BEFORE THE DEPARTMENT OF REVENUE
OF THE STATE OF MONTANA
TO: All Concerned Persons
1. On October 25, 2012, the department published MAR Notice Number 42-2-882 regarding the proposed amendment and repeal of the above-stated rules at page 2149 of the 2012 Montana Administrative Register, Issue Number 20.
2. A public hearing was held on November 15, 2012, to consider the proposed amendment and repeal. Mark Kohoutek, Owner, Great Falls Agency Liquor Store #140, appeared and testified at the hearing. Jacque Thomas, CEO, Krisco Liquor, Missoula, Montana, submitted written comments. The oral and written comments received are summarized as follows, along with the responses of the department:
COMMENT NO. 1: Mr. Kohoutek commented that he was on both the committee that worked on these rules and on the original committee that met in 1998 that adopted the original rules. He stated he was appearing to make references for future consideration on some issues and commented that he is aghast at some of the language in the initial paragraphs that make reference to serious deficiencies, which create inequities, and refer to evolutions. He asked "what serious deficiencies exist, and what inequities are created?"
Mr. Kohoutek further commented that none of this language was brought up to the committee or was a part of the original final report that went to the director. All of this language is new. He further commented that he is unsure how the notices go on up through the chain, but it seems a more prudent method would be to draft the report that goes with it and provide that to the committee to sign off on too. He stated that, in his view, the committee is okay with the proposed rules, but nobody from the committee has ever seen the first page and a half [of the rule notice]. It comes from the department. Perhaps the standard process is that a committee changes rules or amends rules, and then the department adds what it wants. He further commented that he wants to state for the record that those kinds of serious deficiencies and inequities, whatever they are, have never been discussed or defined and he finds the language to be vague innuendo and somewhat offensive.
RESPONSE NO. 1: The department appreciates Mr. Kohoutek's comments.
The department is required by statute, 16-2-203, MCA, which it has complied with, to utilize a negotiated rulemaking process for rules related to the operation of the agency liquor stores. Following the conclusion of the committee meetings, the department considers the recommendations of the committee's final report to the director (which has first been seen by all of the committee members) when preparing the proposed rule notice to be filed with the Secretary of State. The proposed amendments to the rule language published in the proposal notice were intended to match those agreed to by the committee.
Mr. Kohoutek is correct that the preamble, or introduction, to the rules that appeared in the notice was written by the department and was not part of the negotiated rulemaking process. Under law, the rules notice is the responsibility of the department and is issued under its authority. The Negotiated Rulemaking Committee does not have authority over the rules notice. The department, in fact, is not even legally bound to propose the content of the Negotiated Rulemaking Committee in the content of the rule, but in fact chose to do so in this case. The department is well within its prerogatives to include preamble language addressing the Legislature in the proposal notice. The language respectfully asks the Legislature to department to review the law and work towards a viable solution for the future.
Mr. Kohoutek further commented that the language in the preamble was the first the committee had heard mention of inequities. However, when the Negotiated Rulemaking Committee convened and assembled together for its first meeting on November 1, 2010, Director Bucks addressed the committee and talked about those inequities.
In addition to expressing his appreciation to those on the committee for their willingness to serve, the director expressed some of his overall concerns. Among other things, he talked about the inequities of commission rates, especially in cases where stores are located in areas where the population has significantly increased since privatization, and how those stores continue to be guaranteed the same commission rate structure as stores in remote areas who have not seen similar growth in their populations or economies. Yet, even though those small stores now effectively compete in and enjoy the benefits of a larger urbanized market, they continue to retain the higher commission rate intended for small, isolated markets and enjoy a competitive advantage over other agency store in the same market.
The director asked the committee to look at the current inequities that exist and try to find efficiencies in the retail system that would control costs and avoid the trend of agency store commission costs as a percentage of sales increasing continuously. He explained that the current commission structure does not appear to provide incentives to benefit the citizens of Montana in the form of greater agency store efficiencies (i.e. stable or declining costs as a percentage of sales). The director noted that the central state warehouse has been successful in reducing its costs as a percent of sales, which provides a benefit to the public.
