Published on:
December 27, 2022
As you likely know, the three-tier system is the most prevalent way that spirits are sold in the United States. What you may be less aware of are the complex and varied rules and regulations that distillers must keep in mind when expanding into a new state. Following is an overview of the main regulatory and tax rules that distillers distributing in different states need to be sure to comply with.
Licensing
When entering a new state, the first step is almost always to get licensed to sell to in-state wholesalers or get approved to sell to the state’s control board. Pay attention to the specific requirements needed for a supplier license, as they are different state by state. The cost to obtain a supplier license can range from free to thousands of dollars per year. Additionally, some states also require spirits suppliers to have $100,000 held in a bond.
Registration
Because liquor labels contain critical information that identifies the contents and producers of the product, they are highly regulated by the federal and state governments.
After obtaining a COLA, it’s time to get state specific, as nearly 40 states have their own product registration requirements, including some that require yearly renewal. Many states also collect distributor information to manage franchise restrictions, such as documenting the approved territories for distributors or establishing a record of existing relationships in case a party wants to adjust their agreement in the future.
Control States In control states, government agencies take over one of the standard “tiers” of the three-tier system. Most often, state agencies will act as the wholesaler. In 13 jurisdictions, the state also manages or operates retail stores. All states that use a control system apply it to sales and distribution of spirits products.
There are some important differences between selling to a private business and selling your product to a government entity. A license may not be necessary when selling to control boards, though you must still be recognized as a potential supplier by the state.
The key distinction is that you must “list” your products with the state, convincing them of the value and marketability of your products, much like you might need to do with a private wholesaler in other states. This listing process can be complicated and involve additional steps to achieve. As part of listing, you may need to use a registered in-state representative when submitting quotes to the state. States will only accept quotes during specific time periods, and each product category will need to meet specific criteria.
Selling into a control state may seem like a headache but interacting directly with a state agency can have its upsides. Because a supplier will list their products directly with the state, they will not need to file a brand/label registration for those products beyond the listing process. Further, the state does not need to receive regular shipping reports on those distributions because sales are already distributed directly by the state agency.
Filing and Reporting
Each state has its own excise tax requirements, reporting and deadlines. Excise taxes are calculated on the volume of alcohol sold and are levied at both the federal and state levels, meaning that high ABV spirits are taxed more heavily than say, an IPA. By knowing your excise tax obligations, you can properly set prices in the state.
Generally, excise taxes are paid by the “first party to own the product in a state,” which typically implies the distributor. But that is not a universal rule, so spirits producers distributing interstate should be cognizant of any situation where they would be required to remit excise tax themselves.
Many states require suppliers to file reports that outline their sales to in-state wholesalers. These reports outline what was sold, when and to whom, typically on a monthly basis. Some states require copies of all invoices, while others simply want to know the total volume sold. Keeping tabs on the specific requirements in each territory where you do business, whether manually or via a software solution, is essential for comply with three-tier distribution regulations.
For more information on the common distribution rules — and how each state applies them, check out these Distribution Rules by State.
Written By: Sovos ShipCompliant
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