Title of Regulation: 3VAC5-30. Tied-House (amending 3VAC5-30-30).

Statutory Authority: § 4.1-111 of the Code of Virginia.

Public Hearing Information: No public hearing is currently scheduled.

Public Comment Deadline: April 12, 2023.

Effective Date: April 27, 2023.

Agency Contact: LaTonya D. Hucks-Watkins, Senior Legal Counsel, Board of Directors, Alcoholic Beverage Control Authority, 7450 Freight Way, Mechanicsville, VA 23116, telephone (804) 213-4698, FAX (804) 213-4574, or email latonya.hucks-watkins@virginiaabc.com.

Basis: Section 4.1-103 of the Code of Virginia enumerates the powers of the Virginia Alcoholic Beverage Control Authority Board, which includes the authority to adopt regulations and to do all acts necessary or advisable to carry out the purposes of the Alcoholic Beverage Control Act (§ 4.1-100 et seq. of the Code of Virginia). Section 4.1-111 of the Code of Virginia provides the board with the authority to adopt regulations that it deems reasonable to carry out the provisions of the act and to amend or repeal such regulations. Section 4.1-240 of the Code of Virginia authorizes the board to accept payment by any commercially acceptable means, including checks, credit cards, debit cards, and electronic funds transfers, for the taxes, penalties, or other fees imposed on a licensee in accordance with this subtitle.

Purpose: This change is necessary to maintain consistency between regulation and practice. It is essential to protecting the health, safety, and welfare of citizens because those interests are protected through consistent application of regulations. The goal of the amendment is to achieve consistency between current practice and the provisions of the regulation. Inconsistencies between regulations and actual practices have the potential to create confusion in the regulated community and this change is intended to prevent any confusion and inform licensees of all of their options when it comes to making payment to the authority.

Rationale for Using Fast-Track Rulemaking Process: This rulemaking is expected to be noncontroversial because § 4.1-240 of the Code of Virginia permits the board to accept payment by any commercially acceptable means for the taxes, penalties, or other fees imposed on a licensee. Additionally, this revision ensures the regulation aligns with the practice that has already been implemented. The revisions to the regulation do not take away any privilege currently enjoyed by licensees while giving them more flexibility in how they may make payment.

Substance: The substantive amendment adds language stating that payments to the authority may be made through the online licensing system.

Issues: The primary advantage to the public and the Commonwealth is that the regulation will be consistent with current authority practice. There are no disadvantages.

Department of Planning and Budget's Economic Impact Analysis:

The Department of Planning and Budget (DPB) has analyzed the economic impact of this proposed regulation in accordance with § 2.2-4007.04 of the Code of Virginia (Code) and Executive Order 19. The analysis presented represents DPB's best estimate of these economic impacts.¹

Summary of the Proposed Amendments to Regulation. The Virginia Alcoholic Beverage Control Board of Directors proposes to update the regulatory text to reflect the current practice of accepting credit and debit card payments for taxes, fees, penalties, charges, and costs.

Background. The Virginia Alcoholic Beverage Control Authority (Authority) had been accepting payments for taxes, fees, penalties, charges, and costs only in cash and cash equivalents (i.e., money order, check, wire transfer) until January 1, 2022. On that day, the Authority started accepting payments for taxes, fees, penalties, charges, and costs through the Authority's online licensing system, which only accepts credit and debit cards. Therefore, the licensees and permittees have had an additional option to make such payments to the Authority by credit or debit cards in addition to cash and cash equivalents since January 1, 2022. The proposed amendment reflects in the text of the regulation the Authority's current ability to accept such payments through the Authority's online licensing system.

Estimated Benefits and Costs. Presented with an option to pay taxes, fees, penalties, charges, and costs by credit or debit cards, some licensees would start making payments by those means rather than cash or cash equivalents. Any use of cards would substitute the payments that would have been otherwise made in cash or cash equivalents. The Authority does not charge any fees or surcharges for use of cards for payments. Thus, there is no additional cost to the licensees and permittees who use this additional option. However, the use of services offered by card companies is not free. Generally, there are merchant fees also known as interchange fees per transaction plus a commission as a percentage of the payment amount.