Privatization is frequently justified on the basis of bringing the benefits of market competition to government activities to reduce costs to the public. In the case of liquor store privatization, there are no effective mechanisms in the current law to bring the benefits of competition to the public in the form of reduced costs. Instead, there is a system that guarantees that not just the dollar amount, but the rate of agency stores commissions will increase. The irony is that the government owned and operated portion of Montana's liquor system has been cutting its costs as a share of sales, while the privately owned portion of the system has continually increased its costs as a share of sales.
Again, the director brought this concern to the Negotiated Rulemaking Committee at the outset of its proceedings and asked for its help in finding a way to help control rising agency store costs. Despite the fact that the committee did not recommend methods of controlling costs, the department deferred to the committee and proposed the structure of rates it recommended.
COMMENT NO. 2: Mr. Kohoutek also commented that he has some serious issues with ARM 42.11.306(7), the administrative rule that creates a "hybrid" commission percentage. He stated that in essence, what happens is if an agent receives an increase on Part B, they will forever be subject to this hybrid commission percentage. The department has created a fourth commission percentage, for any store who's ever received a Part B increase. There is no statutory authority to back-off Part B increases and, therefore, this creates a new hybrid commission. The statute that is the basis for this administrative rule is 16-2-101(6)(b), MCA, yet nowhere does this statute give any authority to the department or the division to back-off part of their commission increases. In fact, the statute creates three other commission percentages. Section 16-2-101(4), MCA, creates the original, or main commission, 16-2-101(4)(b),MCA, creates the sales volume commission, and 16-2-101(2)(b)(ii)(B),MCA, creates the weighted average discount. There is no statutory authority for this fourth, hybrid, commission to exist at all.
Mr. Kohoutek further commented that the notice makes reference to adding transparency to the rules twice. However, this hybrid commission will never be published. It is only going to be determined every three years and he stated if anything, it takes away from the transparency.
RESPONSE NO. 2: The department appreciates Mr. Kohoutek's comments on this rule. The department is not creating an additional or "hybrid" commission rate through this process. The adjusted commission rate referenced in ARM 42.11.306(7) is used solely for determining the average commission rate for the stores in that particular band with similar sales. If the store's average percentage rate from the banding is greater than their adjusted Part B commission rate, that store's rate will increase to the average for their band. It is not set for the duration of their contract.
The adjusted commission percentage rate is a matter of public record and will be published along with the banding every three years. The department will ensure this is transparent in the banding averages worksheet provided to all agents. The department believes it is operating within the statutory boundaries to remove the Part B adjustment from the calculations for averaging the commission rates. The Negotiated Rulemaking Committee conducted a very thorough review of the process, gave it much consideration, and ultimately agreed to it by way of a consensus vote.
COMMENT NO. 3: Mr. Kohoutek further commented that the hybrid commission percent creates its own deficiencies and inequities. Relative to the example that was provided in the rules to show how it will be used, he commented that the committee either failed to recognize a particular situation that could potentially arise, or else the situation did not come up in the discussions. He explained that the thinking behind backing off Part B increases comes from the idea that Part B increases are particular to the store that received them, and should not be used to help other stores in that band get an increase via the banding average. He further stated that even if the department felt there was a legal basis to back-off the Part B increases, the rules as written will penalize stores and do more harm than the original intent of just backing off Part B increases that are particular to that store.
Mr. Kohoutek stated that this is where the inequity or deficiency occurs. He explained that any store that has been above a band average will be penalized from here on out. For his example, he described the general makeup of the 2007 bands, including 19 stores that were above their band average in 1997. Assuming any of them received a Part B increase in 2007, when subsequently setting the band averages in 2010 and applying this rule as proposed, the department would back-off any one of those 19 stores not to their commission rate, without Part B included, but to their band's average rate. That goes back lower than what that store has averaged, and penalizes all the stores in that band relative to the new averaging.
Mr. Kohoutek commented that to back those stores off goes against the reasoning for why the department originally intended to back-off Part B, and restated that the statutory authority to back it off doesn't exist and in fact would appear to go against the legislative intent. There has never been anything in the statute that allows for decreasing commission and this part of the rule will never hold up in court. He stated that he cannot imagine any argument that could be used to sway a truly impartial third party, like a judge, he finds it to be totally illegal and statutorily baseless, and further stated it should be deleted.
