THE NATURE OF REGULATIONS

Regulations Governing Manufacturers / Suppliers
Licensing
Activity in Retail Stores

Regulations Governing Wholesalers
Management
Inventory
Relationship with Retailer
Transportation

Regulations Governing Retailers
On and Off Premise Conduct
Internet Advertising
Email
Tastings

Regulations Governing Tied House
General Rules
Exceptions to the General Rules

THE NATURE OF REGULATIONS
The beverage alcohol industry is one of the most highly regulated industries in the country, monitored at the federal, state and local levels. The distribution of alcohol involves three different levels of industry, known as the “three tier system.” The three tiers are:

  • Manufacturers, including importers, wineries, distillers and importers
  • Wholesalers
  • Retailers, including on premise (retail stores) and off premise (restaurants and bars)

The first two tiers of the system – alcohol manufacturers and wholesalers -- are regulated at the federal level by the Trade and Taxation Bureau of the Department of the Treasury (TTB). These members of the industry are required to obtain a federal license, known as a “Basic Permit,” in order to operate. Retailers are not regulated at the federal level.

All three tiers of the system -- manufacturers, wholesalers and retailers – are regulated at the state level to a degree that most industries involved in interstate commerce are not. This is largely due to the Twenty First Amendment to the U.S. Constitution which, aside from repealing Prohibition, also gives each state the authority to approve the sale and distribution of alcohol within its own borders.

Tennessee, like most states, has a “licensed” system for distributing and selling alcohol. Unlike the “monopoly” states where the state itself directly purchases and distributes alcohol, Tennessee established a comprehensive structure where the Alcoholic Beverage Commission (ABC) issues permits and licenses that authorize businesses to be engaged in the sale and distribution of wine and spirits. Beer – which contains less than 5% alcohol – is regulated separately by local beer boards and subject to local laws.

The ABC has recently completed a vast review and overhaul of its rules and regulations, which had remained largely unchanged since the agency’s creation in 1963. The process invited industry members and members of the general public to voice their opinions on the regulations and how they could be modified. The resulting changes are intended to better meet the conditions of a changing business environment and to help blend state regulations more readily with the regulations of the TTB.

Among issues now addressed in the regulations are internet advertising, email solicitations, and the increasing production of wine and spirits by local businesses within Tennessee. The end result is a total revamp of the rules that govern the sale and distribution of wine and spirits in the state of Tennessee.

The regulations took effect on June 7, 2010 and are now being enforced across the state. Below is a summary of those rules.

Regulations Governing Manufacuturers / Suppliers
Licensing

  • In order for a representative of a manufacturer to solicit orders in the state of Tennessee, that person must have a manufacturers or importer’s representative permit
  • Manufacturers located within the state, including distilleries and wineries, must obtain a state license.
  • Manufacturers located outside of the state must obtain a “nonresident sellers’ permit” from the ABC and must register their brands with the Tennessee Department of Revenue, in order to ship products into the state.

Activity in Retail Stores
Persons holding a manufacturers’ representative permit have specific limitations in retail stores. Specifically:

  • They may NOT solicit orders from anyone except a licensed wholesaler.
  • They may NOT provide any service to a retailer – whether on or off premise – except as specifically provided in the rules of the ABC. (see Tied House Section)
  • They may enter the public (non-storage) areas of a retailer in order to promote the products they represent or in order to examine the displays.
  • With a retailer’s consent, they may dress a display of their products, but may NOT move, relocate, or re-shelve any other products.
  • They may participate in a tasting conducted by a retailer, but may NOT supply any of the products that are tasted at the event. These products can only come from a retailer’s inventory or be supplied by a wholesaler.

Regulations Governing Wholesalers
Wholesalers are governed by both the TTB regulations and the ABC regulations. While often these are similar, the wholesaler must comply with both, and the most restrictive provisions take precedence. Thus, if the TTB permits an activity but the ABC prohibits it, the activity is prohibited.

