Alcohol Regulatory Fee Guidance

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.

Allowable expenditures

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:

• Employment, salary, and benefits of the city or county alcoholic beverage control administrator and staff who administer alcoholic beverage control laws; 
• Office supplies and equipment for the city or county to administer an alcoholic beverage control office; 
• Office space for an alcoholic beverage control administrator and staff; 
• Travel costs and expenses for the city or county alcoholic beverage control administrator and staff; 
• Additional policing expenses that are directly related to the discontinuance of prohibition, which shall include only those costs and expenses incurred solely as a result of the discontinuance of prohibition that are over and above any policing expenses previously incurred; and 
• Miscellaneous costs and expenses solely and directly related to the discontinuance of prohibition, if the following information is included on the Calculation Form for Alcohol Regulatory Fee in First Year Following Repeal of Prohibition.

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.

Penalties:

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:

• The city being required to provide a refund to any licensee that has been harmed in an amount equal to its prorated portion of the excess revenues collected by the city that are directly attributable to the violation. 
• If the court found the violation to be willful or intentional, the city would be responsible for the payment of the reasonable attorney fees directly incurred by a party to a litigation in an amount ordered by the court. 
• Upon the finding by a court of a second intentional and willful violation, the city may lose the ability to impose the regulatory fee for a period of five years. 
• Upon the finding of a third intentional and willful violation, the city may forfeit the right to impose the regulatory license altogether.

A few other practical points to remember:

• KRS 243.070(1)(c)(1) requires a city to credit the amount the licensee paid for their license against the regulatory fee that is owed. For example, if a licensee owed the city $2,000 in regulatory fees but paid $1,000 to obtain their license, the city would only be able to collect $1,000 in regulatory fees after the credit. 
• The revenue must be deposited into a segregated fund of the city. The money should not be lumped with other fees or in the general fund. 
• To better track alcohol-related policing costs, it is recommended that the city police implement a system that tracks alcohol-related calls. Whether it be a checkbox which identifies the run as alcohol-related or a separate form to track alcohol-related calls, documentation is key in substantiating the fee. 
• Work with your city attorney in setting the rate and reviewing potential expenditures. The penalties for violating the statute have the potential to have huge financial implications for a city. Your city attorney should be consulted prior to expending the regulatory fee money.

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.