DTC: Know the Whole Story

DTC Alcohol Shipping Undermines States’ Rights, Endangers Consumers, and Dismantles Effective Regulatory Oversight 

 

WSWA and our industry partners strongly oppose the interstate direct-to-consumer (DTC) shipment of alcohol.  Proponents tend to over-simplify this complex issue, ignoring the efficacy and benefits of the existing strong state regulatory systems, and glossing over real public health and safety concerns by treating alcohol like every other consumer product.

 

The U.S. alcohol marketplace is the safest and most diverse in the world – DTC alcohol shipping causes widespread and well-known enforcement, public health, and public safety issues all in the name of “consumer convenience” that already exists. Increasing DTC will lead to more bureaucracy, more enforcement actions, and more spending of taxpayer funds—but still fall short of accomplishing the goals that the three-tier system achieves.

 

IT’S TIME TO TALK FACTS:
DTC CANNOT COEXIST WITH A SAFE AND HEALTHY ALCOHOL MARKETPLACE

 

The existing three-tier system prevents underage access through locally licensed businesses that are held accountable in the marketplace and prevents the entry of illicit or counterfeit product through the federal and local licensing of wine and spirits distributors. There is no equivalent accountability in the DTC marketplace. 

 

IT’S TIME TO TALK FACTS:
DTC DOES NOT COMPLIMENT THE THREE-TIER SYSTEM

 

In states that allow winery DTC shipments, it is becoming necessary—and expensive—for states to aggressively pursue enhanced enforcement measures. States are being forced to allocate taxpayer funds to enforce against bad actors that evade taxes and licenses, serve minors, and even have ties to criminal elements.  States’ Attorneys General are stepping in, bringing suits in federal court to target belligerently non-compliant out-of-state businesses that illegally ship alcohol.  In 2020, states like Ohio and Michigan pursued litigation against illegal shippers under the Twenty-First Amendment Enforcement Act.

 

Why Are States Rejecting DTC Spirits Shipping?In the 2021 legislative session, every state that considered DTC spirits shipping legislation refused to enact it due to real concerns over proof that the DTC marketplace:

  • Increases Underage Access
  • Increases Access to Counterfeit/Illicit Product
  • Loses State Tax Revenue
  • Enables Bad Actors at the Expense of State Businesses
  • Creates an Uneven Playing Field

 

IT’S TIME TO TALK FACTS:
RESPONSIBLE CONSUMER CONVENIENCE OPTIONS ALREADY EXIST

 

Despite broad claims otherwise, responsible consumer convenience options already exist within the three-tier system: local alcohol delivery. The alcohol market is innovating daily to meet modern consumer convenience demands without undermining a well-balanced regulatory system. WSWA has long been a champion of local, licensed delivery to meet consumer demand quickly and efficiently.

 

Below, we breakdown the failures and misleading claims of DTC proponents to give you the real story of what the DTC shipping marketplace looks like:

But I can ship wine to my doorstep right?

It's true, wine DTC has existed for decades—enough time for the marketplace to accurately measure the negative impact, and for consumers to feel the impact in the marketplace. Framing spirits DTC as compliant with our three-tier regulatory structure willfully ignores information about the widespread and well-known enforcement, public health, and safety issues rampant within the DTC wine marketplace.

 

DTC wine shipments have led to more bureaucracy, more enforcement action, and the spending of more taxpayer funds – but still fall short of accomplishing the goals that states already achieve with the three-tier system.

 

DANGEROUS PRODUCT: Counterfeit alcohol is a serious problem in unregulated marketplaces: according to EuroMonitor International’s Global Illicit Alcohol Landscape White Paper, distilled spirits make up 81% of illicit alcohol consumption globally. Dismantling the three-tier system through DTC shipping gives bad actors an opportunity to enter the marketplace surreptitiously and provide consumers with dangerous illicit product.

 

UNDERAGE ACCESS: DTC shipping directly increases the likelihood of underage access as common carriers conduct little to no age verification, and when attempted, failed about half the time. 

  • In a study published in the Journal of Pediatrics and Adolescent Medicine, only 12 percent of online alcohol orders placed by underage purchasers were rejected as a result of age verification and 45 percent of orders placed by underage purchasers were successfully received.
  • In an investigation into online alcohol retailers in Kansas, two shipments were delivered to underage individuals. In fact, one box of liquor was handed to a 7-year-old.
  • In Maine, a local retailer testified that a shipment of spirits was handed to his five-year-old “with no signature.”

 

ENFORCEMENT ISSUES: DTC shipping will make enforcement more complex and costly. State agencies will lose oversight of the alcohol marketplace and will not be able to ensure consumer safety or maintain a level-playing field for their law-abiding licensees.

