Introduction by John Hinman: Once again our good friend Rob Tobiassen, the former Chief Counsel of the TTB and the President of NABI, has analyzed the latest enforcement missive from the TTB. TTB Industry Circular 2022-1 (released on Friday March 4, 2022). The TTB Circular caused those of us involved in product distribution to either laugh out loud, or turn pale, at what the TTB was proposing as violating the FAA Act.
The upshot of 2022-1 was the TTB is considering enforcing the “consignment sales” prohibitions in the regulations against “trade buyers” – a defined term that includes both retailers and wholesalers. The way the provisions would be enforced would be to look at the sale of product arrangements (distribution) between the suppliers, wholesalers, and retailers and, when terms over 30 days were offered by the supplier to either a wholesaler or retailer, consider whether those terms were a disguised and prohibited consignment sale (where the buyer is not expected to pay for the goods until they are sold).
Almost every state has credit laws that prohibit supplier/retailer terms over 30 days (and many states require cash on delivery). Therefore, wholesalers throughout the US (who because of consolidation have great leverage over suppliers) typically (and freely) negotiate the longest payment terms that producer and importer suppliers will permit. We fight for 30 days terms for our suppliers but wholesalers often insist on 45-, 60- or 90-day terms, and put that in their agreements. This is obviously designed to reduce (or avoid) the cash flow impact on the wholesaler from holding the goods until the wholesaler is paid by a retailer. However, if the product is sold before the payment becomes due, there would be the equivalent of an actual consignment sale (i.e., no payment until the goods are sold). This is what the TTB is concerned with and wants to address.
Now let’s hear from Rob on the big picture and what this means in practice.
By Rob Tobiassen
TTB has introduced more uncertainty under the illusion of guidance by its recent Industry Circular.
Last Friday, the Alcohol and Tobacco Tax and Trade Bureau (TTB), U.S. Treasury Department, introduced more confusion in its five years of aggressive unfair trade practice enforcement around the country. TTB issued Industry Circular 2022-1, Payment Terms Under Consignment Sales Provision, under the guise of providing guidance and clarification. The press release glowingly described the industry circular “As part of our continuing effort to ensure a level playing field and provide clarity to the alcohol beverage industry, TTB has…provide(d) additional guidance regarding payment terms under the consignment sales provisions.”
However, the demarcation of 30-days as a guidepost for possible regulatory enforcement between producers or importers and wholesalers is unjustified without explanation supporting it. It most likely puts almost every supplier and wholesaler in a possible violation of the consignment sales prohibition, even though they are following numerous longstanding State laws.
Let me explain.
Consignment Sales Provision is a Unique Trade Practice
The Federal Alcohol Administration Act (1935), 27 USC 205(a) – (d), proscribes four distinct trade practices as unfair. Consignment Sales, under section 205(d), is qualitatively different from the other three trades practices of exclusive outlet, tied-house, and commercial bribery. Consignment extends to “trade buyers” (defined as wholesalers and retailers) and now (according to the TTB) governs activity between upper tier industry members (producers and importers and wholesalers). Liability now flows up and down between the participants because a trade offering to buy on consignment may be charged against the buyer, and a supplier offering to sell on consignment may also be charged.
Finally, consignment sale violations do not require proof of exclusion (adverse effect on competition, which is a requirement for a violation under the other three trade practice provisions).
Congress Protected Ordinary and Usual Business Arrangements
Congress realized that the consignment sale provision could hamper legitimate business transactions. So, the consignment sales provision includes a proviso that recognized certain commercial transactions (otherwise falling into the five transactional proscriptions) were “ordinary and usual” and not actionable.
The statute states: “That this subsection shall apply to transactions involving solely the bona fide return of merchandise for ordinary and usual commercial reasons arising after the merchandise has been sold.” This would include spoiled or recalled product that was not salable. TTB promulgated regulations at Title 27, Code of Federal Regulations, Part 11-Consignment Sales, setting forth these types of commercial transactions.
Here Congress expressed its intent that it did not want to displace normal and regular industry practices; in today’s alcohol distribution business, this refers to longstanding credit practices by parties other than the retailer that have become usual and customary under numerous State laws and policies.
State Laws and Policies on Credit Turned on Their Head
Here is the fundamental concern about the impact of this Industry Circular. The vast majority of states allow upper tier industry members to set their own credit terms by having no provisions regulating credit.
