License to Succeed: Does your business need one?
By Daniel Garcia
Navigating the current pandemic by facing numerous challenges has become an integrated part of operating a company for many small business owners. Time tested advertising, market conditions, and operation have become a thing of the past as the nation continues to adjust to the COVID-19 pandemic and stay-at-home orders. Cases continue to rise, and a cure is not guaranteed to be released this year. Yet, COVID-19 cases are not the only thing on the rise; online shopping, e-commerce sites, and products such as alcohol, tobacco, and firearms have seen a surge in demand. The latter products sold in the nation require licensing on the local, state, or federal level and sometimes require all three. Consumers have moved their shopping online to limit their exposure to public areas and to maintain their safety. Online shopping benefits small businesses, enabling them to continue to provide products to their consumer base and maintain some inflow of revenue. Yet, for new companies or those looking to expand into areas where there has been an increase in demand, licensing can prove troublesome not only for physical but also for online transactions.
What types of licenses are there?
The number of licenses required for different types of businesses is vast and frankly too large to convey the information in one article adequately. Most small business owners, when looking at business licenses, assume the registration of their business with their respective state and locality is sufficient to operate. However, depending on the products that the company intends to manufacture or sell, their business may be required to apply and obtain several other licenses. Some examples include manufacturing tobacco, selling alcohol, selling firearms, investment advising, drug manufacturing, preparation of meat products, and broadcasting. Other licensing requirements do not depend on specific products, such as zoning, fire department, and health licensing and permits. The type of license required depends on the locality and state, while some types of product sales, like firearms, require federal licenses regardless of the state and locality. You can view the different kinds of licenses and permits needed on a local, state, and federal level here. Also, the small business administration has a concise list of federal licenses and permits that are required for particular business activities and the issuing agency, which you can find here.
Licensing in-demand products
I have identified three main product categories that have seen an increase in demand during the pandemic and can require licensing both for retail and online sales.
Alcohol sales have increased by 27% since the pandemic began. Notably, online alcohol sales have seen the most dramatic increase during the pandemic, growing over two times the orders from last year, 234% to be precise. According to Nielson studies, in May, online alcohol sales was the fastest growing e-commerce department among consumer-packaged goods. Besides, alcohol is one of the few commodities that is considered recession-proof. For businesses looking to expand into alcohol sales, the type of license required depends on whether they manufacture or only sell alcohol.
There are different licenses required for alcohol sales and depend on whether you are a restaurant, retail store, or a bar. If a small business manufactures, wholesales, imports, or sells alcoholic beverages at a retail location, they will need to get a federal license or permit if the business is regulated by a federal agency. For example, a small business owner that intends to sell alcohol at a retail location is required to obtain a basic permit issued by the Alcohol and Tobacco Tax and Trade Bureau. It is important to note that when issued a permit, the small business must still comply with local and state laws and licensing requirements when selling alcohol. When small business owners expand or start a business selling alcohol on a website site or mobile application, they face two licensing concerns: direct shipping and personal delivery licenses.
Depending on whether you intend to ship in-state or out of state creates different issues. Shipping in the state is the simplest method since you will only have to be concerned with your respective state and local city direct shipping laws. However, it becomes more complicated when small businesses intend to ship alcohol out of state since the laws for each state vary and may require their own licenses or permits to ship into their state. For example, Alabama prohibits any direct shipment of alcohol to customers from out of the state. Other states, such as Delaware, require the shipments to be delivered to a Delaware wholesaler who then may deliver the purchase to the consumer by a retail license holder. Each state has different laws and licensing requirements for direct shipments to its citizens; you can find the direct shipment statutes and if they require licenses to ship into a particular state here.
State delivery license
As a result of the pandemic, many states have relaxed their required licenses and permits that do not allow to-go sales, allowing these businesses to continue to make revenue. Some small businesses, usually restaurants, are taking advantage of these relaxed rules and utilizing online mobile ordering services to deliver their alcohol that the company makes on-site. For example, Arizona's Governor issued an Executive order allowing those with restaurant licenses to sell alcohol through delivery, pick up, and curbside services. The state relaxation of specific laws does differ; for example, California also allows alcohol to be picked up or delivered, but they must sell the drink in conjunction with meals. It is crucial when expanding your business to stay up-to-date with the relaxed licensing because they may not be relaxed indefinitely, and small business owners do not want to risk fines during these troubling times. You can view a list of the different relaxed license and permit rules here.
Tobacco sales have also seen an increase in sales during the pandemic, presumably since consumers are not spending their income on travel, entertainment, or communicating. According to Marlboro maker Altria Group Inc., the pandemic has slowed its yearly decline of cigarette sales to 2-3.5% from 4-6%. They also suggested that adults were switching back to cigarettes because of the outbreak of vape-related lung illnesses.