The Authority utilizes the Virginia Department of the Treasury's statewide contract for these types of card transactions. The Treasury's contract includes hundreds of fee cells depending on the card user's credit rating, the type of the card (e.g., Visa, Mastercard, American Express, Discover, etc.), the company issuing the card (e.g., banks), and various other factors. Although fees are highly variable within small margins, the Treasury reports contract fees being 1.5 cents per transaction and a commission rate of between 1.6% to 3.5% of the payment amount, approximately 2.0% being the statewide average. The contract is with a single entity, but the contractor can serve cards issued by different companies. In other words, the Authority periodically receives an aggregate invoice for all transactions from a single entity for interchange fees rather than receiving invoices from every single card issuer.

The Authority's review of fiscal year 2022 financial records shows that collections were $69.4 million for malt beverage and wine liter tax, $17.1 million for license and permit fees, $4.5 million for wine wholesaler tax, and $253 thousand for penalties, all totaling $91.3 million involving 1,974 transactions and $46,275 payment on average per transaction. Additionally, the Authority's interchange costs are estimated to be 1.61% of the total payments overall.² Further, the Authority reports that one year after it has started accepting card payments, the percentage of card payments are nearing 25% of the $91.3 million total but will likely continue to increase. Based on these factors, the interchange costs could be estimated to be as follows: $365,700 if 25% of the total payments are paid by card, $733,439 if card usage reaches 50%, and $1,100,159 if the card usage reaches 75%.

On the other hand, expanded use of credit and debit cards would likely reduce the Authority's administrative costs associated with processing cash and cash equivalents. Checks can be mailed to nine locations, where there are a total of 21 cashiering staff, and each cashier processes payments for, on average, approximately six hours per day, 365 days a year. At a $15.32 hourly rate, the annual cost of processing cash and cash equivalents equates to $704,567.³ As additional payments are made by cards, a decreasing amount of staff time would be required to process cash and cash equivalents, which would offset some of the interchange costs inherent in card transactions.

If the administrative cost savings are assumed to be linearly related to the percent of transactions that use cards, the 25% card usage combined with the 25% administrative savings would produce $189,558 (i.e., $365,700 minus 0.25*$704,567) as the net marginal cost per year; at 50% card usage, the net marginal cost would be $381,156 ($733,439 minus 0.50*$704,567); and at 75% usage, the net annual marginal cost would be $571,733 ($1,100,159 minus 0.75*$704,567). In reality, however, interchange costs and administrative cost savings would not likely be linearly related because interchange costs are largely driven by the percent fee of the payment amount rather than the number of transactions; likewise, the administrative costs are largely driven by the number of transactions rather than the payment amount. For example, a large transaction such as a $1 million payment would create $16,100 in interchange fees but may translate to only a few hours of staff time in savings. However, this asymmetrically adverse effect of large card transactions on net marginal cost would be limited as most large transactions would likely be continued to be made by checks or wire transfers rather than cards. Although there may be significant uncertainty regarding the exact amount of net marginal cost, any net increase in payment processing costs would reduce the Authority's operating profits and consequently reduce the revenues of the Commonwealth by the same amount.

The Authority envisions that the staff time that would no longer be needed for check processing would likely be redirected to other responsibilities within the agency. To illustrate: at 25% card usage, 11,498 hours of cashiering staff time per year would be redirected to other duties; at 50% card usage, 22,995 hours of cashiering staff time per year would be available for other purposes; and at 75% card use, the number of hours of staff time savings would be 34,495.

The Authority maintains that the main intent for accepting card payments is to improve licensee and permittee customer service, although it would result in a net increase in operating costs. As mentioned, when a licensee or permittee makes a card payment for the stated amount of fees, taxes, or costs, the payment is considered to be made in full even though the net revenues from that transaction are less than the full amount because of the interchange costs involved. In essence, there is no additional cost to the payor. However, the licensee or permittee of the Authority would reap all the benefits of the card option. These benefits may include the avoidance of time that would be required to deliver cash to one of the nine locations; avoidance of time that would be spent on writing a check, mailing, or delivering it to a processing center, and the time it would take for the check to clear; and the ability to pay with credit if short on cash. All of these conveniences associated with card payments are available to the licensees and permittees at no cost. Moreover, the Treasury's statewide card contractor would likely see additional revenues as calculated above as the card payments replace the payments by cash or cash equivalents.

Finally, the proposed language would provide consistency between the current practices and the text of the regulation. Inconsistencies between regulation and actual practice have the potential to create confusion in the regulated community and this change would likely help prevent any confusion and inform licensees of all their options when it comes to making a payment to the Authority.