Based on information obtained from the 2018 National Alcohol Beverage Control Association Survey of state regulatory agencies, if half of the 643,000 retailers in the United States were off-premise retailers with a digital marketplace, each state would average 1 agent per 7,257 retailers to enforce the laws and regulations of their state concerning digital retail purchases.

Alcohol is a legal product, and is the same as all other consumables, right?

Alcohol is NOT like every other good or product, and consumers know this. Alcohol has always been treated differently and even has two U.S. constitutional amendments dedicated to it—along with many state constitutional provisions. The courts likewise acknowledge the legitimacy of state laws and systems that treat alcohol differently under the 21st Amendment for valid public health and safety reasons.

 

According to a 2019 national survey by the Center of Alcohol Policy, 86% of respondents agree that alcohol is a product that needs to be regulated, and 82% agree that alcohol is different than other products and should be regulated differently.

 

  • The 21st Amendment specifically grants states the right to regulate alcohol within their borders, and this system has served states incredibly well for nearly 90 years. DTC shipping advocates consistently attempt to usurp state legislative authority via litigation and undermine effective regulations that prevent illegal activity and uphold valid public health and safety goals.
  • Forcing states to open their highly regulated marketplaces to the dangers of DTC shipping from international, unregulated markets is in direct opposition to what consumers believe.
DTC alcohol shipping opens the door to widespread tax evasion.

Wine and spirits wholesalers collect over $40 billion in consumer and business taxes annually for state and local governments. In states that allow wine DTC, it is well established that allowing DTC shipping from out-of-state alcohol producers to consumers opens the door to compliance issues that impact consumer safety and causes difficulties in tax collection.

 

The loss of tax revenue not only robs the state of taxes it relies upon to fund law enforcement, but it also undercuts legal, compliant, in-state businesses that make up local communities. Here are just a few data points that common carrier alcohol shipment reports have brought to light:

 

To find more examples of tax revenue loss, scroll down to What Carrier Reports Tell Us About DTC Shipping.

 

THE BOTTOM LINE: There is no replacement for the existing state-based, accountable tax collection systems. States can preserve tax collections and public safety goals by encouraging e-commerce solutions such as local, licensed delivery from in-state retailers. DTC opens the door to widespread tax evasion – which harms consumers and law-abiding state licensed businesses

There is no replacement for local control and jurisdiction over alcohol distribution and retail.

As guaranteed by the 21st Amendment, states and localities should be able to maintain licensing and sale decisions. Ensuring the will of local governments and their residents is paramount. 

 

Regulators can hold a local, licensed, in-state business accountable for violating the law – but cannot easily enforce against out-of-state shippers or unlicensed third parties who have no ties or responsibilities to the community. For example, the ability to flag and prohibit unscrupulous businesses from shipping into dry counties and violating the will of those voters   is extremely complex.

DTC shipping increases underage access to alcohol.

The three-tier system contains many checks and balances designed to prevent underage individuals from purchasing alcohol and a regulatory structure that holds violators accountable.

  

All systems of alcohol distribution and sale should prevent underage access. The existing three-tier system prevents underage access through locally licensed businesses that are held accountable in the marketplace. In most states, local businesses can deliver alcohol to local consumers via their own employees or licensed third parties – and are liable for ID checks and underage sales. There is no equivalent accountability in the DTC marketplace. 

 

WHAT WE KNOW: DTC shipping directly increases the likelihood of underage access as common carriers conduct little to no age verification, and when attempted, failed about half the time. 

  • In a study published in the Journal of Pediatrics and Adolescent Medicine, only 12 percent of online alcohol orders placed by underage purchasers were rejected as a result of age verification and 45percent of orders placed by underage purchasers were successfully received.
  • In an investigation into online alcohol retailers in Kansas, two shipments were delivered to underage individuals. In fact, one box of liquor was handed to a 7-year-old.
  • In Maine, a local retailer testified that a shipment of spirits was handed to his five-year-old “with no signature.”

 

QUESTIONS OF LIABILITY: Interstate shipping of wine and spirits directly to consumers introduces questions of liability along the supply chain regarding underage access. Who will be held responsible? The producer? The carrier? Regulators have limited authority to impose penalties on out-of-state entities when the product is received by someone underage unlike the actions they can take against an in-state licensee.

DTC alcohol shipping provides no transparency or accountability in the alcohol supply chain.

Unlike DTC shipping, a major benefit of the three-tier system is that the alcohol products are strictly tracked throughout the supply chain limiting the chance of counterfeit or adulterated products entering the market.

