Direct-to-Consumer (DTC) sales facilitated by ecommerce and cross-border shipping continues to present significant challenges for state and provincial alcohol regulators. A report from the Wine & Spirits Wholesalers of America illustrates the severity of the problem. In Massachusetts, compliance checks conducted in 2023 confirmed 43% of the beverage alcohol shipments did not obtain adult signatures. In Texas, the Texas Alcohol Beverage Commission identified a total of 304,481 unreported or illegal wine shipments into Texas in a single quarter—representing an astounding 57% of all wine shipments into the state. Finally, a comprehensive compliance report by the Vermont Department of Liquor and Lottery (DLL) concluded that lawful direct-to-consumer shipping in the state is significantly underregulated, with their findings stressing the urgent necessity for “strengthened regulation, rigorous oversight, and a bolstered enforcement budget.”
DTC is rapidly becoming the defining enforcement challenge for today’s modern alcohol regulators, a challenge complicated by the number of intersecting issues involved:
To empower regulators to overcome these compliance challenges while simultaneously equipping producers to expand their market reach, alcoholic beverage control agencies are increasingly turning to modern ABC software systems as a long-term solution for managing DTC and cross-border shipping issues.
What exactly are these challenges and how can these software systems help to address them? Let’s take a look.
Tax Collection
Given state and provincial reliance on alcohol excise taxes as a key source of revenue, the rapid growth of DTC sales and resultant cross-border shipping is creating a massive burden for regulators to track and analyze common carrier data to ensure full tax remittance from ecommerce transactions fulfilled across state lines. Inconsistent tax rates and economic nexus laws add further complexity to this regulatory landscape.
During legal action to bring several out-of-state retailers to federal court for illegal shipments into the State of Ohio, Ohio Attorney General David Yost stated, “We’re not talking nickels and dimes here. The tax revenue lost due to online liquor sales could be anywhere from tens of thousands to millions of dollars.” (Source)
The Three-Tier System
The United States regulates the production, distribution, and sale of alcohol via a three-tier system which separates producers, wholesalers, and retailers. This system is designed to prevent unfettered vertical integration and maintain government control over the alcohol industry. Within the three-tier system, state regulators are required to balance the needs of industry regulation and tax collection against the constitutional protections of interstate commerce designed to facilitate improved commerce between jurisdictions.
The system is even more complex in Canada where the three-tier system exists in some jurisdictions but is not uniformly applied. Provinces such as Ontario and Quebec act as both distributors and retailers, while Alberta has privatized the retail side whilst maintaining government control over distribution. In recent years, many provinces have allowed small producers like craft breweries, boutique distilleries, and wineries, to sell directly to consumers—both onsite and/or via their own retail operations.
The rapid growth of DTC sales challenges the conventional regulatory measures associated with the three-tier system creating a potential minefield of disparate compliance and enforcement scenarios.
Sales to Minors
For state and provincial regulators, ensuring that alcohol is not sold to minors is a mission critical responsibility. DTC sales, particularly those across state or provincial lines, make it significantly more difficult to enforce best practices for age verification. Traditional compliance measures such as in-person verification are unfeasible, necessitating a robust age verification process to ensure online vendors are meeting their license obligations to prohibit sales to minors. A properly robust verification process includes the following four steps:
Enforcement and Compliance Monitoring
The rapid growth of DTC sales is confronting alcohol regulators with the mounting challenge of monitoring and enforcing compliance across an ever-expanding number of producers, retailers, and shipping companies. Traditional, resource-intensive enforcement methods are not rapidly scalable to the extent required to keep up with the compliance demands of the digital marketplace.
These mounting resource challenges are summarized by a Vermont Department of Liquor and Lottery (DLL) report following that agency’s sting operation and pilot program that uncovered “alarming findings that stress the urgent necessity for strengthened regulation, rigorous oversight, and a bolstered enforcement budget to supervise existing DTC laws and shield consumers from associated public health and safety risks.”
“Based on the results of this pilot program, DLL concludes that lawful Direct to Consumer (DTC) shipping in Vermont is significantly underregulated and would take a significant investment to properly regulate and ensure public safety. Alcohol sales via DTC shipping is difficult to regulate. The cost of a comprehensive program would be extremely expensive for any widespread application. The Department does not currently have the resources to regulate the currently licensed activity.”
Modern technology platforms with improved data sharing capabilities present significant opportunities to streamline regulatory oversight, improve enforcement, and enhance consumer safety. This summary explores methods by which state and provincial alcohol regulatory agencies can best leverage such resources to address the issues associated with DTC sales and cross-border shipping.
Improving Compliance Through Technology-Enabled Tracking Systems
A primary challenge with DTC alcohol sales is ensuring that shipments comply with local laws, including age restrictions and tax obligations. Many states and provinces have specific laws around who can legally sell and ship alcohol, and DTC sales complicate enforcement. To address these issues, regulatory agencies can adopt modern tracking systems that integrate with existing databases to monitor shipments in real time.
