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Know The Law: Adding Clarity

Posted on  | September 30, 2014   Bookmark and Share
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New SLA declaratory ruling sheds more light on the legality of internet sales

Declaratory Ruling 2014-02148E, issued August 26th in response to a request from an off-premise retail licensee (Retailer), adds to a growing body of advisories explaining the position the New York State Liquor Authority (SLA or the Authority) takes on internet sales. The Declaratory Ruling make clear that in evaluating relationships between licensed and unlicensed entities, the SLA will not only consider the set of facts presented in a request but will also assess the actual “day-to-day” functioning of the arrangements involved.

Does ABC law prohibit the licensed Retailer from paying for fulfillment services performed by subcontractor of a licensed Wholesaler at the wholesaler’s out of state premises, the cost of which is passed along to Retailer?

In connection with sales made outside New York, an out of state wholesaler may act in accordance with the law of the state in which it is licensed. With regard to goods sold into New York, the Authority held that wholesalers must comply with New York law. Consequently, for goods sold to New York retail licensees, an out of state wholesaler is not permitted to conduct fulfillment services for New York retailers at its licensed premises.

The Authority also determined that in this case some services performed by the Wholesaler exclusively for the Retailer violated ABC law Section 101(C), which prohibits manufacturers and wholesalers from rendering gifts or services that influence the Retailer to purchase product from the Wholesaler. In this case, such services included: sharing national inventory; disclosing prices obtained from suppliers, reserving wines months in advance of the purchase; price posting wines at times requested by the Retailer; packaging wines to Retailer’s specifications; and placing an office next to Retailer. The Authority concluded that these services “strongly influence” Retailer to purchase from Wholesaler and that its contract to fulfill for the Retailer is integral to the Retailer’s operation.

Does the Retailer’s business relationship with its third-party service provider (TTP) violate any other provision of ABC law?

The SLA found that Retailer’s relationship with its TPP is a violation of ABC Law Section 111 which forbids a licensee from allowing an unlicensed person to use or profit from its license, commonly known as “Availing.”

In Declaratory Ruling 2013-01006A, the Authority laid out guidelines to be used to determine if a TPP was performing services so integral to the core obligations of the licensee that those performing the services should be listed on the retailer’s license. In this case, the Authority found that, taken together, the following services represented availing: (1) TPP providing Trademark rights to the Retailer; (2) TPP operating and maintaining websites for the wine club website; (3) TPP providing all marketing services for the wine clubs; (4) TPP providing all customer service for the wine clubs; (5) TPP providing logistical services for the wine clubs; (6) TPP recommending wines to be sold and the selling price and (7) TPP only recommending wines from one New York wholesaler.

Additionally, the Authority closely scrutinized the arrangement between Retailer and the TPP for the use of Trademark rights to the wine clubs websites. TPP obtained its legal rights to the Trademarks from a sister company of the Wholesaler. The Authority found that Retailer was receiving an illegal gift or service from the Wholesaler in violation of ABC Law 101(c).

Does the ABC law prohibit a retailer from conducting limited activities outside New York?

ABC law does not require licensees to make all business decisions at its licensed premises. Nonetheless, all sales must be made from the licensed premises pursuant to ABC law Section 111; all books and records must be maintained on the licensed premises pursuant to ABC law Section 105.15; and all deliveries must be made to the licensed premises or permitted warehouse pursuant to SLA Rule Section 67.1.

Does the ABC law prevent licensed Retailer from operating and maintaining some of its inventory on a “just-in-time” basis, by ordering and receiving products from Wholesaler, as needed based on customer demand?

There is no rule prohibiting retailers from ordering and receiving products as needed and based on customer demand. However, the retail off-premise licensee must operate a bona fide store under ABC Rule 53.1. The size of the inventory available at the store is a factor used to determine if the store is bona fide.

The deadline for submission of All Night Permit applications for January 1, 2015 is November 16, 2014.


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