Wine Searcher
Wine sales have been somewhat of a laissez-faire business in the US for some decades – some retailers charged taxes on out-of-state purchases while others elected not to do so. As a result, the same bottle of wine might cost a New York consumer less online in New Jersey than at the shop down the street.
However all of that has changed as last week with the Supreme Court case of South Dakota v Wayfair Inc. In keeping with the justices' ruling, the wine retail market is going to be revamped and standardized in terms of taxes across the country. This telling case – which comes just nine months on the heels of wholesaler pressure pushing UPS and FedEx wine deliveries out of 36 states – will mandate a retail market in which taxes will be paid by retailers large and small.
Most major internet wine sales entities, such as Amazon and Wine.com, have been charging their out-of-state customers taxes all along. Until six months ago, Amazon didn't charge sales tax on sales in areas where it didn't have a brick-and-mortar presence, says Eric F. Citron, counsel of record for South Dakota in the recent Supreme Court case and a partner in the Maryland law firm Goldstein & Russell, P.C. They changed that policy six months ago, he notes. Amazon did not respond in time to comment for this story.
"We don't expect any significant effects to Wine.com because we've already been collecting and remitting sales tax in nearly every state for many years," shares Rich Bergsund,
Wine.com's CEO.
Brave new world but no surprise
While it will likely take a while to implement these new regulations, the wine market is going to drastically change as a result of this case. "After this decision if you have been managing to get your wine out-of-state and tax free that is going to be a lot less likely," shares Citron. He adds that the register price is going to go up as a result. The decision amounts to "a uniform price increase", adds Christian Miller, the proprietor of the Berkeley-based Full Glass Research wine analyst firm.
The new taxes will be "paid in the state of purchase rather than the state of delivery", explains John Hinman, a partner at the San Francisco law firm of Hinman & Carmichael LLP. And it also looks like the roll-out process will be complicated. "It looks like each state will have to pass their own laws," says Danielle Westfall, the CEO and founder of the
Sonoma-based internet wine sales site InVino.
The outcome is "going to hurt a few retailers who are shipping across state lines and operating in a grey market", says according to the
Napa-based Jon Moramarco, a partner in number-crunching firm of Gomberg & Fredrikson.
No one close to the case said the decision was a shock. "All nine justices agreed that the existing rule was dumb and should be changed," says Citron. Westfall seconds that she is actually shocked it didn't happen years ago.
Other retailers, who have been following the case, acknowledge that something like this was likely to have happened sooner rather than later. "Some merchants have been proactive in charging sales tax on all purchases recently," shares Daniel Posner, owner of the White Plains, New York-based wine shop
Grapes The Wine Company and president of the National Association of Wine Retailers (NAWR).
"With their action, they overturned the previous standard that had been determined in the 1992 Quill v North Dakota case, giving states a victory in their years-long effort to gain taxing authority over remote sellers. States must now review their laws to determine what steps they may wish to take to capture sales tax revenues on such remote sales," shares Steve Gross, the vice president of state relations at the Wine Institute.
The huge expansion on the online market "meant that this day was destined to come", adds Robert Tobiassen, a Virginia-based attorney who consults on regulatory issues.
The fallout
Out-of-state purchases serve a number of needs. Many believe that most are driven by the hunt for unusual wines. These purchases are more likely to be convenience, says attorney Elke A. Hofmann, the owner of the eponymous New York law firm.
Michael Newman, a partner in San Francisco law firm of Holland & Knight LLP, agrees that out-of-state purchases are usually sought-after items. "I think it's usually a matter of product availability rather than price."
"Most consumers buy wine online because the three-tier system has let them down and the products they want often aren't sold in their states," agrees Westfall. Hoffman adds that, as a result, New York consumers may be upset. "Saving 8.875 percent on sales tax, especially for large ticket items, makes a difference."
On the other hand, many consumers may not even have been aware that they weren't paying taxes. "Most consumers will initially notice it, gripe about it and then forget about it," according to Tobiassen.
The transition should be fairly smooth for bigger buyers. "The large online retailers have the resources and technical staff to develop the software to calculate and impose these sales … [while] smaller online retailers will face a greater resource demand in order to comply. Perhaps, many of the smaller online retailers will try to link up with a major online retailer and pay that retailer to calculate and process these sales taxes," shares Tobiassen. Many are already collecting taxes, says Westfall, so "this is likely to be another advantage for the big guys".
Once implemented, the taxes are likely to be minor in terms of their additional cost. "For average priced wines, the sales tax is not going to make or break a consumer's purchasing decision," Tobiassen says.
Lower prices may never have been that important to the direct-to-consumer (DtC) market anyway. "It seems unlikely that lower prices were a major driver of DtC sales from out-of-state suppliers," says data analyst Miller.
He adds that evidence of this can be seen by the fact that average prices per bottle sold DtC by wineries and in virtual retailers like Wine.com is far higher than the average off-premise retail price. This is probably because of the shipping costs, he concludes.
"I would be surprised to see a significant negative impact on DtC sales from the court decision."
What lies ahead
As retailers have already been restricted from shipping into 36 states since last October, the big changes to purchases and tax increases are going to take place in the other 14 states and the District of Columbia, where registered carriers can ship wine.
Between how long it will take to enforce the payments and how many retailers already were applying them, some think the new policy will hardly make a ripple. "The majority of state DtC laws already required the collection of both sales and excise taxes so the new ruling will have little impact," says Gross. "We will closely monitor those states where such taxes are not already required for any changes, and will keep members apprised of potential new tax obligations."
"Consumers, especially within wine, will reevaluate the relationships they have with their in-state retailers.
However, I don't think this will slow down collectors whose goals are primarily focused on top bottles as opposed to top deals," says Chris Leon, the owner and wine director of the one-location, Brooklyn shop
Leon & Son Wine.
"The real winners here are the State treasuries, because the aggregate amount of sales taxes that will be collected online will potentially be enormous," concludes Tobiassen.
After all there is price to be paid for everything. Tobiassen notes: "In the middle of the last century, judge Learned Hand wrote in a decision that 'Taxes are the price we pay for a civilized society.'"