New Treasury report on alcohol could help small brewers and distillers

When President Biden issued a executive order to promote competition in the american economy (July 2021), it asked the Administrator of the Alcohol and Tobacco Tax and Trade Bureau to consider, among other things, “reducing barriers that impede market access for brewers, smaller, independent winemakers and distilleries”.

The resulting report, released by the Treasury Department on February 9 and titled Competition in the beer, wine and spirits markets, includes a careful analysis with many recommendations to promote competition. While many of the industry’s recommendations for change may take years to materialize, there may be more immediate consequences for one of the priority areas: alcohol drop shipping.

The Treasury finds a model of growth and consolidation

The following “areas of concern” are listed in the executive summary of the report:

  • Beer production is highly concentrated (two brewers produce 65% of the US beer market)
  • Large producers, distributors and retailers seem to adopt exclusionary behavior
  • The Federal Alcohol Administration (FAA) Act of 1935, created to combat alcohol abuse and organized crime, may now burden small businesses while not “fully addressing the exclusionary impact of certain commercial practices”.
  • Certain state and federal laws may impose an unjustified and disproportionate burden on small and medium producers
  • Some state and federal laws can hinder the growth and competitiveness of small producers
  • Federal tax rates differ between beer, wine and spirits and affect competition between each of these sectors

The report makes several specific recommendations to address these issues.

He advises the Department of Justice (DOJ) and the Federal Trade Commission (FTC) to study how mergers and acquisitions affect consolidation, distribution, innovation, monopolization and pricing – particularly as they relate to small businesses and emerging businesses.

It recommends that the Alcohol and Tobacco Tax and Trade Bureau (TTB) review labeling requirements to prioritize consumer protection while reducing regulatory burdens on small businesses and emerging businesses.

Finally, the report encourages states “to consider the effects of their regulations on small producers and their ability to compete, including their access to distribution.”

Report Findings May Help State of DTC Legislation

The report suggests that one way to help small producers compete is to enable direct-to-consumer shipping. According to the report, the direct-to-consumer (DTC) business model encourages innovation, provides opportunities to serve small niches and allows small producers to expand their distribution. Yet the Treasury also acknowledged that some restrictions on direct delivery “could have legitimate consumer protection or public health reasons”.

Wine producers can ship directly to consumers in most of the country: only Mississippi and Utah prohibit all DTC wine shipments, although Arkansas, Delaware, and Rhode Island require direct shipments of wine be purchased in person at the winery.

Far fewer states allow DTC shipments by breweries, distilleries or retailers:

  • Breweries can ship to nine states and Washington, DC
  • Distilleries can ship to six states and Washington, DC
  • Wine retailers can ship to 13 states and Washington, DC

DTC legislation is already extensive in several states, including one highly publicized bill in California this would open DTC shipping for distilled spirits. Distilleries and breweries are working to expand their reach in multiple states, and wineries are looking to open the few remaining states to DTC shipments. The findings of the Treasury report could prove compelling to state lawmakers considering these bills.

A common argument made against the expansion of DTC shipments is that direct shipments might increase alcohol consumption among underage drinkers. Yet, according to the report, the FTC found no evidence that direct wine shipments lead to increased wine consumption by minors.

What the Treasury has discovered is that drop shipping provides “small grower distribution opportunities” in states where it is permitted. This may explain why, when the Treasury was soliciting contributions, “many commentators spoke in favor of allowing direct shipping as a way for small businesses to market their product as an alternative to regulated or concentrated distribution networks of restrictive way”.

For its part, the FTC has long been a proponent of drop shipping.

In a 2003 study of a local market (detailed in Possible anti-competitive barriers to e-commerce: wine), the FTC found that 15% of a sample of wines offered online to consumers in McLean, Va., were not offered at wine retail stores within 10 miles of McLean. The study explained that states severely limit consumer access to “thousands of small winery labels” when they ban direct interstate shipments. Additionally, consumers could save money by buying wine online, although the savings depended on price per bottle, quantity purchased, and delivery method.

The 2003 FTC report concluded, “State bans on interstate direct delivery represent the greatest regulatory impediment to the expansion of electronic wine commerce.”

According to Avalara for Beverage Alcohol CEO Jeff Carroll, the report played a significant role in the U.S. Supreme Court’s decision in Granholm v. -state wineries to ship directly to state consumers.

The Granholm ruling prevents states from discriminating against foreign producers in interstate commerce. However, it allows states to regulate direct-to-consumer shipping and impose a three-tier system if they choose. In other words, Granholm does not require states to allow DTC shipments.

And despite broad support for DTC shipping, including from the FTC, the Treasury report found there were lingering concerns about the expansion of direct alcohol shipments.

Ongoing DTC Shipping Concerns

There appear to be three main concerns regarding the expansion of DTC shipments of alcoholic beverages. Some commentators were concerned that bypassing the wholesale level:

  • Increase the risk of contaminated alcohol entering the market
  • Increase the odds of not collecting state liquor taxes
  • Increase availability for young people, “since door-to-door delivery has an abysmal record of age checks and identity verification”

The 2003 FTC report found that there were “little or no problems with mailings to minors” in states that allow direct mailings. These states generally require age verification and an adult’s signature at the point of delivery. However, the Treasury concedes, “it is possible that wine has more limited appeal to younger audiences than other beverages, and it is certainly possible that beer and spirits raise different issues than wine at these respects”.

Ultimately, the Treasury concludes, state officials must weigh the distribution opportunities that DTC shipping offers to small producers and the comparative risks it may present for underage drinkers. It encourages the DOJ and FTC to “engage with state actors on state laws impacting competition in alcohol markets by submitting letters in response to state legislative requests for technical assistance.” You can find more details in the report, Competition in the beer, wine and spirits markets.

Find more news related to the direct shipment of alcohol at Avalara Tax Office.

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Gail Cole is Senior Editor at Avalara. Her mission is to uncover unusual tax facts and make complex laws and legislation more digestible for accounting and business professionals.

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