RESPONSE NO. 3: The department agrees with the need to add details and clarity to the rule language to address the situation Mr. Kohoutek cited in his example. The committee did not specifically deal with this particular situation, and the department appreciates Mr. Kohoutek raising the issue. The department is further amending the rules to address the situation raised in his example.
Again, the department believes it is operating within the statutory boundaries to remove the adjustment to Part B in the calculations for averaging the commission rates. As stated in Response No. 2, the Negotiated Rulemaking Committee also agreed to this after much review and consideration.
COMMENT NO. 4: Mr. Kohoutek commented that he wants to point out that the recent committee looked at the issue of whether or not Part B increases were dependent on getting a Part A increase. He further commented that during a committee teleconference, he shared that the original 1998 committee took up this same issue and rejected it entirely. Consequently, this committee drafted language for ARM 42.11.308(2). He stated that it now appears to be deleted from the rules. He further stated that he wants to make it clear for the record, and for all future considerations, that this committee is not abandoning the idea of the language proposed for ARM 42.11.308(2), and in fact rejected the idea of including language that would make a Part B increase contingent on getting a Part A increase.
RESPONSE NO. 4: Mr. Kohoutek's general understanding in this comment is accurate. The department is repealing ARM 42.11.308, altogether. It was always the intent to repeal the rule and it was flagged as such in all versions of the draft the committee worked on. It was determined that the relevant language from the rule would be relocated, primarily into ARM 42.11.306, and amended as needed in order to consolidate the commission percentage discount rate review process language into a single rule. Because ARM 42.11.308 is being repealed, it cannot be amended.
However, the department agrees that the committee discussed and rejected the notion that a commission rate increase under 16-2-101(6)(b) Part B would be contingent on getting an increase under 16-2-101(6)(b) Part A. That part of the language from ARM 42.11.308(2) should have also been incorporated elsewhere for better clarity. The department regrets the omission of the committee's agreed to language from that section of the repealed rule. It was not intentional, but rather an oversight that neither the department nor the committee realized when reviewing the final draft of the proposal notice.
To incorporate the relevant language, the department is further amending ARM 42.11.309(1), to capture the committee's intent. ARM 42.11.309 is the rule that specifically addresses the details of qualifying for a Part B commission percentage increase consideration, and is the most appropriate location for the clarification.
COMMENT NO. 5: Ms. Thomas commented, relative to ARM 42.11.305 and 42.11.310, about the reference to removing a public hearing in a community unless percentages are met, and having no clear written deadline for hearings to be completed by or how a store is issued. She stated that there should not be an additional hardship placed on those who protest in a community. If citizens in that community have concerns, it should be the state's obligation, as public servants, to address the concerns as conveniently and timely to those individuals in that community.
Ms. Thomas further commented that it's also unclear in the language if the lowest bidder proposing ownership of a new store gets the bid. In the name of fairness, the lowest bid submitted should be granted the bid for the store.
RESPONSE NO. 5: The department appreciates Ms. Thomas' comments and interest in the rules. There is no intent to create a hardship for persons in a community, but rather to establish criteria for determining when it does or does not make sense to travel and hold a hearing in a community where little or no interest may even exist in a proposed new store. To this point, department staff has diligently traveled to communities to conduct all hearings. However, in some instances there has turned out to be little or no local interest in the content of the hearing and no one from the community attended. Unnecessary travel is clearly not an efficient use of state resources. The proposed amendments to the rules provide for a fair and equitable way to assess local interest relative to a particular hearing in advance, and plan for the location of the hearing accordingly.
New (7) in ARM 42.11.305 is being proposed to specifically address the requirements for the hearing to be held in the community of the proposed location. To create consistency, the requirements will mirror those for other department liquor hearings. If the number of protests received by the department is equal to or greater than the number that is 25 percent of the number of all-beverage licenses determined for that particular community, plus two, the hearing will be held in the community. The department believes this is a fair ratio of the population to determine if there is more than minimal opposition.
Relative to Ms. Thomas' question about how the winning bidder for a store is selected, ARM 42.11.310(3)(a) states that an agent will be selected according to procedures for competitive sealed bids as defined in ARM 2.5.601. ARM 42.11.310(3)(b) states that the agent's commission percentage discount rate will be initially set at the percentage bid by the lowest responsive bidder. The department will continue to use the procedures for a competitive sealed bid as defined in ARM 2.5.601.
