What’s Up with DtC Audits and Enforcement?

This blog was last updated on February 28, 2024

Regulatory scrutiny is a constant in the beverage alcohol industry, and direct-to-consumer (DtC) shipping is no exception to that. However, the DtC market does bring some unique regulatory concerns. The last several years have seen increased efforts by regulators to get a handle on the growing market, which has led to more audits and enforcement actions.

Let’s talk a little bit about the overall state of regulatory scrutiny in the DtC market.

Age verification and DtC oversight

The heavy stress that regulators put on preventing sales to minors makes that a key area of investigation when they do review a DtC shipper. Therefore, those shipping DtC should ensure the following:

• Make sure any third-party carriers are checking IDs upon delivery.
• At a minimum, use age gates on websites and require consumers to indicate their date of birth at the point of purchase.
• Use public services (e.g., IDology, LexisNexis) where available (even if not specifically required by law, it’s best practice to do so always) or other solutions that integrate age verification.

It is not new for sellers of alcohol to face scrutiny from regulators, but DtC shipping of alcohol involves so many other “non-standard” actors that there are more parts of a DtC sale for regulators to scrutinize. Common carriers, with their critical role in preventing minors from receiving a package containing alcohol, are a paramount example of such a (relatively) new participant in the alcohol market, that regulators assert requires extra attention.

Common carriers are a linchpin in DtC shipping, as they are the last point to make sure that the person receiving the alcohol is legally permitted to do so. In that capacity, states see them as a new and untested part of alcohol sales, and express concerns about how carriers are checking IDs. This has led to crack downs on carriers in the past, which has ripple effects in the industry as carriers are so critical to ensuring that DtC shipments can occur.

Ensuring that only people over the age of 21 are able to purchase or receive alcohol is a vital part of beverage alcohol regulations, and so it’s no surprise that there has been greater focus on age-verification checks in the DtC shipping market. While some states require DtC shippers use specific processes to verify the age of their consumers at the time of sale, it is recommended that all DtC shippers conduct these checks for all sales in all states. Carriers will still provide the last, best defense in preventing minors from getting their hands on alcohol, but a little bit of prevention by the seller themselves can go a long way to avoiding problems down the road.

Other top DtC enforcement concerns

Sales to minors are not the only concern regulators have, and they do end up finding more reason to issue enforcement actions in areas such as taxes and volume limits. Even if you have taken the necessary steps to be properly licensed and are ensuring sales to minors do not occur, there are other key steps to avoid audits and extra scrutiny:

• Remember to pay your taxes — accurately and on time.
• Beware of volume limits and ensure they are adhered to.
• Monitor brand label registration requirements
• Check if product restrictions exist (e.g., not of own production “NOOP” laws).

As an extreme example of enforcement actions being taken in areas beyond age verification, we can look at Texas. In 2019, Texas announced its intention to conduct rolling audits of the approximately 1,600 license holders that are permitted to ship wine to customers in the state. These audits have been designed to ensure that taxes are being paid, licensees are abiding by volume limits on their shipments, and that licensees are not shipping products they are unauthorized to ship. While nothing major has come from these audits so far, and no other state has sought to audit all DtC licensees on a rolling basis (as they might with their locally licensed liquor stores and restaurants) this approach does indicate a possible pattern for other states to follow.

What will the future bring?

Regulator scrutiny, enforcement and the subsequent potential audits will not disappear. They are mainstays of the beverage alcohol industry for all tiers and businesses, and DtC shippers should not expect to be treated any differently than local retailers.

But that doesn’t mean it needs to be something that you are constantly living in fear of. Be prepared as DtC shipping expands that the scrutiny may ramp up — as more retailers, breweries, wineries and distilleries join the fray, there will be more situations that will draw concern from regulators. Stay ahead of the enforcements and audits by regularly and meticulously checking your programs and ensuring everyone is on the same page. The DtC shipping market can be successful, while also staying healthy and safe for all involved.