A Battle is Brewing in Utah over Alcohol Reform
By Adrienne Bell and Catherine Parrish Lake
As the Utah Legislature wrapped up its session this week, it appears that a battle is brewing between the House and Senate over alcohol reform. Citing a concern with the “culture of alcohol,” the Senate declined to support many of the measures the House approved this session. The House voted to eliminate the so-called “Zion curtain,” which several key House members describe as “irrational” and “weird.” The House also approved changes to the population quotas for club licenses and removed restrictions that prohibit beer wholesalers and producers from selling “heavy” beer directly to restaurants. Each of these reforms, however, failed to receive a hearing in the Senate. Representatives Ryan Wilcox and Curtis Oda have been particularly vocal in expressing dismay about the Senate’s refusal to consider House bills that passed with large majorities. In response, the House defeated a number of the Senate’s alcohol bills, including those introduced by Senator John Valentine who is one of the key Senate sponsors of alcohol legislation. The defeated Senate proposals include increasing penalties for serving minors, restricting multiple licenses for the same location, allowing sampling of beer and spirits and restricting DABC’s discretionary powers.
Importantly, the Legislature will study alcohol reform during the interim session, which runs from April through November. Topics for discussion include whether to repeal the Zion curtain and increase the quotas for club licenses. The Senate has suggested that any increase in dining club licenses, which include restaurants like Ruth’s Chris and Spencer’s, would require limiting these establishments to patrons who are 21 and older. The Legislature also indicated that interim committees will review proposed legislation to address the sale of existing licenses.
Catherine Parris Lake and I will continue working on potential alcohol reforms during the interim session and will report on the issues under consideration by the committees. We welcome your feedback concerning any of the proposed changes.
Utah Legislative Wrap-Up on Alcohol Amendments
Only two proposed amendments to Utah’s Alcoholic Beverage Control Act passed during the most recent session of the Utah Legislature, which concluded on March 14th. H.B. 240 passed earlier in the session and addresses the “intent to dine” issue we reported on previously. Under the change, a restaurant licensee must confirm that a patron has an intent to order food prior to selling or furnishing a drink. It is unclear, however, what type of “confirmation” will be sufficient to comply.
The second bill to pass was hammered out during a House and Senate conference committee that met on the last day of the session. The compromise bill was introduced as a substitute to H.B. 228. The House and Senate ultimately approved the substituted H.B. 228 before the session ended. Governor Herbert is expected to sign both Substitute H.B. 228 and H.B. 240.
Most notably, Substitute H.B. 228 authorizes master licenses for full and limited service restaurants. To qualify, restaurants must be commonly owned and the owner must include at least five locations under the master license. Master license fees are $10,000 for full service restaurants and $5,000 for limited service restaurants, plus the initial license fees required for each newly licensed location ($2,200 for full service and $825 for limited service restaurants). As previously reported, enforcement across locations was a concern for the restaurant industry. The bill addresses these concerns somewhat by limiting the scope of enforcement actions. Under the bill, DABC may take disciplinary actions against a single location, individual staff at a single location or a combination of the two. Disciplinary action may be taken against the master licensee or staff of the master licensee if 25% of the locations covered by the master license have committed grave or serious violations or if 50% of the locations have committed any violations. The master license and all locations under it will count as one retail license for quota purposes. While a master licensing scheme may free up additional restaurant licenses, the current availability of restaurant licenses may make it unlikely that chains will adopt the new license format until licenses are no longer available.
Substitute H.B. 228 also makes several other changes, including:
- Allowing DABC to issue a conditional license for any type of retail license;
- Extending the time period for conditional licenses from six months to nine months, with a possible extension of three additional months;
- Allowing existing fraternal clubs to admit and serve guests without a club host if they derive at least 60% of gross sales from food;
- Postponing the effective date of the Transfer of Retail License Act until July 1, 2014; and
- Clarifying certain financial and audit provisions related to the DABC.
Utah Legislature Considers Amendments to Alcohol Beverage Control Act
By Adrienne Bell and Catherine Parrish Lake
Utah State Senator John Valentine (R) (Orem) has introduced a bill (S.B. 261) that may significantly affect alcohol operations if adopted. S.B. 261 would require that all restaurant patrons must be “seated” to be served or consume a drink. Current law allows a patron to be served and consume a drink while standing at a counter, for instance, while waiting for a table or when proposing a toast. The change would require many restaurants to remodel waiting areas to add seats and frustrate patrons who are denied service if they cannot obtain a seat.
