Tax changes brewing for online alcohol marketplaces

Uber’s forthcoming acquisition of alcohol delivery service Drizly and Vivino’s recent round of funding signal seismic shifts for alcohol sellers and marketplace facilitators. A potent mash of alcohol regulations, tax obligations and marketplace facilitator laws is brewing as the industry adjusts to living with the COVID-19 pandemic. Together, these could impact compliance for both alcohol marketplaces and direct-to-consumer alcohol shippers.

People got down to the business of drinking at home when they were unable to dine out, and many found new online suppliers. From early March through June 2020, online alcohol sales grew 309 percent year over year. Business at Drizly and Vivino boomed, and although Uber’s transportation branch has suffered under the pandemic, sales at its Uber Eats food delivery service has soared.

Moving forward, changing consumer habits and relaxing restrictions on the sale and delivery of alcohol will likely spark even more growth. Alcohol e-commerce sales are expected to exceed $40 billion worldwide by 2024. Many of those sales will occur through marketplaces.

To make the most of new opportunities in 2021 and beyond, alcohol sellers and marketplaces will need a thorough understanding of the intersection of alcohol regulations, tax obligations and marketplace facilitator laws.

The growing role of online marketplaces

Like their physical counterparts, online marketplaces provide a platform that connects consumers with sellers. Marketplace facilitators range from the large and diverse like Amazon — where all types of sellers sell all types of goods — to niche marketplaces like RekYou.

No matter their size or focus, online marketplaces have become an essential sales channel, even for companies with an established brick-and-mortar or e-commerce store. They introduce third-party (marketplace) sellers to new customers while easing some of the burdens of fulfillment. It’s common for marketplaces to provide expedited shipping, a simplified returns process, and sales tax collection and remittance services for platform sellers.

Marketplace facilitator laws

In fact, most states require marketplace facilitators to collect and remit the sales tax due on third-party sales. There are marketplace facilitator laws in 42 of the 45 states with a general sales tax, plus Washington, D.C., and some cities and boroughs in Alaska (where there are local sales taxes but no statewide sales tax).

The only states with a sales tax that don’t have a marketplace facilitator law on the books are Florida, Kansas and Missouri; all are considering marketplace facilitator bills during their 2021 legislative sessions.

Marketplace facilitator laws help close the loopholes that allow many online sales to go untaxed.

Until the U.S. Supreme Court decision on South Dakota v. Wayfair, Inc. in June 2018, states could only require a business to collect and remit sales tax if the business had a physical presence in the state. The Wayfair ruling authorized states to base a sales tax collection obligation solely on an out-of-state seller’s sales activity in the state, or economic nexus.

Economic nexus laws typically provide an exception for small sellers — for example, those with less than $100,000 in retail sales or fewer than 200 retail sales transactions in the state in the current or previous calendar year (the economic nexus threshold). A marketplace seller selling beneath a state’s economic nexus threshold can’t be compelled to collect and remit sales tax if it has no physical presence in the state.

By effectively making the marketplace facilitator the seller, states can require marketplace facilitators to collect the sales tax due on all third-party sales.

It’s worth noting that marketplace facilitator laws typically base the sales tax obligation on physical presence (e.g., a warehouse or distribution center) or economic nexus. Some small alcohol marketplaces have neither, and therefore aren’t required to collect and remit sales tax on behalf of their third-party sellers.

How alcohol marketplaces differ from other marketplaces

In theory, online marketplaces devoted to selling alcoholic beverages should function like any other e-commerce marketplace, collecting and remitting sales tax for all sellers in states with marketplace facilitator laws. In practice, it’s not quite that simple.

Thanks to the legacy of Prohibition and the tireless efforts of the Women’s Christian Temperance Union, a complex blend of federal and state regulations govern the production, distribution and sale of alcohol in the U.S. Failure to obtain and maintain all necessary beverage alcohol licenses and comply with all tax obligations can lead to the revocation of federal or state licenses, or worse.

All alcohol sellers must register with the following agencies:

• Federal Alcohol and Tobacco Tax and Trade Bureau (TTB);
• State alcohol beverage control department;
• State tax authority; and
• Local tax authority (where applicable).

Direct-to-consumer (DTC) sellers must also have the appropriate direct-shipping license in states where they make deliveries, and they’re required to use a common carrier for delivery.

The TTB collects the federal alcohol excise taxes due on beer, wine and distilled spirits. Generally, the higher the alcohol content of the beverage, the higher the excise tax rate. However, reduced tax rates and tax credits are often available to businesses meeting certain criteria related to production, processing or foreign assignments.