Businesses and Other Entities Affected. The proposed amendments allow a licensee to pay fees, taxes, or costs to the Authority by a credit or debit card. Currently, there are 21,252 licensees and 1,974 transactions per year involved in such payments. None of the licensees appear to be disproportionately affected.

The Code of Virginia requires DPB to assess whether an adverse impact may result from the proposed regulation.⁴ An adverse impact is indicated if there is any increase in net cost or reduction in net revenue for any entity, even if the benefits exceed the costs for all entities combined. As noted, the Authority itself and consequently the Commonwealth would suffer some revenue losses as result of interchange fees that would have to paid to the statewide card processing contractor under the Treasury's contract. Thus, an adverse impact is indicated.

Small Businesses⁵ Affected.⁶ The Authority does not track which of the affected licensees would qualify as a small business. However, the proposed amendments do not appear to adversely affect any businesses including small businesses.

Localities⁷ Affected.⁸ The proposed amendments do not disproportionally affect any particular localities and do not introduce direct costs for local governments.

Projected Impact on Employment. The proposed amendments appear to increase the utilization of the services of the statewide card contractor and its demand for labor. However, whether if that contractor has any employees in Virginia is not known. The amendments also appear to free up some time of the licensees and permittees or the workers who may be handling payments on their behalf. The amendments further appear to reduce the Commonwealth's revenue collections which may or may not lead to a reduction in the state's demand for workers.

Effects on the Use and Value of Private Property. The newly added card payment option would primarily benefit the statewide card processing contractor in terms of additional revenues, which should add to the asset value of its business. The proposed amendments do not affect real estate development costs.

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¹Section 2.2-4007.04 of the Code of Virginia requires that such economic impact analyses determine the public benefits and costs of the proposed amendments. Further the analysis should include but not be limited to: (1) the projected number of businesses or other entities to whom the proposed regulatory action would apply, (2) the identity of any localities and types of businesses or other entities particularly affected, (3) the projected number of persons and employment positions to be affected, (4) the projected costs to affected businesses or entities to implement or comply with the regulation, and (5) the impact on the use and value of private property.

²The Authority does not have a breakdown of the 1.61% overall estimate between credit card and debit card payments or between per transaction and percentage-based interchange fees.

³$704,567 =$15.32 per hour x 6 hours per day x 21 employees x 365 days. Source: the Authority.

⁴Pursuant to § 2.2-4007.04 D: In the event this economic impact analysis reveals that the proposed regulation would have an adverse economic impact on businesses or would impose a significant adverse economic impact on a locality, business, or entity particularly affected, the Department of Planning and Budget shall advise the Joint Commission on Administrative Rules, the House Committee on Appropriations, and the Senate Committee on Finance. Statute does not define "adverse impact," state whether only Virginia entities should be considered, nor indicate whether an adverse impact results from regulatory requirements mandated by legislation.

⁵Pursuant to § 2.2-4007.04, small business is defined as "a business entity, including its affiliates, that (i) is independently owned and operated and (ii) employs fewer than 500 full-time employees or has gross annual sales of less than $6 million."

⁶If the proposed regulatory action may have an adverse effect on small businesses, § 2.2-4007.04 requires that such economic impact analyses include: (1) an identification and estimate of the number of small businesses subject to the proposed regulation, (2) the projected reporting, recordkeeping, and other administrative costs required for small businesses to comply with the proposed regulation, including the type of professional skills necessary for preparing required reports and other documents, (3) a statement of the probable effect of the proposed regulation on affected small businesses, and (4) a description of any less intrusive or less costly alternative methods of achieving the purpose of the proposed regulation. Additionally, pursuant to § 2.2-4007.1 of the Code of Virginia, if there is a finding that a proposed regulation may have an adverse impact on small business, the Joint Commission on Administrative Rules shall be notified.

⁷"Locality" can refer to either local governments or the locations in the Commonwealth where the activities relevant to the regulatory change are most likely to occur.

⁸Section 2.2-4007.04 defines "particularly affected" as bearing disproportionate material impact.

Agency's Response to Economic Impact Analysis: The Virginia Alcoholic Beverage Control Authority concurs with the Department of Planning and Budget's economic impact analysis.

