With the increase of wet cities and counties throughout the commonwealth, the Kentucky League of Cities Municipal Law Department would like to remind cities of the restrictions surrounding the collection and expenditure of the alcohol regulatory fee.
As a refresher, KRS 243.075 authorizes cities with a population of less than 20,000 based on the most recent decennial census that are wet through a local option election to impose a regulatory fee not to exceed 5% upon the gross receipts of the sale of alcoholic beverages of each establishment located in the city. This regulatory fee is only meant to offset the new costs associated with the oversight of the sale of alcohol in your community.
Setting the rate
As a regulatory fee, this money is not a general revenue tax, and the allowable uses of the money are restricted by state law. The regulatory fee must be set at a rate that will generate revenue that does not exceed the reasonable expenses incurred by the city in the policing, regulation, and administration of alcohol within the city pursuant to KRS 243.075(4).
If your city is establishing the alcohol regulatory fee for the first time, it will need to go back at least one year to identify the costs associated with the policing, regulation, and administration of alcohol to assist in setting the rate. Additionally, the administrative regulation, 804 KAR 10:031 requires the city to fill out a calculation form created by the Kentucky Department of Alcoholic Beverage Control. The form does not need to be forwarded to the Kentucky Department of Alcoholic Beverage but must be retained by the city pursuant to the retention schedule.
A review of the fee percentage must be done yearly to determine whether the city continues to keep the rate at a defensible percentage. To substantiate policing costs, it is recommended that cities have their police departments pull all police reports, logs, citations, and arrest reports over the previous year to determine the percentage of all police calls and actions that had alcohol involvement. If the city cannot substantiate the percentage rate currently set, the city is required to lower the rate.
Once the city sets a justifiable percentage, the city may begin to collect and spend the money on allowable expenses. 804 KAR 10:031 provides a non-exhaustive list of the types of costs that would fit the policing, regulation, and administration requirements. They are:
As a reminder, the regulatory fee money must be solely and directly expended on policing, regulation, and administration of alcohol. Inevitably, the question becomes whether a city police department can buy a cruiser with alcohol regulatory fee money. If the city were to purchase a cruiser with only alcohol regulatory fee money, that cruiser could only be used in the policing of alcohol. It could not be used for general policing or for any other purpose. Most cities authorized to implement the fee do not have the amount of licensees or alcohol activity to support an alcohol-only cruiser. The recommendation would be to use regulatory fee money to offset the amount of the total purchase price by the percentage of alcohol-related policing costs. Also, alcohol regulatory fee money cannot be expended on non-alcohol-related things like debt payments, capital expenses, payroll, etc.
If the city is found by a court to have violated the statutory requirements of collecting and/or expending the alcohol regulatory alcohol fee, the penalties can include:
A few other practical points to remember:
As always, the Municipal Law Department is available to discuss any questions related to the alcohol regulatory fee. Please contact us at 859.977.3700.