You could create a Service Account or Dummy Account in Tableau Server and associate the email address for the distribution with this Account.
When you send a subscription to a DL, your local SMTP server is responsible to resolving the user email addresses and sending the subscription out to each of them, so Tableau Server wouldn't have a way to check if they are Tableau Server users or not, we can rule that out
In this particular case, it looks there was a problem generating the subscription, or communicating with the SMTP server. I'd recommend opening up a case with Tableau Support and providing your Tableau Server logs, they can dig in and see what is happening.
I have tested subscribing to the same dashboard to a different email address and it works. For example - my own email works but when I changed my email to DL list - its not working. So would it be still be SMTP issue?
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It could be that the DL is not configured to receive emails from external email addresses, and is sending an error message back to Tableau Server. I'd ask your SMTP admin if the DL is set up to allow receiving external emails as a first step
I contacted our support team to look into this and looks like we had some email relay issue and I also asked them to allow external email addresses to this DL. And its working now.