BEFORE THE DEPARTMENT OF REVENUE

OF THE STATE OF MONTANA

 

In the matter of the amendment of ARM 42.11.104, 42.11.105, 42.11.106, 42.11.405, 42.11.406, 42.11.409, 42.11.421, and 42.11.424 pertaining to state liquor warehouse inventory practices, amendments to bailment limits, and revisions to product classification

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NOTICE OF PUBLIC HEARING ON PROPOSED AMENDMENT

TO: All Concerned Persons

 

1. On August 31, 2020, at 11:30 a.m., the Department of Revenue will hold a public hearing via remote conferencing to consider the proposed amendment of the above-stated rules.  Interested persons may access the public hearing in the following ways:

(a) Join Zoom Meeting: https://mt-gov.zoom.us/j/94690092459, Meeting ID: 946 9009 2459;

(b) Dial by Telephone: +1.406.444.9999 or +1.646.558.8656, Meeting ID: 946 9009 2459;

(c) Join by SIP: 94690092459@zoomcrc.com;

(d) Join by H.323 (Polycom): 162.255.37.11##94690092459; or

(e) Join by Skype for Business: https://mt-gov.zoom.us/skype/94690092459.

 

2. The Department of Revenue will make reasonable accommodations for persons with disabilities who wish to participate in this public hearing or need an alternative accessible format of this notice. If you require an accommodation, please advise the department of the nature of the accommodation needed, no later than 5 p.m. on August 14, 2020. Please contact Todd Olson, Department of Revenue, Director's Office, P.O. Box 7701, Helena, Montana 59604-7701; telephone (406) 444-7905; fax (406) 444-3696; or todd.olson@mt.gov.

 

3. GENERAL STATEMENT OF REASONABLE NECESSITY.  The department operates a state liquor warehouse (warehouse), authorized under 16-1-302, and 16-1-303, MCA. The department has established, in rule, bailment limits for product inventory levels, product classification processes, and price posting and publication of all inventoried liquor products for wholesale distribution to agency liquor stores.

Changes to department inventory practices, amendments to bailment limits, and revisions to department product classification and product price posting have become necessary because liquor sales continue to grow at an average of three percent per year and new products are constantly being introduced into the marketplace, significantly impacting the department's ability to efficiently and safely manage liquor products within the 100,000 square-foot warehouse. The department requires cost-effective solutions that can be implemented - within existing authority - to maximize all available warehouse space, with little to no impact on product availability, and will permit the department to continue to deliver optimal customer service even with lower on-hand inventory levels.

The department proposes to amend ARM 42.11.104, 42.11.105, 42.11.405, 42.11.406, 42.11.409, 42.11.421, and 42.11.424 which is necessary to achieve the following:

(a) reduce the maximum level of inventory a product may have at the warehouse to improve warehouse inventory management.  Based on the analysis of warehouse inventory management data, reducing the maximum level of inventory in the warehouse from a twelve-week case demand to an eight-week case demand is a low-cost inventory control measure that can provide the department with immediate additional warehouse space upon adoption of the amendments.

(b) amend the frequency in which the department conducts product listing reviews from semiannual to quarterly. The department has observed that under the current product review system there is often a long passage of time before

newly introduced product at the liquor warehouse can meet the classification as "regular product." The department believes increasing the frequency of department product reviews will expedite product classification and will improve efficiency in product inventory management. The effective dates of the reviews are necessary to coincide with the department's quarterly price book.

(c) update department business practices to lessen department burden of managing vendors' obsolete, discontinued, and overstock inventory in the warehouse, and to maximize the allocation of warehouse floor space to more regularly ordered product. The proposed amendments are necessary to update and consolidate all overstock inventory processes into one rule.

(d) make minor "housekeeping" amendments to rule text, which are necessary for language consistency among the rules or to improve clarity or layout of a rule.

Lastly, the department proposes amendments to ARM 42.11.106 which is the implementation of Senate Bill 193 (2015) (SB 193). SB 193 amended 16-2-101, MCA (agency liquor store commission rates) and 16-1-404, MCA (vendor liquor markup rates). The proposed rule amendments are necessary for the rules to be consistent with SB 193 changes to statutory agency liquor store commission rates and vendor markup rates.

 

4. The rules as proposed to be amended provide as follows, new matter underlined, deleted matter interlined:

 

42.11.104 CALCULATION OF POSTED PRICE (1) through (3) remain the same.

(4) The department may reduce the wholesale price of products which the department has designated as discontinued for closeout or are determined to be overstocked in order to eliminate them from inventory. 