 

PRODUCT INTEGRITY: Counterfeit is rampant in the online market. In fact, the U.S. Government Accountability Office found that 43 percent of items purchased from retailer websites were counterfeit. While alcohol was not included in this study, alcohol DTC orders are primarily made online increasing the likelihood that consumers will be sold counterfeit or adulterated product or become victim of a scam and increases the difficulty for state and federal regulators to ensure safe and legitimate products for consumers.

 

The current U.S. alcohol supply chain is made up of licensed suppliers, licensed wholesalers and licensed retailers and is the safest in the world. Licensed suppliers maintain the highest standards and are united in keeping unlicensed actors out of the marketplace. For example, in less regulated markets, such as Mexico, it is estimated that 36 percent of all alcohol is illicit. In just a one-month span in 2020, more than 100 Mexicans died from drinking adulterated alcohol and, in early 2020, 154 people in India died from counterfeit alcohol. In turn, licensed wholesalers ensure only approved products get to licensed retailers before making their way to consumers in a bottle or glass.

 

BOTTOM LINE: The U.S. three-tier system of manufacturing, distribution and sales has worked so well that we often take it for granted. 

 

Consumer convenience already exists through local, licensed delivery.

There is a solution that upholds important public health & safety elements and provides consumer convenience: local, licensed alcohol delivery.

 

SAFETY & CONSUMER CONVENIENCE: Smart and responsible delivery regulations provide consumers with convenience from local retailers within their community. WSWA defines responsible alcohol delivery as the direct transportation of alcohol from a licensed, local retailer to a consumer age 21 or older. WSWA has created resources for legislators looking to craft smart, safe and responsible regulation for alcohol delivery:

Enhanced DTC enforcement measures are only a band aid for a broken system.

While enhanced alcohol DTC shipping enforcement legislation has been proposed and enacted in a few states it does not equate to the regulatory controls of the three-tier system.

 

Enhanced enforcement measures are not a panacea or real solution but a move to begin to understand the scope of the illegal shipping problem. As some states have made the decision to legalize direct-to-consumer (DTC) shipments of alcohol, state regulators have discovered significant noncompliance within these shipping programs. After examining DTC shipments through common carrier alcohol shipment reports and comparing them to available tax data, regulatory agencies discovered massive amounts of unlicensed, untaxed, and even outright illegal shipments of alcohol. States have been forced to spend enormous resources to identify and enforce against illegal DTC shipments.

 

Enhanced enforcement measures are not a panacea or real solution but a necessary move to begin to understand the scope of the illegal shipping problem. These enforcement measures do not stop real-time shipments of alcohol from being delivered to an underage recipient nor does it stop illegal actors from failing to pay taxes. The reports can only shed light on past shipments that entered the state.

 

The ability of illegal actors to hide shipments from regulators using “logistics shippers”, also known as fulfillment centers or fulfillment houses, is a major issue that also came to light upon studying common carrier reports because many are unlicensed muddy the waters when it comes to chain of custody and liability. The use of fulfillment centers to complete a DTC order is an easy way to mask illegal shipments into a state and avoid paying taxes due to the lack of oversight and liability. 

 

STATES INCREASINGLY TAKING ACTION: Multiple states have recently considered banning use of fulfillment centers because of the ability of these centers to provide cover for illegal entities. In 2021, four states implemented fulfillment center licensing and reporting requirements to gain more oversight; however, reporting does not stop real-time illegal activity, it just gives a picture of past illegal activity after-the-fact.

What Carrier Reports Tell Us About DTC Alcohol Shipping:
And How It Costs States Money & Increases Underage Access

 

As some states have made the decision to legalize direct-to-consumer (DTC) shipments of alcohol, state regulators have discovered significant noncompliance within these shipping programs. After examining DTC shipments through common carrier reports and comparing them to available tax data, regulatory agencies discovered massive amounts of unlicensed, untaxed, and even outright illegal shipments of alcohol entering their states. States have been forced to spend enormous resources to identify and enforce against illegal DTC shipments.

 

 
michigan

MICHIGAN

Based on carrier reporting data, in 2019, Michigan consumers received 2,233,880 bottles of alcohol via direct shipment. Of those, 734,365 (33%) were shipped illegally, meaning that one in three bottles of wine shipped to Michigan in 2019 was done so illegally. In the fourth quarter of 2019, 484,101 bottles of alcohol were shipped into Michigan. Approximately 52%, or 250,264, of those bottles were shipped into the state illegally. Read the full press release here.

In 2019, the Michigan Liquor Control Commission (MLCC) and the Michigan Office of Attorney General used carrier reports to send 129 cease and desist letters to unlicensed sellers for illegally shipping alcohol directly to Michigan consumers.

