Sales Tax Changes for Beverage Alcohol Clientsby
Once Americans took to ordering alcohol online the way pinot noir grapes take to cool climates, legislators and tax officials began to examine compliance requirements with an eye toward improving them. Change is therefore afoot.
The ongoing pandemic heightened demand for direct-to-consumer (DTC) beverage alcohol sales, turning a spotlight on the industry and sales tax laws, therein.
Some of the top compliance challenges facing your beverage alcohol seller clients include laws surrounding cocktails to go, third-party providers, economic nexus, fulfillment houses, and more. Read on for details.
Neat New Option: Cocktails to Go
Although the United States is generally in a better place than it was a year ago, the persistent coronavirus pandemic continues to challenge certain traditional business models. With COVID-19 cases back on the rise, states, counties, and cities are reconsidering mask mandates and social distancing requirements. These are particularly hard on the food and beverage industry.
Takeout has been a lifeline for businesses (and consumers) throughout the pandemic, as have loosened restrictions on cocktails to go. Numerous states allowed restaurants and bars to sell alcohol to go when they couldn’t serve patrons in-house.
Since the sky didn’t fall, many states decided to allow delivery and takeout sales of alcohol on a permanent basis. Alcohol-to-go policies have been widely toasted, but can complicate compliance for businesses, particularly if a third-party delivery service is involved.
Third-Party Providers Upend Beverage Alcohol Delivery
Like the restaurant industry, transportation providers such as Uber leapt at the opportunity to deliver alcohol for food and beverage sellers. It helped keep fuel in the car during extended stay-at-home orders. State marketplace facilitator laws generally require unlicensed third-party providers to collect and remit tax on behalf of individual sellers. Yet these laws stand in contrast to state regulations governing alcohol sales, which require alcohol licensees (e.g., the restaurant) to control the sale of alcohol and collect and remit all related taxes.
With alcohol-to-go laws here to stay in parts of the country, states are reevaluating the intersection of alcohol and marketplace laws. Key considerations include:
- Age validation
- Sales solicitation by unlicensed third-party providers
- The flow of funds for alcohol transactions involving third-party providers
Of course, many consumers live in states where delivery or takeout sales of alcohol are banned. For them, online shopping has become key.
The internet has been an integral sales channel for beverage alcohol sellers for years, and it’s become even more so over the past 18 months. In fact, online alcohol sales in the U.S. are expected to surpass sales in China — the world’s largest online alcohol market — by the end of 2021.
Alcohol Ecommerce Meets Economic Nexus
The landmark U.S. Supreme Court ruling in South Dakota v. Wayfair, Inc. (June 21, 2018) didn’t immediately turn the beverage alcohol industry on its head, but fallout from the decision is impacting direct-to-consumer sales in many parts of the country.
The Wayfair decision overturned a long-standing physical presence rule that prevented states from taxing out-of-state businesses. In a nutshell, it authorized states to base a sales tax obligation solely on a remote seller’s economic activity in a state (aka, economic nexus). Out-of-state sellers whose sales into a state surpass that state’s economic nexus threshold are now required to register and comply with all relevant sales tax laws.
Due to the nature of their sales, DTC wine shippers already had an obligation to register for sales tax in most states even before the Wayfair decision. However, economic nexus laws in certain states and cities can and do affect beverage alcohol sellers in some unexpected ways.
For example, wineries selling into Florida must now register to collect and remit sales tax in addition to excise tax. Other jurisdictions to watch include California, Chicago, Colorado, Illinois, Iowa, Louisiana, Minnesota, Texas, and Washington, D.C.
The Future of Fulfillment Houses
Fulfillment houses play a critical role for many online beverage alcohol sellers that lack the resources to store and ship their products directly to consumers nationwide. Essentially logistics centers that receive orders then pack and ship wine (also beer and spirits where permitted), fulfillment houses generally aren’t considered the retailer and therefore aren’t responsible for collecting and remitting applicable taxes.
With DTC sales on the rise and fulfillment houses playing a growing role in distribution, several states are looking to more closely regulate fulfillment houses. For example, Kentucky recently explicitly allowed them to operate in the state (they already were, but now it’s official), while Alabama, Kansas, and Tennessee licensed their use. We expect other states to follow this trend.
Other Issues Facing DTC Sellers
The above issues underscore why it’s critical for beverage alcohol sellers to cultivate real-time compliance, and they’re just the tip of the iceberg. Other issues facing DTC sellers today include:
- New enforcement efforts
- New license and filing requirements
- New volume limits
Gail Cole is a Senior Writer at Avalara. She’s on a mission to uncover unusual tax facts and make complex laws and legislation more digestible for accounting and business professionals — or anyone interested in learning about tax compliance.