Title of Regulation: 3VAC5-70. Other Provisions (adding 3VAC5-70-240).

Statutory Authority: §§ 4.1-103, 4.1-111, and 4.1-227 of the Code of Virginia.

Public Hearing Information: No public hearings are scheduled.

Public Comment Deadline: October 10, 2012.

Effective Date: November 4, 2012.

Agency Contact: W. Curtis Coleburn III, Chief Operating Officer, Department of Alcoholic Beverage Control, 2901 Hermitage Road, Richmond, VA 23220, telephone (804) 213-4409, FAX (804) 213-4411, TTY (804) 213-4687, or email curtis.coleburn@abc.virginia.gov.

Basis: Section 4.1-209.1 F of the Code of Virginia provides that "the Board shall develop regulations pursuant to which fulfillment warehouses may apply for approval to provide storage, packaging, and shipping services to holders of licenses issued pursuant to this section. Such regulations shall include provisions that require (i) the fulfillment warehouse to demonstrate that it is appropriately licensed for the services to be provided by the state in which its place of business is located, (ii) the Board-approved fulfillment warehouse to maintain such records and to submit to the Board such information as the Board may prescribe, and (iii) the fulfillment warehouse and each wine or beer shipper licensed under this section to whom services are provided to enter into a contract designating the fulfillment warehouse as the agent of the shipper for purposes of complying with the provisions of this section."

Section 4.1-209.1 G of the Code of Virginia provides that "the Board shall develop regulations pursuant to which marketing portals may apply for approval to provide marketing services to holders of licenses issued pursuant to this section. Such regulations shall include provisions that require (i) the marketing portal to demonstrate that it is appropriately organized as an agricultural cooperative association and licensed for the services to be provided by the state in which its place of business is located, (ii) the Board-approved marketing portal to maintain such records and to submit to the Board such information as the Board may prescribe, and (iii) the marketing portal and each wine or beer shipper licensed under this section to whom services are provided to enter into a contract designating the marketing portal as the agent of the shipper for purposes of complying with the provisions of this section."

Purpose: Since 2003, Virginia has allowed the direct shipment of limited quantities of wine and beer to consumers in the Commonwealth by licensed shippers. These shippers have indicated a desire to use third-party service providers to facilitate such sales and shipments to consumers. "Marketing portals" are third-party companies that solicit and accept orders for alcoholic beverages and accept and process payment for such orders. For example, a marketing portal might be a website that allows consumers to place orders for wine. The website operator forwards the order and payment to the winery, which ships the product to the consumer under its shipper's license. "Fulfillment warehouses" are third-party facilities that provide logistic services to producers. They warehouse the winery's product and provide picking, packing, and shipping services at the winery's direction. Amendments to §§ 4.1-209 and 4.1-209.1 of the Code of Virginia adopted by the 2010 General Assembly make such arrangements legal in Virginia and require this regulatory action. This regulation, coupled with the existing regulation of direct shippers, is necessary to protect the health, safety, and welfare of citizens, to ensure that only licensed shippers are shipping approved products on which the appropriate taxes have been paid.

Rationale for Using Fast-Track Process: This rulemaking is expected to be noncontroversial. It tracks the requirements of the statute, with minimal recordkeeping requirements. The provisions of the proposed regulation impose no more burden than the minimum required by the enabling legislation.

Substance: This action creates a new section providing the procedure for a marketing portal or fulfillment warehouse to apply for approval to provide services to a Virginia-licensed wine or beer shipper. An applicant for approval would be required to establish that it met the minimum statutory requirements. Approved fulfillment warehouses, which ship wine or beer on behalf of a licensed shipper, would be required to maintain records of shipping transactions.

Issues: There are no disadvantages to the public or the Commonwealth. The primary advantage to the public and to the agency is an orderly marketplace in which the legally drinking public is able to obtain the products it desires with reasonable certainty that products are genuine and that appropriate taxes have been paid.

