In a recent op-ed in Wine Industry Advisor, author Alex Koral misleads readers by attempting to define the realities facing the direct-to-consumer (DTC) wine marketplace as “myths.” Rarely is Koral able to use facts to back up his opinion, rather he relies on anecdotal narratives and rhetoric to ultimately make the case that DTC alcohol shipping should “happen because it’s popular.”
Wine & Spirit Wholesalers of America (WSWA) respects the Twenty-First Amendment and the powers it grants each state to regulate the distribution of alcohol as they see fit. However, as responsible distributors of alcohol for nearly a century, it is incumbent upon us to point out weaknesses that incumber the state’s ability to effectively regulate a socially-sensitive product or collect taxes on products purchased within its borders.
To an industry that has spent hundreds of millions of dollars on social responsibility efforts and campaigns, it’s most concerning that DTC wine shipping privileges may expand to include spirits as argued by Koral, compromising the public health and safety of Americans.
Below we explore Koral’s “myths:”
1. Minors Will Buy DTC
In his attempt to discredit the very real (and recorded) occurrences of minors making illegal DTC purchases or being delivered DTC shipments without ID checks, Koral relies on a 2003 FTC report that found that the “market wasn’t conducive to sales to minors.” And, to be fair, nearly 20 years ago, it wasn’t – the iPhone and smart phones didn’t exist, “WiFi” wasn’t recognized in the dictionary, and the largest e-commerce platform in the world had barely expanded its product pool past textbooks. The reality is that today’s e-commerce marketplace is unrecognizable to a 2003 18-year-old with a flip phone, rendering the findings of that FTC report nearly useless.
In a more recent 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.
The existing system that regulates alcohol prevents underage access through locally licensed businesses that are held accountable in the marketplace and by state authorities. In most states, local businesses can deliver alcohol to local consumers via their own employees or licensed third parties – and are easily held liable for ID checks and underage sales. There is no equivalent accountability in the DTC marketplace.
2. DTC Shippers Don’t Pay Taxes
Since 2020, more and more states are allocating resources to act against illegal shippers and attempt to recoup millions in lost tax revenue.
The loss of tax revenue not only deprives the state of taxes it relies upon to fund law enforcement and education, but it also undercuts legal, compliant, in-state businesses that make up local communities. Most states lack the bandwidth and resources to analyze common carrier reports (where available) to expose the lack of DTC shipping compliance; however where investigated, these reports have led to some shocking numbers:
Ohio, Michigan, North Carolina, and Virginia have made efforts in recent years to crack down on illegal DTC shipments:
- Ohio Attorney General David Yost found over 40,000 illegal shipments of wine and spirits in 2019 that circumvented the payment of state excise tax and general sales tax.
- The Virginia ABC estimates a loss of more than $60,000 in unpaid excise taxes in a single 4-month period in 2018 and received $1 million in funding last year to fund 10 new DTC enforcement positions.
- In Michigan, Attorney General Dana Nessel continues to act against illegal shippers by using the Twenty-First Amendment Enforcement Act.
- On May 3, 2022, the North Carolina Alcoholic Beverage Control Commission sent cease and desist letters to multiple out-of-state retailers that had been shipping illegally to North Carolina residents. Offenders were given 30 days to provide a receipt proving that North Carolina state taxes had been paid or be considered presumptively guilty of a felony.
- Becky Schlauch, the Alcohol Beverage Control Division administrator for Montana said at a recent National Alcohol Beverage Control Association (NABCA) meeting that they’re focusing on DTC shipments in her state too. “That is a big resource consumption.”
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 shipping opens the door to widespread tax evasion – which harms citizens and law-abiding state licensed businesses.
3. States Can’t Regulate Out-of-State Shippers
Even in states where illegal shippers could get licenses and ship legally, many repeatedly fail to do so and continue to show up as illegally shipping to consumers on carrier reports. And unfortunately, states have limited resources and ways to effectively punish wrongdoers in other states. Koral’s insistence that an effective step is to “extend the ranks of businesses that can get license – and therefore accept the state’s authority over them” is not only blatantly false – it is completely self-serving.
Koral’s company, SOVOS/ShipCompliant, is a tax and reporting compliance software provider for DTC shippers, and any expansion of DTC licensing increases its profitability.
4. DTC Shipping is Full of Counterfeits
Koral’s insistence that the DTC marketplace is the “best way to avoid counterfeits” is an illogical argument but not unexpected. The U.S. three-tier system of licensed production, distribution, and retail sales has worked so well that Americans often take it for granted that any alcohol product sold through a licensed retailer – recognized label or not – is safe to consume.
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. There are similar problems in the U.K.
Within the anonymity of the internet, unlicensed producers or retailers may introduce dangerous products that arrive neatly packaged on the doorstep of consumers. 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. These orders and shipments, which are hidden from effective oversight, increases the difficulty for state and federal regulators to ensure safe and legitimate products for consumers. Where does the liability land?
Furthermore, 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. In fact, the chain of custody is so well established that any recall of an alcoholic product can be executed in less than 24 hours to protect consumers.
5. DTC Shipping is a Jobs Killer
In a study undertaken by the Wine & Spirits Wholesalers of California, it was estimated that recently-introduced legislation aimed at expanding DTC shipping privileges to distilleries could eliminate up to 5,000 jobs. Similar studies in Vermont and Maine undertaken by WSWA found up to 42 and 98-full time jobs were at risk, respectively paying $1.5 million and $3.3 million in wages and lowering the states’ economies by $5.9 million and $12.4 million.
Should DTC licensing privileges expand as Koral suggests, orders will most likely be mainly fulfilled by larger producers that can “manage complex regulatory schema and handle the expensive and labor-intensive shipping process” and dominate the e-commerce space by out-buying search returns and digital ad space, just as Home Depot edged out mom and pop hardware stores and Amazon edged out independent book shops.
Why Not DTC Shipping?
The bottom line is DTC wine shipping is not a perfect model and should not be something extended to spirits. Regardless of how “popular” wine clubs and direct purchasing may be with consumers, this flawed model should not be expanded to include privileges for spirits producers—regardless of how much business that expansion of privileges may bring to SOVOS/Ship Compliant.
Enforcement issues, non-compliance, increased underage access, lack of supply chain transparency, severe loss in tax revenue, public health and safety issues, local job loss, and more are each a reason why DTC spirits shipping is a bad idea. Advocates for a deeply flawed, untested, and sure to be weakly regulated marketplace are trading social responsibility progress for profits. We know what is myth and what is fact.