September 13, 1988

Robert A. Warder 
City Attorney 
Box 10 
Hill City, South Dakota 57745

Official Opinion No. 88-42

Mark-up by city of malt beverage costs

Dear Mr. Warder:

You have requested an official opinion on the following factual situation:

FACTS: 

The City of Hill City has four operating agreements with four establishments in Hill City.  One is an operating lease on the municipal bar and liquor store for a monthly fee to the City from the operating licensee. 

They also have an operating agreement with the Chute Rooster bar for a monthly fee and also setting forth certain rights and obligations of both parties. 

The City council wants to charge the other commercial establishments selling malt beverage the 5% mark-up fee that is allowed by the recent amendment to state law. 

We are unable to determine because of the existing operating agreements as to whether the City can charge the other commercial establishments the 5% mark-up fee allowed by law.

Concerning this you have asked the following question:

QUESTION: 

May Hill City charge the 5% mark-up fee permitted by SDCL 35-4-60.2 to malt beverage retailers or package dealers other than those with whom it has operating agreements.

Required provisions in the operating agreements are contained in SDCL 35-4-20 .  Subdivision (5) provides: 

The manager shall pay for all liquor supplied by the municipal off-sale establishment, the actual cost price, the transportation charges and mark-up and such additional compensation or fee as may be mutually agreed upon by both parties.

You have indicated that in Hill City the operating agreement provides for a monthly fee for the on-sale establishment but you have not indicated what fee is charged to the wine and malt beverage establishments.

SDCL 35-4-60.2 provides: 

A licensee licensed under subdivisions (17) [malt beverage retailers] or  (18) [malt beverage package dealers] of §  35-4-2 shall purchase the malt beverages he sells from the municipality if the municipality in which he is located is a licensee under subdivision (5) [municipal off-sale licenses] of §  35-4-2 and if the municipality has by ordinance required that such purchases be made from the municipality.  A municipality selling malt beverages to any licensee licensed under subdivisions (17) or (18) of §  35-4- 2 may not charge such licensee more than five percent above the municipality's cost for malt beverages plus freight unless the municipality has operating agreements in effect on April 1, 1988, for its on-sale alcoholic beverage licensees licensed pursuant to subdivision (4) of §  35-4-2 and imposes a mark-up higher than five percent for malt beverages.  The  municipality shall charge all such licensee's [sic] the same price for malt beverages.  [Emphasis supplied.]

Under this section there are several conditions which must exist before a municipality may charge malt beverage retailers or package dealers a mark-up fee.  The municipality must hold an off-sale license and have an ordinance requiring that purchases be made from the municipal package store.  If a municipality has both an off-sale and an on-sale license, or a license in the name of the municipality with operating agreements to individuals, the municipality may charge a mark-up for sales to that licensee.  The mark-up may not be more than five percent above the municipality's cost for malt beverages plus freight unless there are operating agreements for on-sale licensees which were in effect on April 1, 1988, imposing a greater amount.  These are licenses which are issued pursuant to subdivision (4) of §  35-4-2.

To impose a mark-up higher than the five percent for the malt beverage retailers licensed under (17) or (18) of §  35-4-2 the municipality must impose a higher mark-up on those persons holding operating agreements.  If the municipality is charging less for the holders of operating agreements on their purchases of malt beverages it may not charge malt beverage retailers or package dealers the five percent and, in fact, may not charge more than they are charging for malt beverages to the on-sale operators.

The answer to your question is that Hill City may not charge a five percent  mark-up fee to malt beverage sellers licensed under (17) and (18) of §  35-4-2 unless it was charging at least five percent for the sale of malt beverages to licensees with whom the city holds an operating agreement.

Respectfully submitted,

Roger A. Tellinghuisen
Attorney General