This edition of Booze Rules is published in conjunction with the launch of our new video web series, the Booze Bulletin. This post on credit laws digs into the specifics of some of the issues discussed in our video Booze Bulletin.
The important news is that the California ABC, with an invigorated trade enforcement unit, is actively enforcing the California 30-day credit law. Accusations charging credit law violations were filed in the fourth quarter of 2016.
A violation of the 30 day rule (or shorter period in many states) is a federal and state crime for the provider of credit (the supplier) and a state crime for the receiver of credit (the retailer).
The CA state level penalties for failure to comply typically include a license suspension or a $10,000 fine for the supplier (with escalating fines for successive violations), and license suspensions or a $3,000 fine for the retailer for a first violation, with escalating fines for successive violations. The federal penalties for the supplier are just as serious but the fine level may be far greater depending on the assessment of culpability by the TTB.
Intentional violations are treated much more seriously than negligent violations by both agencies.
The Reason for the Credit Laws
Providing credit in excess of the permitted period is considered to be a “thing of value” and the prohibition on excessive credit goes back to the dawn of trade practice enforcement following the repeal of Prohibition.
The regulatory concern with the provision of credit from alcohol suppliers to alcohol retailers has it genesis in the pre-prohibition American saloon. In the early part of the last century brewers and distillers used credit and consignment sale techniques to induce saloon owners to carry their brands of beer and spirits over competing brands. Preventing abuse of credit was a core concern of alcohol regulators from the early 1930’s onward because the technique had been so widely used by pre-prohibition distillers and brewers.
By offering long credit terms the suppliers locked in the retailers and increased consumer consumption of their specific alcohol brands to intemperate levels. This theory of intemperate consumption underlies almost all of the tied house laws as they were enacted in the original Federal Alcohol Administration Act at the time of Repeal.
Over the intervening years, and even today, restrictions on credit have been adopted in some form in every state and are codified in the regulations implementing the Federal Alcohol Administration Act.
State and Federal Law
Federal law, applicable throughout the US, provides for a maximum of 30 days credit from a supplier to a retailer. Federal law, however, only governs suppliers. (See 27 CFR 6.65 to 6.67)
Every state has regulated credit between suppliers and retailers, most mirroring the federal law, but some states prohibit credit altogether. There are many cash states where no credit at all is permitted and all purchases must be on a COD or CBD basis (certainly a vendor’s dream – legally required in-cash purchases).
In California the legislature (in 1963) enacted complex (and often difficult to decipher) credit restrictions intended to interpret and enforce the California 30-day credit law. The calculations surrounding the 30-day credit law are found in the ABC Act at Business and Professions Section 25509.
Excerpts from Business and Professions Code § 25509. “Additional charge against retailer not making payment”
(a) A [supplier] who sold and delivered beer, wine, or distilled spirits to a retailer and who did not receive payment for such beer, wine, or distilled spirits by the expiration of the 42nd day from date of delivery shall charge the retailer 1 percent of the unpaid balance for such beer, wine, and distilled spirits on the 43rd day from date of delivery and an additional 1 percent for each 30 days thereafter. . .
(b) A [supplier] who sold and delivered beer, wine, or distilled spirits to a retailer and who did not receive payment in full by the expiration of the 30th day from date of delivery or who has not received payment of the 1 percent charge at the expiration of the 30th day from the day the charge became due shall thereafter sell beer, wine, or distilled spirits to said retailer either for cash or by receiving payment in advance of delivery until such time as all payments are received for the beer, wine, or distilled spirits sold and delivered to the said retailer more than 30 days previously. . .
(c) The 42-day period and the 30-day period provided for in this section shall commence with the day immediately following the date of invoice and shall include all successive days including Sundays and holidays to and including the 42nd or 30th day as the case may be. When the 42nd day from date of invoice or the expiration of each additional 30-day period falls on Saturday, Sunday, or legal holiday, the next business day shall be deemed to be the expiration day. . .
