Why Play By The (wine shipping) Rules?
I was contacted recently by the owner of one of the most accomplished and successful Direct-to-Consumer wineries; a winery that has been able to secure the vast amount of their annual revenue from direct to consumer marketing and shipping. They asked me a simple question:
"Why should I continue to abide by the rules and regulations of the various states that allow licensed direct to consumer shipping?"
It was a legitimate question.
The fact is, as long as there are wineries that ship into states without paying for a permit, without undertaking and paying for the tasks associated with the required reporting to the states and without remitting required taxes to those states, those wineries that do these things and work via the letter of the law are put under a severe disadvantage. Why should they work under this kind of disadvantage?
With the exception of noting that its the law and that failing to ship wine under the letter of the law is not a legitimate act of civil disobedience, I couldn't come up with a really good reason why this winery owner should continue to act in obedience to the state laws and put their business at a disadvantage in the marketplace.
If you are a winery and you want to ship direct to consumer to, say, the 20 largest wine consuming states, it's going to cost you. It's going to cost you in paying for annual permits. It's going to cost you time and money to comply with the reporting requirements. It's going to cost you to arrange to collect and remit taxes that must be remitted to these states. Meanwhile, the lawbreakers are creating an unbalanced playing field and taking up residence on the light side of the equation.
They can do this because the fact remains that there is very little in the way of enforcement of the direct to consumer shipping statutes that exist in states that allow wineries to ship. Now, it's true that State liquor commissions really are misspending their resources if they are committing too much time and money to policing direct shipping since this method of distribution is one that doesn't lend itself to abuse by heaving imbibers or by under-aged drinkers. Nor is it the source of nuisance that brick and mortar bars and alcohol retailers can be. At least when it's done above board and according to the rules.
The State of New Hampshire, for example, is able to police its direct shipment in an efficient way by keeping good records and working with common carriers to see who is shipping and how current they are on their reporting and remittance of taxes. And they are able to do this without significant expenditures. Direct To Consumer shipping is, in fact, among the safest and easiest regulated distribution avenues.
Still there are wineries that break the rules.
But what my friend the winery owner pointed out, and which is absolutely true, is that if wineries want to be able to ship to every state in the union, what they need to do is demonstrate that this avenue for consumer sales lucrative for the state. And the best way to do that is to have each and every winery that wants to ship into a given state to register, pay for their permit and pay taxes to the state on the wines they ship in.
As winery associations and their allies go state to state asking for direct to consumer shipping privileges, they need to be able to show that this sales channel is a lucrative source of tax revenue that is not merely a case of trading in-state sales for out of state sales, a circumstance it decidedly is not. However, to show this they need to be able to point to other states where shipping rights have been granted and and revenue increased. This happens in significantly impressive ways only when the entire collection of wineries shipping direct do so in accordance with state laws that dictate both reporting and tax collection.
This goes to for wine retailers, who have seen a set of circumstances specific to their political disposition provide them with merely 14 states that allow legal retailer to consumer wine shipping.
I suspect my winery owner's lament was just that and I suspect he'll continue to play by the rules even though it puts him at a commercial disadvantage in the market place. He'll probably be just fine as he's is a remarkable marketer who knows the consumer mind and how consumers operate and because he provides exceptional customer service, the bedrock requirement of any good direct to consumer marketer.
But his (likely) rhetorical question remains a good one: If all are not going to, why should he play by the rules?
It’s not just the cost of complying with the rules for each state that I can ship to. I’m also at a disadvantage in the states that I either can’t ship to (because it’s illegal) or don’t ship to (because it’s too expensive relative to the return.) There are wineries shipping to prohibited states, and consumers don’t understand why I am not able to ship there, but that other guy does.
Your point about showing shipping-prohibited states how it can work is very well taken, and is why I will continue to be a boy scout (at least in this matter ;).
To build upon El Jefe’s point:
There are wineries shipping to prohibited states, and consumers don’t understand why I am not able to ship there, but that other guy does.
Tennessee just recently allowed limited shipping, with permits and annual fees. Before that, profound ignorance ruled the day, which made it difficult to get the laws changed. Many people refused to believe that it was illegal, or that there were legal circumventions. Among the excuses:
– “Sure it’s illegal, but my wife was born in California so we’re exempt.”
– “I paid for a tour of five wineries in Napa, and included in the price was a permit for lifetime shipping to Tennessee.”
– “It’s OK as long as you don’t go above X cases.” (X was never the same number.)
– “I’m grandfathered in. This law doesn’t apply to me.”
Now that things have slightly opened up, people still don’t know what’s going on. They falsely believe that:
– Shipping is fully open and legal from any state or country.
– There are no case limits.
– This also applies to beer and spirits.
Sadly, what happens is that customer service personnel at honest wineries bear the brunt of angry, ignorant customers. When I visited Sonoma I stopped saying I was from Tennessee because of the painful wince I’d see on the face of the tasting room host.
Wineries and Wine merchants should play by the state wine shipping rules. If they do not it will eventually catch up with them. Corporate social responsibility is a prevalent topic of conversations in media, blogging, and the business world. Brand equity, awareness, and association are key drivers of influence and sales. Over the long term a major wine brand will cannot maintain the same level of respect and clout without following the rules.
… because it’s the law. I rather say “no, sorry can’t ship there” than risk the chance of getting caught and loosing my winery permit. And when my customer tells me, “but X winery in MA ships to me”, I say “they must have a permit to do so and I don’t, I’m really sorry”.
As a side note, I honestly haven’t figured out how a winery selling wines in the $14-$19 price range can legally ship direct to consumer and make any profit on it without making it ridiculously expensive to the customer. Between shipping, packaging, annual permits, and taxes, a $14 bottle of Chardonnay becomes really expensive. How many people are out there looking to buy and have shipped a full case of Massachusetts wine so that they can leverage the shipping cost? I’m guessing not many. It may just very well be that direct to consumer shipping isn’t fit for all wineries.
I now ship through a fulfillment service at the warehouse where I store my wine. It is only a dollar or two per bottle to use their permits. Not really a “severe disadvantage” compared to potential loss of license. And a lot better than putting it into three tiers.
What I don’t understand is how people can ship wine without following the rules. Will FedEx or UPS ship it? Does the winery commit fraud at this level as well? My sense is that the number of wineries shipping without permits is overstated …
I agree that states need to view simplifying their permitting and reporting requirements as a potential source of easy revenue and increased well-being for their citizens. Unfortunately, many states seem to want to make direct shipping as complicated as possible – increasing the burden on the winery and the state authority. (e.g., Why must I file a paper copy monthly to a state where I make only one or two sales per year?) The mindset of the liquor control boards needs to be brought into the 21st century.