Request By:
Ms. Catherine Staib
General Counsel
Department of Alcoholic Beverage Control
123 Walnut Street
Frankfort, Kentucky 40601
Opinion
Opinion By: Steven L. Beshear, Attorney General; By: Suzanne Guss, Assistant Attorney General
This is in response to your request for an opinion of this office as to whether the Alcoholic Beverage Control Board has the authority to bring action against licensees for violations of KRS 365. You have presented a fact situation in which a retail malt beverage licensee purchases beer at $1.50 per six-pack from a distributor and sells the six-pack to his customers for $1.51.
The issues presented are:
1. Whether a retail licensee is guilty of violating KRS 244.050 if he does not include as part of his cost those factors specified in KRS 365.030(3)?
2. Whether the licensee can be found in violation of KRS 365 in show cause proceedings before the ABC Board?
KRS 244.050 states:
"Treating" prohibited - Exception. No retail licensee shall give away alcoholic beverages in any quantity, or deliver it in any quantity for less than a full monetary consideration, except as provided by KRS 243.155.
KRS 365.030(1) provides:
Except as provided in KRS 365.040, no person engaged in business within this state shall sell, offer for sale or advertise for sale any article or product, or service or output of a service trade, at less than the cost thereof to such vendor, or give, offer to give or advertise the intent to give away any article or product, or service or output of a service trade, for the purpose of injuring competitors and destroying competition.
KRS 365.030(3) defines cost:
As applied to production, 'cost' includes the cost of raw materials, labor and all overhead expenses of the producer. As applied to distribution, 'cost' means the invoice or replacement cost, whichever is lower, of the article or product to the distributor and vendor plus the cost of doing business by the distributor and vendor. The 'cost of doing business' or 'overhead expense' means all costs of doing business incurred in the conduct of the business and must include without limitation the following items of expense: Labor (including salaries of executives and officers), rent, interest on borrowed capital, depreciation, selling cost, maintenance of equipment, delivery cost, credit losses, all types of licenses, taxes, insurance and advertising. 'Vendor' includes any person who performs work upon, renovates, alters or improves any personal property belonging to another person.
From the foregoing, it is clear that any licensee selling malt beverages to customers at a price which does not match, if not exceed, his "cost," as defined in KRS 365.030(3), is in violation of KRS 365.030(1), assuming sales below cost are for the purpose of injuring competitors or destroying competition.
Whether, in your hypotretical, the $ .01 increase over the retailer's purchase price reflects hig "cost" in a matter of tecnnical calculation. Assuming the retail price of $1.51 does not reflect the cost factors specified by statute, two remedies are available. First, the violator will be subject to a line and/or imprisonment pursuant to KRS 365.990(2). Second, the violator's license may be revoked pursuant to KRS 243.490 which provides that "any such license may be revoked for any cause which the alcoholic beverage control board in the exercise of its sound discretion deems sufficient." However, before a licensee will be found in violation of KRS 365.050(1), the Board must establish that the sale below cost was done with the purpose to injure competitors of destroy competition. Laundry Operating Co. v. Spalding Laundry & Dry Cleaning Co., Ky., 383 S.W.2d 364 (1964). Purpose or intent is essential and it cannot be presumed that the[Illegible Word] done with such purpose. Kentucky Utilities Co. v. Carlisle Ice Co., Ky., 131 S.W.2d 499 (1939). The[Illegible Word] does not rest upon the defendant to disprove intent. Id.
It is also the opinion of this office that sale below "cost," as defined in KRS 365.030(3), is not the equivalent of giving away alcoholic beverages for less than a "full monetary consideration" as prohibited by KRS 244.650. So long as the retail sales price to the customer matches or exceeds the replacement price on the date of sale (i.e., fair market value) or his original purchase price, whichever is lower, the retailer receives "full monetary consideration." Had the legislature intended that "full monetary consideration" incluse the retailer's costs, it would have explicitly provided for such requirement in KRS 244.050, as it did in KRS 365.
You have also asked whether the ABC Board may fund a licensee to be in violation of KRS 365.050 in a show cause hearing under the following fact situation. A malt beverage distributor licensee sells a quantity of a branc of malt beverages to retail licensee "A" at $25.00 per half barred and the same product and quantity to retail licensee "B" at $29.00 per hall barrel. If the rebate or discount is secretly made "to the injury of a competitor and tends to destroy competition" the distributor licensee is in violation of KRS 365.050. Jefferson Ice & Fuel Co. v. Grocers Ice & Cold Storage Co., Ky., 286 S.W.2d 80, 83 (1955). If the Board deems a violation of KRS 365.050 to be a sufficient cause for revocation of a license, a show cause hearing may be held to determine if such violation has in fact occurred. KRS 243.490.
We trust this information has satisfactorily answered your inquiry. If you have additional questions, please contact us.