Fulfillment warehouses: the confusion of their role in modern alcohol sales
The lack of understanding may come from the absence of basic information, or perhaps it’s more deliberate.
The story of the fulfillment business as it related to the beverage alcohol industry has been an interesting topic to watch. It is sadly being used as another pawn in the game of those trying to delay, stop, or sabotage the channels of Direct to Consumer (DTC) and Direct to Trade (DTT) sales.
In most industries, these types of businesses are called 3PL’s (Third Party Logistics) or just fulfillment facilities. In simple terms, they are warehouse locations that handle order fulfillment for other businesses. They serve a vital role for many businesses, providing the labor and supplies required for order fulfillment and that includes many businesses in the alcohol beverage industry. They are not, as Rep. William Lambeth (TN) stated in 2021 when arguing for banning fulfillment facilities, “a business that keep someone’s complete customer list, handles their marketing, and manages their distribution, they have the complete ability to destroy that small business.” Fulfillment houses are an essential partner and tool to alcohol businesses of all sizes who benefit from the economies of having a location, store, pick, and pack orders in real time, a process that could otherwise take an owner many hours per day, when they have other pressing matters like connecting with customers and growing their businesses.
I believe it is of paramount importance legislators should be educated by industry members and not by paid lobbyists, as often a single side of the story is being told by the lobbyist or in the case of Rep William Lambeth, misinformation or inaccurate information was shared.
There is an inherent danger in having legislators who do not fully understand the complex nature of the beverage alcohol industry, be in charge of enacting the exact legislation that is set up to govern it. There is no greater risk in the beverage alcohol industry than legislators changing the rules to the detrimental effect of small businesses. As an industry we can create demand, connect with customers, and tell our stories, but if we are legally bound by misinformed ancient laws, then the industry will never be able to truly grow.
Some of the latest harmful law changes include, Missouri stopping retailers shipping direct to consumer, Louisiana removing a producers’ right to self-distribute their products, and Maryland removing a distillery’s right to use common carriers (UPS, FedEx) to ship – these are things that destroy businesses by reducing sales or driving up cost. They, however, do not destroy all business equally. These targeted practices destroy small, family run businesses by ensuring they cannot compete with incumbents in the beverage alcohol space.
The lack of education in this space was most notably seen in testimony to the Tennessee legislator in 2021. Rep. William Lamberth, made many uninformed and inaccurate statements about fulfillment facilities, saying that licensing and controlling fulfillment facilities ensures all taxes and fees are collected. As I have previously written, this could not be further from the truth. The compliance software wineries are using will ensure all taxes are calculated properly and remitted by the winery so the winery can report accurately to the state. Fulfillment houses merely fulfill the given order.
Rep. Williams also made a far-reaching statement that a fulfillment facility is basically a wholesaler. Well, I wish that were true, because then we would be at the starting point of the virtual wholesaler. He also harkens back in history with, “If you go back a hundred years, alcohol can be made in a way that is dangerous” – he is implying that if they do not license a fulfillment house, somehow a fulfillment facility could produce and ship dangerous products. There are so many elements of falsehood in the whole testimony that if you are in the alcohol beverage industry it is like watching our own Saturday Night Live sketch. Do note, the Alcohol and Tobacco Tax and Trade Bureau (TTB) manages who makes what, and where.
However, in the alcohol beverage industry there are the usual nefarious candidates that are trying to prevent the use of modern shipping practices and the only explainable reason for this is to obstruct efficiency or disrupt the alternate channels in order to protect an established sales channel – no other reason can be attributed to these efforts. The Uniform Law Commission’s (ULC) legislation where they try to insert obstructive legislation in various states is a clear example of this. It is based on nonfactual rhetoric and is damaging to the new emerging channels of distribution, specifically channels that are being established to support new and smaller businesses in our industry.
So, what exactly is the job of a 3PL?
They serve to store, pick, and package orders for sellers who for other reasons do not have the capacity or have chosen to outsource this process. The 3PL location is not a licensed seller of products. In simple terms these locations are responsible (under contract) for picking and packing the products that their clients tell them to get ready for shipment. They will then either use the client’s shipping account or for bigger 3PL’s they will use their own carrier accounts to ship the products to the final destination. They are neither compliance facilities, distributors, sellers of products, age verification services, nor collectors of taxes. All those services are the responsibility of the seller, not the warehouse. 3PL’s are a valued tool for producers around the country to ensure accurate and timely fulfillment of orders to customers.
A 3PL has no responsibility for reporting sales (they are not the seller) and they are not responsible for the collection and remittance of any state excise tax or sales tax. The one exception related to excise taxes would be if the 3PL designates “part” of its location as a bonded warehouse – this bonded structure is done at the federal level to put them on a par with a wine producer (for the storage part of wine), and then at the state level (again for storage reasons and no other reason). This allows them to warehouse products for clients where federal and state excise tax has not been paid. This is used by producers to move and store products in bond so that they do not have to pay the excise tax immediately (especially important if their products are being stored for years). Once it comes out of bond, the bonded 3PL is responsible for paying those taxes on those products. Other than this exception where they must be licensed by the TTB, they are simply warehouse facilities providing services related to tax paid products.
More states are being misled as to the role that 3PL’s play in the alcohol beverage industry as nefarious actors are looking to provide roadblocks to the craft alcohol industry. These actors are the ones with the connections and the money that can contribute to lobbying campaigns. This has led to more states looking to license out of state warehouses who perform the simple task of picking and packing the products. The reason made to license 3PLs is so the state can analyze shipping records from the fulfillment facilities (and under some states the false thought of higher tax collection rates). States already receive manifest reports directly from the common carriers (UPS, FedEx) to verify licensed sellers shipping records. As states continue to look at budgets, licensing 3PLs will lead to more overhead and no improvement in enforcement.
