Seven states plus the District of Columbia currently allow distillers to ship direct-to-consumer (DTC), but that number may be changing with a new bill making its way through the California Legislature.
“California is always the trendsetter of the liquor industry,” said liquor attorney Sean O’Leary, president of O’Leary Law and Policy Group, LLC in Chicago. “If California has four or five years of having a spirit shipping program and it’s working, people are going to look to other states and say, ‘Why shouldn’t we do this to open up our markets and give our distillers the right to ship?’”
O’Leary is one of the many people across the country keeping an eye on S.B. 620, a bill that would allow distillers to ship directly to consumers in California— although its current iteration has significant caveats. In March 2020, distillers were temporarily allowed to ship to individuals due to the pandemic’s financial impact on California distillers. But that accommodation expired earlier this year, leaving state legislators, lobbyists and spirit companies in a battle to reform delivery laws. Legal control over the production and sale of alcohol is determined state by state, except that no state can violate another state’s laws via the transportation of alcohol.
The new bill was passed by the California Senate Committee on Government Organization in January, and now heads to the California Committee on Appropriations. But amendments made in early May have dramatically changed the bill. The new version cuts out larger distillers and breweries, and adds stricter fulfillment and shipping regulations. The removal of beer from the bill coincides with other proposed state legislation focused solely on interstate direct shipping for craft brewers.
“The real focus came down to small distillers in California,” said Cris Steller, the executive director of the California Artisanal Distillers Guild and the founder of Amador & Dry Diggings Distillery.
The revision allows DTC shipping from California and out-of-state craft distillers making less than 150,000 gallons per year. The amount distillers sell to consumers also can’t exceed the quantity sold to wholesalers. The exclusion of larger distillers has shifted the position of the Distilled Spirits Council of the U.S. (DISCUS), which previously supported the bill.
“Sen. Allen’s original bill recognized California spirits consumers deserve the same convenience that has been afforded to wine consumers for more than three decades in the state,” said Adam Smith, vice president government relations of DISCUS. “Unfortunately, S.B. 620, as amended, no longer meets that goal.”
While the wine industry enjoys DTC shipping in most states, beer and spirits are regulated differently. Smith added that the exclusion of distilleries making 150,000 gallons or more annually limits consumer choice and discriminates against distilleries who have achieved broader success, “including legends in the California distilling industry,” he said.
But for small distillers like Amador & Dry Diggings Distillery, the bill will allow them to fulfill orders they can’t do through distribution, and extend their reach and ability to build their brands, according to Steller. Another component of the bill: a bump in selling permissions from 2.25 liters per person per day to 4.5 liters per person per day, which amounts to a three bottle increase.
“It’s a way for us to build brand awareness and build California as a state where distilleries are producing higher end products,” Steller said.
Changes to the bill also regulate how spirits are shipped. Products would only be allowed to ship direct from distilleries, fulfillment centers are prohibited, and common carriers are restricted from using contract employees or independent contractors to deliver spirits. California Teamsters and other opponents to DTC spirits shipping argue that tighter reins on shipping come down to limiting the possibilities of delivery to underage drinkers. Proponents argue that position is a veil for protecting the interests of wholesalers.
“I think the whole goal is to basically limit the universe of people that would be able to ship, they put limits at the top, and then by putting the fulfillment house language in there, you put limits at the bottom, so it’s a squeeze,” O’Leary said.
The new shipping parameters could make it more expensive for small distillers to deliver products, who would then have to implement systems to fulfill orders themselves.
The timing of California’s bill coincides with a report from the U.S. Treasury Department, suggesting DTC shipping as one way for small distillers to compete, although it did come with warnings that restrictions on direct shipping may have had legitimate consumer protection or public health rationales. It also signals a continued push from spirit companies that are grasping for more access to an emerging sales strategy. E-commerce alcohol sales have surged since the pandemic, and are expected to reach more than $42 billion across key markets by 2025 — a growth of +66%, according to research by IWSR Drinks Market Analysis.
In 2020, Kentucky passed a bill to allow DTC shipping for its distillers to anywhere in the state and regions with reciprocal agreements. It later passed a bill removing a provision that prohibited the use of third-party fulfillment houses. In May, lawmakers in Maine proposed new DTC laws for distillers but failed to enact new regulations, resulting in only a recommendation to review the laws and procedures to produce and ship spirits.