TTB: Generous Payment Terms Violate Federal Law
Under the Federal Alcohol Administration Act’s unfair competition and unlawful practices statute (27 US Code Section 205), alcohol suppliers are prohibited from selling alcohol to wholesalers and retailers on consignment. The TTB recently released Industry Circular 2022-1, which discusses the TTB’s position that long payment terms may violate the federal anti-consignment law.
Federal Law Prohibits Anti-Competitive Arrangements
Under Section 205, the Federal Alcohol Administration Act (FAA) prohibits a number of industry practices that are deemed to be uncompetitive. These practices include exclusive sales outlets, tied houses, and commercial bribery by which an alcohol supplier or wholesaler might attempt to control the sales of alcohol retailers. Also prohibited by Section 205 are sales of alcoholic products on consignment. That is, federal law deems that it is illegal for an alcoholic beverage manufacturer or other supplier to make sales to a distributor or other wholesaler on consignment, and prohibits wholesalers from making sales to retailers on consignment.
“On consignment,” in the context of FAA Section 205, includes any transaction that involves a condition sale, right of return, or any other arrangement that does not qualify as a “bona fide sale.” However, Section 205(d) excludes from the meaning of consignment transaction that involve only the “bona fide return” of merchandise for ordinary and usual reasons arising after the merchandise has been sold. That is, a sale is not a prohibited consignment sale if it was final when made but a situation arises after the provides a typical reason for returning the purchased products.
TTB Concludes that Generous Payment Terms May Violate Law
In Industry Circular 2022-1, the TTB has addressed whether and to what extent long payment terms violate the federal prohibition against consignment sales. According to the TTB, payment terms that exceed 30 days “may invite scrutiny from [the] TTB to determine whether the payment terms were merely subterfuge to sell on consignment.” In other words, if the wholesaler or retailer buyer of alcoholic beverage products has more than 30 days in which to make payment to the supplier, this may violate the anti-consignment law. In situations such as this, the TTB reasons that “the trade buyer is effectively under no obligation to pay for the products until such trade buyer sells it.”
Florida Alcoholic Beverage Companies Should Check Their Distribution Contracts
In light of TTB Industry Circular 2022-1, Florida suppliers (manufacturers, broker/sales agents, and importer) and Florida distributors should evaluate the payment terms contained in their distribution agreements. If the distributor is required to pay the supplier within 30 days, this is “unlikely to constitute consignment sales” according to the TTB (in the absence of other circumstances). However if the payment terms afford to distributor are greater than 30 days, the TTB may view these arrangements as de facto consignment sales.
What about sales to Florida retailers? Florida law requires retailers to make payment to distributors within 10 days, and failure to do so may land a retailer on the No Sales List. However, an arrangement that goes so far as to give the retailer more than 30 days to make payment would violate not only Florida law but perhaps federal law as well.
Do you have any questions about federal anti-consignment law? Contact us at email@example.com to schedule a consultation with a beverage attorney.
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