Management

  • A wholesaler can have NO interest in a retail establishment. This includes liquor by the drink and liquor stores.
  • A wholesaler or its representative can solicit orders ONLY from a business that holds a license from the ABC.
    • Small exception: a wholesaler may solicit an INITIAL order from a business that has already applied for a license from the ABC, but has not yet received it. Note that no deliveries can be made until the ABC has actually issued the license.
  • The business of a wholesaler must be managed by the holder of the license or, if corporate, by a corporate officer. Wholesalers are prohibited from subcontracting their rights to another entity.
  • Wholesaler employee permits are good for five years and must be in the possession of the person holding the permit.

Inventory
Wholesalers are fully responsible and accountable for their alcoholic beverage inventory. The inventory of a wholesaler may ONLY be depleted in one of the following manners:

  • Sales to a licensed retailer (with invoice to back up the sale).
  • For personal or training purposes, such as educating staff on the products, or as promotions or gifts (personal withdrawal) to entities other than a licensee.
  • For purposes of contributing product to a charitable organization. Wholesalers may participate in and support events held pursuant to a special occasion permit.
  • For tastings.
  • As a result of breakage or deteriorated inventory.
    • Broken products must be held by the wholesaler if returned from a retailer and the replacement must be specified on a written invoice with the retailer. Disposition also requires approval of the TDOR, due to reduction in taxes.
  • Courtesy sales to other licensed wholesalers in the state.
  • Merchandise that is returned to the supplier or manufacturer.

Relationship with Retailer

  • Wholesalers are prohibited from providing anything of value -- ANYTHING -- to a retailer unless it is specifically permitted by the regulations of the ABC (the TTB has similar regulations, but the state regulations tend to be more limiting). A few exceptions include:
    • Providing those limited items and services specifically permitted by the “tied house” rules. (See below)
    • Arranging the wholesaler’s stock within a retail establishment, if permitted by the retailer.
    • Setting up advertising displays or advertising signs as permitted by the “tied house” rules.
    • Assisting a retailer in holding a tasting (See below).
  • Wholesalers may NOT accept an order from one retailer to be delivered to a different location. A wholesaler would be in violation of the regulation if it took an order from one retailer and delivered it to another retail establishments.
  • Wholesalers may NOT store product for a retailer. Thus, a retailer that purchases product may not delay delivery of such product. The regulations permit the ABC to authorize a wholesaler to store products for a retailer, but they do not indicate the conditions where such storage might be approved.
  • Wholesalers may NOT provide alcoholic beverage products to a retailer with a privilege of return. This prohibition of consignment sales is also specifically prohibited by the TTB.
  • Wholesalers may NOT extend credit to a retailer beyond 10 days. This requirement is statutory, although the regulations specifically deal with the issue as well. Be aware of the following:
    • Anytime there is a delivery of product to a retailer, it must be accompanied by the invoice which bears the actual date of delivery.
      • A wholesaler cannot cancel an invoice and then reissue an invoice if the product is not delivered with the invoice.
      • Wholesalers are charged with keeping accurate account of the invoices and delivery dates.
    • The 10-day period starts on the day following the invoice and ends on midnight of the 10th day.
      • Saturdays, Sundays and holidays ARE counted as part of the 10 days.
      • After midnight, the account is delinquent.
    • If payment is DEPOSITED IN THE U.S. MAIL and POSTMARKED within the 10 days, it is considered in compliance with this rule.
      • This DOES NOT permit a wholesaler representative to “pick up” a payment after midnight on the 10th day.
    • A wholesaler is required to deposit payments on the first banking day after receipt of a check.
      • Wholesalers are prohibited from accepting a POST DATED check and may NOT hold checks.
      • If a check is dishonored for any reason and is not paid by midnight of the 10th day following the invoice, the account is delinquent.
    • A wholesaler is REQUIRED to disclose to the ABC any account that is delinquent.
      • If a wholesaler has reason to believe that the retailer sent the payment in the U.S. MAIL but the wholesaler has not received the payment, then the wholesaler can rely upon the postmark of the payment to document that disclosure to the ABC was not required.
    • Electronic Funds Transfer is an approved method of payment (mail is not required if the funds are transmitted by EFT).

