Leave cookies? Pay sales tax, says Massachusetts

Massachusetts just devised a fairly brilliant scheme for collecting sales tax from out-of-state sellers.picseli-6730

The Department of Revenue (DOR) recently published Directive 17-1: Requirement that Out of State Internet Vendors with Significant Massachusetts Sales Must Collect Sales or Use Tax. This guidance from the DOR lays out the conditions under which “internet vendors” that ship into Massachusetts must register to collect and remit sales tax. Since almost all websites use “cookies”, the directive could have a significant impact.

What is a cookie?

Cookies are small files that are left on computers by websites either temporarily (“session” cookies) or for longer periods of time (“persistent” cookies) that help eCommerce vendors track, among other things, progress in the shopping cart checkout process. Since these files reside on computers that exist physically in Massachusetts, are owned by the vendor (not the customer), and help facilitate sales, according to Massachusetts that triggers “in-state business activity” and therefore triggers a requirement to register to collect and remit sales taxes.

Does it apply to wineries?

Massachusetts is one of the very few states that wineries can ship to that does not require sales tax registration as a condition of receiving a direct shipping permit. To determine whether this new directive would even apply to wineries, we have to answer a few questions:

  1. Do wineries leave cookies?
    According to Andrew Kamphuis, former Founder and CEO of Vin65, “It’s next to impossible to have a shopping cart without having cookies. Almost all wineries have an eCommerce site, and I’m not aware of any wine industry eCommerce companies that do not leave cookies.”
  2. Are wineries “large Internet vendors”?
    The directive only applies to internet vendors that do more than $500,000 in sales in Massachusetts AND more than 100 transactions per year. It would not be uncommon for a winery to do 100 transaction in Massachusetts per year. But, $500,000 in sales per year is a significant amount. Let’s say you sell your wines for $50 per bottle, and make 2 different 3-bottle club shipments per year to 100 different Massachusetts customers. That’s only $30,000 in sales per year, so well below the $500,000 threshold.
  3. Will this directive take effect?
    The directive is designed to take effect on July 1st. However, it seems likely that at least one group will challenge the law’s constitutionality in courts. According to NPR, NetChoice is already pursuing an injunction to block enforcement before it takes effect.
  4. Does the directive apply to out-of-state wine shipments?
    Even if this directive is found to be constitutional, it’s unlikely that wine shipments would be subject to sales tax even for those over $500,000 in sales. Because the ABCC Advisory on wine shipping makes no mention of sales tax but explicitly requires registration with DOR for excise taxes, it seems clear that sales tax are not required. Further, a 2010 ballot initiative repealed the application of sales tax to sales of alcohol that are subject to excise taxes.

Why does this matter?

As we’ve discussed in the past, sales tax reform is coming. States are looking for any way they can to work around the Quill Supreme Court decision, and they’re getting closer and closer to cracking that code. This new attempt by Massachusetts is just another example of a creative solution to compel out of state sellers to pay sales taxes, joining Colorado’s “tattletale” reporting rules (which were upheld as constitutional and are now being copied by multiple states), “economic nexus” rules in multiple states that are working through the courts, and “click-through nexus” in multiple states. Massachusetts accelerates the march to reform and in very short order, the issue of sales tax on eCommerce orders will be settled either by Congress or the Supreme Court.

Until then, fast changes and a lot of uncertainty will exist at the state level. This directive in Massachusetts will be challenged, and we’ll wait to see if an injunction is granted. If it survives the courts, other states will copy it. Massachusetts chose a very high threshold of $500,000, but other states that follow would likely have a much lower annual revenue threshold ($100,00 as the standard in Colorado, for example) or separate transaction threshold. Even though this directive will likely not apply to any wineries, it’s worth staying on top of the ever-changing sales tax landscape.

Sales Tax Reform is Coming

jacob-hilton-228976On Saturday, the list of states where Amazon collects and remits sales tax on purchases grew to 46, including the District of Columbia. Even though technically that means they added only the states of Hawaii, Idaho, Maine and New Mexico to the roster, this is a watershed moment for sales and use tax reform. Amazon now collects sales tax in ALL states that require it (only the “NOMAD” states of New Hampshire, Oregon, Montana, Alaska, and Delaware have no state-wide sales tax requirement). This is a significant symbolic change that will tilt the scales towards sales tax reform.

Amazon’s gradual policy change

Ever since the Quill decision of 1992, states have had a difficult time compelling out-of-state and online sellers to register for sales tax in their states. In fact, Amazon would battle states and refuse to register for sales tax under the cover of the Supreme Court’s ruling in Quill, which said that states can not require sellers to remit sales taxes if they do not have a physical presence (“substantial nexus”) in the state. Amazon could only do this, however, in states where they did not own a warehouse or an office.

