Many wineries that ship direct to consumer (DTC) in Arizona have received compliance notices from the AZ Dept. of Liquor Licenses and Control (DLLC), seeking to audit how much wine they produce to assure compliance under Arizona’s byzantine DTC laws.
What’s going on in Arizona?
People are wondering, what’s going on in Arizona? According to the DLLC the step-up in enforcement is due to a recently-implemented new reporting mechanism developed with input from the industry to make it easier for wineries to do their reporting (which is not a new requirement), and for the state to track that reporting. To streamline the process, reporting is now done online (via this page).
Arizona has the dubious distinction of having some of the most complicated direct shipping rules in the country. We thought it might be helpful if we broke them down and made them a little easier to understand for non-Arizona wineries (and tiny distillers – you too can ship direct!):
The Production Requirements – What are they?
The bottom line is that the amount of alcohol produced per calendar year by the licensee with the permit is the basis for the Arizona direct shipping rules. It’s best to be a very small winery, and the requirement to be licensed is measured on a facility by facility basis. Each individual winery (regardless of common ownership by a parent company) counts as one permittee. If the winery produces between 200 gallons/year and 20,000 gallons/year and obtains an Out of State Farm Winery license from the DLLC, the winery will be allowed to ship any amount of wine that the winery produces or manufactures to an Arizona individual, regardless of whether they purchased the wine in person at the winery, or over the Internet, phone or other method. Wineries in this category are also allowed to sell direct to trade (i.e. to Arizona retailers, both on- and off-premise).
Craft Distillers are included in the DTC program
Small craft distillers may take advantage of this privilege: A craft distiller producing no more than 1,189 gallons/year (and obtaining an Out of State Craft Distillery license), may ship any amount of their products directly to AZ residents who order it via Internet or any other method, as well as directly to AZ retailers. This is an important privilege.
What about the larger wineries? Now it gets confusing. The 8,333 to 16,600 case winery restrictions
It a winery produces between 20,000 and 40,000 gallons (16,666 9L cases of wine) per year, it is still eligible for a Farm Winery permit, but the winery can only ship its wine to an Arizona resident who had at some point visited and made an in-person purchase at the winery with the permit, and the winery is limited to shipping 2 cases per individual per year. The winery must keep records that can back up the in-person visit, such as a signature and ID-verification in a logbook, etc., as Arizona requires such records to be kept for two years. This is where the audit comes into play, as the state audits the production limits, the visit requirement and 2 cases per year requirement.
How about the big wineries, can they do anything?
Yes. Although wineries that produce over 40,000 gallons/year are not eligible for the Farm Winery Permit, if they hold any other license in Arizona (such as an Out of State Producer license for shipping to Arizona wholesalers), they don’t need any additional license in order to ship DTC, though they still must follow the in-person purchase rule and the 2-case per person per year rule.
This is important: The DLLC interprets the in-person purchase requirement to mean that the person must visit the winery, at some point (and the winery must have records to back this up), but does not require that person to place each subsequent order in-person at the winery. The winery is required to keep records for two years, but in order to keep shipping directly to a person beyond the two-year period, the winery would need to have a record of that person's on-site purchase (which may reach back more than two years). Again, this is subject to audit.
For all of the direct shipment methods described above, age verification at time of purchase is required. Additionally, products cannot be shipped to a licensed premises but only to an individual for personal use; the delivery person must be at least 21; and the packaging must contain language identifying the contents as alcohol and that an adult signature is required. And last but not least, shipment reports are required from both the shipping winery and the carrier that shipped the product.
Finally, the Arizona Direct Shipment Permit
And finally, there is what’s called a Direct Shipment permit in Arizona – but it’s not at all what it sounds like, and is a last resort. It is for any winery that holds no other licenses in Arizona and wishes to ship DTC to consumers who have not visited the winery in person. It allows an out of state winery to take orders via Internet or any other method from and ship to a consumer, but the shipment must go through an Arizona wholesaler and retailer, and the retailer must be the one who makes the delivery to the consumer. Cumbersome? Yes. Does anyone do this? Probably not many large wineries take advantage of this dubious solution.
There are rumblings that the confusing DTC situation in Arizona may be cleared up with legislation next year, so stay tuned. However if you get an audit letter, read this blog post (and the requirements in the audit letter) carefully and make sure that you are eligible for the shipping method that you are using. Failure to properly comply carries potentially serious consequences.