 

AUTH: 16-1-303, MCA

IMP: 16-1-302, 16-1-404, MCA

 

REASONABLE NECESSITY: In addition to the general statement of reasonable necessity provided above, the department proposes to amend ARM 42.11.104 to remove (4) because it is not current department practice to reduce the wholesale price of a product in order to eliminate the product from inventory and the continued inclusion of (4) is contradictory.

 

42.11.105 DEFINITIONS The following definitions apply to subchapters 1, 2, and 4:

(1) through (8) remain the same.

(9) "Regular product" means product that:

(a) is among the highest-selling 1,300 products in the state based on case sales in the 12-month period prior to the department's biannual quarterly review where sales are not erratic or based upon closeout or overstock;

(b) through (14) remain the same.

 

AUTH: 16-1-303, MCA

IMP: 16-1-302, MCA

 

42.11.106 REDUCTION IN STATE MARKUP FOR DISTILLERIES AT OR BELOW 25,000 PROOF GALLONS (1) remains the same.

(2) The 20 percent reduced markup rate is determined using a 100 percent reduction in markup after agency liquor store commissions and discount costs and the costs to operate the state liquor warehouse have been accounted for. These costs account for approximately half of the standard markup normally collected on product sold by the department.  The department will annually review the associated agency liquor store commissions and discount rate costs and the costs to operate the state liquor warehouse to ensure these costs do not exceed the reduced markup. The department will publish any adjustments to the reduced markup based on the results of the annual review.

(3) A distillery requesting a reduction in the state markup must certify with a sworn statement, on a form supplied by the department, that the number of proof gallons they have manufactured, distilled, rectified, bottled, or processed nationwide annually is at or below the 25,000 proof gallon threshold.

(4) A distillery requesting a reduced markup rate must submit this form and meet the specified requirements at the time of initially registering with the department and by February 15 of each of the following calendar years in order to receive the reduced markup rate.

(5) The following effective dates will apply for those distilleries that meet the reduced markup rate criteria:

(a) the department will apply the reduced markup rate to existing liquor products effective November 1, 2011;

(b) for each liquor product introduced thereafter, the distillery's current applicable markup rate will apply with an immediate effective date;

(c) each subsequent year, the distillery's applicable markup rate will be effective May 1 with the department's May, June, and July quarterly price book or the next available price book if the form is submitted after the February 15 annual deadline; and

(d) (4) fFailure to submit the form described in (3) annually to the department each year by February 15 will result in a 40.5 percent markup rate for liquor products, 20 percent for sacramental wine products, and 51 percent for fortified wine products. The effective date of any changes in a distillery's markup rate will coincide with the publication date of the next quarterly price book.

(5) Each new liquor product a vendor introduces will be assigned the distillery's current applicable markup rate.

(6) and (7) remain the same.

 

AUTH: 16-1-303, MCA

IMP: 16-2-211, MCA

 

REASONABLE NECESSITY: In addition to the general statement of reasonable necessity provided above, the department proposes to amend ARM 42.11.106 by removing references in (2) to discount rates. Section (2) is also proposed for amendment to describe a percentage approximation for the reduced markup rate of 20 percent, relative to the standard markup rate, to support the SB 193 amendments.

The department proposes to combine rule text from current (4) into (3). This consolidation is necessary to improve text organization because the form reference in current (4) lacks context and is a continuation of the requirements in (3).

Proposed (4) amends the markup rate for liquor products referenced in current (5)(d) from 40 percent to 40.5 percent pursuant to SB 193. Proposed (4) also proposes an amendment to describe how the department's receipt of a distillery's filing will determine the effective date of the distillery's reduced markup rate using the publication date of the department's price book. This amendment is necessary to accommodate the proposed quarterly product review and is a revision of what is present in current (5)(c).

The department proposes to remove content from current (5) because the subsection was initially drafted with an implementation date of November 1, 2011, and the date reference is now obsolete. Other portions of current (5) are proposed for inclusion as proposed (5) for increased clarity and organization of the rule text.

 

42.11.405 PRODUCT AVAILABILITY (1) Liquor products will be made available for sale in the following classifications:

(a) Regular products will be designated in the department's quarterly price book and have sufficient supply maintained in the state liquor warehouse in accordance with ARM 42.11.421. An agent shall give an all-beverage licensee a reduction of 8 eight percent off the posted price for purchasing regular products in unbroken case lots.

(b) Special order products that have sold at least one case in the prior 12 months will be published in the department's quarterly price book. An agent shall may not give an all-beverage licensee an 8 eight percent discount for purchasing special order products in unbroken case lots.

(i) Inventories will be maintained in the state liquor warehouse in accordance with ARM 42.11.421 on the highest-selling 350 special order products based on case sales in the 12-month period prior to the department's biannual quarterly review.

(ii) remains the same.

