Registering products
Once the supplier has the proper operating permits and produces or purchases products, those products must be registered in some states. There are generally two steps to product registration:
- Federal registration. Each new product must be tied to a Certificate of Label Approval (COLA) from TTB, unless the products are less than 7% alcohol by volume. Some products will also need formula approval in order to secure a COLA.
- State-by-state registration. After the COLA is approved, products must be registered with each specific state ABC where they will be sold, if the state requires registration. Specific requirements and limitations vary from state to state.
Updating registrations
Product registration should be considered an ongoing task for suppliers; products need to be registered and continually updated with both TTB and the destination state Alcohol Beverage Control (ABC) agency. Once a product is registered, changes made to the product or its packaging need to be evaluated to determine whether an update is required for certain jurisdictions. Some changes to labels require an entirely new registration, while others are deemed allowable revisions.
Requirements for products distributed as a non-resident dealer (NRD) vs. direct to consumer (DTC) also often differ. Some states even require separate registrations. The same is true for variances by state. The owner of the registration is responsible for knowing when updates are required.
Reporting and returns
Once all permits, licenses, and product registrations are in place, suppliers are responsible for reporting and returns at several levels. If the operation produces beverage alcohol, federal and state production reporting is required along with excise tax returns.
For interstate commerce, suppliers may also be required to submit a list of invoices for products they’ve sold to wholesalers as a non-resident dealer.
Similarly, direct to consumer licensees typically must pay both excise and sales taxes. They may also be required to submit a direct shipping report to each state in which they’re licensed, including a list of sales invoices for each destination state.
A growing trend among state ABC agencies is to compare the supplier reports to reports they receive from common carriers, like FedEx and UPS, as well as fulfillment houses. They look for discrepancies between the direct to consumer licensee, carriers, and fulfillment houses to verify the correct excise tax was paid and the shipping entity was licensed to make the shipments.
Understanding different tax types
A number of different tax types are applied to beverage alcohol, and at different times in the supply chain. Each has complexities, but all are important to understand in order to achieve accuracy and minimize audit exposure.
Federal excise tax
Excise taxes are due on most beverage alcohol products produced in or imported into the U.S. Excise taxes aren’t exclusive to the beverage alcohol industry and are also collected from the sale of motor fuel, airline tickets, tobacco, communications, health-related goods and services, and other restricted commodities. These taxes aren’t paid directly by the consumer but are instead baked into the price of a product or service. Federal excise tax is due to TTB on all beverage alcohol products above 7% ABV, but the specific alcohol type, ABV percentage, and total volume removed during the calendar year determine the amount due by volume.
Understanding when this tax is incurred is important. In the case of producers, products are often bottled, labeled, then put into storage “in bond” so payment of taxes can be deferred until products are ready for sale. Some fulfillment facilities provide bonded storage for producers, allowing that facility to pay the excise taxes directly upon shipment then bill back the supplier. Whether the supplier stores their own inventory or uses a third-party warehouse, the federal excise taxes must be paid before sale to consumers or wholesalers. This is an extremely important component of record keeping all producers should mind closely. Importers should also be mindful of their excise tax responsibilities, strategy, and record keeping.
State excise tax
Like federal excise tax, state excise taxes are paid on specific goods and aren’t charged directly to the consumer. Instead, they’re included in the total cost of producing the product.
State excise taxes can differ depending on their application to a DTC seller or a non-resident dealer. For example, if a winery is selling directly to a consumer, they’ll typically pay the state excise tax. These taxes apply to all direct shippers in the state where excise taxes are applicable. Conversely, during non-resident dealer distribution (or self-distribution by a producer), state excise taxes are rarely paid by the supplier when selling directly to a retailer.
Sales tax
Most states require sales tax be paid if a supplier is located within a state or shipping to a state that allows DTC shipping. The only states that don’t require sales tax are New Hampshire, Oregon, Montana, Alaska, and Delaware (often referred to as the NOMAD states.) If the state is not a NOMAD state, whether you have to pay sales tax or not depends on that state's nexus laws and the laws that govern DTC shipping.
Nexus laws include a sales tax obligation based on a certain level of economic activity within the state, including sales revenue, transaction volume, or a combination of both. Like many sales tax laws, economic nexus criteria vary by state and by the type of tax.
Markup taxes
Markup taxes can be tricky — they aren’t a tax on the actual product, but a tax on the retail value of the product. The “retail value” distinction is important because even when a product is sold at a reduced price, for example, a $100 bottle of wine sold for a discount at $80, the tax should still be paid on the original value of $100.
This tax type is a hybrid of excise tax and sales tax and is required by a handful of states. Suppliers pay markup taxes in those states if they have a direct shipping license.
The beverage alcohol compliance bottom line
Achieving — and maintaining — compliance is complicated. There’s no way around that. However, if you follow the guidelines above — acquire permits and licenses, pay your taxes, and file the proper reports and returns — your business should be well on the road to compliance.
But, since compliance isn’t a one-time task, compliance maintenance is critical. Both small and large changes can trigger a need to update compliance: expanding into new states, changing formulas, updated state laws, new business ownership, etc. Staying on top of and up to date on the rules is a must.
Fortunately, companies like Avalara have the expertise and the staff to help. We have services to support a compliant business, including a dedicated software platform and experienced industry consultants.
Contact the Beverage Alcohol team at Avalara to find out how a compliance partner can support your business.
Avalara is dedicated to simplifying tax and regulatory compliance with easy-to-use software and helpful service designed specifically for the beverage alcohol industry. We can help you spend less time worrying about tax payments, license filings, and state and federal regulations — and more time growing your business.