BEFORE THE DEPARTMENT OF REVENUE
OF THE STATE OF MONTANA
TO: All Concerned Persons
1. On October 28, 2010, the department published MAR Notice No. 42-2-858 regarding the proposed amendment of the above-stated rules at page 2563 of the 2010 Montana Administrative Register, issue no. 20.
2. A public hearing was held on November 23, 2010, to consider the proposed amendments. Gary Funes, Regional Director - NW Control States, for Proximo; Brett Wiensch, State Manager, Young's Market Company of Montana; Robin Frey, Regional Manager, McCormick Distilling Company; and Mike Soule, Owner, Liquor Store #76, Belgrade, Montana, all appeared and provided testimony at the hearing. Written comments were received from Montana liquor store representatives Chris Byrd, of Kalispell; Shane Farnsworth, of Billings; K. C. Hill, of Ronan; Doug Kirby, of Billings; Mark Kohoutek, of Great Falls; Bea Lunda, of Conrad; Dan Moerkerke, of Hamilton; Chad Ouellette, of Big Sky; and Jacque Thomas, of Missoula. As requested in advance, the hearings officer read Mr. Hill and Mr. Byrd's written comments aloud during the hearing. Oral and written testimony received is summarized as follows along with the responses of the department:
COMMENT NO. 1: Mr. Funes commented on ARM 42.11.104(3), relative to wholesale price. He asked if this means that a product that is discontinued by the department would never be allowed to return into the product line. Mr. Funes used the example that a particular product that they couldn't give away ten years ago is now doing quite well.
RESPONSE NO. 1: The department appreciates Mr. Funes' comments. If a product marked as discontinued becomes available again, the department will offer the product for purchase again, as a new special order item.
COMMENT NO. 2: Mr. Wiensch commented on ARM 42.11.243(5), relative to samples. He questioned how the language that says a sample product may only be given to licensed retailers or liquor store agents would affect their ability to provide products such as gift baskets to charitable events. Mr. Wiensch also commented about the requirement in ARM 42.11.243(10) that the vendor fill out the department's paperwork for removing the samples, and asked if this means that the broker would no longer be able to do this on behalf of the suppliers.
RESPONSE NO. 2: The department appreciates Mr. Wiensch's comments. The proposed amendments to ARM 42.11.243 do not change current requirements. Liquor vendors and liquor representatives cannot provide products to charitable events. This rule is governed by the Code of Federal Regulations, chapter 27, part 6.91, which states that samples are an act of an industry member furnishing or giving liquor or fortified wine to a retailer who has not purchased the brand within the last 12 months. Industry members, including liquor vendors and representatives, are only allowed to give samples to a licensed retailer or liquor store agent.
Mr. Wiensch's comment regarding samples is correct. Registered representatives are no longer able to send the request to withdraw inventory for sample purposes from the warehouse. The request needs to come directly from the owner of the product, i.e., the vendor of record.
COMMENT NO. 3: Ms. Frey commented on ARM 42.11.402(3), relative to inventory policy, that the use of flavors is very vague, covers too broad of an area, and needs more definition.
Mr. Funes also commented on this rule, stating that choosing not to sell the caffeinated alcoholic products is absolutely correct. He further commented, relative to different flavors of current or new products, that the state has a responsibility to offer the products that come along to their constituents as long as they are only being sold to people 21 years of age or older.
Mr. Kohoutek commented on this rule stating that while he does not object to the first part, the language "such as, for example, bubble gum or cotton candy" in ARM 42.11.402(3)(d) seems excessive. He explained that it appears this language is added to specify that certain products won't be allowed in Montana, and says he would argue that to single out cotton candy, for example, may be incorrect. He further stated that a survey of fairs would show that at least 50 percent of cotton candy sold is for adult consumption and, therefore, it seems like a huge leap to say this flavor is directed toward children. He proposed ending ARM 42.11.402(3)(d) at "targeted toward children" and it would accomplish the department's intent without drawing a conclusion that may not be correct now or in the future.