(c) Seasonal products are not published in the department's quarterly price book. The department will notify agency liquor stores when seasonal products become available. An agent shall may not give an all-beverage licensee an 8 eight percent discount for purchasing seasonal products in unbroken case lots.

(d) Discontinued products are not published in the department's quarterly price book. Discontinued products are available until all inventories have been depleted. An agent is not required to give an all-beverage licensee an 8 eight percent discount for purchasing discontinued products in unbroken case lots; however, the agent may sell the product below its last posted price. An agent may sell discontinued products to licensees at or below the last price on file with the department and may sell discontinued products at any price to the general public. 

 

AUTH: 16-1-103, 16-1-303, MCA

IMP: 16-1-103, 16-1-302, 16-2-201, MCA

 

REASONABLE NECESSITY: In addition to the general statement of reasonable necessity provided above, the department proposes to amend ARM 42.11.405 for language use for described percentages, which is consistent with statute and the administrative rules writing style manual adopted by reference in ARM 1.2.519.

The department also proposes to amend (1)(a) to insert the descriptive word "case" when referring to "lots," which is necessary for internal consistency in references to unbroken case lots and is consistent with 16-2-201, MCA.

Subsection (1)(d) proposes to revise and relocate existing content that is currently in ARM 42.11.409 because the department believes the rule content is better suited, topically, in this rule.

 

42.11.406 PRODUCT LISTING (1) Each January, April, and July, and October, the department shall classify all products based on the criteria set forth in ARM 42.11.405. The Changes in product classifications from the January review are effective May 1. The classifications from the July review are effective November 1. are effective as follows: 

(a) January reviews are effective May 1;

(b) April reviews are effective August 1;

(c) July reviews are effective November 1; and

(d) October reviews are effective February 1.

 

AUTH: 16-1-103, 16-1-303, MCA

IMP: 16-1-103, 16-1-302, MCA

 

42.11.409 REVISED LISTING, CLOSEOUT, AND OVERSTOCK (1) A product that no longer meets the current criteria in ARM 42.11.406 42.11.405 will be listed in a classification commensurate with its sales volume and effective with the quarterly price book.

(2) A product that a vendor discontinues and is not marketed by another vendor will be closed out and removed from the quarterly price book in accordance with ARM 42.11.104.

(3) Inventory in excess of a historical 12 eight-week case demand for a product will be treated as overstock in accordance with ARM 42.11.104.

(4) The effective date of a closeout sale or overstock sale is as soon as written notice can be disseminated to state agency liquor stores.

(5) Products that have been discontinued may be sold to licensees at or below the department's last known posted price.

(6) Products that have been discontinued may be sold to the general public at any price.

(3) The department shall provide a vendor with written notice of any inventory identified as overstock. The vendor shall remove the overstock from the state liquor warehouse within 30 days of the department's notice. If the vendor fails to remove the overstock by the prescribed date in the notice, the department may, in its discretion, dispose of the overstock or return it to the vendor at the vendor's expense.

 

AUTH: 16-1-103, 16-1-303, MCA

IMP: 16-1-103, 16-1-104, 16-1-302, MCA

 

REASONABLE NECESSITY: In addition to the general statement of reasonable necessity provided above, the department proposes to amend ARM 42.11.409 to implement revised maximum product inventory level practices at the warehouse; and for consistency with the department's proposed bailment amendments to ARM 42.11.421.

Like the proposed amendments to ARM 42.11.104, the department proposes to amend the title of ARM 42.11.409 because it is not the department's current practice to close out liquor products and the title is contradictory. All liquor products are classified in accordance with (1), which corresponds to the sales history and availability of the product. Section (1) is proposed for amendment to provide an updated cross-reference to ARM 42.11.405.

Section (2) is proposed for substantial amendment because it also includes references to closed-out products and the reference to ARM 42.11.104 is incorrect as that rule speaks to the calculation of a product's posted price, not how excess inventory is managed, which is in proposed (3). The department proposes to further amend (2) through the inclusion of text from (3) for consistency with the proposed amendments to ARM 42.11.421. 

The department proposes to remove existing (4) as notice to agency liquor stores regarding a close-out price because its continued inclusion would be contrary to department practices.

The department proposes to remove (5) and (6) from this rule and relocate revisions of the sections into ARM 42.11.405 for improved organization of rule content.

New (3) is proposed by the department to provide vendors with an overstock products removal process and compliance requirements in the event of a vendor's non-compliance with the removal of overstock. Removing overstock is necessary to ensure the department can effectively and efficiently manage the warehouse. The proposal includes a requirement to provide a vendor written notice of the identification of the vendor's overstock, a 30-day period for the vendor to make arrangements for the overstock to be removed from the warehouse, and recourse for the department should the vendor fail to remove the overstock within the prescribed time. The notification is necessary to explain to a vendor the department's overstock determination, it establishes the reasonable timeline of 30 days for the removal of the overstock, and it restates the existing department remedy - moved from ARM 42.11.424 - because this rule is a more appropriate place to contain overstock inventory requirements should a vendor fail to comply with the overstock pickup requirement.

