WSR 15-01-093

PROPOSED RULES

[Filed December 17, 2014, 11:28 a.m.]

Supplemental Notice to WSR 14-12-099.

Preproposal statement of inquiry was filed as WSR 13-07-026.

Title of Rule and Other Identifying Information: Six new sections are being created in chapter 314-23 WAC: WAC 314-23-060 What are "volume discounts"?, 314-23-065 What are "unfair trade practices"?, 314-23-070 What is "local market"?, 314-23-075 Are licensed distributors or other suppliers of spirits and wine allowed to provide discounts to on-premises or off-premises retail licensees based on a commitment from the retailer to purchase a particular percentage of the spirits back-bar, well drinks, wine by the glass, or any combination of these?, [314-23-080 Are licensed distributors or other licensed suppliers of spirits and wine allowed to provide volume discounts to on-premises or off-premises retail licensees?], and 314-23-085 What type of discounts are not allowed?

Hearing Location(s): Washington State Liquor Control Board, Board Room, 3000 Pacific Avenue S.E., Olympia, WA 98504, on January 28, 2015, at 10:00 a.m.

Date of Intended Adoption: February 4, 2015.

Submit Written Comments to: Karen McCall, P.O. Box 43080, Olympia, WA 98504, e-mail rules@liq.wa.gov, fax (360) 664-9689, by January 28, 2015.

Assistance for Persons with Disabilities: Contact Karen McCall by January 28, 2015, (360) 664-1631.

Purpose of the Proposal and Its Anticipated Effects, Including Any Changes in Existing Rules: This rule making is a result of a stakeholder petition for rule making to clarify RCW 66.28.170 regarding discrimination in price to purchaser for resale prohibited. Confusion in the alcohol industry regarding "volume discounts" since the passing of Initiative 1183 requires further clarification in the rules.

Reasons Supporting Proposal: Additional rule language needs to be created to fully clarify the statute.

Statutory Authority for Adoption: RCW 66.08.030.

Statute Being Implemented: RCW 66.28.170.

Name of Proponent: Washington state liquor control board, governmental.

Name of Agency Personnel Responsible for Drafting: Karen McCall, Rules Coordinator, 3000 Pacific Avenue S.E., Olympia, WA 98504, (360) 664-1631; Implementation: Randy Simmons, Deputy Director, 3000 Pacific Avenue S.E., Olympia, WA 98504, (360) 664-1671; and Enforcement: Justin Nordhorn, Enforcement Chief, 3000 Pacific Avenue S.E., Olympia, WA 98504, (360) 664-1726.

In order to assess the potential impact of the proposed rules on businesses, the board circulated a survey to stakeholders and individuals on the rule making distribution list maintained by the board. The board received responses from one hundred forty-six businesses. At least one organization, the Washington Restaurant Association, sent the survey to all of their members. The analysis below incorporates comments received in response to the survey. The board had received comments on an earlier set of proposed rules and made the changes reflected in the proposed rules based on comments made in rule-making hearings, as well as comments received from stakeholders.

1. Description of the Reporting, Recordkeeping, and Other Compliance Requirements of the Proposed Rule: The proposed rules do not add any reporting or recordkeeping requirements beyond what are required by existing law or rules.

2. Kinds of Additional Professional Services, If Any, Will Your Business Need in Order to Comply with the Rules as Proposed: Thirty-six percent of the responses stated there would be no additional professional services needed to comply with the rules as proposed. In response to the board's proposed rule, one distributor notified its customers that the rule would require it to begin charging fees for delivering orders that included less than full case lots of one product (split case fees) to customers that it had not charged those fees in the past. The proposed rules do not allow or prohibit split case fees, but do require that charges that differ between customers be justified under one of the bases allowed in the law.

Despite the rule not addressing split case fees, sixty-four percent of the responses stated they would need additional professional services to maintain additional recordkeeping to monitor their alcohol ordering to avoid split case fees charged by distributors. Another cost listed was renting additional storage space to warehouse their inventory so they could order in full cases to avoid split case fees.

Respondents with more than one location stated they would need to rent a warehouse space to have their orders delivered to a central warehouse to take advantage of volume discounts on spirits and wine purchases. They also stated they would need to hire additional staff to maintain the warehouse and deliver product to their licensed locations. The board maintains that practices that have been used in the past, with distributors providing volume discounts to licensees who have more than one location, but making separate deliveries to each location, are not allowed by the law, and the retail licensees should have been having deliveries to a central location in order to receive the volume discounts.