RESPONSE NO. 3: The department thanks Ms. Frey, Mr. Funes, and Mr. Kohoutek for their comments. A very important responsibility of the state, through the department, is to protect the health, welfare and safety of the people of Montana in the sale and distribution of alcoholic beverages. The department believes the language used in ARM 42.11.402 is in the best interest of the state for the protection and safety of all citizens, including those who are under the legal age to consume alcoholic beverages.
New and innovative products are entering the market at a fast pace. Some of these products include new flavors, unique packaging, and a variety of marketing techniques. Although it may not be the intention of vendors, some flavors, packaging and advertisements do target youth under the legal age or make it difficult for individuals to differentiate an alcoholic product from a nonalcoholic product.
COMMENT NO. 4: Mr. Wiensch further commented on ARM 42.11.405(1)(b), relative to special orders, asking if this could be reworded to provide an opportunity to bring in extra cases in some instances. He explained that we all know how hard shipping into Montana can be depending on supplier size. He said he understands the six- to eight-week lag-time, and acknowledged that the state has always been very cordial about allowing extra inventory of quicker-moving products. Mr. Wiensch asked if the elimination of the warehouse supply category leaves strictly the case-by-case option and said he has concerns that this would put these promotional products at a disadvantage.
In reference to ARM 42.11.405(1)(b)(ii), Mr. Wiensch asked if he correctly understands this to read that a supplier will only be allowed to bring in one promotional request product at a time. He explained that if a supplier brings in multiple brands, it would be harder for the department to regulate. Also, he said that due to the time it takes for something to get included in the price book's regular listings, up to ten months, it could pose a problem for introducing secondary products, new flavors, etc. Mr. Wiensch stated that Montana has been built on special order products through some of the liquor stores. He explained that he doesn't want that eliminated and requested that this be looked at more closely.
RESPONSE NO. 4: The department understands how important the special order and promotional request process is in Montana and has further amended ARM 42.11.405 to address these concerns.
The department will continue with its current practice for promotional requests. The amendments to the rules are not intended to limit a vendor to one promotional request at a time. A vendor can send multiple promotional requests to the department; however, if one request has expired and excessive inventories remain in the liquor warehouse, no additional promotional requests will be accepted until the inventory on the expired request has been removed. The department will continue to provide updates to registered representatives and vendors on the status of their promotional requests throughout the process.
Additional detail, relative to this rule, is provided in the department's response to comment no. 6.
COMMENT NO. 5: Ms. Frey also expressed a concern about ARM 42.11.406(1)(a)(i) relative to product listing, stating that erratic sales should be better defined to address distribution in more than one store. Ms. Frey further commented on ARM 42.11.406(1)(a)(iii), relative to product listing requirements, asking if it has always been a requirement that a product has been in the state for at least six months. She also asked if a newly introduced product is selling well within three months, should it be listed automatically.
RESPONSE NO. 5: The department agrees with Ms. Frey's concern and has added the term "erratic sales" into the definitions in ARM 42.11.105. In response to Ms. Frey's second comment, the six-month introductory period has been the department's practice for several years and has not created any concern. The department believes six months is both a necessary minimum and an adequate amount of time to make certain the product demonstrates a consistent sales history. The six-month period also allows the department to confirm the long-term availability of the product.
COMMENT NO. 6: Mr. Byrd commented on the provision to base the 8 percent discount on the year 1994 case sales. He stated he is already losing a substantial amount of money on case sales to taverns/casinos, and that it is not right that the statute says the state will subsidize taverns/casinos 8 percent for case lot purchases, yet the state does not compensate the stores for that amount. Mr. Byrd further stated that, in the proposed amendment to the warehouse changes, the state is offering even more product to the taverns/casinos at the 8 percent discount without proposing a method to compensate the stores for this additional cost, that the amendment favors the taverns and casinos at the expense of the stores, and he is not in favor of it.
