CA: ABC Issues Industry Advisory on Outsourcing Marketing, Compliance and Logistics

Gustavo Jiménez
June 8, 2009

On Friday, CA ABC issued an advisory to respond generally to the explosion of service providers that enable wineries to outsource one or more components of their D2C and D2T channels.

Activities Requiring Licenses: The Department describes when third party providers require a license. In CA a license is required when a business sells (transfers title), solicits a sale or delivers alcohol pursuant to an order. (B&P Code 23025) If interpreted according to its plain language, the definition of sale would require the following types of businesses to obtain licenses to sell wine: delivery companies, credit card companies that offer wine to certain cardholders, banks with loyalty programs, florists that offer wine through retail partners, airlines, and many more. To avoid opening Pandora’s box, ABC offers some exceptions. ABC allows a delivery company under the express direction of a licensee to operate without a license. The Advisory does not offer the same exception for a website that makes an offer to sell at the direction of a licensee. However, if a website merely publishes an offer made by a winery this would not be a solicitation by the web provider. If ABC were to hold otherwise, every media publication in California accepting winery advertisements would require a license. The Advisory does make clear that when selecting a marketing service provider, the winery or licensee must retain control of business decisions and core operations such as pricing, making offers, transferring title and directing delivery.

Tied House Risks: Beyond the cautions on unlicensed sales, ABC reminds wineries that they cannot pay retailers for advertising. Wineries cannot pay online storefronts licensed to sell as retailers for loading content, posting any material, or any advertising whatsoever. The retailer only can receive money from its markup and sale of the wine products. In some instances, the winery can pay for additional services such as age verification and compliance services.

Nothing is Free: ABC reminds industry that no free goods or premiums may be provided in connection with the marketing and sale of alcoholic beverages. This includes free shipping. Shipping may be included the price but it cannot be offered as free shipping.

Consignment Sales: Federal and state beverage alcohol laws prohibit consignment sales. Attempts to improve inventory management through just in time logistics can be problematic for innovative service companies. A licensee must sell alcoholic beverages to which they have title. Inventory cannot be returned if unsold. Any just in time delivery solutions should be carefully examined to ensure that the transaction is not a disguised consignment sale.

The web of federal and CA law is full of traps for the unwary. ABC’s advisory identifies many of the traps without offering solutions. Businesses must examine the totality of the circumstances and ensure that the essential elements of each transaction and control of these elements rest with licensees.

This analysis was authored by Susan Cagann, Special Counsel at Farella Braun + Martel LLP.  Susan will be speaking on the subject of marketing and retail agents at ShipCompliant’s Compliance Seminar and Users Conference June 11th in Napa, CA.

