Direct-to-consumer (DtC) shipping of alcohol requires producers, shippers and retailers to stay compliant with numerous rules and regulations. Tax determination and reporting is one of those key areas, and also presents a unique challenge to shippers.
Regulations on DtC shipping require shippers to recognize and manage a tax burden that is much broader than if sales were happening through a state’s three-tier system. This includes a state’s excise taxes, based on the volume of sales made, and a state’s sales taxes, based on the value of sales made.
When producers want to ship alcoholic beverages DtC to a particular state, they generally must obtain a shipping license or permit for that state. As a condition for getting a license or permit, states require the prospective shipper to assume a sales tax liability, regardless of the number of shipments or annual revenue they make in the state. A state will also require the applicant to agree to the jurisdictional authority of that state, meaning the shipper will have to abide by any notices or penalties issued by the state for failure to comply with their shipping laws.
DtC shippers, having agreed to abide by the jurisdiction of the states they ship into are also subject to generally applicable tax laws, which states amend frequently. For example, the 2018 South Dakota v. Wayfair, Inc. Supreme Court decision can present DtC shippers with additional tax liabilities in certain circumstances.
Why is tax so complicated?
Each state can determine its own sales and excise tax rates, exemptions and remittance processes. With the 21st Amendment, states have even more power to tax and regulate alcohol at their discretion. Once sellers are registered for sales tax with a state, they must continue submitting returns indefinitely, even when no sales tax is due, until the seller shuts down their business operations in that state.
Depending on the state, wine may be taxed at a different rate than other items (e.g., food, general merchandise) or may even not be subject to sales tax. For example, Maryland taxes alcohol at 9%, while general merchandise is taxed at 6%. In Massachusetts, alcohol is exempted from sales tax when it has had excise tax paid on it. Imagine how increasingly complicated it becomes to remain compliant as wineries (or other producers) expand to more states and are managing sales tax manually.
Much of the complexity comes down to making numerous sales in a single state with lots of different, variable sales tax rates. Colorado is the prime example of this, as tax rates can vary depending on which side of the street you are on. Other states are more straightforward, with just one tax rate across the board.
Sales tax rates can also be set at the state, county, city or special district level. With over 12,000 jurisdictions in the U.S., this creates an extremely complicated sales tax burden. Additionally, from July 1, 2020 to July 2021, there have been 640 rate changes implemented by tax authorities.
Sellers are also required to remit all taxes they’ve collected to the state. Once a seller has calculated and collected the correct amount of sales tax from consumers, it is time to file the appropriate returns and remit all of the taxes they’ve collected to the state. This is where those numerous tax jurisdictions come into play again. Filing processes can vary from state to state.
DtC tax determination and reporting is unavoidable but manageable
As wineries, breweries, cideries and distillers all enter the DtC shipping market, recognizing their additional tax liability in each state they will ship into is an important first step. From there, it’s a matter of monitoring state excise tax burdens, and knowing when obligations exist for sales taxes on purchases in their tasting room or other physical shops. States have also adopted economic nexus laws, which may mean new tax burdens or altered existing ones for DtC shippers.
DtC shippers have unique tax obligations that typically would be managed by a wholesaler or retailer in a three-tier distribution system. While tax determination and reporting are unavoidable, they can be managed with the right tools.
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