The laws of California, Florida, Illinois, New York, Texas, and Washington State do not establish limits on credits between upper industry members. Ohio and Michigan are the only major states to require cash payment from wholesalers and allow no credit period. Sales transactions between suppliers or importers with wholesalers have developed over decades where there were no credit period limitations and terms of sale may be 30 days or may be 90 days, or even longer.
The credit period for retailers has no logical application to wholesalers. The consignment sales provision acknowledges the business reality of “usual and customary” sales transactions. Finally, the Treasury Department Report highlights the need for clear regulations for the industry to comply.
Industry Circular 2022-1 states as “guidance:”
Although TTB’s consignment sales regulations generally prohibit arrangements in which a trade buyer is not obligated to pay an industry member for distilled spirits, wine, or malt beverages until after the trade buyer sells such products, the regulations do not specifically impose payment term limitations for sales between industry members and trade buyers.
However, this does not mean all payment terms are beyond scrutiny as potential sales on consignment. In the absence of explicit terms that violate the consignment sale regulations, payment terms of up to 30 days are unlikely to constitute consignment sales.
On the other hand, payment terms exceeding 30 days for sales between industry members and trade buyers may invite scrutiny from TTB to determine whether the payment terms were merely a subterfuge to sell on consignment because the trade buyer is effectively under no obligation to pay for the product until such trade buyer sells it. (Emphasis added).
While this portion of the Industry Circular is titled “Analysis”, it does not explain how or why the 30-day number was determined. There is no indication of any review of existing industry practices, State laws, or TTB precedent. It fails to explain why the trigger of concern arises when the length of the credit period is longer than 30-days when States and usual and customary commercial practices are much longer periods and have been so for decades. This is the type of agency decision that begs for public comment through notice and comment rulemaking.
“Brevity is the soul of wit” But Reasonable Explanation is Still Essential
Even as it announces a new enforcement approach to consignment sales investigation, the brevity of the industry circular would be witty but for the serious adversity it portends for suppliers and distributors.
My suspicion is TTB drew it from the tied house provision on extensions of credit that are means to induce retailers, which is 30 days per 27 CFR 6.65. However, the Circular clearly does not explain the assumption that a supplier to wholesaler payment term exceeding 30 days is potentially actionable.
Administrative Fiat is Easier than Rulemaking
Industry circulars are administrative fiat. Even formal rulings are only given judicial deference to the extent they are persuasive and articulate a reasonable explanation for the holding. Unlike formal rulemaking for regulations, industry circulars and formal rulings are not subject to any opportunity for public comment and input. This harms both the agency because it denies itself the opportunity to educate itself on the issue at hand and it is unfair to the industry because it must live with a policy position that may be ridiculous in the reality of the business world. During my 34-year career with both ATF and TTB, I experienced numerous times where a comment submitted in response to a Notice of Proposed Ruling provided new information we had not considered ourselves earlier in the development process.
The TTB Newsletter announcing Industry Circular 2022-1, refers to the recent Treasury Department Report, mandated by the President’s Executive Order on Promoting Competition. TTB points out that the Treasury Department Report recommends TTB consider rulemaking to review and revise, if appropriate, the unfair trade practice regulations.
“TTB is actively considering rulemaking to update its trade practice regulations. As always, any proposed changes in the regulations will be offered for public comment.”
The unaddressed question is why did TTB not wait to propose this policy as part of amendments to the consignment sales regulations? Formal rulemaking provides stronger deference for positions taken in the regulations and importantly allows the industry to give TTB core details about the way businesses operate in their usual and customary manner so TTB may, in turn, make an informed and knowledgeable decision.
In Conclusion, Ambiguity Prevails and Uncertainty Remains
Industry Circular 2022-1 sows’ confusion both to the consignment sales provision and enforcement investigations by stating: “payment terms of up to 30 days are unlikely to constitute consignment sales” and payment terms exceeding 30 days for sales between industry members and trade buyers may invite scrutiny from TTB.”
These words provide no certainty. Consignment sales investigations have been frustrating in many ways because of the complete lack of clarity of the rules. Industry Circular 2022-1 provides no certainty to the industry members and only gives TTB the illusion of a rule to challenged wholesalers in the latter’s long-established practices on no credit periods for them under state law. It is likely that many wholesalers, both large and small, woke up Monday morning only to find they are now at risk of being investigated by TTB for a consignment sale violation. The certainty provided by many State laws is now washed away by the torrent of this administrative fiat.
This blog is dedicated to occasional (and hopefully interesting) reports of state and national alcoholic beverage regulatory developments that we encounter in our practice. Booze Rules (and any comments below) are intended for informational use only and are not to be construed as legal advice. If you need legal advice please consult with your counsel.