COMMENT NO. 6: Ms. Thomas also commented on ARM 42.11.306. She stated that she has been perplexed since the beginning how the average commission rates can go up. It appears the only way the rate can change is if a store is in a band that changes. She further commented that she is making clear for the record that for 16 years store number 170 has been in the top band, and that has made raises almost impossible at times under the current and proposed system.
Ms. Thomas asked: "What is the purpose of a commission rate review, for a rate change, in a situation like just described?" "Is driving customers away to reduce the sales band the store falls in until the next review the answer for an increase?" When you are in the top band, it is ridiculous to ask someone and base a system for rewards on failures, not merits.
RESPONSE NO. 6: The department thanks Ms. Thomas for her comments on this rule. The commission rate review and application structure is provided for in statute, and provides only for an adjustment in the store's commission rate for those stores below the average of stores with similar sales volume. For additional detail, Ms. Thomas may wish to refer to 16- 2-101(6)(a), MCA.
COMMENT NO. 7: Ms. Thomas commented, relative to ARM 42.11.307, that making the inflation factor based on the top 25 products as the basis of an increase, again sets up a store for little to no rate increase. Assuming those products are low-end, it is the history of those products to increase zero to maybe .30 cents a bottle over the course of a lengthy time frame. In times of inflation, consumers who purchase top-shelf products then reduce their purchases to mid-premium products. Mid-premium product purchasers then reduce to low-end product purchases. There are no incentives for the low-end producers to increase costs, since quantity is a given. Taking that information into account, perhaps the 25 middle products sold could be used as the factor in volume sales discounts instead.
RESPONSE NO. 7: The department appreciates Ms. Thomas' comments on this subject. The Negotiated Rulemaking Committee reviewed and discussed this rule at length to determine the most equitable approach. Based on the information and options reviewed, the proposed method was determined to be the most viable and transparent.
COMMENT NO. 8: Ms. Thomas also commented on ARM 42.11.309, relative to the rental costs for a building. The number the department is trying to arrive at is an inflation-based calculation in that area rather than an actual cost basis. Your inflationary costs to actual have already been addressed in the volume rate review. Not including autos as an allowable cost of doing business is unrealistic and should be noted. Ms. Thomas asked "When an account purchases $50 thousand or more of goods a month, are you recommending we tell them to pick it up themselves?" "Do we tell them it is not included by the state as a fair cost of doing business?" The state never had to deliver to accounts, or for that matter even came close to the volume in sales that is being done by the stores today.
RESPONSE NO. 8: The department appreciates Ms. Thomas' input on this rule. As written, the rule does provide for other expenses unique to an agent to be considered, through the inclusion of language in (2)(a), which states: "allowable costs include but are not limited to." However, elective or discretionary business decision costs are not considered. Agents making discretionary business decisions are responsible for the costs associated with their choices.
As previously noted, the department worked together with a Negotiated Rulemaking Committee when drafting all of the proposed rule amendments found in proposal notice MAR 42-2-882. Several of the committee members are themselves agency liquor store owners. The committee members were very helpful with identifying and detailing the criteria to include in the proposed amendments to ARM 42.11.309(2).
It is important to remember that the proposed changes to the rules were based on the conversations and work that took place during the committee meetings. Both the department and representatives from the agency liquor stores agreed in principal to the rule changes put forth, and found them to be in the best interest of both the agency liquor stores and the state of Montana.
3. As a result of the comments received, to reinsert language that was inadvertently stricken in the proposal notice, and to remove a repealed implementing citation, the department amends ARM 42.11.306, 42.11.309, and 42.11.310 as follows:
42.11.306 COMMISSION PERCENTAGE DISCOUNT RATE REVIEW
(1) through (6) remain as proposed.
(7) The average commission percentage discount rate for each band will be established by adding the band's agency liquor stores' commission percentage discount rates together and dividing by the number of agency liquor stores in the band. Each agency liquor store's current commission percentage discount rate will be used in the calculation unless the agency liquor store's current commission percentage discount rate reflects an adjustment through ARM 42.11.309 in any previous review period. In that circumstance, and for the purpose of calculating the band average only,
the lesser of the agency liquor store's current commission percentage discount rate or the commission percentage used will be the greater of the agency liquor store's band average from the last review period will be used or the agency liquor store's current commission percentage discount rate less the adjustment given through ARM 42.11.309.