Department of Planning and Budget's Economic Impact Analysis:

Summary of the Proposed Amendments to Regulation. Chapters 317 and 561 of the 2010 Acts of Assembly create fulfillment warehouse licenses which are licenses that authorize agricultural cooperative associations operating in the Commonwealth to solicit and receive orders, and pack or ship wine or beer. In addition, the bill permits the formation of marketing portals which would allow authorized agricultural cooperative associations to solicit and receive orders for wine or beer from individuals located in Virginia through the use of the internet. The marketing portals would function on behalf of wine or beer shipper licensees.

Pursuant to Chapters 317 and 561 of the 2010 Acts of Assembly the Alcoholic Beverage Control Board (Board) proposes to add a new section to these regulations, 3VAC5-70-240, providing the application process for marketing portals or fulfillment warehouses as defined in § 4.1-209.1 of the Code of Virginia to seek approval to provide services to holders of wine or beer shippers license. The new section will require marketing portals to demonstrate that they are appropriately organized as an agricultural cooperative. It will require both marketing portals and fulfillment warehouses to demonstrate that they are licensed by the state in which they are located to provide the intended services. Both will be required to enter into a written contract with the wine or beer shipper to which services are to be rendered, designating the marketing portal or fulfillment warehouse as the agent of the shipper for the purposes of complying with applicable regulations and statutes. Approved fulfillment warehouses will be required to maintain certain shipment records.

Result of Analysis. The benefits likely exceed the costs for all proposed changes.

Estimated Economic Impact. Since 2003, Virginia has allowed the direct shipment of limited quantities of wine and beer to consumers in the Commonwealth by licensed shippers. These shippers have indicated a desire to use third-party service providers to facilitate such sales and shipments to consumers. "Marketing portals" are third-party companies which solicit and accept orders for alcoholic beverages and accept and process payment for such orders. For example, a marketing portal might be a website that allows consumers to place orders for wine. The website operator forwards the order and payment to the winery, which ships the product to the consumer under its shipper's license. "Fulfillment warehouses" are third-party facilities that provide logistic services to producers. They warehouse the winery's product, and provide picking, packing, and shipping services at the winery's direction. Amendments to §§ 4.1-209 and 4.1-209.1 of the Code of Virginia adopted by the 2010 General Assembly make such arrangements legal in Virginia, and require the board's proposed regulatory action. This regulation, coupled with the existing regulation of direct shippers, is necessary to protect the health, safety, and welfare of citizens, to ensure that only licensed shippers are shipping approved products on which the appropriate taxes have been paid.

The Department of Alcoholic Beverage Control (Department) is not aware of any current marketing portals in Virginia. Since prior to July 1, 2010 such activities have been illegal, and the Department has not been approached by any agricultural cooperative; though the Department has heard that Virginia wineries are considering setting up a cooperative, which might attempt to offer both marketing and warehouse services. The marketing portal would have to show proof of its status as an agricultural coop, since that status is statutorily required to qualify to conduct such business in Virginia, and the warehouse would have to maintain records of shipments (the marketing portal would not, since it never touches the wine). The other requirements would be the same. The use of fulfillment warehouses may allow manufacturers and retailers to reduce expenses by sharing logistical services. The use of marketing portals could increase sales for direct shippers of wine and beer.

Businesses and Entities Affected. The Department anticipates that Virginia wineries will likely set up a cooperative, which might attempt to offer both marketing and warehouse services. The Department is not currently aware of any other entities which are likely to seek fulfillment warehouse licenses.

Localities Particularly Affected. The proposed amendments could affect all localities, but may particularly affect localities with wineries.

Projected Impact on Employment. The proposal amendments are unlikely to significantly affect employment.

Effects on the Use and Value of Private Property. The use of fulfillment warehouses may allow manufacturers and retailers to reduce expenses by sharing logistical services. The use of marketing portals could increase sales for direct shippers of wine and beer.

Small Businesses: Costs and Other Effects. The proposed amendments will not increase costs for small businesses.

Small Businesses: Alternative Method that Minimizes Adverse Impact. The proposed amendments do not adversely affect small businesses.

Real Estate Development Costs. The proposed amendments are unlikely to significantly affect real estate development costs.

