Is California Preparing an Internet Wine Crackdown?

The state warns wineries and direct shipping marketers that they may be breaking the law

Augustus Weed
Posted: July 21, 2009

A warning from California's Alcohol Beverage Control (ABC) is causing concerns among some small wineries and the firms that help them sell wine online. The advisory, issued last month, could hamper the growth of online sales and direct shipping. And it could further complicate and delay Amazon.com's long-awaited entry into wine sales.

The decision could also prevent consumers from buying many of their favorite wines. With the growth of Internet retailing and the loosening of restrictions on direct shipping, more and more wineries are selling online. During the recession, distributors are scaling back the number of brands they carry, focusing on their best sellers, and wineries are looking to the Internet to reach more consumers.

Many have turned to third-party marketing agents to help them. Such organizations facilitate sales and help wineries navigate the confusing array of regulations in each state, but never touch the actual bottles. Because they don't handle the wine, many have assumed they don't need a license.

On June 5, the California ABC issued an industry advisory warning that third-party service providers require a license if they facilitate the sale of alcoholic beverages and share in the revenue. While the ABC says it has not passed judgment on any of the programs offered by these providers, wineries working with unlicensed businesses could potentially lose their liquor licenses, a devastating blow.

The advisory describes third parties as, "persons or businesses operating Internet websites for the purpose of promoting, marketing or selling alcoholic beverages."

The advisory sent a tremor through the industry. Wineries that have found it easier to sell their wine online by working with marketing agents, such as Snooth, AmericanWinery.com and Bottlenotes, may have to change the way they operate on the Internet.

"We've had to change one relationship with a company because of the advisory," said Stephen Bachmann, CEO of Vinfolio, an online wine store. Vinfolio, which has a liquor license, had to terminate an agreement with a third-party provider. The third-party firm was referring business to Vinfolio, taking a percentage of sales profits, and did not have a license.

Amazon, one of the largest online retailers in the world, is attempting to create a wine division but continues to run into delays. The company had announced it would partner with New Vine Logistics, a Napa-based direct-shipping service, so it wouldn't have to directly handle the wine. Amazon could make sales without having to acquire a license in every state. (New Vine Logistics was saved from bankruptcy recently after rival Inertia Beverage Group stepped in; Inertia is selling off many New Vine assets and has made no comment on the future of the Amazon deal.)

According to Mathew Seck, chief of the California ABC's trade enforcement unit, the advisory was released to address confusion surrounding Internet regulations. Consumers and licensed businesses had been calling in with questions pertaining to unlicensed marketing agents and websites. Seck admitted that the ABC doesn't have time for its employees to be scanning the Internet, and relies on complaints.

Seck also said the ABC has wine drinkers in mind. Unlicensed businesses that sell alcohol are unregulated. If a consumer receives a damaged product, they may not be able to pursue compensation. "[It's] a very complicated issue," said Seck. "The department is concerned about consumer protection. It's really a buyer beware situation when they purchase from non-licensed sources."

The ABC only has jurisdiction over licensed businesses in its state. It can stop wines coming into California but cannot pursue the original sources. "If wine enters the state illegally it could be seized. [It] comes down to whether we have jurisdiction," Seck said. But the agency can punish California wineries.

Despite the risk, few wineries have reacted strongly to the advisory. Only a handful of wineries contacted by Wine Spectator were concerned and some had not heard about the warning. "Obviously if we are non-compliant in any way we would work to correct that," said Michael Doilney, general manager at Parallel wines in Napa. Parallel uses several services to sell wine online.

Many involved in the industry believe the growth of direct online sales is inevitable and new regulations will have to be developed. "[The advisory] won't stop the wave that is occurring with marketing agents," said Paul Mabray, chief strategy officer at VinTank, a digital think tank for the wine industry. The question remains whether the ABC will slow that wave down.