Mr. Farnsworth wrote that he understands the department's wish to streamline the three classification sections of the warehouse; however, he stated that taking the warehouse supply products to the regular list will be detrimental to the agency stores by decreasing the profitability of sales. He added that if these items were not worthy of the regular list criteria, they should not be made so arbitrarily through rulemaking. He requested that this provision of the rule not be acted upon. Mr. Farnsworth also commented that the only problem he sees from an agent's perspective is that the warehouse supply items should go on back-order. He explained that the agents currently re-order these items weekly until they show up, and having them go on back-order would greatly relieve stress on the system.
Mr. Hill commented on the increase in the number of warehouse supply products being added to the regular list, the current weighted average discount ratio established in the year 1994, and referred to 16-2-101(2)(b)(ii)(B), and 16-2-201, MCA. Mr. Hill stated that the proposed amendments do not specify how the department will reimburse agents for the additional case lot discounts on the 550 warehouse supply products, and requested that the language in the proposed amendments specifically state how the department will reimburse agents for the additional case lot discounts on these products. Mr. Hill further stated that if it is not the intention of the department to reimburse the agents, he opposes the elimination of the concept of warehouse supply products in the proposed rule amendments.
Mr. Kirby commented that he is opposed to adding 700 or more special order and warehouse items to the front of the price book. He explained that stores make little on case lots and the special order status of the items allows stores to earn a better percentage.
Mr. Kohoutek expressed concern about the proposed amendments to ARM 42.11.405, 42.11.406, and 42.11.423. He stated that changing the listing of products will increase the regular-listed products from about 800 to 1250. This would be a 50 percent increase in the number of products that require the 8 percent discount, which seems like a huge increase. He stated that the weighted discount is based on case sales from the early 1990s and, should a change in the listing of products occur, every store would have a legal argument to have its weighted average discount adjusted. He also proposed that it would be more logical to have the warehouse supply products grouped in with special orders instead of the regular-listed products than to give an 8 percent discount to a product that may only sell 20 or so cases a year. He further stated that he would like to see the rules specify that a product must sell a certain number, such as 100 cases or more, to be a regular- listed product. He said it seems to him that the 8 percent discount is intended for products that sell in large volume.
Ms. Lunda stated that she is opposed to the amendments to ARM 42.11.405, 42.11.406, and 42.11.423. She explained that, prior to the year 1995, the warehouse supply items were not calculated into the mathematical formula to assign a weighted discount average to each agency store, only regular-listed products were used in the formula based on case lot discounts from the year 1994. Therefore, to eliminate warehouse supply items would require all agency stores to give the 8 percent case lot discount to licensees on more than 500 additional items, and this would have a significant financial impact on many agency stores without the means to recover the added cost.
Mr. Moerkerke commented that it is hard to understand the concept behind adding more products to the regular category. He asked if by adding more products that are eligible for discount, it doesn't add more cost to the department for reimbursement to the agent stores, too. He questioned if the proposed amendments explain how the department will reimburse the agents.
Mr. Ouellette stated that while he appreciates the effort to create efficiencies in the warehouse, and that downsizing listings may make sense, the impact of the 8 percent discount on the additional cases is dramatic and many of the agencies wouldn't be able to handle the impact. He states he would like to think that there is a way to solve the listing problem without the negative monetary impact.
Mr. Soule commented that he assumes the department is aware that, with the proposed amendments to the definitions in ARM 42.11.105, by moving 750 warehouse supply items to the regular list, liquor stores will sustain a substantial cost. He further stated that there are a handful of liquor stores struggling financially, and adding more items requiring the 8 percent bar discount will be detrimental to the stores.
Ms. Thomas provided comments specific to ARM 42.11.405(1)(b), stating that she is opposed to the removal of the warehouse supply product designation. She explained that while the intention of the amendment may have been to streamline product lines, passing it would penalize liquor stores by giving away what is already a slim profit margin until the next commission rate review period, which is at least three years away. Ms. Thomas says she estimates that in her operation alone, this would result in a loss of $100,000 in gross profits and lead to significant cuts in customer service and the number of employees. She added that not only would each store be damaged, but this amendment would reduce net income to the state and reduce revenues that go back into local communities.
