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Know The Law: SLA Moves Forward On Two Key Issues

Posted on  | February 21, 2013   Bookmark and Share
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Combination Packs & Third Party Internet Sales Targeted

The New York State Liquor Authority held an open meeting on January 17th to discuss changes in the rules related to combination packages. Following that meeting, the full board met to discuss a request for a declaratory ruling relating to internet sales.

Combination Packs

Section 101-b, which sets out the price posting requirements for wine and spirits provides, “[T]he bottle and case price to wholesalers, the net bottle and case price paid by the seller, which prices, in each instance, shall be individual for each item and not in “combination” with any other item…” As a result, suppliers were not permitted to price post and sell packages which contained more than one brand of wine or spirits.

On November 1st, 1999, however, the New York State Liquor Authority published Bulletin No. 583 which permitted a supplier to create “a sealed pre-wrapped combination package which includes only containers of liquor and/or wine.”Following the publication of Bulletin No. 583, suppliers began to create combination packages which they used to introduce new products into the retail marketplace and to encourage retail licensees to purchase products which they had not previously carried.

Industry members asked the Liquor Authority to expand Bulletin No. 583, to permit a wholesaler to create combination packages from its own inventory. arguing that the creation of the packages would be consistent with the purpose and intent of the statute.

After listening to comments from all interested parties, Chairman Rosen directed Special Counsel Thomas Donohue to draft an Advisory which would replace Bulletin No. 583. Before the full board votes to adopt the Advisory, a copy will be posted on the SLA website and Industry Members will have an additional opportunity to comment. Whatever the Authority decides, it is likely to add to what the Authority previously allowed. The options available to retailers will not be reduced.

Third Party Internet Sales

That same day, the Liquor Authority held a full Board Hearing to review the application of ShipCompliant, a technology and regulatory compliance service company located in Colorado. ShipCompliant filed a request for a declaratory ruling “that its national MarketPlace Platform, operated as set forth in this Petition, does not violate New York Alcoholic Beverage Control laws or related SLA Rules.”

In its petition ShipCompliant claimed it “developed a business model and compliance system (“MarketPlace Platform”) that facilitates the ability of NY licensed wineries and retailers, as well as wineries throughout the US licensed with NY direct shipment permits (collectively, “Licensed Sellers”) to utilize the services of advertising platforms (such as operators of internet marketing portals, online magazines and specialty websites) that do not hold alcoholic beverage licenses in NY (“Advertisers”) to advertise to consumers the availability of alcoholic beverage products from Licensed Sellers.”

In essence, ShipCompliant asked the Liquor Authority to approve internet sales by wineries with direct shipping licenses and the sale of wine and spirits by retail licensees through a non-licensed third party internet provider. If the SLA agreed, it would be putting its imprimatur on all third party internet wine sites that use the ShipCompliant platform. ShipCompliant described that platform as follows:

Consumers select and place a request for a Product from the items advertised by the Licensed Seller on the Advertiser website or other media, and the Advertiser uses the MarketPlace Platform technology to forward the consumer’s request to the Licensed Seller for approval and sale at the Licensed Seller’s premise. Product prices listed by the Advertiser are specified by the Licensed Seller. The consumer’s order request is checked for compliance (age validation, product compliance and so forth), as well as inventory availability. Once availability and compliance are confirmed, the Licensed Seller must either accept or reject the order request through an automated acceptance utility that employs clickable buttons that direct the licensee to either accept or reject each request. If the order is accepted, the Licensed Seller directs the fulfillment of the order to the consumer.

Under the MarketPlace Platform system, when the consumer’s credit card is charged, funds go into an escrow account from which the gross proceeds are divided among the supplier, wholesaler, retailer, advertiser, warehouse-fulfillment center and shipper. In the documents attached to the request for a declaratory ruling, ShipCompliant suggested that from an average order of $59.40, ShipCompliant would receive $1.00, the “Advertiser” $10.00 and the licensed seller would receive $29.00.

In response to questioning led by Chairman Rosen, it became clear that 1) the Liquor Authority had conducted an investigation into the actual methods of operation of some of the “Advertisers” selling in or into New York using ShipCompliant’s MarketPlace Platform; 2) some of the Advertisers already working with ShipCompliant in New York engaged in practices which did not conform to the protocols set forth in the request for a declaratory ruling. For instance, agreements among ShipCompliant, a retailer and an Advertiser included a provision that the retailer would receive 20 cents a bottle on each bottle sold. Moreover the Authority found evidence the retailer did not know where the warehouse was and had no involvement in selecting the product that was to be sold. It also appeared that the retailer did not actively approve a sale; rather, the sale went through unless the retailer took steps to cancel it within four hours.

The Liquor Authority expressed grave concerns as to whether the business practices of the parties matched the protocols in the request for a declaratory ruling. ShipCompliant’s representatives explained that the protocols were adjusted from time to time based upon discussions with attorneys at the SLA. Lessons were learned as compliance issues came to light. ShipCompliant assured the Members that it is seeking to create a fully compliant system and asked the Authority to assist them in reaching this goal.

The Members asked for comments from other interested parties. Speakers who address the Board pointed out it is illegal for a non-licensed person to participate in the profits of a licensed entity. The term for such participation is “Availing.” Those opposed to the application argued that the non-licensed entity (“Advertiser”) is availing because it received a significant portion of the gross sales price.

Additional questions raised included:

•    If a wholesaler is involved and only one retailer, is there a gift or service issue?
•    If an out of state winery is storing its goods in New York and shipping from New York, doesn’t it need a New York wholesale license?
•    If an out of state winery is storing goods in New York and shipping from New York to customers in New York, aren’t they doing business in New York and shouldn’t they pay New York State income taxes?
•    Are the products involved in the transactions so limited that the goods are essentially assigned to one retailer? If so, is the wholesaler limiting sales to a single retailer or group of retailers in violation of New York law?

One attorney asked the Members to remember that ShipCompliant is not the only company working with direct shippers and third party advertisers. She asked that any pronouncements made by the Authority not be limited to ShipCompliant’s protocols but be broad enough to cover all interested parties.

The Liquor Authority clearly intends to tackle the issue of internet sales and third party advertisers. However, the Members wish to proceed with caution. The factors involved are complicated. The Authority does not seek to stand in the way of legitimate internet platforms. However, the Members will not respond to the declaratory ruling request without giving the industry a chance to comment and a full understanding of the parties past conduct. Consequently, the Members will continue to study all the issues discussed before crafting a declaratory ruling or advisory. Industry Members who wish, should address their comments to the secretary of the Authority, Jacqueline Held at JHELD@abc.state.ny.us.

The full hearing can be viewed at: http://abc-state-ny.granicus.com/MediaPlayer.php?view_id=2&clip_id=502


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