PRICING
Proprietors of Distilled Spirits Plants, Bonded Wine
Cellars, Tax Paid Wine Bottling Houses, Brewers,
Importers, Wholesale Malt Beverage Dealers, Wholesale
Liquor Dealers, and Others Concerned:
PURPOSE. The purpose of this circular is to
advise members of the regulated industries of the
Bureau's position relative to "pricing type"
transactions in light of the recent court decision
handed down in the case of National Distributing
Company v. U.S. Treasury Department, 626 F.2d 997
(D.C. Cir. 1980).
BACKGROUND. The National Distributing Company
case arose from an order of the Director suspending
the wholesaler's permit for violations of
section 5(b)(3) of the Federal Alcohol Administration
Act (FAA Act), 27 U.S.C. section 205(b)(3). The
violations were based upon National's sale of wine
at a price substantially below its own cost of
acquisition. The one-time price reduction was duly
posted in accordance with State law and was offered
to all retailers in a particular market area. The
offered low price was not conditional upon any future
purchases by retailers accepting the offer. In
reversing the Director's Order the court held that
an unconditional, nondiscriminatory, low-price sale
does not violate the FAA Act.
In its decision the court reviewed the Bureau's
position on "pricing" under the Act from 1949 through
the two recent rulings directly at issue, ATF Ruling
74-6, 1974 ATF C.B. 50 and ATF Rul. 76-16, 1976 ATF
C.B. 11. The court interpreted these later rulings
to hold that sales of alcoholic beverages below "laid
in" cost constituted a violation of section 5(b)
of the Act unless the permittee could justify the
transactions to the Bureau in terms of introducing
a new product line, closing out a line, or some other
"legitimate" motive.
DISCUSSION. In view of the National Distributing
Company case and the impact the court's decision has
on the alcoholic beverage industry, it is necessary
that the Bureau offer a clear and concise statement
of its future enforcement policy with regard to
below-cost pricing.
In its decision the court emphasized that prior
to the first laid-in cost ruling, the Bureau since
1949 had consistently taken the position that price
competition was not covered by the Act. This policy
was always accompanied with a caveat, that in some
instances the price or discount might in fact be a
subterfuge for otherwise violating the Act. Although
the Bureau does not agree with the court's view that
ATF Rulings 74-6 and 76-16 represented an "abrupt and
unexplained" shift from these prior policies, the
Bureau decided not to seek further review of the
court's decision.
The longstanding Bureau policy with regard
to pricing is reflected in Rev. Rul. 54-161, 1954-1
C.B. 338. This ruling is consistent with the court's
decision and the Bureau intends to adhere to the
position stated therein.
Rev. Rul. 54-161 provides, in pertinent part, as
follows:
"Price reductions, rebates, refunds, and
discounts given by a wholesale liquor dealer to
a retail liquor dealer pursuant to an agreement
made at the time of the sale of the merchandise
involved are considered a part of the sales
transaction, constituting reductions in price
pursuant to the terms of the sale. Such
transactions do not fall within the purview
of section 5(b) of the Federal Alcohol
Administration Act, provided they do not involve
the imposition of any requirement upon the
retailer to take and dispose of a certain quota
of the wholesale dealer's products, or do not
involve any of the other practices set forth in
section 5(a) to 5(d), inclusive, of the Act.
This view would hold irrespective of whether
the quantity discount was prorated and allowed
on each delivery, given in a lump sum after the
entire quantity of merchandise purchased had been
delivered, or based on dollar volume or on the
quantity of merchandise purchased."
Under this ruling the pricing aspects of a
transaction will be disregarded only if the Bureau
establishes that the low price or discount was in
fact merely a subterfuge to otherwise violate the
Act. The purpose of the subterfuge warning is to
highlight the fact that a permittee cannot legitimize
otherwise unlawful conduct merely by characterizing a
transaction as pricing. For example, a price cut or
discount used as consideration for an exclusive
outlet or quota sales agreement would not immunize a
permittee from possible violations of sections 5(a)
or (b). Similarly, if a permittee agrees to loan
money to a retailer or pay for a retailer's equipment
in possible violation of section 5(b)(3), a permittee
would not legitimize the arrangement by disguising
the loan or payments as discounts in order to avoid
detection.
In conclusion, the two rulings discussed in the
National decision were interpreted as shifting the
burden of proof to the permittee anytime a discount
did not bear a reasonable relationship to cost
savings or where a below-cost price was given. Since
the Bureau will no longer follow these rulings, all
pricing arrangements will remain presumptively valid
and violations will be found only where a specific
subterfuge can be established.
INQUIRIES. Inquiries concerning this circular
should refer to its number and be addressed to the
Assistant Director, Regulatory Enforcement, Bureau of
Alcohol, Tobacco and Firearms, 1200 Pennsylvania
Avenue, NW., Washington, DC 20226.
Director |