FREE GOODS, DISCOUNTS, REBATES, REFUNDS AND PRICE REDUCTIONS
Proprietors of Distilled Spirits Plants, Bonded Wine Cellars,
Taxpaid Wine Bottling Houses; Brewers, Importers, Whole-
sale Malt Liquor Dealers, Wholesale Liquor Dealers and
Others Concerned:
Purpose. This circular is to advise industry members
that ATF Ruling 76-16 will be published in the August issue of
the ATF Bulletin. The ruling further amplifies the provisions
of Revenue Ruling 54-161, C.B. 1954-1, 338 (Internal Revenue)
and supersedes ATF Ruling 75-12, ATF C.B. 1975, 33. (See also
ATF Ruling 74-6, ATF C.B. 1974, 50.) The ruling reads as
follows:
The response from industry following the
publication of ATF Ruling 74-6, ATF C.B. 1974, 50,
which related to practices employed by some industry
members who furnished retailers with inordinate
amounts of free goods and/or substantial price re-
ductions, volume discounts, rebates, and refunds,
indicated that the ruling had been interpreted as a
shift in the Bureau's position concerning pricing.
Actually the intent of the ruling was to merely re-
emphasize and amplify our position established in
Revenue Ruling 54-161, C.B. 1954-1, 338 (Internal
Revenue).
In general, 27 U.S.C. 205(b)(3) states that it
is unlawful for any producer, bottler, importer, or
wholesaler of alcoholic beverages, directly or in-
directly, or through an affiliate, to induce any
retailer to purchase alcoholic beverages from him
to the exclusion, in whole or in part, of any such
products sold or offered for sale by other persons
in interstate commerce by furnishing, giving, renting,
lending, or selling to the retailer any fixtures,
signs, supplies, money, services, or other things of
value.
It was held in Revenue Ruling 54-161 that so-called
free goods, discounts, rebates, refunds, and price reduc-
tions given to retailers pursuant to an agreement made
at the time of sale are merely methods used to arrive at
an agreed sales price and as such do not come within the
purview of the Federal Alcohol Administration Act. How-
ever, if the free goods, discounts, rebates, etc., are
such that the pricing aspect is merely a subterfuge, the
transaction would constitute a "gift" within the meaning
of 27 U.S.C. 205(b)(3).
The Bureau has consistently recognized that discounts,
rebates, refunds, etc., may be granted to introduce new
products, close out discontinued lines, and pass on to
retailers savings to the supplier as a result of volume
purchases, etc., and, as such, are methods used to arrive
at an agreed sales price. However, if they arc in reality
a subterfuge for granting financial assistance to a re-
tailer or for any other proscribed purpose, they would
constitute a "gift" within the meaning of 27 U.S.C.
205(b)(3).
Approximately one year ago the Bureau, at the request
of industry, issued ATF Ruling 75-12, ATF C.B. 1975, 33,
setting forth cost guidelines to assist industry in dis-
tinguishing between legitimate price reductions and
proscribed inducements.
Investigations to date have disclosed that uniform
application of the criteria by the Bureau has been
impeded by:
(1) Differences in business or corporate structures.
(2) Differences in accounting systems.
(3) Difficulty in determining whether a particular
"operating" cost item should be included or
excluded in "total operating" cost.
The disparity created by the above factors makes it
impossible to administer the criteria in a fair and
equitable manner.
In view of the above, the Bureau modifies its
position regarding free goods, discounts, rebates, refunds,
etc., to the extent that it will now consider questionable,
and subject to investigation, the operations of any
wholesaler or other supplier where it is found, or where
there is reason to believe, the giving of a discount or
price reduction results in a price to the retailer of
less than the wholesaler's or supplier's "laid-in" cost.
For the purposes of this ruling "laid-in" cost will be
that cost incurred by a wholesaler or supplier to place
the goods in inventory and would consist of such costs
as manufacturer's invoice price, freight, and state and
local taxes.
The above criteria will be applicable to all type
discounts and price reductions (volume discounts, dollar
volume purchases, combination "deals," etc.) and to all
brand categories (confined brands, private label brands,
etc.). Price determinations will be made primarily on
an item by item basis for each item on an invoice.
The Bureau does not take the position that a sale
below "laid-in" cost is automatically a violation of
law, but merely that such a sale is questionable and may
be investigated. If an investigation discloses that the
discount, price reduction, etc., is in fact a subterfuge
for granting financial assistance to a retailer the
Bureau will consider the transaction a proscribed induce-
ment; if the elements of exclusion and interstate or
foreign commerce are also present, a violation of the
Federal Alcohol Administration Act would be incurred.
It is not the intent of the Bureau to interfere with
industry members' prerogative to use discounts, rebates,
etc., as legitimate pricing arrangements. The Bureau's
major objective in issuing this ruling is to furnish
industry with the most effective yet practical criteria
possible in distinguishing between legitimate price re-
ductions and proscribed inducements. The criteria set
forth above are intended solely to provide industry with
a workable guideline with which to make this distinction.
Rev. Rul. 54-161, C.B. 1954-1, 338 (Internal Revenue),
amplified by ATF Rul. 74-6, ATF C.B. 1974, 50, is hereby
further amplified; ATF Rul. 75-12, ATF C.B. 1975, 33, is
hereby superseded.
Inquiries. Inquiries concerning this circular should refer
to its number and be addressed to the Assistant Director, Regula-
tory Enforcement, Bureau of Alcohol, Tobacco and Firearms,
1200 Pennsylvania Avenue, NW., Washington, DC 20226.
Rex D. Davis
Director |