The New York SLA and Online Wine Sales: A Work in Progress

On April 9th, the New York State Liquor Authority (SLA) issued a declaratory ruling describing limits on the activities of national advertisers (marketing websites) who advertise the availability of wine for sale to consumers in New York from licensed NY retailers. While the system presented to the SLA was not the first Internet marketing platform designed to operate within the three-tier system in New York (and to attempt to comply with all of the NY laws and regulations associated with selling wine through the three-tier system), it was the first time anyone had requested a declaratory ruling from the SLA to obtain guidance on how to operate such a marketing platform.

In its eight-page ruling, the SLA analyzed an actual relationship from an earlier iteration of the model that was submitted to the SLA for the declaratory ruling. The SLA noted that the relationship did not comport with the model presented to the SLA for approval (that was because the relationship existed before the model was developed and submitted), and found that the historic day-to-day business relations between that Internet advertiser and that NY retailer violated ABCL §111, which “prohibits a licensee from making its license available to a person who has not been approved by the Authority to hold that license.” In other words, the SLA believed the advertiser in the relationship they examined was too involved with, and had too much control over, the retailer’s business.

This is far from the death knell of Internet wine marketing platforms in New York; indeed, the SLA went out of its way to acknowledge that the Internet, and Internet marketing, is of vital importance to the NY marketplace.  In announcing its ruling, the SLA said it will continue to conduct public meetings and gather more information to further address the issues raised by the more sophisticated model described in the declaratory ruling request, as well as more generally, the issues raised “by the involvement of unlicensed parties in the Internet sale of alcoholic beverages to consumers in this state,” in an Advisory to the trade.

In the meantime, there are a number of important takeaways in the ruling itself that provide helpful interim guidelines to Internet wine marketers and NY retailers.  According to the SLA, a third party advertising arrangement with a licensed NY retailer selling wines through the three-tier system should abide by the following guidelines:

(a) Flat fees to retailers (paid by the Internet advertiser to compensate for a sale) are prohibited;

(b) Advertisers may not decide what wines will be offered for sale by the NY retailer (this is a function reserved to the retailer);

(c) Advertisers may not set the website prices for the wines offered for sale by the NY retailer (this is a function reserved to the retailer);

(d) Advertisers may not perform essential retailer functions such as deciding how consumer funds are controlled and disbursed, and deciding what the retailer’s profit margin will be; and

(e) Advertisers may not retain a “substantial” portion of the sales price for their services.

Thus, a retailer who selects the products that are going to be advertised on its behalf, sets the prices for the products that are going to be advertised, determines and receives normal business margins for the products that its sells, controls the funds received from consumers, and takes normal business risks (for example from loss or breakage of product, or credit card fraud) may utilize Internet advertising services facilitated by third parties.  (These elements were all present in the advertising platform described in the request for declaratory ruling, but the SLA focused on the prior system in its ruling).

There were also some unquestionably safe harbors mentioned by the SLA as a precursor to its Advisory to come:  a third party may host and maintain a retailer’s website and perform "related services," and a retailer may advertise its own products on a third party’s website, so long as consumers are directed to the retailer's website to place orders and the advertiser’s compensation is a flat fee that is "not contingent on the number of sales or the amount sold.”

While this ruling answered some questions, it raised many others that still need to be addressed - such as, is it acceptable for an advertising and marketing fee to be something less than a substantial portion of sales made by the retailer, or must it always be a flat fee?  What kinds of banking arrangements may the retailer use to receive consumer funds?  To what extent may a retailer coordinate with an Internet advertiser who is running a national advertising program? These are all tricky questions and we look forward to further guidance on these issues from the SLA.