A great example of using manifest reports is New Hampshire, who have been running a matching service between carrier manifest and sellers reports for fifteen plus years. If there is a shipment on the carrier manifest that does not match to any DTC licensed shipper reports, the state sends a “gentle” inquiry in the form of a cease-and-desist letter to the shipper as to what they shipped and why it was not reported or as a reminder to become compliant.
The only reason I can see that states can be looking to license 3PL businesses in other states would be to either generate income, which will be tiny, build deliberate barriers to competition, or they are being highly influenced by the older wholesale channel as a market protectionist effort.
For the overall industry to grow we need to accept modern practices. All production facilities are licensed both federally and by their home state and are able to produce, store, pick and pack their product and then pass it off to carriers or trucking companies for final delivery to wholesalers, trade accounts (where states permit), and also for direct sales. A number of states now allow wineries to sell other wineries products and ship them within their home state. It is simply how they are licensed and how the industry works. With modernization and the internet, the processes have improved, become more efficient, and today are the most secure when relating to data tracking than they have ever been, and has nothing to do at all with the wholesale channel.
We need to bring attention to how the beverage alcohol industry works (all beverage alcohol producers working together) and continue to focus on efficiency and ensuring consumers get the products they want thus allowing the industry to grow and flourish. Legislators who support the concept (many showed up in the Tennessee hearings) are concerned with two things - the ability for producers in their constituency to be able to ship to their customers, and the consumers in their district being able to have products shipped to them that are not available in the local market. However, there is an ongoing move by regulators and legislators to create more barriers and rules around warehousing and shipping products in the alcoholic beverage industry. When doing so they demonstrate a complete disregard for sellers and buyer’s rights and are deliberately building costly barriers to operate both for the 3PLs and those that use them.
Taxes, taxes, taxes
Most states really care about two things when it comes to alcohol sales - minors cannot access alcohol products and the accurate and timely collection of taxes.
Listening to arguments put forth by legislators or regulators about how these new fulfillment house rules and interpretations will ensure their state collects excise and sales tax is simply untrue. It remains the seller of the product who is responsible for the reporting and paying of taxes. There is a positive exception on the sales tax side of things. A number of states (39) implemented Marketplace Facilitator rules starting in 2019 to ensure the collection and remittance of sales tax on behalf of sellers. It was a moment of genius and will have increased the collection, reporting and payment of sales taxes. The concept should be implemented for excise tax as well for direct sales. Even with its success in many states, some state regulators actually argue that alcohol beverage products are not covered by the new marketplace facilitator regulations. How silly is this? For example, South Dakota tries to take this stance. They are simply wrong. Regulators do not get to interpret state legislation and select what taxable products are or are not covered, they are simply required to enforce the laws that are written.
Following the money
Every 3PL provides carrier tracking numbers to the seller. They do this for two main reasons:
To communicate with the seller so they know the package has shipped and can pass the tracking information to the customer. We all love it when we are told the package has shipped and can track it. I recently read that, on average, we check tracking numbers 2.5 times per order.
More advanced states require tracking numbers listed on reports, so they can match them to carrier reports (note New Hampshire above).
The states not asking for tracking numbers on their reports should be doing so. Virginia is a great example. They have the seller report who the carrier is for every order but oddly they do not ask for the tracking number. It would help the state regulators solve their issues of out of compliance shipping quickly and it would be much better information than asking for the name, address and date of birth of the buyer and the products they buy, which actually has nothing to do with tax payments and pulls them into consumer privacy laws regarding recording what consumers are buying.
Future industry growth & modernization
To help the beverage alcohol industry grow and meet the demands of the consumer for direct sales and direct shipment, states need to modernize themselves, not add more barriers. They should simply update their systems in a uniform way. As sales platforms advance, states could link directly into e-commerce platforms for data or let the commerce platforms run compliance services for the state with real time data flows. The key to having all producers in compliance is making the structure for being in compliance accessible and easy. The harder and more expensive states make it for producers to be in compliance, the higher the likelihood the producer will avoid sales to that state or worse, make sales and ship into a state illegally.
The problem, and opportunity, is that the new generation of consumers expects to be able to buy and receive all products, no matter its origin, within a few days. States need to be able to move with the times. Drop shipping for licensed producers, or warehouse to a consumer is the new normal and the alcohol beverage industry (well the regulatory side of the house) needs to catch up.
If you are a state legislator reading this and you are stuck on how to modernize the beverage alcohol industry in your state, don’t go to your regulators for a solution. They are great at enforcement and at identifying the issues, however they are not close enough to the core issue to provide a solution. Speak to the non-profit alcohol associations in your state, the service providers to your state producers, and small family run producers.
Remember 95% of producers are small to micro. Please make sure to not just speak to one lobbyist who says they represent the whole industry, as they will just be speaking for the 5% made up of medium to large producers, who have the resources to manipulate the market in their favor.
Ask the smaller industry members who can help you and provide systems that solve your problems, not create more overhead. You should do it soon because the industry and consumers are moving forward and are demanding more. You do not want to be left behind and become irrelevant. Marketplace Facilitator legislation already solved one of your biggest issues over sales tax collection, now ensure your constituents can access the products they desire, when they want, and the best systems are in place to profit on this cross-border trade with accurate sales tax collection and reporting.
States, you have the opportunity to modernize quickly thus freeing up resources to focus on the real issues of minors consuming (not buying), DUI, overserving, and genuine unlicensed bad actors who ship illegally. Let technology be your friend and monitor, collect, report and pay the taxes.