(d) All moneys received from a retailer in payment for any beer, wine, or distilled spirits sold and delivered to him or her shall be first applied to the payment of the oldest balance on beer, wine, or distilled spirits. . .
The California credit law requires that suppliers charge specific yet varying amounts of interest to their customers based on how late their customers are with their payments, and enforce cash on or before delivery terms to any customers who have past due accounts. The federal law just requires COD or CBD terms to retail accounts in arrears.
In California, it is not easy to calculate when exactly an account is in arrears. The calculation is not made on a discrete invoice by invoice basis (as most purchase transactions are considered today in order to monitor and track specific product deliveries), but rather on a total amount of debt outstanding between the supplier and the retailer at any time basis as determined by the suppliers records. If any debt owed by a retailer goes over 30 days from the date of delivery of any specific purchase (regardless of the reason, including claimed non-receipt of the product), all subsequent transactions between that supplier and that retailer must be cash before or cash on delivery until the account is brought current. In addition, in another trap for the unwary, if any retailer debt goes over 42 days based on the same calculation, there is a mandatory 1% surcharge that must be collected before the COD requirement can be lifted, as well as another 1% payment for every additional 30 days.
The California accounting calculation provisions go back to the days (1963 specifically) when retailers and suppliers primarily operated on ledger cards showing deliveries and payments on an entire account basis rather than on individual invoices. The result is that the accounting methods that are applied to ABC transactions by the statute are different than those that apply to most modern non-alcohol purchase and sale transactions. This creates enormous accounting reconciliation problems for both retailers and suppliers when the delivery invoice is checked upon arrival and what is actually delivered doesn't match what was supposed to be delivered. For this reason many retailers just pay invoices rather than question the delivery, which can and does result in a windfall to the supplier making a short delivery in the event that the delivery mistake never gets straightened out.
In one case dating back several years a retail chain (one that has since been acquired by another chain) with central purchasing was threatened with having to send over 100 stores COD following an ABC audit investigation that showed central purchasing was over 30 days out to a specific supplier (because of unposted credit memos) until the accounting could be straightened out, and then had to face an accusation for the receipt of unlawful credit (the supplier involved, a major wholesaler, was also charged and paid the fine). In another case a large California retailer audited their own records against actual deliveries and discovered literally millions of dollars of annual DSD (direct store delivery) overcharges from certain wholesalers, who insisted on invoices being paid regardless of what was actually delivered.
The wholesaler trade organizations have maintained (since the early 1990’s) that the assessment of accounting charges relating to researching non-conforming invoices (where receipts don’t match up to deliveries, and whoever made the mistake is responsible for research costs) are prohibited “things of value,” a position that makes the cost-effectiveness of internal auditing of massive numbers of invoices where the delivery records are disputed very difficult. This is not an issue limited to California; alcohol vendors throughout the US benefit from these restrictions, and from the application of strict credit laws to the resolution of otherwise normal delivery disputes.
The issue of when the clock for a violation starts ticking is critical. The statute uses the term "date of delivery." This obviously requires all parties to keep track of actual delivery dates regardless of the date on the invoice (which may be earlier, or occasionally later) than the delivery date). While the ABC does allow 15 days after delivery to return products in excess of those ordered, after 15 days permission has to be sought from the ABC to make returns. This is a procedure that is seldom used, and there is no legal procedure for managing short deliveries.
Because of these confusing requirements, every accounting department of every winery, brewery and retailer should regularly review the credit restrictions and should structure their accounting and collection protocols to comport with the federal and state credit laws. The penalties are substantial and the odds of getting caught if there is an investigation (usually triggered by complaints from competitors) are very high because the records that are kept by both the supplier and the retailer are easily available for audit upon request of the agency as a matter of law.
Our message? Train your salespeople and accounting department and track your invoices which, by the way, are legally required to be maintained for three years.