Re-posted with permission from Farella Braun + Martell

CABC – Advisory Third Party

Industry Advisory Unlicensed Third Party Service Providers The Department has received numerous inquiries regarding the participation by licensees in programs operated by unlicensed Third Party Service Providers. These programs often involve the operation of Internet websites through which consumers may purchase alcoholic beverages. While there are many different components to the various programs, the regulatory concerns remain consistent. The Department has neither approved nor disapproved any of these programs and this Industry Advisory is intended to provide guidance under existing law as to some of the most common issues that typically present themselves to aid licensees in evaluating whether to participate in such programs. For purposes of this Industry Advisory, “Third Party Service Providers” includes persons or businesses operating Internet websites for the purpose of promoting, marketing, or selling alcoholic beverages. Such persons or businesses are often referred to as “marketing agents”, “compliance agents”, “agents of the consumer”, “agents of the winery”, “agents of the retailer”, “fulfillment operators”, “logistics providers”, “affiliate marketers”, or similar descriptors. While many Third Party Service Providers engage in activities that do not require licenses issued by the Department (such as, for example, simply producing and maintaining a website operated by or for a licensee, or providing back-office compliance services), many are engaging in activities for which a license is required. June 2009 Following are the statutory provisions typically implicated and the regulatory concerns of the Department: • Business and Professions Code section 23300 prohibits the exercising of license privileges without holding a license authorizing such privileges. Business and Professions Code section 23355 authorizes the exercising of license privileges only by the person to whom the license is issued at the premises licensed by the Department. Business and Professions Code section 23025 defines the “sale” of alcoholic beverages to include any of the following: o Any transaction whereby title to alcoholic beverages is transferred from one person to another for consideration; or o The solicitation or receiving of orders for alcoholic beverages; or o The delivery of alcoholic beverages pursuant to an order therefore. The Department’s position is that any Third Party Service Provider soliciting orders of alcoholic beverages for or on behalf of licensees is engaged in the “sale” of alcoholic beverages and must hold a license issued by the Department. “Solicitation” includes transactions often described as an “offer to purchase” by the consumer. The Department does not consider independent delivery services, acting pursuant to the express direction of licensees, to be engaged in the “sale” of alcoholic beverages pursuant to this provision. • Business and Professions Code sections 25500 and 25502 prohibit suppliers of alcoholic beverages (manufacturers, distributors and importers) from giving anything of value to on-sale and off-sale retail licensees (respectively). In addition, Rule 106(f) prohibits cooperative advertising by suppliers and retailers. Business and Professions Code section 25503(h) prohibits suppliers from paying for the privilege of placing advertising on or in a retail premises—such payment need not be to the retail licensee directly. It can be extremely problematic for suppliers and retailers to be involved in the same program through which alcoholic beverages are sold to consumers, as the platform (website or otherwise) will often be financed, in whole or in part, by suppliers with a benefit to retailers, or retailers will necessarily receive benefits from advertising or purchase order submission via the platform. Business and Professions Code section 25600 and Rule 106 prohibit the giving of any premium, gift, or free goods in connection with the sale or distribution (including marketing) of alcoholic beverages, except as expressly permitted. The Department has observed that many programs operated by Third Party Service Providers will include enticements or inducements to order alcoholic beverages, such as free shipping or free items with orders. • • • June 2009 • Licensees may only sell alcoholic beverages to consumers that they actually own at the time orders are received. As to retail licensees, to do otherwise could result in a consignment sale between the retailer and supplier(s); as to other licensees, it may result in the licensee exceeding their license privileges. See, generally, Business and Professions Code sections 23355, 23393, 23394, 25502, and 25503(a). Management decisions, pricing decisions, controlling the distribution of funds, and profiting from the sale of alcoholic beverages are considered fundamental privileges of a licensee. As such, if any such decisions are made by nonlicensees, or if non-licensees share in the profits from the sale of alcoholic beverages, violations of Business and Professions Code sections 23300 and 23355 may occur. o Service fees are not, in and of themselves, improper. However, the Department does have sign
ificant concerns when fees are based upon a percentage of the sale of alcoholic beverages. The Department does draw a distinction between sharing in the profits from the sale of alcoholic beverages and nominal transaction fees charged by independent financial service providers (such as credit card companies and banks). While financial service providers may typically charge a transaction fee based upon a percentage of the sale, such a fee is generally de minimus and is otherwise unrelated to the sale or promotion of the product. Moreover, unlike many Third Party Service Providers, such financial service providers are otherwise uninvolved in the program and have no vested interest in the promotion or sale of alcoholic beverages. • In evaluating any proposal involving Third Party Service Providers, licensees should consider the entirety of the program and the respective roles of the various participants. Violation of the above statutory provisions may subject a licensee to discipline, even if all prohibited activities are conducted by a Third Party Service Provider. If you have any questions regarding this advisory, please contact the Department’s Trade Enforcement Unit at (916) 419-2500. June 2009

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Gustavo Jiménez

Gustavo Jimenez is the Product Marketing Manager for Sovos’ e-invoicing solutions and is based in Atlanta. Gustavo is responsible for go-to-market strategy for Sovos LatAm e-invoicing solutions in countries with existing and upcoming mandates. He has more than five years of experience in e-invoicing, middleware integrations, and regulatory research. He works closely with the product management and development team as well as sales and marketing to facilitate compliance process transformations for Sovos clients. Prior to joining Sovos, Gustavo was responsible for marketing activities and strategy at Invoiceware International, a leading e-invoicing solution for businesses with operations in Latin America. He focused on the go-to-market strategy of their solutions as well as communications with the LatAm market about regulatory changes and new solutions.
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