Alcohol Marketplaces 2.0 Part 5: Looking Ahead

Only businesses holding a license to sell alcohol at retail can sell alcohol to consumers. That simple fact complicates matters for unlicensed entities such as online marketplaces, delivery apps, and delivery services that would like to create or enhance platforms to facilitate alcohol sales. Marketplace platform providers, alcohol licensees, and alcohol and tax regulatory agencies all have different goals and concerns when it comes to the sale of beverage alcohol products.

In this Alcohol Marketplaces blog series, Rebecca Stamey-White, partner at Hinman & Carmichael LLP, and Jeff Carroll, general manager of Avalara for Beverage Alcohol, will explore the multiple issues surrounding alcohol marketplaces and propose a compliance framework to meet the goals and concerns of the different stakeholders.

Disclaimer: This post may constitute attorney advertising and is not intended to provide or be relied on as legal advice. Perform independent legal research and consult your lawyer.

In our previous posts in this series, we covered the original regulatory frameworks for alcohol marketplaces (Part 1), the compounded sales tax complexities with the addition of marketplace facilitator laws (Part 2), the flow of funds considerations for marketplaces (Part 3), and age verification and enforcement issues (Part 4). Now we'll look at what the future may bring for this important segment of the industry.

Trends point toward more diverse ecommerce categories, which may bring greater regulation

It's safe to say alcohol marketplaces and home delivery/shipment of alcohol are here to stay and will continue to grow even as Americans get back out into the world following stay-at-home restrictions. Our bet is we'll see greater regulation of this sector as the lines continue to blur in ecommerce, with the following trends unfolding:

1. Unlicensed marketplaces taking greater fees and more responsibilities;

2. Spirits/beer/seltzer producers marketing direct-to-consumer (DTC) 'buy-it-now' options;

3. 'Cocktails-to-go' COVID allowances continuing to be widely popular and many wanting them to remain permanent, giving on-premises retailers more explicit privileges to sell mixed drinks and closed bottles off-sale;

4. Suppliers acting as retailers and third-party providers (TPPs) and retailers acting as TPPs to market or sell third-party products and leverage their customer base for more products consumers want; and

5. Brands forward-staging alcohol for faster shipping that may look and feel like local delivery.

Regulators are left trying to figure out the ground rules for all of these evolving practices. Here are the regulation and legislation trends we're seeing:

• The New York State Liquor Authority (NYSLA) has proposed an advisory that would require TPPs that receive more than a de minimis percentage of a licensed business's revenues be disclosed to the authority. Per the advisory, the TPP would be listed as a 'co-licensee' on the license and thereby subject to NYSLA's jurisdiction. This proposed advisory may be bolstered by proposed legislation to require a written agreement between a food service establishment and third-party food delivery services, intended to prevent perceived predatory practices by TPP delivery apps listing restaurant offerings without their permission.

• Having already expanded the California Department of Alcoholic Beverage Control's (ABC) authority to conduct minor decoy operations for online sales, there's now a bill to expand requirements for deliveries of alcohol, requiring ID verification and person-to-person delivery, invoices identifying the licensee as the merchant, no payment on delivery, and deliveries only between 9:00 a.m. and 1:00 a.m.

• Iowa expanded delivery options for marketplaces by passing a bill to permit retailers to work with third parties to deliver to consumers, provided they comply with age verification, do not deliver to visibly intoxicated recipients, and enter into a written contract with the retailer.

• Spirits and/or beer DTC bills are in play around the country (California, Delaware, Hawaii, Kentucky, Maine, Missouri, New York, South Dakota, Washington); and

• Cocktails-to-go/in-state delivery bills have been adopted or proposed around the country (Arizona, California, Colorado, Connecticut, Florida, Georgia, Illinois, Kansas, Louisiana (RTDs), Maryland, Michigan, Missouri, Nebraska, Oklahoma, Oregon, Pennsylvania, Rhode Island, Tennessee, Texas, Vermont, Virginia).

What are some of the key policy questions for future regulation?

Regulation of the 'fourth tier' of the industry (unlicensed marketplaces and delivery apps) will become increasingly important as ecommerce trends continue to accelerate. Pulling out the major themes from existing guidance, proposed legislation/regulation, and industry trends, the following policy categories will be important for regulators and the industry to contemplate when considering future regulatory frameworks for alcohol marketplaces:

Licensing: Should a license, or co-license structure exist for (currently) unlicensed fourth-tier companies that solicit orders or deliver beverage alcohol products to consumers, or should the licensee remain responsible for all activities of unlicensed providers?

Flow of funds: In scenarios where the third-party provider is either licensed or unlicensed, how should funds flow between providers and licensees? How important is it to ensure licensees retain control over all funds received from customers, especially if they have contracted for managed services?

Compensation: Does it make sense to put guard rails around the extent to which providers can be compensated for their service? If so, is a flat fee required for marketing services, or is a percentage-based compensation structure acceptable? If percentages are permitted, should there be an upper limit?

Delivery: What are the requirements for ensuring deliveries are made only to people of legal drinking age? Should deliveries be restricted to certain hours of the day? Will training be required for drivers?

Relationship of the parties: Is there a permissible model where individuals are the agents of consumers or must they always be the agents of the merchants? Must individual shoppers or delivery drivers be employees or can they be independent contractors? Of the third-party company or of the merchant?

Control: What mechanisms are required to ensure licensees control the placement and pricing of the product? To what extent must the buyer receive customer information? To what extent must the customer be aware of the merchant of record?

Tied house: How do you ensure third-party marketplaces don't permit indirect tied house issues otherwise prohibited between retailers and suppliers, such as suppliers advertising retailers and suppliers advertising on platforms to send sales to certain participating retailers? Can third parties receive payment from both suppliers and retailers? What if the platform is free for retailers but supported by supplier advertising?

Exercising privileges not authorized by license type: Can wholesalers, importers, and beer/spirits suppliers that don't have direct selling privileges leverage licensed and unlicensed marketplaces to access consumers? Should that be an enforcement priority or should there be clearer guidance or options for these license types?

Taxes: If the provider is required to collect and remit sales taxes, can the provider keep the sales tax portion of the funds and remit the balance to the licensee? Should 'Wayfair' rules for marketplace facilitators extend to excise tax collection on top of sales tax?

We'll be watching as the landscape evolves and regulators and legislators ponder these important questions about unlicensed providers. Will regulators continue to take a hands-off approach, focusing enforcement on the low-hanging fruit of preventing sales to minors and ensuring proper reporting, or will regulators seek to license and control TPPs more fully as we're seeing in New York? These challenges aren't going away as alcohol marketplaces continue going gangbusters, so it may be worthwhile for regulators and the industry to work together to carefully consider a thoughtful and appropriate path forward.

Have tax or compliance questions? Contact Avalara's Beverage Alcohol team.

Have legal or compliance questions? Contact Hinman & Carmichael LLP.