RESPONSE NO. 6: The department appreciates the liquor store agents' comments and understands their concerns. To help address these concerns and still meet the intent of the law, the department has further modified the language in ARM 42.11.105, 42.11.405, and 42.11.406. The modified language closely mirrors the rule classification of liquor products in the year 1994 that was in place when the mathematical formula was devised to assign a weighted average discount to each agency store. This modified language will better correspond with how the weighted average discount was calculated and provided to agency stores for the 8 percent discount.
In the year 1994, regular products were items that achieved 100 cases of sales or $1,000 annual net profit in the 12-month period prior to the preparation of the division's quarterly price book. In the year 2006, the criteria for regular products was amended, making the total number of regular products equivalent to the number of available locators in the state liquor warehouse. During this period, the department had 870 available locators.
The number of available regular products has not changed in more than five years. Based on the rules in the year 1994, which was the time period when the weighted average discount was determined for each store, the department would have 1,198 regular products today.
The modified language in ARM 42.11.105 defines regular products to be any item that has sold 50 or more cases in the 12-month period leading up to the department's biannual review process. Based on sales records, this modification would increase the number of regular products from 870 to 1,003. This is a significant decrease from the previously proposed quantity of 1,250, and is also less than the quantity of regular products it would have been if based on year 1994 rules.
The modified rule also amends the language to say that any product not meeting the regular product criteria will be classified as a special order product. Those special order products, that have sold more than 24 cases in the 12-month period leading up to the department's biannual review process, will have inventories maintained at the liquor warehouse. If the special order item has a sales history of 24 or fewer cases, the product will be brought in on a case-by-case basis, as is currently done. All special order products will go on backorder if supply is not available at the liquor warehouse. The price book will clearly note which special order items will be maintained at the liquor warehouse.
3. Based on the comments received and a proposed edit presented at the hearing by the Liquor Control Division administrator, the department further amends ARM 42.11.105, 42.11.243, 42.11.405, and 42.11.406 as follows, stricken matter interlined, new matter underlined:
42.11.105 DEFINITIONS As used in this subchapter, the following definitions apply:
(1) through (8) remain as proposed.
(9) "Erratic sales" means sales having no fixed or regular course; lacking consistency, regularity, or uniformity.
(9) through (14) remain as proposed, but are renumbered (10) through (15).
(15)(16) "Regular product" means a product in which inventories are continually maintained at the state liquor warehouse. that has sold 50 or more cases in the 12-month period leading up to the department's biannual review if:
(a) product sales are not a result of closeout, overstock, or erratic sales;
(b) product is available year-round; and
(c) product has been in the state for at least six months prior to the review.
(16) through (18) remain as proposed, but are renumbered (17) through (19).
(19)(20) "Special order product" means a product in which inventories are not constantly maintained at the state liquor warehouse that does not meet the criteria to be classified as a regular product.
(20) and (21) remain as proposed, but are renumbered (21) and (22).
AUTH: 16-1-103, 16-1-104, 16-1-303, MCA
IMP: 16-1-103, 16-1-104, 16-1-302, 16-1-401, 16-1-404, 16-1-411, 16-2-101, 16-2-201, 16-2-301, 16-3-107, MCA
42.11.243 SAMPLES (1) through (3) remain as proposed.
Sealed sample Sample products, which must be in their original containers, may only be given to licensed all-beverage retailers or agency liquor store agents.
(5) through (10) remain as proposed.
AUTH: 16-1-103, 16-1-303, MCA
IMP: 16-3-103, MCA
42.11.405 PRODUCT AVAILABILITY (1) Liquor products will be made available for sale in the following classifications:
(a) Regular products will be designated in the department's quarterly price list, and have sufficient supply maintained in the bailment warehouse in accordance with ARM 42.11.421. An agent shall give an all-beverage licensee an 8
% percent discount on a full case lot of a regular product.