Legal Mandate. 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 Administrative Process Act and Executive Order Number 14 (10). Section 2.2-4007.04 requires that such economic impact analyses include, but need not be limited to, the projected number of businesses or other entities to whom the regulation would apply, the identity of any localities and types of businesses or other entities particularly affected, the projected number of persons and employment positions to be affected, the projected costs to affected businesses or entities to implement or comply with the regulation, and the impact on the use and value of private property. Further, if the proposed regulation has adverse effect on small businesses, § 2.2-4007.04 requires that such economic impact analyses include (i) an identification and estimate of the number of small businesses subject to the regulation; (ii) the projected reporting, recordkeeping, and other administrative costs required for small businesses to comply with the regulation, including the type of professional skills necessary for preparing required reports and other documents; (iii) a statement of the probable effect of the regulation on affected small businesses; and (iv) a description of any less intrusive or less costly alternative methods of achieving the purpose of the regulation. The analysis presented above represents DPB's best estimate of these economic impacts.

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

Summary:

This action promulgates a new section, 3VAC5-70-240, providing the application process for marketing portals or fulfillment warehouses, as defined in § 4.1-209.1 of the Code of Virginia, to seek approval to provide services to holders of wine or beer shippers licenses. The new section requires marketing portals to demonstrate that they are appropriately organized as an agricultural cooperative. Both marketing portals and fulfillment warehouses are required to demonstrate that they are licensed by the state in which they are located to provide the intended services. Both are required to enter into a written contract with the wine or beer shipper to which services are to be rendered, designating the marketing portal or fulfillment warehouse as the agent of the shipper for the purposes of complying with applicable regulations and statutes. Approved fulfillment warehouses will be required to maintain certain shipment records.

3VAC5-70-240. Marketing portal and fulfillment warehouse approval process.

A. Any holder of a wine or beer shipper's license wishing to use the services of a marketing portal or fulfillment warehouse, as defined in § 4.1-209.1 of the Code of Virginia, must use an approved marketing portal or fulfillment warehouse. Marketing portals or fulfillment warehouses licensed to perform such services by the state in which they are located may apply for approval to provide such services to holders of Virginia wine or beer shipper's licenses by letter to the Supervisor, Tax Management Section, Virginia Department of Alcoholic Beverage Control, requesting such approval. Each applicant shall submit as attachments copies of all licenses issued by the state in which its place of business is located that authorize the provision of the services to be provided. A marketing portal shall submit as attachments copies of documents showing that it is properly organized as an agricultural cooperative in the state where it is located. The board may refuse, suspend, or revoke approval if it shall have reasonable cause to believe that a marketing portal or fulfillment warehouse is not licensed to provide such services by its home state, that it has failed to comply with the regulations of the board, or that a cause exists with respect to the marketing portal or fulfillment warehouse that would authorize the board to refuse, suspend, or revoke a license pursuant to § 4.1-100 et seq. of Title 4.1 of the Code of Virginia. Before refusing, suspending, or revoking such approval, the board shall follow the same administrative procedures accorded an applicant or licensee under § 4.1-100 et seq. of Title 4.1 of the Code of Virginia and regulations of the board.

B. Any approved marketing portal or fulfillment warehouse shall, prior to performing services for a wine or beer shipper's licensee, enter into a written contract. The contract must designate the marketing portal or fulfillment warehouse as the agent of the shipper for the purposes of complying with the provisions of this regulation and §§ 4.1-209 and 4.1-209.1 of the Code of Virginia. A copy of each such contract shall be submitted by the marketing portal or fulfillment warehouse to the Supervisor, Tax Management Section, Virginia Department of Alcoholic Beverage Control, prior to the commencement of services.

C. Approved fulfillment warehouses shall maintain for two years complete and accurate records of all shipments made on behalf of Virginia wine or beer shippers, including for each shipment:

1. Number of containers shipped;

2. Volume of each container shipped;

3. Brand of each container shipped; and

4. Names and addresses of recipients.

The records required by this subsection shall be made available for inspection and copying by any member of the board or its special agents upon request.