Avalara : States carve out distinct rules for DTC shipping and local delivery of alcohol

When the pandemic first forced bars, restaurants, and other "non-essential" businesses to close or limit offerings, many state and local governments allowed bars and restaurants to sell alcoholic beverages for delivery or takeout. These usually began as temporary, emergency measures, but numerous states have since authorized delivery and/or to-go sales of alcohol on a permanent basis - Arizona and Iowa among them.

Both states now also allow bars, restaurants, and retailers to make alcohol deliveries through a third-party provider (TPP). However, the policies in each state differ considerably.

Iowa

Iowa House File 2540 authorized certain businesses to sell beer, wine, and cocktails for off-premises consumption back in June 2020, and the Iowa Alcoholic Beverages Division (ABD) provided additional guidance on its Cocktails To-Go page. However, neither the bill nor the ABD addressed the dos and don'ts of alcohol delivery.

House File 766 did. The measure authorized licensees and permittees able to sell alcoholic beverages for off-premises consumption to contract with a third party to deliver the alcoholic beverages on their behalf. It took effect July 1, 2021.

The ABD page on third-party delivery clarifies, per the law, that there must be a written agreement between the licensee or permittee and the third-party provider (TPP). Additionally, the licensee or permittee must provide the Iowa Alcoholic Beverages Division (ABD) with a list of all third parties authorized to act as its agent, and it must update the list as changes occur.

Yet HF766 is a short bill focused entirely on delivery by third parties. Guidance on issues like who can prepare a cocktail to go, what types of containers can be used, sealing requirements, and more must come from HF2540 or the ABD Cocktails To-Go page.

For example, the following containers cannot be used for carryout or delivery sales of alcohol:

• A container with a lid with sipping holes or openings for straws

• A cup made of paper or Styrofoam

• A plastic cup that is intended for one-time use

The container must have some sort of breakable seal. A plastic heat shrink wrap band, strip, or sleeve that extends around the cap or lid may work. Alternatively, there could be a screw-top cap or lid that breaks apart when the container is opened. Additional details can be found on the ABD website.

Arizona

Like Iowa, Arizona temporarily allowed restaurants to sell alcohol to-go shortly after the pandemic first struck. The enactment of House Bill 2773 in March 2021 made Arizona's temporary allowance more permanent as of October 1, 2021 - at least for some businesses.

According to the Arizona Department of Liquor Licenses and Control (DLLC), operators with a series 6 or 9 liquor license may begin selling cocktails to go (following all published standards) as of October 1, 2021. But through 2025, restaurants with a series 12 license must apply to lease to-go cocktail privileges, on an annual basis, from a bar or liquor store located in the same county.

The annual lease doesn't come cheap: Currently, "the official price for restaurants to acquire the to-go-cocktail privilege is $2,500," plus the application fee.

H.B. 2773 also allows licensees with delivery and to-go privileges to use the services of one or more TPPs, like its counterpart (HF766) in Iowa. The bill calls them "registered alcohol delivery contractors" and defines them as "a person who delivers spirituous liquor to a consumer on behalf of a bar, beer and wine bar, liquor store, or restaurant." Alternatively, licensed establishments may use their own employees to make deliveries.

There's a lot of regulations and requirements to track. See the DLLC's FAQ for registered alcohol delivery contractors, FAQ for cocktails to go, and FAQ for alcohol to go for more details and additional guidance.

Alcohol delivery by third parties is becoming more prevalent

Carryout and delivery sales of alcohol have become more prevalent in this country since the pandemic. Still, it's a relatively new trend, and many states haven't yet determined whether or to what extent TPPs can be involved. Some, like Iowa, could authorize delivery before clarifying the potential role of TPPs. Others, like Arizona, could do both at once.

As states grapple with the issue of delivery, some consumers and even businesses may wonder why it's an issue at all. After all, in many states, it's long been possible to have alcohol delivered directly to your door.

So, what's the difference between alcohol delivery (e.g., new allowances in Arizona and Iowa) and direct-to-consumer (DTC) sales (e.g., the wine-of-the-month club)? When and how can TPPs be used to facilitate the delivery of alcohol?

What's the difference between DTC shipping and alcohol delivery, and why does it matter?

More and more states are looking to define and differentiate between direct shipments and delivery. Specifics vary from state to state and policy to policy, but, generally speaking, the following differentiators are emerging.

DTC shipping

With a DTC shipment, a licensee (a producer or retailer) generally:

• Ships alcohol across state lines
• Ships via a common carrier
• Signs an alcohol shipping agreement with a national or regional common carrier (e.g., FedEx or UPS)

Direct shippers often need to obtain a DTC permit in many states. Once authorized to make DTC shipments, licensees need to register with the tax authorities as required and collect and remit all applicable taxes on those sales. Beverage alcohol taxes vary widely from state to state and can include alcohol excise tax, gallonage tax, liquor tax, direct wine shipper excise tax, sales tax, wine tax, or others.

Direct shippers generally use a common national or regional carrier to deliver alcohol. Companies like FedEx and UPS are professionals and understand what shipping alcohol entails. Signing an alcohol shipping agreement with them indicates the licensee also understands - and will comply with - all applicable alcohol shipping regulations.

For example, alcohol shipments must be identified as containing alcohol. They must indicate, typically via a sticker on the package, that an adult signature is required at the point of delivery. Delivering a bottle of whiskey or wine isn't quite the same as delivering a tea towel or trivet.

Alcohol delivery

According to Jeff Carroll, general manager of beverage alcohol at Avalara, alcohol delivery is somewhat harder to define than its DTC counterpart. Nevertheless, there are some clear similarities and differences.

As with DTC shipping, delivery sales must be made by a business licensed or permitted to sell the alcohol being sold. Yet unlike DTC sales, alcohol deliveries have typically already traveled through the three-tier system of checks and balances; they're moving from a retailer to a consumer.

Delivery sales tend to be more local than DTC sales, typically occurring within one jurisdiction.

But perhaps the greatest distinction between the two is that alcohol deliveries don't typically ship via common carrier; your neighborhood pub won't ask FedEx or UPS to deliver a burger and beer to your door.

Alcohol licensees often deliver their products themselves or use employees to make deliveries. As in Iowa prior to July 1, sometimes this is mandated by law. If permissible, like in Iowa today, bars, restaurants, and retailers may hire a TPP to make deliveries on their behalf. The particulars of each state's policy vary.

TPPs can follow several different models, and different businesses operate in different parts of the country. Some companies typically use an employee of the licensed retailer for alcohol delivery, even if not required by law. Others may deliver alcohol via their own employees or contractors. These are some common scenarios; there are others.

Carroll says the trend of states carving out a delivery law similar to Iowa may continue. Alcohol delivery regulations seem to be following the path of cocktails to go: There's a push to turn temporary allowances put in place during the pandemic into law.

If you have beverage alcohol tax or compliance questions, contact Avalara's Beverage Alcohol team.