Tobacco also has various licensing requirements and depends on whether you are manufacturing or selling the product. Currently, there is no federal license needed to sell tobacco products, but businesses that manufacture tobacco products do need one. The appropriate licenses for selling tobacco in each state depend on where the sales take place. Many states require retailers who sell or intend to sell cigarettes or tobacco products to obtain a retail cigarette and tobacco license. As of December 31, 2019, eighteen states required retailers to have a license to sell cigarettes, and other non-cigarette tobacco products over the counter and twenty-three states require licenses to sell e-cigarettes over the counter.
How do these over the counter sale licenses affect online sales? That answer, as always, largely depends on the state. For example, California requires all retail cigarette sales to be a vendor-assisted face to face sale. If a small business wanted to ship these products to consumers, they may, with a valid license since there is an exception in the code for these sellers. The critical phrase is if they have a valid license. You can find the statute requiring the license here. When expanding to online sales, small business owners must identify the licenses that may be required to ship tobacco products to their consumers. Failing to do so may result in penalties that are detailed below.
Firearms have also seen a spike in sales since the pandemic began. According to data from the FBI, in January, the average firearm sales was varied from 80,000 to 100,000 per day. On March 16, the highest spike occurred where the sales peaked at 176,000. The numbers continue recaching a high of 150,000 per day on June 2 and an estimated 1.4 million sales beyond the regular expected sales for June. Yet, depending on the state and locality, the ability to ship to consumers varies.
A business is required to obtain a federal license if they intend to sell firearms. The Bureau of Alcohol, Tobacco, Firearms & Explosives (ATF) requires any person or business that wants to sell firearms must register with them to sell firearms. The ATF issues 11 types of Federal firearm licenses. You can view the types of firearm licenses that ATF issues and other facts here. Concerning states, the licensing requirements vary significantly. Here is a guide that a small business owner can use as a starting point to determine whether your state requires an additional license to sell firearms.
It is crucial to fully understand the licensing requirements because, for many states, these licenses are required for online sales and in-person sales. Whether you intend to operate entirely online and ship throughout the state, understanding the licenses for each state by following the link above will prove fruitful and avoid costly penalties listed below.
How can these licenses affect my small business?
It is essential to understand that there are licensing requirements for small business owners selling products from a physical store and online such as alcohol, tobacco, and firearm licenses to avoid running into problems in the future. The pandemic has moved much of the traditional orders online and established businesses looking to expand or those starting a new e-commerce business should be aware of the specific licenses required for selling and shipping these products. The repercussions for failing to adhere to acquire a license before commencing a business can be minimal or drastic, eliminating your business before you can start. To illustrate the importance of licensing, I have provided some examples of penalties for failing to acquire a license.
Shipping cigarettes without a license in California
Shipping cigarettes and failing to acquire a license to ship the cigarettes in California is a misdemeanor. Doing so can result in fines of up to $5,000 fine or imprisonment for up to one year. The small business owner can also be subject to civil actions by the attorney general, city attorneys, or district attorney for each violation. For subsequent violations, the civil penalty can be as much as $10,000 for the fifth and subsequent violations during a five-year period.
Selling and shipping firearms without a license
Selling firearms without a license has one of the most extreme penalties. Even if shipping firearms does not require a license in your state, if a small business does not register federally, they will be subject to penalties. The current penalty is up to five years in prison, a fine up to $250,000 or both, a costly mistake that can end a small business.
Whatever product a small business owner intends to sell, it is crucial to discover any licenses that are required to sell that particular product, either online or in person. As a result of the relaxation of rules and increase of online shopping, it is imperative to discover any additional licenses needed to ship products bought online or if the enforcement is delayed and when they may be reinstated.
How can I determine whether I need a particular license?
For small business owners, a good starting point is the small business administration since it describes business activities that require a license but also link the issuing agency. A small business owner can follow those links at the beginning of this article and discover the requirements to receive a particular federal license.
For state and local licenses, small business owners can start by looking at their respective state's business resource website to discover the appropriate licenses or permits that they may need. For example, California's Office of Business and Economic Development provides resources for prospective businesses to search their city or county and business type to discover the relevant licenses or permits that might be required. You can find the website here.
Where can I get help to discover and comply with the licenses?
Even if you discover several licenses that might apply to your business but still feel overwhelmed or unsure whether the license applies, you can use Legalucy to help narrow what licenses or permits you might need. Also, Legalucy connects your small business with law firms in your area that can help you apply and obtain any licenses or permits that may be required and to counsel you as to the best method to remain in compliance.
The pandemic pushed all businesses into uncharted territory. Whether you are expanding your small business online or want to launch a new e-commerce business, it is imperative to understand whether there is a license requirement or not. Don't let licensing kill your business before you start. Good luck!
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