The seating requirement, along with other proposed changes in the bill, also would prevent restaurants from hosting private functions where guests remain standing while drinking, such as during a cocktail party, wedding reception or holiday party. Utah restaurants likely would experience a significant loss of sales as a result. Businesses and individuals who look to restaurants for private functions services also would be negatively affected by the loss of such services.
Additionally, S.B. 261 limits the DABC’s powers to waive or vary the requirements imposed under the statute. Unless expressly authorized under the statute, the DABC no longer would be able to grant variances based on long-standing interpretations of various provisions. For example, the bill would prohibit the change the DABC recently adopted to reverse its position on whether a restaurant patron must place an order for food prior to being served a drink as discussed here. If DABC were required to enforce the express provisions of the statute – a “licensee may not sell, offer for sale, or furnish an alcoholic product except in connection with an order for food” – it would not have been able to reverse course to read this provision as requiring that a patron may be served if an “intent to dine” is demonstrated.
S.B.261 also might eliminate other DABC practices that are not expressly articulated in the statute. For example, DABC currently allows a management agreement between a former owner and a new owner to bridge the gap between a change of ownership and the DABC’s review of the new owner’s license application. Such practice prevents a business from going dry for a short period of time while the new owner’s application is pending. If S.B. 261 passes, it is unclear whether the DABC could continue this practice.
Continue Reading...Stoel Rives Opens Office in Washington, D.C.
We are pleased to announce that we have opened a satellite office in Washington, D.C. Our new address, effective immediately:
Stoel Rives LLP
1020 19th Street NW, Suite 375
Washington, DC 20036
Phone: (202) 398-1795 / Fax: (202) 621-6394
The new office is headed by firm partner Greg Jenner, a former Deputy Assistant Secretary of the U.S. Treasury for Tax Policy and Tax Counsel to the U.S. Senate Committee on Finance.
Click here to read the press release.
Utah DABC Changes Alcohol Enforcement Policy
By Adrienne Bell and Catherine Parrish Lake
Utah’s liquor control agency has started citing restaurants that serve alcoholic drinks to patrons before they order food. The agency has shifted policy to now strictly interpret a key provision of Utah’s Alcoholic Beverage Control Act, which provides:
A full-service restaurant licensee may not sell, offer for sale, or furnish an alcoholic product except in connection with an order for food prepared, sold, and furnished at the licensed premises. U.C.A. Section 32B-6-205(8)(a) (2012).
Previously, the agency only required evidence of an intent to dine before wait staff could serve drinks to patrons. It was not uncommon for customers to sip cocktails as they perused dinner menus or waited for a table. Now, just in time for the Sundance Film Festival and Outdoor Retailer market, the agency is strictly interpreting and enforcing the statute’s provisions to require that restaurant patrons place a food order before being served an alcoholic beverages. Restaurant owners who fail to abide by the new interpretation risk fines ranging from $500 to $3,000 and temporary license suspensions. The policy shift has led to a recent spate of enforcement actions and public outcry.
Several local restaurants have modified their serving practices in response. Some establishments have adopted a conservative approach and are now refusing to serve drinks until food is served. Others are serving drinks once an order for food is placed. Still others have adopted a more creative approach by adding new items, such as a variety of $1 amuse-bouches, which patrons can order together with drink orders. All of the approaches appear to comply with the new interpretation. Whether the agency’s policy shift will lead to legislative changes remains unclear, but at least one state legislator, Representative Gage Froerer, has indicated an interest in amending the statute to address this issue.
As Wine Industry Evolves, Local Regulation Remains King
Litigation concerning the direct shipment of wine has garnered a significant amount of attention in the years since the United States Supreme Court’s seminal decision in Granholm v. Heald. Generally speaking, these disputes have played out in the federal courts, far removed from the typical family winery.
Although direct shipment will remain an important issue both for wineries and for the attorneys who represent them—indeed, it is one of the topics covered in Stoel Rives’ Law of Wine treatise—a winery’s long-term financial success may be just as likely to hinge on the outcomes of lower-profile controversies litigated in front of local government bodies. Depending on the state and locality, these local governments may have the power to prohibit the construction of new tasting rooms or restaurants—a growing source of revenue for many wineries1 —or to regulate the number and character of marketing events held by a winery.
Continue Reading...Part I: Understanding the License Application Process Under Washington Initiative 502
by Susan Johnson and Claire Mitchell
As we reported last week, Washington Initiative 502 (I-502), a marijuana law reform measure which appeared on the November 2012 general ballot, won the popular vote passing by a margin of approximately 55% to 45%. Now that the initiative has passed, as of December 6, 2012, it will be legal for adults aged 21 years and over to possess up to “one ounce of useable marijuana,” 16 ounces of marijuana-infused product in solid form, 72 ounces of marijuana-infused product in liquid form, or “any combination” of all three.