The estimated costs that survey respondents listed as imposed by the proposed rules break down as follows:

3. Costs of Compliance for Businesses in the Following Areas; Reporting, Recordkeeping, Equipment, Supplies, Labor and Administrative Costs: Twenty-six percent of the respondents stated there would be no additional costs for recordkeeping, labor, and administrative costs to comply with the proposed rules. Seventy-three percent of the respondents stated there would be additional costs for recordkeeping, labor, and administrative costs to comply with the proposed rules. Despite the rule not addressing split case fees, sixty-four percent of the responses stated they would need additional professional services to maintain additional recordkeeping to monitor their alcohol ordering to avoid split case fees charged by distributors.

Another cost listed was renting additional storage space to warehouse their inventory so they could order in full cases to avoid split case fees. Respondents with more than one location stated they would need to rent a warehouse space to have their orders delivered to a central warehouse to take advantage of volume discounts on spirits and wine purchases. They also stated they would need to hire additional staff to maintain the warehouse and deliver product to their licensed locations. The board maintains that practices that have been used in the past, with distributors providing volume discounts to licensees who have more than one location, but making separate deliveries to each location, are not allowed by the law, and the retail licensees should have been having deliveries to a central location in order to receive the volume discounts. The estimated costs that survey respondents reported break down as follows:

4. Will Compliance with the Proposed Draft Rules Cause Businesses to Lose Sales or Revenue? Thirteen percent of respondents stated their business would not lose sales or revenue. Eighty-seven percent of respondents stated their business would lose sales or revenue. For those respondents who listed a cause, the reasons for loss of revenue were split case fees charged by distributors and the allowance in the proposed rules for channel pricing for on-premises and off-premises liquor licensees. If the licensee is required to pay higher prices for their products they will have to raise the price of drinks to their customers. The estimated loss of revenue submitted by respondents is as follows:

5. Number of Jobs That Will Be Created or Lost as a Result of Complying with the Proposed Draft Rules? Sixty percent of respondents stated there would be no jobs created or lost as a result of complying with the proposed rules. Thirty percent of respondents stated one to five jobs would be created or lost as a result of complying with the proposed draft rules. Ten percent of respondents stated one to five jobs would be created as a result of complying with the proposed rules.

6. Cost of Compliance for Small Businesses Compared with the Cost of Compliance of Large Businesses: The survey sought information on the size of the businesses who replied, to enable a comparison of compliance costs. Most of the businesses who responded to the survey identified themselves as small businesses. Seventy-two percent of the respondents stated they had ten to fifty employees. Twenty-eight percent of respondents stated they had over fifty employees.

Despite the rule not addressing split case fees, eighty-three percent of the responses stated they would need additional professional services to maintain additional recordkeeping to monitor their alcohol ordering to avoid split case fees charged by distributors. They are smaller businesses and don't always purchase product in full cases.

Central warehousing is also not part of the proposed draft rules, but eight percent of respondents stated the reason for additional costs and loss of revenue would be due to central warehousing. Respondents stated they would need to rent a warehouse space to have their orders delivered to a central warehouse to take advantage of volume discounts on spirits and wine purchases. They also stated they would need to hire additional staff to maintain the warehouse and deliver product to their licensed locations.

Nine percent of respondents stated the reason for additional costs and loss of revenue would be the allowance of channel pricing. All nine percent of those respondents were small business[es] employing fewer than fifty employees.

The board considered whether any changes could be made to the proposed rules to lessen or eliminate the potential impact on small businesses. This rule making was originally begun in response to a petition from small businesses who believe that the law prohibits certain sales and marketing practices that are addressed by the proposed rules. The board determined to open this rule making to examine the business practices that are occurring, and whether those practices comply with the law. The comments on the rule making demonstrate a strong split of opinion on what the law does, and does not, allow, thus the board believes the rules are necessary to interpret the law to define the limits on business practices in the liquor industry. The original petitioners believe the proposed rules allow too much leeway in spirits pricing and delivery, while other stakeholders assert the board is prohibiting practices that are allowed by law. The board believes the proposed rules strike a legitimate balance in the liquor marketplace and appropriately prohibit unfair trade practices.

A copy of the statement may be obtained by contacting Karen McCall, P.O. Box 43080, Olympia, WA 98504, phone (360) 664-1631, fax (360) 664-9689, e-mail rules@liq.wa.gov.

A cost-benefit analysis is not required under RCW 34.05.328. A cost-benefit analysis was not required.

December 17, 2015

Sharon Foster

Chairman