(a) Example 1: An agency liquor store has a current commission percentage discount rate of 9.75 percent and it does not reflect an adjustment through ARM 42.11.309 in any previous review period. The rate used for the banding calculation will be 9.75 percent. The band's average for the current review period is calculated to be 9.35 percent. In this example, this agency liquor store's commission percentage discount rate going forward will continue to be 9.75 percent because it is higher than the band average.
(b) Example 2: An agency liquor store has a current commission percentage discount rate of 9.75 percent and it does reflect
an a .05 percent adjustment through ARM 42.11.309 in a previous review period. This agency liquor store's band average from the last review period is 9.25 percent. The rate used for the banding calculation will be the lesser greater of the agency liquor store's current commission percentage discount rate less their adjustment through ARM 42.11.309 or the agency liquor store's band average from the last review period. In this example, 9.25 9.70 percent will be used for banding calculation purposes. The band's average for the current review period is calculated to be 9.35 percent. In this example, this agency liquor store's commission percentage discount rate going forward will continue to be 9.75 percent, because it is higher than the band average.
(c) Example 3: An agency liquor store has a current commission percentage discount rate of 9.75 percent and it does reflect
an a .05 percent adjustment through ARM 42.11.309 in a previous review period. This agency liquor store's band average from the last review period is 9.25 percent. The rate used for the banding calculation will be the lesser greater of the agency liquor store's current commission percentage discount rate less their adjustment through ARM 42.11.309 or the agency liquor store's band average from the last review period. In this example, 9.25 percent will be used for banding calculation purposes. The agency liquor store's rate used to calculate the band's average will be 9.70 percent. The band's average for the current review period is calculated to be 9.80 percent. In this example, this agency liquor store's rate would change from 9.75 percent to 9.80 percent, and their commission percentage discount rate would no longer reflect the adjustment through ARM 42.11.309, because the average of the band it is in is more than the adjusted amount.
(8) through (10) remain as proposed.
AUTH: 16-1-303, MCA
IMP: 16-2-101, MCA
42.11.309 AGENT REQUESTED COMMISSION PERCENTAGE DISCOUNT RATE REVIEW (1)
An agent All agents who has have been open for business on a regular and continuous basis for the three most recent calendar years may petition the department for an increase to their commission percentage discount rate by sending a completed application and required documentation to the department by May 1, 2013, and by May 1 of every succeeding three years thereafter. Upon review of the application, including any additional information requested, such as the agency liquor store's financial records and supporting documentation, the department may increase the agent's commission percentage discount rate.
The An agent's commission percentage may be increased to a percentage greater than the commission percentage discount rate received under ARM 42.11.306 will apply, if the following criteria are met:
(2)(a) through (6) remain as proposed.
AUTH: 16-1-303, MCA
IMP: 16-2-101, MCA
42.11.310 SELECTION OF AGENT (1) through (3) remain as proposed.
AUTH: 16-1-303, MCA
IMP: 16-2-101, 16-2-109, 16-2-407
, 18-4-303, 18-4-304, MCA
4. Therefore, the department amends ARM 42.11.306, ARM 42.11.309, and 42.11.310 with the amendments shown above; and amends ARM 42.11.301, 42.11.305, and 42.11.307, and repeals ARM 42.11.308, as proposed.
5. An electronic copy of this notice is available on the department's web site at www.revenue.mt.gov. Select the "Laws and Rules" link in the left hand column, and click on the "Rules" link within to view the options under the "Current Rule Actions – Published Notices" heading. The department strives to make the electronic copy of this notice conform to the official version of the notice, as printed in the Montana Administrative Register, but advises all concerned persons that in the event of a discrepancy between the official printed text of the notice and the electronic version of the notice, only the official printed text will be considered. While the department also strives to keep its web site accessible at all times, in some instances it may be temporarily unavailable due to system maintenance or technical problems.
/s/ Cleo Anderson /s/ Dan R. Bucks
CLEO ANDERSON DAN R. BUCKS
Rule Reviewer Director of Revenue
Certified to Secretary of State December 10, 2012