COVID-19’s Impact On Extensions of Credit and Returns in the Alcohol Beverage Industry

The ripple effects of governmental response to COVID-19 are being felt in all tiers of the alcohol beverage industry. State and local orders closing restaurants, bars, and other on-premises retailers of alcoholic beverages have left many retailers trying to find creative ways to recover their losses. One solution to recover cash and prevent waste is to return alcohol beverage inventory the retailers do not believe they will be able to sell as a result of the closures. In a time when on-premises retailers are struggling to stay afloat and pay their staff, they are also looking at whether they can postpone paying some of their bills, including amounts due to the wholesaler licensees who are their source of supply. Under ordinary circumstances, returns and extension of credit are strictly regulated under federal and state tied house laws, and are allowed only under very narrow conditions. Under federal and state statutory schemes, retailers may not return products because they are overstocked or slow moving. In response to the current crisis, however, some jurisdictions have suspended some of these laws and regulations in an effort to support the suffering retailers.

FEDERAL GUIDANCE

In its newsletter dated March 13, 2020, the U.S. Department of the Treasury, Alcohol and Tobacco Tax and Trade Bureau (“TTB”) indicated it would be relaxing the standard rules on product returns due to event cancellations. TTB stated:

Given the unexpected and widespread nature of the concerns involving COVID-19, TTB will not consider returns of alcohol beverage products purchased to sell during such cancelled events to violate Federal consignment sales rules provided the products were not initially purchased or sold with the privilege of return. Even though such returns are lawful, a producer or wholesaler is not required to accept returns of such products.(1)

At least at this time, TTB has not offered guidance scenarios involving restaurant or bar closures as opposed to event cancellations, but state alcohol beverage agencies are responding on some level to these conditions.

STATE GUIDANCE

Our country always has been a patchwork quilt of alcohol beverage regulation. In these times, however, with state governors, county commissioners, and mayors issuing executive orders on what seems like a daily or even hourly basis, tracking current enforcement policies can be quite difficult, particularly given that some state alcohol agencies temporarily have suspended normal laws and regulations for different date ranges based on what state and local governments are defining as the emergency period.

Below are just a few of the temporary policies coming from various state alcohol beverage control boards and commissions on the topic of product returns and extensions of credit.

Product Returns

New Hampshire, a control state, has announced that the New Hampshire Liquor Commission will accept curbside returns of alcoholic beverage products. The products must have been purchased between March 1 and March 17, 2020.(2)

In Indiana, the Alcohol & Tobacco Commission has referred licensees to the TTB’s March 13, 2020, newsletter for guidance.(3)

In Texas, the Texas Alcoholic Beverage Control Commission (“TABC”) has suspended rules to allow certain types of wholesale distributors to repurchase product from retailers, only for the duration of Governor Abbott’s March 13, 2020, disaster declaration. (4) The products returned must be unused/unopened, and must have been purchased on February 16, 2020, or later. Texas is following the TTB’s statement, and the agency’s guidance dictates that any returns are limited to a major event cancellation due to the coronavirus (TABC provided these examples: Houston Livestock Show and Rodeo, SXSW, professional and college sporting events, concerts, theatrical productions, parades, etc.). Recordkeeping requirements apply, and the middle tier members involved have complete discretion over whether to repurchase any products.(5)

Extensions of Credit

California has temporarily suspended Business and Professions Code Section 25509, which prohibits manufacturers, wholesalers, and other specified suppliers from extending credit to retailers beyond 30 days. This section also requires the imposition of statutory penalty charges on delinquent accounts, and allows delinquent retailers to purchase additional alcoholic beverages from any unpaid supplier only on a COD basis. In a Notice of Regulatory Relief (“Notice”) published on March 19, 2020, The Department of Alcoholic Beverage Control stated that it will not be enforcing these provisions. Per the Notice, “[i]t will be up to the parties to determine appropriate credit terms during this time. However, licensees should also consider that when these temporary measures are lifted, the statutory provisions will pre- empt any agreed-upon credit terms.”

In Louisiana, the state has extended the normally required fifteen day credit terms. Bars (Class AG) and restaurants (Class AR) businesses which have ceased operations in compliance with Governor Edwards’ Executive Order issued on March 16, 2020, will be granted an extension to April 30th to make full payment. During this period of time, the retailer will not be deemed to be in default and will not be to subject to cash only delivery orders. However, if the business resumes operations by reordering products prior to April 30th, past due invoices shall be due upon delivery of products.(6)

In Virginia, the Virginia Alcoholic Beverage Control Authority (“VABC”) has made the decision to allow a deviation from the rules governing the manner in which wholesalers may pick up wine and beer products from licensees whose immediate operations have been affected by the Novel Coronavirus (COVID-19), thus allowing for returns and refunds. Any such pick up and refund shall be documented by the wholesaler on the proper invoice. The state gave the following example: Wholesaler pickup of 100 cases of ABC Beer from retailer due to COVID-19 cancellation of XYZ concert, $200 refunded CK#9999 to retailer.(7)

These rapidly changing times are driving frequent changes to state agency enforcement policies and protocols. Industry members should not assume that all jurisdictions will make these types of temporary changes, but instead should monitor the developing situation to determine where and whether these allowances can be made. As the country moves through our new reality of COVID-19 business, industry members will also need to track the expiration dates on these rule suspensions and temporary policies, so as to be in compliance with regulatory authorities when the emergency orders are lifted.

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citations

1. As TTB also reiterated in the March 13, 2020, newsletter, that under normal circumstances “[t]he Federal consignment sales rules generally prohibit the sale or purchase of alcohol beverage products with the privilege of return. See 27 CFR 11.21. Returns for ordinary and usual commercial reasons arising after the product has been sold are not prohibited, but the return or exchange of a product because it is overstocked or slow-moving does not constitute a return for ordinary and commercial reasons. See 27 CFR 11.45.”
2. See New Hampshire Liquor Commission Industry Circular 2020-05 (March 18, 2020).
3. The agency also stated on its website that while it will be responding to complaints, enforcement of the fifteen day credit terms for retailers/dealers and wholesalers will not be an enforcement priority.
4. Licensees holding the following types of licenses may avail themselves of this policy: General Distributor’s License (BB), Branch Distributor’s License (BC), Wholesaler’s Permit (W), Wholesaler’s (General Class B) Permit (X), and Local Distributor’s Permit (LP).
5. See TABC Industry Notice dated March 19, 2020.
6. See ATC letter to licensees dated March 23, 2020.
7. See VABC letter to licensees dated March 24, 2020.