FREE GOODS, DISCOUNTS, REBATES, REFUNDS AND PRICE REDUCTIONS
Proprietors of Distilled Spirits Plants, Bonded Wine Cellars,
Taxpaid Wine Bottling Houses; Brewers, Importers, Whole-
sale Malt Liquor Dealers, Wholesale Liquor Dealers and
Purpose. This circular is to advise industry members that an ATF
Ruling will be published in an early issue of the ATF Bulletin which
will further amplify the provisions of Revenue Ruling 54-161, C.B. 1954-1,
338 (Internal Revenue). (See also ATF Ruling 74-6, ATF C.B. 1974, 50.)
The new ruling will read as follows:
The response from industry following the publication
of ATF Ruling 74-6, ATF C.B. 1974, 50, which related to
practices employed by some industry members who furnished
retailers with inordinate amounts of free goods and/or sub-
stantial price reductions, volume discounts, rebates, and
refunds, indicates that the ruling has been interpreted as
a shift in the Bureau's position concerning pricing.
Actually, the intent of the ruling was to merely re-emphasize
and amplify our position established in Revenue Ruling 54-161,
C.B. 1954-1, 338 (Internal Revenue).
In general, 27 U.S.C. 205(b)(3) states that it is un-
lawful for any producer, bottler, importer, or wholesaler
of alcoholic beverages, directly or indirectly, or through
an affiliate, to induce any retailer to purchase alcoholic
beverages from him to the exclusion, in whole or in part, of
similar products sold or offered for sale by other persons
in interstate commerce by furnishing, giving, renting, lend-
ing or selling to the retailer any fixtures, signs, supplies,
money, services, or other things of value.
It was held in Revenue Ruling 54-161 that so-called
free goods, discounts, rebates, refunds, and price reductions
given to retailers pursuant to an agreement made at the time
of sale are merely methods used to arrive at an agreed sales
price and as such do not come within the purview of the
Federal Alcohol Administration Act. However, if the free
goods, discounts, rebates, etc., are such that the pricing
aspect is merely a subterfuge, the transaction would con-
stitute a "gift" within the meaning of 27 U.S.C. 205(b)(3).
In amplification of Revenue Ruling 54-161, the
Bureau recognizes the fact that discounts may be granted
to introduce new products, close out discontinued lines,
and pass on to retailers savings to the supplier as a
result of volume purchases, etc., and as such are
methods used to arrive at an agreed sales price. How-
ever, if the discount is such that it is in reality a
subterfuge for granting financial assistance to a re-
tailer or for any other proscribed purpose, the discount
would constitute a "gift" within the meaning of 27 U.S.C.
It is not the intent of the Bureau to interfere
with industry members' prerogative to use discounts,
rebates, etc., as legitimate pricing arrangements.
However, the Bureau will consider questionable, and
subject to investigation, the operations of any whole-
saler or other supplier where it is found or where
there is reason to believe the giving of a discount or
price reduction results in a price to the retailer of
less than the supplier's "laid-in" cost plus "total
operating" cost. The foregoing will be applicable to
all type discounts and price reductions (volume dis-
counts, dollar volume purchases, combination "deals,"
etc.) and to all brand categories (confined brands,
private label brands, etc.). Price determinations
will be made primarily on an item by item basis for
each item on an invoice.
For the purposes of this ruling "laid-in" cost
will be that cost incurred by a wholesaler or supplier
to place the goods in inventory and would consist of
such costs as manufacturer's invoice price, freight,
and state and local taxes; "total operating" cost will
include selling, shipping and delivery, occupancy,
warehouse operation, administrative and general ex-
penses normally incurred in the conduct of business.
The Bureau does not take the position that a sale
below laid-in cost plus total operating cost is auto-
matically a violation of law, but merely that such a sale
is questionable and may be investigated. However, if the
sale does not meet the above criteria, and the purpose
for which a discount is given cannot otherwise be specifi-
cally justified, the Bureau will consider such transaction
a proscribed inducement; if the elements of exclusion and
interstate or foreign commerce are also present, a
violation of the Federal Alcohol Administration Act would
The Bureau's major objective in issuing this
ruling is to furnish industry with the most effective
yet practical criteria possible in distinguishing
between legitimate price reductions and proscribed
inducements. The criteria set forth above is intended
solely to provide industry with a workable guideline
with which to make this distinction.
Rev. Rul. 54-161, C.B. 1954-1, 338 (Internal
Revenue), amplified by ATF Rul. 74-6, ATF C.B. 1974,
50, is hereby further amplified.
Inquiries. Inquiries concerning this circular should refer to
its number and be addressed to the Assistant Director, Regulatory
Enforcement, Bureau of Alcohol, Tobacco and Firearms,
1200 Pennsylvania Avenue, N.W., Washington, D. C. 20226.
REX D. DAVIS