 

42.11.421 BAILMENT LIMITS (1) and (2) remain the same.

(3) The maximum level is a historical twelve eight-week case demand. The historical twelve eight-week case demand is calculated by taking the product's sales from the previous 12 months and dividing by 52 to obtain a weekly demand. This figure is then multiplied by 12 eight to obtain a twelve an eight-week demand. The maximum level may be exceeded if a vendor demonstrates to the department's satisfaction that a larger amount is needed to meet a sales forecast or to obtain an economical shipment.

(4) through (6) remain the same.

 

AUTH: 16-1-103, 16-1-303, MCA

IMP: 16-1-103, 16-1-302, MCA

 

42.11.424 BAILMENT ADJUSTMENTS (1) The A vendor's bailment inventory will be adjusted for withdrawals, purchases, deliveries, defective merchandise, destructions, and errors.

(2) remains the same.

(3) The department shall charge vendors the direct and indirect costs for carrying out vendor withdrawal instructions.

(4) The department shall destroy, at the vendor's expense, product held in the state liquor warehouse in excess of the maximum level established by ARM 42.11.421 after 30 days' notice to the vendor.

(5) and (6) remain the same but are renumbered (3) and (4). 

(5) The department may charge a vendor for reasonable costs associated with handling the vendor's products at the state liquor warehouse beyond the normal receipt, storage, and shipping of products. Handling includes, but is not limited to, affixing labels on cases, repackaging cases, restacking cases, destroying product, and assembling product for return. Charges will be offset against the department's payment for products.

 

AUTH: 16-1-103, 16-1-303, MCA

IMP: 16-1-103, 16-1-302, MCA

 

REASONABLE NECESSITY: In addition to the general statement of reasonable necessity and consistent with the department's justification for its proposed amendments to ARM 42.11.409, the department proposes amending ARM 42.11.424 which is necessary to support the amendments the department proposes in ARM 42.11.409 regarding overstock.

The department proposes amending current (1) to reference vendor product destruction in support of the other overstock rule amendments in this rulemaking. The department also proposes consolidating and revising content from current (3) with expanded descriptions of "handling" in proposed (5) and transferring the content in current (4) to ARM 42.11.409. 

Proposed (5) seeks to authorize the department to impose a fee for additional handling of products beyond the normal receipt, storage, and shipping of products. The authorization and vendor notice is necessary because the department occasionally spends excessive amounts of time processing specific vendor overstock which detracts from warehouse staff processing regular inventory replenishment and fulfilling agency store orders. Proposed (5) includes a non-exhaustive list of inventory tasks that includes affixing labels, repacking and restacking cases, destroying product, and assembling product for return. Depending on the size of a vendor's product request or the nature of the inventory obligation, reasonable fees may be necessary for the department to recoup expenses.

 

            5. Concerned persons may submit their data, views, or arguments, either orally or in writing, at the hearing. Written data, views, or arguments may also be submitted to: Todd Olson, Department of Revenue, Director's Office, P.O. Box 7701, Helena, Montana 59604-7701; telephone (406) 444-7905; fax (406) 444-3696; or e-mail todd.olson@mt.gov and must be received no later than 5:00 p.m., September 8, 2020.

 

6. Todd Olson, Department of Revenue, Director's Office, has been designated to preside over and conduct the hearing.

 

7. The Department of Revenue maintains a list of interested persons who wish to receive notices of rulemaking actions proposed by this agency. Persons who wish to have their name added to the list shall make a written request, which includes the name and e-mail or mailing address of the person to receive notices and specifies that the person wishes to receive notice regarding particular subject matter or matters. Notices will be sent by e-mail unless a mailing preference is noted in the request. A written request may be mailed or delivered to the person in number 5 above or faxed to the office at (406) 444-3696 or may be made by completing a request form at any rules hearing held by the Department of Revenue.

 

8. An electronic copy of this notice is available on the department's web site at www.mtrevenue.gov, or through the Secretary of State's web site at sosmt.gov/ARM/register.

 

9. The bill sponsor contact requirements of 2-4-302, MCA, do not apply.

 

10. With regard to the requirements of 2-4-111, MCA, the department has determined that the amendment of the above-referenced rules will not significantly and directly impact small businesses.

 

 

/s/ Todd Olson                                              /s/ Gene Walborn                                        

Todd Olson                                                   Gene Walborn

Rule Reviewer                                              Director of Revenue

 

Certified to the Secretary of State July 28, 2020.