Starting in about 2012, Amazon began changing their philosophy around sales tax. Recognizing that consumer behavior was shifting around delivery expectations, Amazon began building warehouses around the country to enable faster delivery. To do this though, they were forced to negotiate with the states where they wanted to build warehouses, including an agreement to start collecting and remitting sales taxes. Since 2012, consumer expectations have continued to shift, and Amazon has moved in lockstep to meet demand with increasingly fast and convenient delivery options. Accordingly, and especially over the last year, Amazon rapidly relented to the remaining states where they weren’t collecting sales tax.

States target Amazon’s competitors

Now that Amazon is collecting sales tax in all states that require it, the pressure is on Amazon’s competitors as states look to compel out-of-state sellers to register and remit sales taxes. Because the states are hamstrung by Quill, and Congress has yet to push a federal sales tax bill over the finish line, states are increasingly inventing creative ways to circumvent Quill. Forcing sellers to register and remit is far more effective than collecting use tax individually from in-state residents.

Colorado found an interesting way to work around Quill by requiring out-of-state sellers to report their transactions to the Department of Revenue if they don’t register for sales tax. In other words, if out-of-state sellers choose not to voluntarily register to collect sales tax in Colorado, they are forced to rat out their customers so the state can collect use taxes from them. This scheme, originally enacted in 2010, was upheld as constitutional recently following multiple years of constitutional challenges by Direct Marketing Association, resulting in multiple states looking to replicate Colorado’s model. Colorado will start enforcing this law on July 1st.

If Congress does not act, the Supreme Court will

Many other states are in the process of pushing the limits of Quill with the explicit goal of reaching the US Supreme Court (SCOTUS). South Dakota, for example, enacted an “economic nexus” law that was designed to make it all the way to SCOTUS. An immediate challenge is currently on its way to the South Dakota Supreme Court. Indeed, if Congress fails to act, one if not multiple state laws will make its way to SCOTUS and sales tax reform could come from an opinion overturning Quill from the highest court in the nation.

Although Congress has many priorities that have been laid out in this important year for the new administration, sales tax may end up on the docket this year or next given the momentum from Amazon’s change coupled with the increased challenges states and courts are facing.  The only question is whether sales tax reform will come prior to a ruling by SCOTUS or following.

Several proposals have been floated over the last five years or so in Congress. The most successful attempt was the Marketplace Fairness Act (MFA) of 2013. MFA would perpetuate the current incredibly complicated destination-based sales tax scheme while giving states the teeth they need to enforce their local laws. Rep. Bob Goodlatte (R-VA), on the other hand, would like to move to an “origin-sourcing” scheme in an attempt to simplify the sales tax laws. Neither proposal is perfect, so hopefully Congress can compromise and create a bill that’s fair to both large and small sellers.

The route to reform is not perfectly clear yet, but one way or the other we’ll have a significantly different sales tax landscape over the next 1-2 years.

What this means for wineries

Wineries that ship products directly to consumers can currently ship to 45 states with the proper permits. Most of those states require the wineries to first register with the Departments of Revenue for sales tax remittance prior to obtaining their direct shipping permit. Yet some of those states still do not require sales tax registration. Minnesota, for example, currently does not require sales tax registration. The current flurry of activity and momentum towards sales tax reform will surely mean that wineries should prepare for the eventuality of having to register and remit sales taxes in all non-NOMAD states that allow direct shipments.

 

What Michigan tells us about the future of DtC wine shipping

I had the pleasure of writing a guest post at Hinman and Carmichael’s Booze Rules blog called Michigan: Canary in the DtC Coal Mine? I hope you can check it out and let me know your thoughts.

To me, the timeline that I outlined at the top of the piece was a very interesting confluence of events. The fact that Michigan got sued for a third time on DtC legislation is pretty fascinating on it’s own. However what’s really interesting to me is that the events in Michigan followed almost exactly the events that occurred shortly before in Illinois.

Illinois wholesalers had taken matters into their own hands, and then forced more involvement by the Illinois Liquor Control Commission. That was followed by much more restrictive legislation (including potential felony penalties), which led to a lawsuit against the state. Sound familiar?

So, is this a pattern? Should we expect similar events to play out in additional states? It seems like it. As we speak, Minnesota is considering similarly restrictive legislation. Wineries, retailers, third party providers, and fulfillment houses that operate in the DtC wine world should be sure to stay on top of all of these changes and step up their compliance game.

In Michigan, the legislation seemed to be enabled significantly by the “Wine Direct Shipping Research and Analysis” report out out by the Michigan wholesalers. I’d like to take a closer look at this report in a future post. Some of the methodology, assumptions, and conclusions in the report need a closer review in my opinion.

Check out the piece and let me know what you think!

 

 

 

Tidbits from TTB’s Annual Report

I’m not sure if I’ve actually read the Alcohol and Tobacco Tax and Trade Bureau’s (TTB) Annual Report cover to cover before. It’s actually quite good and informative. Here’s a few things I learned from reading the 2016 report.