Transportation

  • Wholesalers are required to deliver the products they sell to retailers. Retailers are NOT permitted to pick up products at a wholesaler’s place of business.
  • Trucks that deliver alcoholic beverages that are OWNED or OPERATED by a wholesaler may only carry alcoholic beverages and those things specifically permitted by the “tied house” rules, such as point of sale advertising and product displays. (See “Tied House” section below.)
  • If the transportation of alcohol is made by a truck that is owned, leased or operated by a wholesaler, the truck must have the name and address of the licensee printed on each side and on the rear of the truck.
  • A salesperson employed by a wholesaler may make deliveries of alcohol to a retailer in a vehicle other than a truck so long as the deliveries are in amounts of less than 20 cases and so long as the salesperson has in his or her possession written documentation of the purchaser, the seller, the quantity and identity of the products.

Regulations Governing Retailers
On and Off Premise Conduct

  • Retailers may NOT sell anything other than alcoholic beverages and lottery tickets.
  • Retailers may NOT deliver alcoholic beverages that they sell, but they may carry the items purchased to a vehicle on their lot or a lot adjacent to their establishment.
  • Retailers may NOT solicit sales at the residence or place of business of a consumer.
  • Retailers may NOT give consumers anything of value to induce them to purchase alcoholic beverages.
  • Retailers may make donations of alcoholic beverages to a charitable organization. These donations must be documented by records demonstrating the donation, the organization and other details.
  • Retailers may store alcoholic beverages only on the ground floor of their establishment. Retailers may not store products for other retailers.
  • Retailers may NOT conduct a public contest where alcoholic beverages are offered as prizes. They may conduct such a contest for its own employees.
  • Retailers may sell gift certificates or gift cards to consumers.
  • Retailers may accept a tentative order by telephone or email but the actual sale must be completed on the premises of the retailer.
  • Retailers may NOT combine with other retailers to purchase alcohol and may not exchange product between them. If one retailer is convicted of participating in such an illegal cooperative operation, then all members of the group are equally guilty.
  • Retailers are fully responsible for all of the acts and conduct of their employees.

Internet Advertising

  • Retailers may advertise on the internet as long as the advertisements are consistent with the general rules that govern the advertising of alcohol in other media:
    • No use of state or U.S. Flag
    • No statement of curative or therapeutic effects
    • Accuracy in place of origin
  • Retailers and wholesalers that want to use internet advertising must submit to the ABC the website name that they intend to use prior to opening the website.

Email

  • Wholesalers and retailers can develop electronic mail and computer access mailing lists and may respond by email to any question.
  • Retailers may NOT send unsolicited email (such as spam advertising) to a consumer. However, email can be used by retailers to reach consumers if the consumer has requested it. Wholesalers and retailers must retain the written or electronic request of consumers that wish to receive email communications.

Tastings

  • Retailers may NOT hold tastings on their premises for consumers.
  • Retailers MAY hold employee-only tasting on their premises with products that are provided by the retailer or a wholesaler.
    • Any bottles opened during the tasting must be gone within 7 days of the product’s delivery (if from a wholesaler) or when the product is opened (if from the retailer’s inventory).
  • Retailers MAY conduct tastings of their products for consumers on the premises of the holder of a liquor-by-the-drink (LBD) license or at some other location.
    • Tastings on LBD Premise (restaurant, club, hotel, etc.)
      • Retailers may impose reasonable charges for consumers to attend tastings.
      • Retailers may solicit orders from those who attend as long as the sale is consummated at their actual store and NOT at the LBD location.
      • LBD employees are NOT permitted to serve alcoholic beverages that are not from the inventory of the LBD. It is permissible for the retailer to employ the LBD employee to work the tasting. Such must have their servers permit available for inspection.
      • If employees of a retailer are serving alcoholic beverages at the tasting, then they must obtain a servers permit and have it available for inspection.
    • Tastings on Non-LBD Site
      • The ABC must issue a notice of approval for the tasting event.
      • Retailers must notify the ABC at least 4 days prior to the date of the event, providing the following information:
        1. Date, time and location of event
        2. Identity of the sponsor (retailer, wholesaler, winery, supplier)
        3. The cost imposed on the public to attend the tasting event.
        4. Other relevant information as requested by the ABC.
      • A wholesaler may provide the alcohol to the retailer for the tasting, but a manufacturer or supplier may NOT supply product.
      • Retailers must send a written invitation to consumers to attend the tasting.
      • Retailers may NOT charge consumers to attend.
      • Food may NOT be sold at the event, but food may be given away at the event.
      • Retailers may NOT solicit orders at the event.