One emerging solution is the implementation of blockchain technology. Blockchain provides a secure, transparent method for tracking the journey of each bottle or shipment from the manufacturer or retailer to the consumer. By recording each step of the transaction, from purchase to delivery, blockchain can ensure that alcohol is being sold in compliance with legal age restrictions and that taxes are being accurately applied. Each transaction could be logged in a distributed ledger that both regulators and industry stakeholders can access, promoting transparency and reducing the potential for fraud.
Additionally, using electronic tracking systems like RFID (Radio Frequency Identification) or GPS-enabled tracking can offer real-time monitoring of alcohol shipments. Such systems allow for the identification of shipments at every point in the supply chain, providing regulators with the ability to verify that alcohol is being delivered to the correct destination, and that the recipient is of legal age.
Data Transparency for Enforcing Taxation and Revenue Collection
For alcohol regulatory agencies, ensuring that proper taxes are collected on DTC alcohol sales is a critical concern. Without effective oversight, it becomes difficult to track and enforce tax obligations, especially when alcohol is being shipped across borders. Leveraging software systems capable of facilitating true data transparency can significantly improve the enforcement of these taxes.
State and provincial alcohol agencies could establish data-sharing partnerships with carriers, online retailers, and e-commerce platforms to ensure that the necessary tax information is recorded and transmitted with every sale. For instance, a direct integration between alcohol wholesalers, DTC sellers, and government databases could automatically calculate and apply the appropriate taxes based on the destination of each shipment. This system would ensure that taxes are paid correctly, both for the state or province of origin and the destination.
Additionally, advanced data analytics could be used to identify patterns and detect potential tax evasion or illicit sales. By analyzing large datasets, including shipping volumes, destinations, and pricing, agencies can uncover discrepancies in tax reporting or spot unusual sales activity that may warrant further investigation.
Leveraging Artificial Intelligence (AI) for Age Verification
Age verification is another critical issue in DTC alcohol sales. Unlike traditional retail locations, where age can be verified face-to-face, online sales often lack the ability to conduct in-person checks. This opens up the potential for underage drinking, a primary concern for regulatory agencies.
Modern technologies such as AI and machine learning can play a key role in automating the age verification process. These technologies can be integrated into online sales platforms to analyze the data provided by customers—such as credit card information, public records, and age-verification services—to automatically verify the purchaser’s age. Additionally, AI can theoretically use facial recognition technology to match the customer’s face with a database of public records, enhancing the accuracy of age verification.
To ensure that shipments are only delivered to individuals who meet the legal drinking age, carriers could be equipped with AI-powered mobile apps that scan identification cards, verifying that the recipient is the intended purchaser and of legal drinking age before delivery is completed. These measures would not only improve compliance but also increase consumer confidence in the safety and legality of DTC alcohol transactions.
Cross-Border Shipping Oversight Through Collaborative Platforms
The complexity of cross-border alcohol shipping—whether between states or provinces or across international borders—poses additional challenges for regulation. Differing laws regarding the sale, distribution, and taxation of alcohol make it difficult to ensure that cross-border shipments are compliant. By leveraging collaborative platforms and data-sharing agreements, agencies can address these challenges more effectively.
States and provinces can establish software systems that allow for the seamless exchange of data related to shipments, taxes, and compliance between neighboring jurisdictions. Suitable systems such as POSSE ABC integrate with existing government systems and can be configured to serve as a central hub where agencies can share information about licensed retailers, taxes, and delivery practices. Real-time data exchange between jurisdictions could help track whether shipments comply with both local and destination laws and regulations.
Additionally, international agreements and technological tools could be used to regulate cross-border DTC shipments more efficiently. For example, countries with shared trade agreements could collaborate to create common standards for alcohol shipping, including harmonized tax codes, packaging regulations, and identification requirements. In this way, the digital infrastructure
As state and provincial regulators evaluate the various technology avenues to support improved DTC compliance, a common theme emerges. To better monitor, tax, and enforce direct-to-consumer sales, it is crucial that your software system is able to achieve timely regulatory reporting and reconciliation across multiple stakeholders. Utilizing a robust Regulatory Reporting module like the one found in POSSE ABC, forward-thinking alcohol regulators are properly equipped to configure the necessary tools to achieve improved DTC compliance in three critical areas:
Requires all tracking number reports related to direct shipment list carriers and fulfillment centers.
Requires a common source of truth (carrier tracking number) across all reports.
Requires the necessary data to compare common carrier report with fulfillment centers identified by Direct Shipper Licensee.
The challenges posed by DTC sales and cross-border shipping are numerous and substantial, but modern alcoholic beverage control software systems like POSSE ABC offer a path forward.
By helping to automate tax collection processes, assisting compliance with age verification best practices and interstate shipping laws, and facilitating real-time monitoring and enforcement tools, today’s modern software systems equip state and provincial regulators to achieve a sustainable compliance model for DTC enforcement. Of equal importance, the ability of such systems to facilitate multi-stakeholder data-sharing and workflow collaboration creates a viable framework for producers and wholesalers to expand their market reach and meet the growing demand for online sales, while simultaneously maintaining the required consumer protections and compliance obligations.