Summary:

The amendment adds payment for taxes, fees, penalties, charges, and costs through the Virginia Alcoholic Beverage Control Authority's online licensing system as an option for licensees.

3VAC5-30-30. Certain Payment and recordkeeping requirements for certain transactions to be for cash; "cash" defined; checks and money orders; electronic fund transfers; records and reports by sellers; payments to the board.

A. Sales of wine or beer between wholesale and retail licensees of the board authority shall be for cash paid and collected at the time of or prior to delivery, except where payment is to be made by electronic fund transfer as hereinafter provided in this section. Each invoice covering such a sale or any other sale shall be signed by the purchaser at the time of delivery and shall specify the manner of payment.

B. "Cash," as used in this section, shall include (i) legal tender of the United States, (ii) a money order issued by a duly licensed firm authorized to engage in such business in the Commonwealth, (iii) a valid check drawn upon a bank account in the name of the licensee or permittee or in the trade name of the licensee or permittee making the purchase, or (iv) an electronic fund transfer, initiated by a wholesaler pursuant to subsection D of this section, from a bank account in the name, or trade name, of the retail licensee making a purchase from a wholesaler or the board authority.

C. If a check, money order, or electronic fund transfer is used, the following provisions apply:

1. If only alcoholic beverage merchandise is being sold, the amount of the checks, money orders, or electronic fund transfers shall be no larger than the purchase price of the alcoholic beverages; and

2. If nonalcoholic merchandise is also sold to the retailer, the check, money order, or electronic fund transfer may be in an amount no larger than the total purchase price of the alcoholic beverages and nonalcoholic beverage merchandise. If a separate invoice is used for the nonalcoholic merchandise, a copy of it shall be attached to the copies of the alcoholic beverage invoices which that are retained in the records of the wholesaler and the retailer. If a single invoice is used for both the alcoholic beverages and nonalcoholic beverage merchandise, the alcoholic beverage items shall be separately identified and totaled.

D. If an electronic fund transfer is used for payment by a licensed retailer or a permittee for any purchase from a wholesaler or the board authority, the following provisions shall apply:

1. Prior to an electronic fund transfer, the retail licensee shall enter into a written agreement with the wholesaler specifying the terms and conditions for an electronic fund transfer in payment for the delivery of wine or beer to that retail licensee. The electronic fund transfer shall be initiated by the wholesaler no later than one business day after delivery, and the wholesaler's account shall be credited by the retailer's bank no later than the following business day. The electronic fund transfer agreement shall incorporate the requirements of this subdivision, but this subdivision shall not preclude an agreement with more restrictive provisions. For purposes of this subdivision, the term "business day" shall mean a business day of the respective bank;

2. The wholesaler must generate an invoice covering the sale of wine or beer, and shall specify that payment is to be made by electronic fund transfer. Each invoice must be signed by the purchaser at the time of delivery; and

3. Nothing in this subsection shall be construed to require that any licensee must accept payment by electronic fund transfer.

E. Wholesalers shall maintain on their licensed premises records of all invalid checks received from retail licensees for the payment of wine or beer, as well as any stop payment order, insufficient fund report, or any other incomplete electronic fund transfer reported by the retailer's bank in response to a wholesaler initiated electronic fund transfer from the retailer's bank account. Further, wholesalers shall report to the board authority any invalid checks or incomplete electronic fund transfer reports received in payment of wine or beer when either (i) any such invalid check or incomplete electronic fund transfer is not satisfied by the retailer within seven days after notice of the invalid check or a report of the incomplete electronic fund transfer is received by the wholesaler, or (ii) the wholesaler has received, whether satisfied or not, either more than one such invalid check from any single retail licensee or received more than one incomplete electronic fund transfer report from the bank of any single retail licensee, or any combination of the two, within a period of 180 days. Such reports shall be upon a form provided by the board authority and in accordance with the instructions set forth in such form.

F. Payments to the board authority for the following items shall be for cash, as defined in subsection B of this section:

1. State license taxes and application fees;

2. Wine taxes and excise taxes on beer and wine coolers;

3. Solicitors' permit fees and temporary permit fees;

4. Registration and certification fees, and the markup or profit on cider, collected pursuant to these regulations;

5. Civil penalties or charges and costs imposed on licensees and permittees by the board; and

6. Forms provided to licensees and permittees at cost by the board.

Provided however, payments to the authority may be made directly through the authority's licensing system software.