Regulations Governing Tied House
Both the TTB and the ABC have regulations that govern the business relationships between the tiers in the industry – supplier, distributor, and retail. State Tied House regulations tend to be stricter than the federal regulations, and licensees must comply with the strictest regulation. The Federal rules govern the upper two tiers of the industry, but the state governs all three.

As a general rule, neither a wholesaler nor a supplier may give anything of value to a retailer. This prohibition is very broad and specifically prohibits any of the following:
General Rules:

  • Wholesalers and suppliers may NOT have any interest, direct or indirect, in a retailer.
  • Wholesalers and suppliers may NOT have any interest in any of the property of a retailer (i.e. shelves, cars, TVs, etc.)
  • Wholesalers and suppliers can NOT GIVE, LEND or SELL a retailer any equipment, fixtures or anything of value, except as specifically permitted in the exceptions to the General Rules (below).
  • Wholesalers and suppliers may NOT provide advertising for the benefit of a retailer or credit the retailer for advertising. This includes ads for a particular product by the supplier which names the retailers in the area.
  • Wholesalers may NOT impose a quota on a retailer, and suppliers may NOT impose a quota on a wholesaler.
  • Wholesalers and suppliers cannot require a customer to buy one product in order to buy another product. This does not prohibit the creation of a “special” combination pricing structure that reduces the costs of two items when purchased together, as long as each of the products can be purchased separately.
  • Retailers may NOT purchase inventory from any source that is not the designated distributor for the territory registered by the Tennessee Department of Revenue.
  • Wholesalers and retailers may NOT hold consignment sales.
  • Wholesalers may NOT exchange one product for another except if the product is an equal quantity of the same type and brand, but packaged in another size. Thus, a wholesaler can exchange a case of 750ml of a product for a case of 1.5L of the SAME EXACT product. They may NOT exchange one varietal of wine for another varietal of wine.
  • A wholesaler may NOT sign an “exclusive” contract with a retailer to sell only a particular product. This is tempting when a special occasion permit holder wants to have a “BRAND X” type promotion, so the wholesaler agrees to subsidize the promotion conditioned upon only “BRAND X” being sold by the retailer.

Exceptions to the General Rules
Both the TTB and the ABC permit certain exceptions to the general rules and it is these that have generated the most questions and confusion over the years. It is critical for all three tiers to fully understand the exceptions below:

  • Product Displays
    • A supplier or a wholesaler can supply a retailer with “product displays,” such as wine racks, bins, barrels, casts, shelving etc. from which spirits and wine can be displayed for sale.
    • The value of the display cannot exceed $300 (the actual cost of buying the product display) and the product display must have “conspicuous and substantial advertising” inscribed or affixed to it.
    • Despite the “quota” rules, the wholesaler may require the retailer to purchase inventory adequate to fill the product display as a condition for receiving the product display.
  • Indoor Signage
    • A wholesaler or a supplier can provide “inside signs” for advertising purposes. These would include posters, mechanical devices and window decorations.
    • There is not a dollar limit on these “inside signs,” but they can have no “secondary value” and can provide value only as advertising.
    • These “inside signs” cannot be used for outdoor advertising.
    • A wholesaler or supplier cannot credit or pay a retailer for posting the “inside sign.”
  • Outdoor Signage
    • A wholesaler or a supplier may provide a retailer with an “outside sign” for advertising purposes.
    • “Outside signs” have a dollar limit of $400, which includes the cost of installation.
    • The “outside sign” must be on the wall or roof of a retailer’s building or a building adjacent to the retailer’s premises.
    • The signs may include the retailer’s name on them.
    • A wholesaler or supplier may not compensate or credit a retailer for using the “outside sign.”
  • Point of Sale Advertising
    • Wholesalers and suppliers may provide “point of sale” materials to retailers so long as the items bear advertising. If the POS material is coming from a supplier, it may only be provided to a retailer through the wholesaler.
      • These “point of sale” items can include posters, placards, electric, mechanical or other “inside signs,” window decorations, trays, coasters, mats, menu cards, meal checks, paper napkins, foam scrapers, bar mats, clocks, calendars, wine lists, menus, etc.
    • Wholesalers may provide to retailers items intended to be carried away by consumers from a retail establishment. Note that a supplier wishing to provide such items to retailers can only do so through a wholesaler.
      • These items include pouring racks, ash trays, bottle or can openers, cork screws, bags, matches, recipes, pamphlets, cards, postcards, pencils, cups glassware, shirts, hats, visors, and other branded items of “nominal” value.
  • Combination Packs
    • Wholesalers, suppliers and retailers can create combination packs where an alcoholic beverage is sold along with a non alcoholic item.
      • Such combination packs, usually including glassware or some other item.
      • The cost of the nonalcoholic item cannot exceed twice the cost of the alcohol.
      • The cost is determined by the cost of the item to the entity creating the combination package.
      • The cost of creating the nonalcoholic item cannot be borne by the wholesaler or the supplier.
      • Combination packages may NOT include “perishable” food items and whatever
  • Tastings
    • Wholesalers or suppliers may provide “educational seminars” or tastings to the employees of retailers on their premises or the premise of the retailer.
      • These seminars can also be designed to assist retailers in dealing with equipment as well as products.
    • Wholesalers may provide to a retailer a sample of distilled spirits or wine that they have not previously purchased within a year. The sample can be up to 1.75L.
  • Stocking Shelves
    • Wholesalers may, with a retailer’s consent, rotate and stock shelves in the retail establishment.
      • When doing so, a wholesaler may move only items sold by that wholesaler and is not permitted to shift or move other products.
      • Wholesalers may also set up a Point of Sale display at the retail establishment.
    • Supplier representatives may rotate and stock shelves or set up a point of sale display as long as they are accompanied by a wholesaler’s representative and have retailer consent.
      • Please note: Even though a supplier representative can set up point of sale items with consent, point of sale materials may ONLY be supplied to a retailer from a wholesaler. Thus suppliers must ship point of sale materials only to the designated wholesaler in a market.
  • Coupons
    • Suppliers may offer coupons for refunds, contest prizes and premium offers to consumers on the following conditions:
      • Coupons may be offered only through a general advertising program as a point of sale, newspaper, magazine or internet offer.
      • On premise retailers may only participate in the offers for contests and premium offers. They may NOT participate in refund offers.
      • No quotas or minimum participation can be required by a wholesaler or a supplier for a retailer to participate in the offers to consumers.
      • No “cents off” coupons that can be redeemed at the point of sale are permitted.
  • Equipment
    • A wholesaler or supplier may sell equipment or other supplies to a retailer, subject to the following requirements:
      • The equipment that is sold to the retailer must be sold at a price that is not less than the cost the wholesaler or supplier originally paid and the purchase price must be paid in full within 10 days of the receipt of the equipment.
      • The wholesaler or supplier may install the equipment at the retailer’s premises as long as the retailer pays the actual cost of installation.
      • “Coil cleaning” can be provided by a wholesaler to a retailer.
  • Entertainment
    • A wholesaler may entertain retailers or a retailer’s employees by providing:
      • Meals (Limited to $100 per person, limited to 6 employees of the same retailer per day)
      • Admission to concerts, theater and arts events (no limit on cost)
      • Admission or participation in sporting events (no limit on cost)
      • Admission to charitable events (no limit on cost)
      • Admission to a private party.
    • Entertainment expenses do NOT include the cost of transportation to a permitted event for a distance over 100 miles from the retailer.
    • A wholesaler can provide entertainment as long as there is no condition that a retailer purchase a certain product (or quantity of product).
    • A wholesaler can entertain a person no more than 4 times per calendar year.
    • The wholesaler is responsible for maintaining the records to demonstrate compliance with this provision.

 
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