October 10, 2019

Article Series-Alcohol Regulatory Fees

Article Series-Alcohol Regulatory Fees

Regulatory Fee Roundtable – First Article in a Series

Over the next few weeks KLC’s Department of Municipal Law and Training will be offering our thoughts on changes made by SB 29 to the alcohol regulatory fee statute, KRS 243.075. In this article, we will look at how a previously wet city can now impose a regulatory fee.

Senate Bill 29 now allows a city with a population of less than 20,000, based on the most recent decennial census, that is wet through a local option election to impose a regulatory fee not to exceed five percent upon the gross receipts of the sale of alcoholic beverages of each establishment located in the city. KRS 243.075(1)(a).

This fee is not a general revenue tax and the manner the fee is to be imposed and spent is limited by the statute. A city cannot just pass an ordinance at five percent and go about its day.  Specific steps requiring a city to look at some hard numbers to set the appropriate rate must be followed.

Any fee authorized by KRS 243.075(1) and (2) must be established at a rate that will generate revenue that does not exceed the total reasonable expenses actually incurred by the city in the immediately previous fiscal year for the additional cost, as demonstrated by reasonable evidence of policing, regulation, and administration as the result of the sale of alcoholic beverages in the city. KRS 243.075(4). The funds must only be spent to offset spending in these three areas by the city and cannot be allocated to other areas of the city budget.

A wet city which is now able to impose a regulatory fee must look back at least one year to see the policing, administrative, and regulatory costs incurred by the city due to the sale of alcohol.  Simply assessing a five percent rate will not meet the statutory requirements. A city must look at the costs associated with the administration and regulation of alcohol. These costs are largely clerical in nature and should be easy to pin down. 804 KAR 10:031 has a helpful, but not exclusive, listing of these allowable costs and expenses.

As to the policing costs, cities would be wise to have their city police department pull all police reports, call logs, citations, and arrest reports over at least the previous year, if not longer. These reports will need to be examined to determine the percentage of all police calls and actions that had alcohol involvement over the past year. Once the city has come up with that percentage along with the regulatory and administrative costs, a rate will be easy to assess, and the evidence should support five percent. If it does not, a lower rate must be imposed. This one-year lookback must be done annually. KRS 243.075(4).

A city’s failure to follow these steps could potentially require a refund to any licensee affected in the amount equal to the prorated portion of the excess revenues collected. KRS 243.075(7)(a).

Any city which does not meet the 20,000-population requirement and who imposed a regulatory fee as of January 1, 2019 may continue to do so. KRS 243.075(9)(a).

A city which has imposed a rate over five percent as of June 27, 2019 may still do so. KRS 243.075(9)(b). So, a city imposing a nine percent fee that later needs to adjust down to eight percent can do so and still be in statutory compliance.  They would not be required to drop to five percent.

As a final note, KLC is aware that we have cities under 20,000 as of June 27, 2019 when the changes in the law were effective who cannot impose the fee because they voted to go wet more than two years before that date. KRS 243.075(3) created a two-year window for a city to impose a regulatory fee if they did so after July 15, 2014. The changes made by SB 29 to KRS 243.075 were effective outside the two-year window of regulatory fee implementation for many of our cities. We are aware of this issue and will be working in the upcoming legislative session to remedy it. Please feel free to contact your local state legislators to make them aware of this if you are one of our cities impacted by this issue.

If you have any questions, please contact Chris Johnson in the Department of Municipal Law and Training at 859-977-3709.