Compliance Basics for Wholesale Distribution of Alcohol

The wholesale market remains one of the more fruitful and effective ways for beverage alcohol suppliers to get their products into the hands of consumers. And in many cases, selling wholesale through what is called the three-tier system is the only way for a winery, brewery, distillery or cidery to enter a state’s marketplaces.

As with all aspects of the beverage alcohol industry, three-tier distribution requires complying with a wide array of laws and regulations, all of which vary state-to-state and by whether it’s beer, wine, spirits or cider that is being sold. Even for a small supplier looking to sell in only a handful of states, managing this web of rules can get very complicated very quickly.

To help demystify things, here is a breakdown of the main regulatory requirements that alcohol suppliers need to be aware of when selling at wholesale, particularly when entering a new state.

Wholesale distribution 101

Licensing

Perhaps the most basic rule in the beverage alcohol industry is that only authorized parties may participate in the beverage alcohol industry. This should be no surprise to suppliers, as they already need licenses to produce or import their products in the U.S. Just the same, they will (almost always) need a license to sell those products as well.

Production licenses (e.g., a winery or brewery license) often grant the holder permission to sell to local distributors, but when a supplier wants to sell in another state, they will need to receive separate authority from that new state. As such, a supplier will need a separate license for each state they will sell into.

These licenses are unique to each state, varying in their name, their price, their permissions, and which products they apply to. Some states have one supplier-type license available for everyone, while others have several varieties, depending on the product type being sold. And then some states don’t have a specific license at all (though most of these, like Florida and Rhode Island, require suppliers to at least register as a Primary American Source for their brands before they begin registering).

The key things to recognize when applying for a supplier license are what products it applies to and who it is meant for. If you are an out-of-state supplier, you don’t want to waste time on a license designed for in-state producers.

Product management

When preparing to sell a new beverage alcohol product, particularly when selling it across state lines, it is critical to register that product with the relevant regulatory agencies.

At a minimum this means receiving a Certificate of Label Approval (COLA) from the federal Tax and Trade Bureau (TTB), which indicates that the product has been vetted by the TTB to ensure that its label conforms with the federal rules around alcohol labeling. COLAs are not required—or even available—for every product: beer that is only sold in the state where it is produced are exempt from COLA requirements; non-hopped Flavored Malt Beverages and wines with an ABV less than 7% are entirely excluded from the COLA process. But most everything else does need to be reviewed by the TTB before it can be distributed in the U.S.

Beyond this federal registration, most states have their own form of brand/label registration that suppliers need to manage when bringing a new product into the state. In some cases, this registration can be simple—say, just showing the state agency a copy of the COLA. Elsewhere, brand/label registration can get very complicated, requiring weeks even to get state approval.

Online systems, such as Product Registration Online, promise to make this process much easier to work through, though many states continue to rely on paper registrations.

Distribution agreements

Under the three-tier system, suppliers must distribute their products through licensed wholesalers. Many states have additional restrictions on how suppliers can work with wholesalers, limiting a supplier to only one wholesaler per designated territory or allowing only one wholesaler to handle a particular brand across the entire state. Further, many states have what are called franchise laws, which restrict a supplier’s ability to terminate or renegotiate their contracts with wholesalers, making it very difficult to cancel a noxious or ineffective relationship.

As such, suppliers must take pains to ensure they have a good and effective agreement with all their distributors across the country to best avoid getting trapped in a bad situation. While franchise laws may not allow a supplier to have free rein with their distributor agreements, it is possible to set out the shared expectations of the relationship and certain conditions that might constitute “just cause” to terminate if things do sour. If nothing else, suppliers need to thoroughly read and understand their wholesaler contracts—they should never simply sign whatever the wholesaler sends over and they certainly should never rely on an oral contract, no matter how friendly the wholesaler is.

This is not to scare anyone away from working with wholesalers, as a good relationship can benefit everyone tremendously. When they do their jobs, wholesalers should be effective partners for their suppliers, educating them on local laws and market conditions, and assisting them with marketing campaigns and sampling efforts.

But being trapped in a bad distribution relationship can mean years and years of lost revenue and spoilt product and has been the source of not a few sob stories in the industry. While it may seem expensive, the best way to get ahead of these issues is by working with an attorney experienced in the beverage alcohol industry.

Taxes and reporting

After all the setup has been complete and products have been sold, there is still plenty of follow-up needed from beverage alcohol suppliers. Of course, taxes are a key part of this follow-up, with every state imposing its own excise taxes on alcoholic products, which vary product-by-product (and often by ABV within product categories).

For interstate distributions, liability for remitting these taxes generally is placed on the wholesalers (or other “first party to own” the products in the state). But most states do still require out-of-state suppliers to file regular shipping reports, detailing their sales to wholesalers. At a minimum, these reports need to show the total amount of product sold to whom—so the state knows how much tax revenue to expect from wholesalers—but often enough the supplier will need to provide a lot more details, such as how much of each brand or bottle size was shipped, and even copies of their wholesale invoices.

And then there are some states, such as Wisconsin and, for beer, Pennsylvania and Maryland, that do make the out-of-state supplier pay their own excise taxes. While not common, a supplier should make sure to recognize these unique situations so they do not get in trouble with the state. No state is going to take missed tax revenue lightly.

It is no secret that the beverage alcohol market is heavily regulated. That each state has its own set of regulations only makes it more confusing for a supplier trying to establish a national presence. Recognizing what laws are out there, and how they vary state to state, is the best way to avoid any potential regulatory pitfalls and prevent future pain.