  • Screen Shot 2017-03-15 at 9.23.37 AMTTB’s vision is to “be the world’s authority in the regulation, taxation, and science of alcohol and tobacco products and a model for next generation government”
  • TTB has three strategic goals: Collect the Revenue, Protect the Public, and Management and Organizational Excellence
  • There are 82,391 total permittees, 97% of which are from the alcohol industry, however only a subset (12,941 in FY 2016) pay taxes in a given fiscal year.
  • $22.1 Billion in revenue was collected in FY 2016, on a total budget of only $106 Million
  • 161,477 Certificate of Label Approval Applications (COLAs) were received in FY 2016. That is a massive number!
  • Tobacco tax collections are trending downward (12% since 2012), but still amounted to $13.3 billion in FY 2016, representing 60% of all TTB tax collections
  • Tax collections in Virginia and North Carolina exceed $5 Billion each. California and Kentucky are north of $1 Billion each. In Mississippi, North Dakota, and Wyoming, tax collections are each less than $1 Million.
  • In FY 2016, TTB processed approximately 8,000 applications for a federal permit
  • California boasts 7,254 alcohol permit holders, far exceeding the next state of Washington (1,911)
  • Wine products represented roughly 72% of all COLA applications in FY 2016, followed by malt beverage (18%) and distilled spirits (9%)
  • Distilled spirits represented 48% of the 11,452 formula applications, followed by wine (32%) and malt beverages (20%)

 

California ABC issues $400,000 settlement against beer wholesalers

The California ABC issued a press release stating that they had issued on of the biggest penalties in the history of the ABC. Primarily levied against Anheuser-Busch, LLC’s distributorships, the settlement is for prohibited marketing practices. The distributors are accused of providing “things of value” to retailers, thus creating an unfair marketplace. The year-long investigation in this case begun back in 2015.

Our Take: Some of the infractions seem minor here, but many ABCs around the country take “Tied House” laws very seriously and won’t stand for any things of value to be provided. It’s a bit surprising to see the California ABC issue such a major settlement, akin to what has become standard fines from the New York SLA. California is clearly sending a message to the rest of the industry here.

Minnesota wants to license wineries for direct wine shipments

Minnesota is currently one of three states that allows wineries to make direct shipments from off-site sales without a permit, along with Alaska and Florida. That would change under Minnesota HF 791 (and companion bill MN SF 1418), which is currently being reviewed by the Committee on Commerce and Regulatory Reform.

The new bill would create a standard permit system for wineries begging on July 1, 2017 and would also introduce several new provisions that wineries must comply with, including:

  1. 2 case per calendar year volume limit
  2. Wineries must submit all of the addresses from which shipments will originate (including winery warehouses and fulfillment houses)
  3. Wineries must provide a list of all Third Party Providers (TPPs) that they will be working with. Presumably this refers to fulfillment houses (aka third partly logistics – 3PL) companies, but it’s not perfectly clear in the bill text
  4. Annual license renewal by January 1st of each year
  5. Restricts shipments to wines of the “winery’s own production”
  6. Any TPP that is operating on behalf of wineries must first verify that the winery is properly permitted in Minnesota. TPPs must also submit a monthly report of shipments into Minnesota, “unless the direct ship winery has supplied the required statement to the commissioner”
  7. Wineries must collect gross receipts tax, sales and use tax, and a monthly report to the commissioner detailing each wine shipment
  8. Restricts common carriers (FedEx and UPS, for example) from making shipments unless the carrier confirms that the winery is properly licensed. The commissioner is required to provide a list to the common carriers and the TPPs on a monthly basis of all licensed wineries.

Our Take: This bill isn’t written very well in its current form. Many of the provisions seem insufficiently crafted or thought-through. However, otherwise it seems like a fairly standard direct shipping bill that allows wineries to ship with a permit including volume limits and taxes, but prohibits retailers from doing the same. The common carrier and TPP provisions are more and more becoming standard fare in new wine shipping bills.

 

California ABC is Actively Enforcing Credit Laws

John Hinman has an explanatory blog post and accompanying video that explain the active enforcement by the California ABC regarding credit laws. Both suppliers and retailers can face significant, escalating fines for violating the credit laws, so wineries, breweries, distilleries, importers, and retailers doing business in California should pay close attention to these developments.

The “Booze Rules” blog post does a great job of describing why the credit laws exist (suppliers are not allowed to provide a “thing of value” to retailers, and extending credit was commonly used as an incentive for retailers prior to prohibition) and what suppliers and retailers should do to make sure they’re in compliance. In short, study up on the credit laws, which exist both at the federal level and in each state where you’re doing business, and make sure your accounting and sales teams are trained and have the systems and processes in place to monitor invoices and accounts receivable.