Avalara : Kentucky finally opens for DTC alcohol shipments, but with a catch

Kentucky finally opens for DTC alcohol shipments, but with a catch

Gail Cole Gail Cole Mar 5, 2021

Originally published December 14, 2020.

Update, March 5, 2021: Kentucky may soon allow holders of a direct shipper license to use third parties to fulfill shipments. The Bluegrass State authorized DTC shipments of beer, wine, and spirits last year, but not the use of fulfillment houses. This oversight has an enormous impact on wineries lacking widespread national distribution, as they typically use licensed fulfillment houses to reach customers in other states.

House Bill 415 (2021) allows direct shipper licensees to use a third-party fulfillment house that holds a storage license or transporter's license (it doesn't need an alcoholic beverage license). A third party may operate from the premises of the direct-shipper licensee or from another business location.

The direct shipper licensee - not the fulfillment house - will be liable for any violations of KRS 242.250, 6 242.260, 242.270, or 244.080 by the third party.

The measure was introduced February 9, 2021, and is already on its way to Governor Andy Beshear's desk. It will take effect "upon its passage and approval by the Governor or upon its otherwise becoming a law." The governor has 10 days (excluding Sundays) to act on a bill after it's received.

DTC shipments can now commence, but not from fulfillment houses

On December 14, 2020, the Kentucky Legislature approved the administrative regulations authorizing out-of-state producers of beer, spirits, and wine to ship directly to consumers (DTC) in the state of Kentucky.

The regulations bring House Bill 415 into full effect. Although the measure became law in April and officially took effect July 15, out-of-state producers have been unable to engage in DTC sales pending finalization and authorization of the regulations.

In preparation for the change in policy, the Kentucky Department of Alcoholic Beverage Control (ABC) began allowing manufacturers to pre-apply for a direct shipper license in November. Businesses that have already pre-applied should now be able to pay the $100 permit fee to the ABC.

After the ABC electronically issues the DTC permit, direct shippers must register with the Kentucky Department of Revenue to collect applicable Kentucky sales tax, excise tax, and "wholesale sales equivalent" tax. Rates vary depending on the type of alcohol sold.

Qualifications for a direct shipper license

To qualify for a direct shipper license, an applicant must:

Hold a current license to manufacture alcoholic beverages in a state

Hold a current permit or authorization under the Federal Alcohol Administration

Complete the online direct shipper license application via the ABC's licensing portal

Provide the address and a description of the premises from which alcoholic beverages will be shipped to consumers

Pay the annual license fee

Disclose all current alcohol-related licenses, permits, and applications granted by Kentucky, the federal government, and if applicable, the state in which the alcoholic beverages are manufactured

Disclose all convictions for violations of alcoholic beverage laws or misdemeanors attributable to the use of alcoholic beverages or the use or trafficking in controlled substances in the past two years in any state

Disclose all convictions or sentences served for felonies of any kind

Complete all registration requirements related to paying applicable excise tax, state or local sales or use tax, local regulatory license fees, or other tax due on direct shipments of alcoholic beverages to consumers in Kentucky

Consent to the jurisdiction of the Commonwealth of Kentucky for purposes of enforcement of KRS Chapters 241-244

Direct shipper licensees must retain records related to DTC sales in Kentucky for a minimum of three years. Additional details can be found in the regulations and will soon be available from the ABC and the Kentucky Department of Revenue.

The role of fulfillment houses in DTC sales

The new regulations don't authorize shipments from fulfillment houses.

The regulations "prevent California wineries from using a fulfillment house to process and send shipments to consumers in Kentucky on their behalf. At this time, any wineries shipping wine to Kentucky residents should be doing so from their own licensed premises."

Industry advocates are expected to ask the legislature to fix this issue in 2021, so wineries and other manufacturers will be able to ship from fulfillment houses. Using licensed fulfillment houses is common practice among wineries, most of which are small and lack widespread national distribution.

In the meantime, wineries, breweries, and distilleries will soon be able to ship directly to Kentucky consumers via FedEx and UPS. Licensed retailers aren't eligible for the direct shipper license in Kentucky.

Avalara for Beverage Alcohol can help businesses ship directly into Kentucky and other states. Contact us at 877-855-9956 or visit our solutions overview to learn more.