Passage of title (“POT”) is legal shorthand for the sales protocol used by many retailers, wineries and distillers (with state mandated privileges permitting sales to consumers either at or from their license premises). POT provides a potential direct-to-consumer (“DTC”) route to market option for the sale of wine and spirits to consumers residing in states an out-of-state licensee may not otherwise be able to reach. It is based on Article 2 of the Uniform Commercial Code (“UCC”), which is the law in all 50 states of the US except Louisiana. In essence, the UCC blessed contract of sale between the merchant (winery, distiller, or retailer) and the customer is entered into in the jurisdiction where the merchant is licensed (and located), and delivery of the purchased goods is completed (and all sales taxes paid) in that same state of licensure, regardless of where the consumer is located.
Final receipt of the purchased product by the buyer is a more complex matrix and is governed by the law of the purchaser’s state; most of which (subject to limitations on amounts and the payment of local use taxes) permit the transportation of personal amounts of alcoholic beverages by individuals between states (or from foreign countries into the US). As an example, think of the situation of a customer moving from state to state and transporting his or her personal wine and spirits cellar as part of the move. That is the concept, and almost every state provides some form of personal importation rights of alcohol relating to travel and extraordinary circumstances.
For example, a California retailer using POT could sell wine in California to a consumer residing in a state without DTC permits for retailers. This is because under POT the transaction takes place completely in California, is subject to California law and sales taxes, and the consumer then utilizes their personal importation rights to have the wine delivered to themselves wherever the consumer desires and can manage the transportation logistics.
Note, however, that POT is not a free pass for licensees. State regulators generally don’t fully understand the model, meaning licensees risk enforcement actions along with the headache and defense costs that comes with it. Furthermore, there are varying state based personal importation restrictions and tax considerations to keep in mind.
POT can sometimes be more burdensome than selling under a DTC license, for both the merchant and the consumer, and there are many compliance hoops to jump through (including clear contracts, clear website disclosures and customer service education). We recommend the POT model be used only where DTC licensing is not otherwise available and that any licensee using the technique thoroughly understand the concepts, make sure their contractual documentation is up to date, and their customer service staffs educated.
Summary of POT
The POT model can generally be summarized as follows:
Ownership of the goods (wine, beer, or spirits) passes from the licensee to the consumer in the state of sale (e.g. where the licensee is located) and sales tax is paid (and reported) as required by the state of sale.
The licensee delivers the goods to a storage facility in the state of sale under contract with the consumer.
The consumer may personally pick up the goods from the storage facility or arrange for a third-party delivery service to pick up the product on their behalf and deliver their goods to their home or other designated location (via the consumer's personal importation rights).
Legal Basis
The legal support for POT is found in Article 2 of the UCC, which has been adopted by 49 of the 50 states (Louisiana is the exception). In California, section 2401 of the California Commercial Code allows parties to specify by contract where and when the buyer owns and takes title to goods. Specifically, “title to goods passes from the seller to the buyer in any manner and on any conditions explicitly agreed on by the parties.” Cal. Com. Code § 2401(1). This means that a manufacturer or retailer may contractually agree with the consumer that title to products passes at the licensee’s premises, rather than when the products are delivered to the consumer at some other location.
Personal Importation
Consumer personal importation rights (which exist under federal and state law) are key to POT operating efficiently, and is a privilege provided to consumers, not sellers. Not all states allow consumers to personally import alcohol, and the states that do generally limit the amount a consumer can import. Additionally, many states have troublesome personal importation restrictions, such the requirement that consumers physically “accompany” any imported alcohol into the state. Such laws must be considered when using POT.
Taxes
Tax professionals should be consulted about the proper allocation of taxes. Sales tax applies to the sale of merchandise. On the other hand, use tax applies when a consumer makes a purchase without sales tax from a business located outside the state and imports the goods to him or herself within their home state. Unless the consumer’s shipping destination is a state in which the licensee holds a DTC permit (in which case the sale is controlled by the DTC permit conditions), licensees should collect and remit sales tax to the tax authority where the sale takes place (e.g. the location of the licensee). Improper payment of tax contradicts the basic POT principles. For example, licensees who pay tax to the state where the consumer is located rather than where the licensee is located potentially weaken (but do not completely shut down) a POT defense because, in most cases, permits are not available in those states.
Risk and Risk Mitigation for Licensees
Whether and how much potential risk a licensee will accept is ultimately a business decision. A conservative approach would be to limit sales to consumers only in states where the licensee has a license and/or DTC permit. Licensees may accept the potential risks highlighted above incident to locally servicing consumers residing in other states (or countries – this is also an international protocol) and to act at their direction in arranging for the delivery and transportation of the products to an in-state storage facility for ultimate delivery to a location the consumer chooses.
For licensees using the POT model, we highly recommend terms of sale be carefully drafted to ensure title is properly passed to the buyer at the desired location. This includes updating the language on websites and other supporting documents, and training sales and marketing personnel on POT to ensure their conversations and messaging accurately reflect the system. Last, taxes should be paid in the jurisdiction where title to the product is transferred. While not a silver bullet, such steps will put the licensee in the best position to legally defend their system.
Evolving Legal Landscape
Route to market is a rapidly evolving landscape. Litigation is pending in numerous states seeking to expand manufacturer and retailer DTC and DTR (direct to retail, or self-distribution) rights. Such challenges stem from the Supreme Court’s rulings in Granholm v Heald (2005) and Tennessee Wine v Thomas (2019), which found that state laws favoring in-state retailers/wineries violate the Dormant Commerce Clause of the US Constitution. These cases apply as well to the expanding small distiller tier of the industry.
Out of state retailers are challenging laws in Arizona, Illinois, Indiana, New Jersy, Ohio, and Rhode Island, while out of state producers are fighting for their DTR rights to self-distribute in California, Idaho, Iowa, and New York. If Granholm and Tennessee Wine are any indication, manufacturer and retailer rights will only continue to expand as the issues are litigated and evolve.
Meanwhile, however, your sophisticated customers (especially those buying high-value wine and spirits for investment or auction purposes) should be made aware of their options.
This blog is dedicated to occasional (and hopefully interesting) reports of state and national alcoholic beverage regulatory developments that we encounter in our practice. Booze Rules (and any comments below) are intended for informational use only and are not to be construed as legal advice. If you need legal advice please consult with your counsel.