Alcohol is also subject to a bevy of state and local taxes. These vary by state and locality, and typically include state and local excise taxes and sales taxes. DTC sellers must collect all applicable taxes in the destination state and remit them to the proper tax authorities.

Before the advent of marketplace facilitator laws, the taxes due on sales of alcohol made through a marketplace were clearly the responsibility of the licensed sellers who solicit, offer, accept, make and deliver the alcohol purchased.

Marketplace facilitator laws muddy the role of marketplaces in alcohol sales. Must the alcohol marketplace become the licensee for the alcohol sales it facilitates? This is a complex question that states are just starting to answer.

Who collects the tax on marketplace alcohol sales?

After California’s marketplace facilitator law took effect Oct. 1, 2019, the California Department of Alcoholic Beverage Control (ABC) received “a number of inquiries” regarding the intersection of the state’s marketplace facilitator law and “prohibitions against non-licensees exercising license privileges, including financial control of the alcohol sales transaction.”

These are fair questions, given the longstanding ABC policy that only licensees can “exercise license privileges” such as taking orders, receiving funds and delivering alcohol.

The ABC admitted its marketplace facilitator law seemed “to conflict with the Department’s position that only the licensee may be the ‘seller’ of the alcoholic beverages.” And in July 2020, it found that making the marketplace facilitator the seller of record with respect to sales tax didn’t conflict with the requirement that “only licensees may be the seller of alcoholic beverages.”

Thus, so long as the marketplace is liable for tax under the state marketplace facilitator law, the marketplace must collect California sales tax on facilitated alcohol sales, while the alcohol licensee (i.e., the marketplace seller) remains responsible for all other applicable taxes. If not, for reasons explained above, the seller is responsible for all the taxes.

Other states may come to different conclusions, though many will likely follow California’s lead.

COVID-19 guts food and beverage industry but opens new opportunities

One surprising side effect of the COVID-19 pandemic was a relaxing of alcohol restrictions.

The pandemic hit restaurants and bars hard. According to the 2021 State of the Restaurant Industry Report by the National Restaurant Association, more than 110,000 eating and drinking places temporarily or permanently closed in 2020, costing nearly 2.5 million jobs.

To help businesses whose sales were flagging under capacity caps and temporary bans on in-person dining, states permitted takeout and delivery sales of beer, wine and even cocktails. In much of the country, it’s now possible to get sake with to-go orders of sushi, or margaritas with chicken mole.

It seems to be having an impact. Seven out of 10 full-service restaurants have added alcohol to-go options since March 2020, and 35 percent of takeout customers told the National Restaurant Association they’re more likely to choose restaurants that provide alcoholic beverages to go.

Marketplaces are certainly responding. DoorDash offers a way for consumers to find “Alcohol Near Me.” Grubhub allows them to “Find all Alcohol restaurants that deliver to you.” And an Uber help page answers the frequently asked question, “How can I order alcohol?” But not all states allow marketplaces to make the delivery; some require the alcohol licensee to do so.

California allows third parties to deliver alcohol on behalf of licensees. Yet facilitating sales and delivering alcohol can complicate compliance for online delivery marketplaces — several have run afoul of state alcohol beverage control agencies for not properly verifying the age of buyers. During sting operations last spring, the California Department of Alcoholic Beverage Control found some third-party deliverers were “routinely delivering alcoholic beverages to minors.” Some simply left bottles and single-serving drinks on doorsteps.

Louisiana authorized the sale of alcohol for off-premises consumption in 2019, so long as liquor retailers or their employees delivered the alcohol. A marketplace facilitator could be involved, but only to market, receive and process orders. A year and a pandemic later, the state opened deliveries of beer and wine to third-party delivery services.

Looking ahead

Expect there to be more growing pains in the coming year, as states work out conflicts between alcohol and marketplace facilitator laws, and businesses strive to meet changing consumer demands.

Avalara is closely watching the changing landscape and analyzing its impact on tax and regulatory requirements of beverage alcohol marketplaces in a new blog series. Alcohol Marketplaces 2.0 is co-authored by Jeff Carroll, Avalara for Beverage Alcohol general manager, and Rebecca Stamey-White, partner at Hinman & Carmichael LLP. The first post is now available: Alcohol Marketplaces 2.0 Part 1: Solicitation of sales by unlicensed third-party providers.