Unique Tax Considerations for DtC Wine Shippers

Taxes are one of the primary compliance concerns for direct-to-consumer (DtC) shippers of wine, and one of the more complex ones. The 47 states, plus D.C., that permit DtC shipping of alcohol want to ensure there is parity between alcohol sold in-state and any coming from out-of-state sources. So, if a bottle of wine is going to be DtC shipped to a consumer in New York, it would be subject to the same taxes as if the wine was purchased in a local retail shop.

Broadly this means that DtC shippers must assume an obligation to collect and remit both excise and sales taxes on the wines they ship. Usually, this obligation is imposed on DtC shippers as a condition for getting the necessary shipping licenses in a state. (For sales taxes, this creates what might be called “DtC shipper nexus,” where the shipper has a tax obligation on even $1 of sales, meaning most of the recently adopted economic nexus laws across the country did not change much for DtC shippers.)

While excise taxes and sales/use taxes are by no means simple to manage, they are at least relatively standard and recognizable. If nothing else, there are plenty of resources out there to help prospective DtC shippers collect and remit these taxes.

But there are several states where DtC shippers face an additional or unique tax scenario that may not look quite normal. The sales tax rate may be greater than for other merchandise or there may be an additional excise tax levied just because the wine was shipped DtC. To help relieve any possible confusion, we outline some of the more notable unique taxes below.

Additional wholesale taxes applied to DtC shipping

Kentucky assesses what it calls the “wholesale sales tax” on alcohol sold within the state. When DtC shipping came into effect in 2021, it was included among DtC shippers’ other tax obligations in the state. As written, the tax is a 10% levy on the wholesale price of wine and beer, or 11% for spirits products. For three-tier sales, the distributor can readily account for and remit the tax, but it presents a unique challenge for DtC shippers who may not have set a wholesale price of their products in Kentucky. As such, Kentucky’s law allows DtC shippers to instead calculate the wholesale price as 70% of the retail cost of their products for the purposes of this tax. Notably, the state also allows DtC shippers to collect this tax from consumers at the time of purchase, just like the state’s sales tax, even if it is remitted alongside any excise tax that is due. The upshot of all this is that Kentucky consumers end up paying a tax of over 13% on their DtC shipments (to further complicate things, Kentucky considers any collection of the wholesale sales tax to itself be subject to the state sales tax), which DtC shippers need to manage .

South Dakota has a similar 2% tax on the price of all alcohol sold in the state. For products sold in the three-tier system, that is assessed against the wholesale price, but for DtC shipments it is instead calculated against the price paid by the consumer. Like in Kentucky, this tax can be collected from the consumer, raising the tax rate a consumer will see on their invoice.

Control state markup equivalence

New Hampshire is a control state for wine and spirits, so when the state began DtC shipping of these products, there were no excise tax rates ready for them to port over to DtC shipments (control states generally assess a “markup” on products they distribute, instead of more standard volume-based excise taxes). Instead, the state requires all DtC shippers to remit an 8% tax on their shipments—including beer, even though beer is not a controlled product in New Hampshire. Again, this tax can be collected from consumers at the time of purchase, like a sales tax. Since the Granite State is famously tax-antagonistic, however, this can lead to some awkward, if not hostile, conversations between DtC shippers and their consumers who might look askance at finding a tax rate listed on their receipts.

Wyoming is also a control state for wine and so similarly lacks a ready excise tax rate. Instead, the state imposes a 12% tax on DtC shipments there. The extra complication in Wyoming is that, while the state does have a sales tax, it does not require all DtC shippers to pay the sales tax as a condition of being a DtC shipper. Instead, only DtC shippers with nexus in the state (either physical or economic) will have a sales tax liability. But Wyoming also considers its 12% DtC markup to be part of the taxable base cost of any DtC shipment, meaning it is subject to the state’s sales tax. So, for a DtC shipper without nexus, they will assess only a 12% tax on their sales, but a DtC shipper with nexus will need to collect over 18% in tax from their Wyoming customers.

Unique sales tax rates

For the most part, DtC shippers are required to collect and remit state and local sales tax on all their shipments, even for $1 worth of sales. There are a handful of states that are exceptions to this rule, however, which can complicate things for DtC shippers as they need to track their annual revenue to see where they might have economic nexus. Generally, besides nexus tracking, managing sales tax is little different for DtC shippers than any other retailer in a state. There are a few states that do tax alcohol differently than other merchandise, which should be pointed out.

• Arkansas assesses an additional 3% tax on liquor sales.
• The District of Columbia taxes alcohol at 10.25% (10% for on-premises sales), rather than 6% for general merchandise.
• Kansas exempts alcohol from the state’s sales tax, but instead assesses an 8% Liquor Enforcement Tax, which applies to DtC shipments as well.
• Maryland taxes alcohol at 9%, as opposed to the 6% for general merchandise.
• Massachusetts exempts alcohol from sales tax as long as the state’s excise tax was collected.
• Minnesota assesses an additional 2.5% tax on liquor sales.
• North Dakota taxes alcohol at 7%, plus local rates, not at the 5% rate for general merchandise.
• West Virginia assesses an additional 5% “municipal liquor tax.”

It can seem daunting for DtC wine shippers to manage all the various unique tax scenarios they may be subject to. However, correctly meeting their tax obligations is one of the more critical regulatory obligations for a DtC shipper and so it should not be ignored just because it’s complex. Instead, DtC shippers would do well to prepare for their tax burdens and seek out the best support and solutions available to them.