Title of Regulation: 3VAC5-30. Tied-House (amending 3VAC5-30-90).

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

Public Hearing Information: No public hearings are scheduled.

Public Comment Deadline: January 11, 2017.

Effective Date: February 3, 2017.

Agency Contact: Shawn Walker, Director of Law Enforcement, Department of Alcoholic Beverage Control, 2901 Hermitage Road, Richmond, VA 23220, telephone (804) 213-4569, FAX (804) 213-4411, or email shawn.walker@abc.virginia.gov.

Basis: Section 4.1-101 of the Code of Virginia establishes the Department of Alcoholic Beverage Control and the Alcoholic Beverage Control Board. Section 4.1-103 of the Code of Virginia enumerates the powers of the 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 reasonable regulations that it deems reasonable to carry out the provisions of the Alcoholic Beverage Control Act, and to amend or repeal such regulations and provides that the board promulgate regulations that may displace competition in the marketplace.

Purpose: The amendment is intended to be responsive to the regulated business community; promulgated in response to the petition for rulemaking submitted by the Virginia Wine Wholesalers Association. The amendment to 3VAC5-30-90 will have no impact on the health, safety, or welfare of citizens.

Rationale for Using Fast-Track Rulemaking Process: This amendment is not expected to be controversial because the board sought public comment in response to the petition for rulemaking submitted by the Virginia Wine Wholesalers Association, and all responses received were favorable; no registered opposition to the regulatory amendment was received.

Substance: The amendment provides that wholesalers of wine products are permitted to establish differentiated pricing between on-premises retail licensees and off-premises retail licensees for the same product and package.

Issues: The primary advantage of this regulatory action is it allows businesses more flexibility in pricing structures of products sold, based upon the business model of the purchasing customer. According to the petitioners, this change will allow for a distribution structure that is modernized and consistent in the wine market segment in other jurisdictions. There are no disadvantages to the agency or the Commonwealth because tax revenue collections are not affected. A pertinent consideration for the regulated community is that long-standing nondiscriminatory pricing is altered, but the public comment period revealed no opposition to the amendment.

Department of Planning and Budget's Economic Impact Analysis:

Summary of the Proposed Amendments to Regulation. The Alcoholic Beverage Control Board (Board) proposes to permit wholesale wine licensees to differentiate in product pricing between retail establishment purchasers with on-premises and off-premises privileges.

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

Estimated Economic Impact. The current regulation limits the ability of wine and beer wholesalers from differentiating pricing between retail off-premises and retail on-premises privilege licensees. The Board was petitioned by the Virginia Wine Wholesalers Association to consider amending the regulation section 3VAC5-30-90; Price Discrimination, Inducements, to allow for differentiated pricing between off-premises and on-premises accounts. The Board proposes an amendment that would permit licensed wine wholesalers to establish differentiated pricing between on-premises and off-premises retail licensees. The amendment does not pertain to beer wholesalers.

The proposed amendment will enable wholesale wine licensees to have greater flexibility in how they choose to price their products. This may enable these firms to adjust prices in a manner that increases profits. Wholesalers will likely seek to determine if one of the two types of retail establishment purchasers (on-premises and off-premises) is more sensitive to price changes than the other; in other words, more likely to increase purchases with a lower price and reduce purchases with a higher price.¹ If wholesalers determine that one of the types of retail establishment purchasers is more price sensitive, they will charge a lower price to that type than to the less price sensitive type. The more price sensitive type may benefit from lower prices, while the less price sensitive type may face higher prices.

Businesses and Entities Affected. The proposed amendment affects the 14,000+ retail on-premises and retail off-premises Alcoholic Beverage Control licensees and the 350 wholesale wine licensees in the Commonwealth, most of which are small businesses.²

Localities Particularly Affected. The proposed amendment does not disproportionately affect particular localities.

Projected Impact on Employment. The proposed amendment would not likely significantly affect employment.

Effects on the Use and Value of Private Property. The proposed amendment may enable wholesale wine licensees to increase profits by enabling additional flexibility in product pricing.

Real Estate Development Costs. The proposed amendment does not affect real estate development costs.

Small Businesses:

Definition. Pursuant to § 2.2-4007.04 of the Code of Virginia, 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."

Costs and Other Effects. The proposed amendment allows wholesale wine licensees to charge one price to small retail off-premises privilege licensees and a different price to small on-premises privilege licensees. Wholesalers will likely increase prices for the type they determine to be less price sensitive, and lower prices for the type they determine to be more price sensitive. Thus the cost of wine purchases from wine wholesalers will likely increase for the less price sensitive type and decrease for the more price sensitive type.

Alternative Method that Minimizes Adverse Impact. Though the cost of wine purchases will likely increase for the less price sensitive type of Alcoholic Beverage Control retail licensee, there is no apparent alternative method that will reduce that adverse impact and still meet the intended policy goal with its associated benefits.

Adverse Impacts:

Businesses. The proposed amendment allows wholesale wine licensees to charge one price to retail off-premises privilege licensees and a different price to on-premises privilege licensees. Wholesalers will likely increase prices for the type they determine to be less price sensitive.

Localities. The proposed amendment does not adversely affect localities.

Other Entities. The proposed amendment does not adversely affect other entities.

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¹ In the terminology of economists, those who are more price sensitive are said to have relatively elastic demand, and those who are less price sensitive are said to have relatively inelastic demand.

² Data source: Department of Alcoholic Beverage Control

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

Summary:

The amendment allows wine wholesalers to differentiate pricing between retail off-premises privilege licensees and retail on-premises privilege licensees.

3VAC5-30-90. Price discrimination; inducements.

A. No wholesale wine or beer licensee shall discriminate in price of alcoholic beverages between different retail purchasers except where the difference in price charged by such wholesale licensee is due to:

1. Acceptance or rejection by a retail purchaser of terms or conditions affecting a price offer, including a quantity discount, as long as such terms or conditions are offered on an equal basis to all retailers;

2. A bona fide difference in the cost of sale or delivery; or

3. The wholesale licensee charging a lower price in good faith to meet an equally low price charged by a competing wholesale licensee on a brand and package of like grade and quality.

Where such difference in price charged to any such retail purchaser does occur, the board may ask for and the wholesale licensee shall furnish written substantiation for the price difference.

B. Notwithstanding subsection A of this section, wholesale wine licensees may differentiate in the pricing between retail purchasers with on-premises and off-premises privileges. However, there shall be no discrimination in pricing among retail licensee purchasers with on-premises privileges and no discrimination in pricing among retail licensee purchasers with off-premises privileges, unless the conditions in subsection A of this section are present.

C. No person holding a license authorizing the sale of alcoholic beverages at retail shall knowingly induce or receive a discrimination in price prohibited by this section.