(b) Special order products that have sold at least one case in the prior 12 months will be published in the department's quarterly price list.
Supply will not be maintained in the warehouse and will only be available on an order-by-order basis, and depending on supplier requirements and availability of a product, orders may take six weeks or more to be filled. An agent shall not give an 8 % percent discount on a full case lot of a special order product.
(i) Inventories will be maintained in the bailment warehouse if the item has sold more than 24 cases in the 12-month period leading up to the department's biannual review.
(ii) Inventories will not be maintained in the bailment warehouse if the item has sold 24 or less cases in the 12-month period leading up to the department's biannual review. These items will be available on an order-by-order basis and, depending on supplier requirements and availability, the order may take six weeks or more to be filled.
(i)(A) A vendor with a current Montana permit who has at least one registered representative may ship special order these products in on a promotional contract if approved by the department on a predetermined form. The promotional contract should:
(A)(I) state that the product will be maintained in the bailment warehouse;
(B)(II) list the test market locations proposed for the product and the expected initial order amount;
(C)(III) describe the promotional strategy that the vendor and the vendor's registered representative will undertake during the six-month promotion period; and
(D)(IV) specify a return address for excess product at the end of the promotional period.
(ii)(B) No additional supplier promotions will be allowed until excess product is removed from the warehouse. If arrangements have not been made to ship excess product back within 30 days of notification, product will be destroyed at the vendor's expense.
(c) Seasonal products are not published in the department's quarterly price list. Seasonal products are only available from the manufacturer during certain times of the year. The department will notify store agents when seasonal products become available. An agent shall not give an 8
% percent discount on a full case lot of a seasonal product.
(d) Discontinued products are not published in the department's quarterly price list. Discontinued products are available until all inventories have been depleted. An agent is not required to give an 8
% percent discount on a full case lot of discontinued product; however, the agent may sell the product below its last known posted price.
AUTH: 16-1-103, 16-1-303, MCA
IMP: 16-1-103, 16-1-104, 16-1-302, 16-2-201, MCA
42.11.406 PRODUCT LISTING (1) A product listing will be determined by the total number of
case cases sales the product sold in the past 12 months 12-month period prior leading up to the department's biannual review. The listings will be reviewed in January and July of each year. The results of the January review are effective May 1. The results of the July review are effective November 1. The listings will be categorized as follows: regular product and special order product, as defined in ARM 42.11.105.
(a) Regular products are the top 1,250 products in the state of Montana if:
(i) product sales are not a result of closeout, overstock, or erratic sales;
(ii) product is available year-round; and
(iii) product has been in the state for at least six months prior to the review.
(b) Special order products are products that do not meet the criteria for regular list products.
AUTH: 16-1-103, 16-1-303, MCA
IMP: 16-1-103, 16-1-104, 16-1-302, MCA
4. Therefore, the department amends ARM 42.11.105, 42.11.243, 42.11.405, and 42.11.406 with the amendments listed above, and amends ARM 42.11.104, 42.11.402, and 42.11.423 as proposed.
5. An electronic copy of this notice is available on the department's web site at www.revenue.mt.gov. Locate "Legal Resources" in the left hand column, select the "Rules" link and view the options under the "Notice of Proposed Rulemaking" heading. The department strives to make the electronic copy of this notice conform to the official version of the notice, as printed in the Montana Administrative Register, but advises all concerned persons that in the event of a discrepancy between the official printed text of the notice and the electronic version of the notice, only the official printed text will be considered. In addition, although the department strives to keep its web site accessible at all times, concerned persons should be aware that the web site may be unavailable during some periods, due to system maintenance or technical problems.
/s/ Cleo Anderson /s/ Dan R. Bucks
CLEO ANDERSON DAN R. BUCKS
Rule Reviewer Director of Revenue
Certified to Secretary of State March 14, 2011