Additionally, in 2020, Michigan Attorney General Dana Nessel brought 21st Amendment Enforcement Act cases against two out-of-state entities that defied state liquor laws by illegally shipping wine and beer directly to consumers. These cases were the second use of the 21st Amendment Enforcement Act (Ohio being the first) and resulted in consent decrees requiring the companies to stop shipping into the state. The cases also included a consumer protection act claim that led to the imposition of monetary penalties. Read more here.

 

ohio

OHIO

In 2020, Ohio Attorney General Dave Yost filed the first lawsuit using the 21st Amendment Enforcement Act seeking to enjoin multiple out-of-state retailers from making illegal shipments into the state.  The case resulted in several consent decrees that required the retailers to ensure that no further illegal shipments are made into Ohio. “Shipping data reported to the Division of Liquor Control showed that, in 2019, Wine.com directly shipped about 24,000 packages of wine to Ohio consumers and Winc, about 13,000. Those two companies alone delivered nearly 700,000 pounds – or 350 tons – of wine shipments to the state, all without paying Ohio taxes." Read more here.

 

tennessee

KANSAS

Common carriers reported that 198,556 shipments of alcohol were made to Kansas residents in 2020. The Kansas Department of Revenue, Alcoholic Beverage Control reported to the state legislature that, based on their findings in carrier reports, “Unlawful shipments of alcoholic liquor are a known problem.” And further: “(I)t is clearly easy to order alcoholic liquor online giving easy access to underage individuals. Not only is underage access a problem, but there is a high risk for tainted or counterfeit alcoholic liquor which poses a health risk…Additionally, there is a significant loss of revenue due to the State of Kansas in the form of unpaid liquor enforcement tax and gallonage tax. Read the full briefing here (Page 3).

The Kansas ABC conducted an investigation of unsolicited social media advertisements shipping alcoholic liquor to Kansas residents. Of the 22 vendors involved in the investigations 95% sold and shipped spirits, which is not authorized for direct shipment in the state.

Additionally, 100% of the vendors sold and shipped beer which is illegal in Kansas.

50% of the vendors who sold and shipped alcohol during this investigation had no federal license from TTB and none of the vendors had a Kansas special order shipping license for wine.

Of all shipments involved in this study, two shipments were delivered to an underage individual. Further, one box of liquor was handed to a 7-year-old.

 

virginia

VIRGINIA

The Virginia Alcoholic Beverage Control Authority examined carrier reports from June to September of 2018 and found 69,478 shipping transactions in this period. Of those shipments, 26,963, or 39 percent, were shipped from unlicensed entities, resulting in large losses of tax revenue and licensing fees to the state. Find the full presentation here.

In the 2021 budget, the Virginia ABC received an additional $1 million per year for 10 new DTC enforcement positions including four auditors, three non-sworn compliance agents, two special agents, and one license technician.

Industry Response: DTC In The News

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Nov 16, 2021

WSWA Responds to One-Sided, Inaccurate Daily Beast Article on Direct-To-Consumer Shipping of Spirits

WSWA Sheds Light on Inaccuracies and Provides Facts to Counter Article Written by Susannah Skiver Barton

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WSWA

Nov 09, 2021

Three-Tier System Creates Level Playing Field

Chair & Vice-Chair for the Michigan House Regulatory Reform Committee Reps. Roger Hauck (R-Union Township) and Kevin Hartel (D-St. Clair Shores) respond to a recent column in The Hill.

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Michigan State Flag

Nov 09, 2021

U.S. Alcohol Market Blocks Monopolies, Encourages Competition

The Michigan Beer & Wine Wholesalers Association responds to a recent column in The Hill.

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Michigan Beer & Wine Wholesalers Association

Nov 05, 2021

Washington Post Covers Illegal DTC Sales by Law Enforcement

The Illegal Selling and Shipping of Alcohol by Washington D.C.’s Fraternal Order of Police Lodge

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Jul 30, 2021

DTC Principles for Alcohol Shipping Fail to Gain the Recommendation of ALEC

State Legislators Recognize the Danger of Direct-To-Consumer (DTC) Alcohol Shipping at Annual American Legislative Exchange Council (ALEC) Conference

One hundred percent of state legislatures that faced new interstate spirits shipping bills have chosen NOT to enact DTC spirits laws in 2021.

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Jul 06, 2020

WSWA Issues Guidance for Smart and Responsible Alcohol Delivery Regulation

“WSWA advocates for local delivery from beverage alcohol licensees, with delivery executed by their employee or a licensed third-party delivery company”

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