Where Are We with Fulfillment House Regulation?

Over the last few years, one of the leading issues affecting the direct-to-consumer (DtC) wine shipping market has been the ongoing effort by states to regulate third-party shipping services, specifically fulfillment houses. At various times, it has seemed as though a deluge of new rules and restrictions around using fulfillment houses was about to sweep across the country, only for the clouds to part and things to carry on, more or less as normal.

Still, the issue of further fulfillment house regulation keeps popping up, and it remains important for DtC shippers to understand and abide by the regulation of fulfillment houses that currently exists so that they can remain compliant with their duties as licensees.

How are fulfillment houses being regulated currently?

One of the central tenets of beverage alcohol regulation, and of DtC wine shipping in particular, is tracking the movement of alcohol products, who ships them, how they are transported and where they end up.

Fulfillment houses support the DtC wine shipping industry through critical logistics offerings. In their warehouses, they offer storage for wineries that often lack the room to house their wine after it is bottled. And with their packaging and shipping services and ties to common carriers, fulfillment houses also enable faster and easier delivery for consumers.

For many state regulators, however, fulfillment houses seem to muddle their understanding of where DtC wine shipments come from and who is responsible for them. This is because a DtC wine package shipped from a fulfillment house warehouse will list the warehouse’s location as the “ship-from” address. At a glance, then, it may seem that the package came from an unlicensed, unknown source, even though a licensed and perfectly compliant winery made the sale and is behind the shipment.

As such, states that have adopted fulfillment house regulations have focused on licensing/registration and reporting to establish a more thorough understanding of DtC wine shipping within their borders. This has largely taken two forms, which vary in how much the burden of compliance is placed on the fulfillment houses or their winery clients.

In Alabama, Kansas, North Dakota, Tennessee and Virginia, fulfillment houses (or other non-carrier third-party logistics services) must get licensed by the state before they can support DtC shipments there. Further, DtC wine shippers can get in serious trouble if they use a non-licensed fulfillment house to ship to these states.

Illinois and Louisiana will also only allow DtC wine shipments from addresses that have been registered with their respective alcohol regulatory agencies. However, in these states the onus of identifying fulfillment houses is placed on the DtC wine shipper (the wineries) themselves during the licensing process.

In all cases, the states also require fulfillment houses to provide a regular (at least annual) report of the shipments they supported. The intent there is for regulators to be able to compare those reports against those from the DtC shippers to ensure that they are compliant.

DtC wine shippers should be aware of a trend among states to regulate the use of fulfillment houses in the absence of any statutory change. For instance, New Hampshire requires all new and renewing DtC shipping licensees to list any third-party locations they may ship from during the application process. Shipping from an unregistered location would violate the shipper’s license terms.

States like New Hampshire can make changes like this under their broad authority to set whatever conditions they want to issue a shipping license, and it can have a real impact on a prospective shipper that gets caught unaware. So DtC shippers should always take care when filling out their application forms to ensure they completely understand what they are signing up for.

Why are fulfillment houses subject to state regulations?

As we’ve noted, the ostensible reason for fulfillment house regulation is to track the market and allow regulators to protect against illegal shipments. Since fulfillment houses shipments can look something like a black box to regulators, they claim they need licenses and reports. And besides, everyone else involved in the alcohol market generally needs a license, so why not fulfillment houses?

It is hard to discount a regulator’s reasonable-sounding desire for better visibility into how alcohol is shipped within their jurisdiction. And indeed, many fulfillment houses have gone out of their way to accommodate these regulations, getting licensed and filing reports in the states that require it.

At the same time, it can be hard not to think of all this as another layer of bureaucracy designed to inhibit the DtC wine shipping market. That is, the ultimate effect (which some parties likely hope will happen) is that by making it harder for fulfillment houses to operate, there will be fewer overall DtC shipments.

If the goal is to create a better record of DtC shipments within a state, it’s unclear how much extra value there is from requiring additional licenses and reports from fulfillment houses. It may be helpful for a state to know ahead of time that a DtC licensee may ship from a third-party location, but that need not require full background checks (which Alabama has required from fulfillment houses applying for a license).

And the DtC wine shipping market is already replete with reporting, so there is little extra value that will come from a fulfillment house’s report. In most states, both the licensed shipper and the common carrier must report their shipments of alcohol. If a state is struggling to compare the shipments reported by a carrier with the shipments reported by the licensed shippers, states could require both of them to include the shipment tracking number on their reports—this is a unique, universal datum that all parties in the shipment have access to and would give a regulator a much clearer picture of DtC shipments than one more report with a ship date and shipping addresses that need to be parsed for reconciliation.

In the end, if states want to further reduce whatever illegal DtC shipments of alcohol might exist, they should be looking for ways to make it easier for more parties to access the legal DtC shipping market and not be imposing needless obstacles on compliant shippers. Certainly, no one is advocating for Ray’s Discount Liquor Garage on eBay, but otherwise law-abiding members of the industry might look for less-legitimate alternatives if they find that the services they once relied on are forced to close due to regulatory overreach.