 

As the license holder for their DtC shipments, the DtC shipper is ultimately responsible for whatever happens in their name. If their third-party service acts (or fails to act!) in a way that violates a law, or the shipper interacts with the third-party in an impermissible way, the DtC shipper is at real risk of facing the consequences themselves, be that fines or loss of license.

Here are some key considerations for DtC shippers to keep in mind as they investigate a prospective third-party service.

Marketing on third-party services

Consumers can’t buy products they don’t know about, which is why many shippers look for support in advertising or marketing what they’re selling. At a basic level, this can simply be positive ratings, or perhaps paid advertising. But there are many online sites out there for DtC shippers to post their products on, and provide lists of new or favorite releases to entice consumers.

While there are some state laws that do specifically relate to advertising in relation to DtC shipping, they tend to be not too difficult to follow. Generally they are limited to listing the DtC shipper’s license number in fine print (Washington) or prohibiting direct marketing campaigns from sending anything to minors (Michigan).

However, a DtC shipper who focuses solely on DtC shipping-specific advertising laws is putting themselves at risk. This is because state regulators largely do not make distinctions between an online sale or a brick and mortar sale. Essentially, the principle many state regulators work on is if it’s not allowed in person, then it’s not allowed online.

That means that DtC shippers need to be aware of those generally applicable restrictions on advertising and marketing beverage alcohol (which do vary state by state). As such, DtC shippers should confirm with their third-party marketing services that they are in compliance with all applicable federal and state laws that govern how alcohol can be marketed and promoted.

Selling on third-party services

Establishing and managing an online store can be a major challenge for anyone, so many DtC shippers will look for established ecommerce marketplaces to sell through. However, depending on how involved in the sales process these marketplaces are, using them can be very fraught for a DtC shipper.

There is a general prohibition on anyone who does not hold a valid, relevant license from collecting any money (even for fractions of a second) from a sale of alcohol. There are also widespread principles that the licensee must fully direct sales made in their name, controlling everything from pricing to what products are available to ownership and handling of the products. 

As such, DtC shippers cannot rely on any old online marketplace to sell their products. Instead, they must make sure that the marketplace is aware of and is compliant with these laws. In effect, the marketplace should be mostly a blank platform that the licensed DtC shipper can use to facilitate sales, but won’t conduct any sales itself. Critically, any money that is processed through the marketplace must be sent directly from the consumer to the DtC shipper, and cannot be held by the marketplace even momentarily.

There is some slight controversy about this last point, as it contradicts some states’ sales tax rules for marketplaces, which have come into effect along with economic nexus laws. These rules place the responsibility for collecting and remitting sales tax on large marketplaces, to relieve their users of that burden. However, the question is open whether that would constitute an illegal realization of money from a sale of alcohol. So far, only the California ABC has issued any guidance on this matter (saying that it does not consider collecting sales tax money to be improper sharing of revenue), but other states may adopt a different position.

In the case that a state would look askance at a marketplace collecting sales tax money from a sale of alcohol but the marketplace is generally liable for remitting sales tax, then the DtC shipper needs to work through how to get the money to the state. One possibility is to reimburse the marketplace for remittances they make in the name of their users. The other would be for the DtC shipper to contract with the marketplace in a way that does place the remittance burden on the DtC shipper, as most states with marketplace collection and remittance rules allow.

Using third-party logistical services

Once the sale has been completed, there is the difficult process of getting the product ready to be shipped to the consumer. To manage this, many DtC shippers have come to rely on third-party logistics services, namely fulfillment houses.

In 2021, there was a tremendous surge in scrutiny on these fulfillment houses, and several states adopted licensing and reporting requirements for them. Suffice it to say, DtC shippers looking for support from fulfillment houses should be aware of these laws and make sure any such services they use are in compliance.

There’s no getting around that DtC shipping of alcohol can be complicated. But there are lots of services out there for DtC shippers to use to help relieve those complexities, from tax and compliance management, like Sovos ShipCompliant, to more generic ecommerce platforms. 

As DtC shippers look around for support, they need to be aware of the potential risks that can come with these services. Understanding how a service works, recognizing what the third-party service will do and won’t do, and not assuming that something that works fine for selling t-shirts will work perfectly with selling alcohol, are all necessary actions for DtC shippers to take.

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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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