In addition to legalizing the possession of a limited quantity of marijuana for recreational use by persons 21 and up, the initiative also establishes a licensing system for marijuana producers, processors, and retailers to be administered by the Washington State Liquor Control Board. Over the next year, the Board will be charged with promulgating rules and regulations to fully implement this new licensing structure.
Part III of I-502 establishes the licensing regime over marijuana producers, processors, and retailers and explains the procedures for obtaining a license. All license applicants will first be required to pay an initial application fee of $250. Thereafter, each licensed marijuana producer, processor, and retailer will be required to pay an annual renewal fee of $1,000.
Continue Reading...Washington State Liquor Control Board to Regulate Marijuana Following Passage of Initiative 502
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Co-authored by Susan Johnson and Stephanie Meier
Earlier this week, Washington Initiative 502 (I-502), a marijuana law reform measure which appeared on the November 2012 general ballot, won the popular vote passing by a margin of approximately 55% to 45%. As a result, beginning on December 6, 2012, the initiative that is now law will make it legal for persons aged twenty-one years and over to possess a limited amount of marijuana for recreational use.
Washington State was joined by Colorado in making history this week. On Tuesday night, Colorado voters passed Amendment 64, a measure seeking the legalization of marijuana for recreational use by adults, by 55% to 45%, a margin identical to Washington State’s. A similar measure in Oregon was not as successful. Measure 80, Oregon’s own measure to legalize possession and recreational use of marijuana, was rejected by voters.
Continue Reading...Spirits Retailers Can Now Deliver
WSLCB adopted a new rule that will allow spirits retail licensees to deliver spirits to customers that place orders in person, through the mail or over the phone, fax or internet. This rule mirrors the beer and wine delivery privileges currently held by grocery store and beer/wine speciality shop licensees. The rule will go into effect December 8, 2012, and the full text of the rule can be found here.
I-1183 Upheld
The Washington Supreme Court has upheld I-1183. Here is a link to the opinion, the concurrence and the dissent.
We will follow up with additional analysis, but for now, you can plan your first trip to the grocery store to purchase liquor as early as tomorrow.
Washington State Supreme Court Hears Oral Argument On Constitutionality Of I-1183
by Hunter Ferguson
Yesterday, the Washington State Supreme Court heard oral argument in Washington Association for Substance Abuse & Violence Prevention v. State, concerning the constitutionality of I-1183. WASAVP contends that I-1183 violates Article II, § 19 of the Washington Constitution in two ways: (1) the initiative violates the “single-subject rule,” by including a $10 million earmark along with provisions to privatize the sale of spirits and also by allowing for price variability in the sale of wine; and (2) the initiative violates the “subject-in-title rule” because, although the title refers to license fees to be imposed on sellers, in reality, such fees resemble taxes because they are levied as a proportion of sales. These arguments, and the responses of the State and the Costco-led intervenors were discussed in earlier blog posts here and here. Copies of the briefing filed in the Supreme Court can be found here: 1, 2, 3, 4. A recording of the hearing can be viewed here.
On the single-subject issue, the Court sought clarity on the framework for analyzing whether there is rational unity between the different provisions in the initiative. In particular, Justice Stephens pressed counsel on whether the issue of rational unity boiled down to whether there is a rational basis for the $10 million earmark, i.e., even though such funds are not specifically allocated to alcohol-related law enforcement, is there nonetheless rational unity because such funds might be spent in connection with alcohol-related issues. WASAVP responded, no, that rational unity required an specific expenditure requirement. The Court seemed unmoved by that position, especially in light of the past practice of making general appropriations from the Liquor Revolving Fund.
On the subject-in-title issue, Justice Wiggins expressed skepticism about referring to the license fee as such when the revenue-raising scheme so closely resembles a tax. Attorneys for the State and the intervenors urged the Court that use of the term fee was proper and that the Court need not decide whether the “fee” is actually a “tax” so long as it was clear to voters what type of revenue scheme would be created. WASAVP’s attorney, of course, pointed that the easiest way to ensure clear understanding was to use the word tax.
I-1183 is set to take effect on June 1. The Court is expected to issue its opinion before that date.
I-1183 Litigation Update
Today the Washington State Supreme Court accepted review of the challenge to I-1183. The briefing schedule has been posted, and the arguments are set for May 17th. We expect an opinion to be issued before the June 1st implementation date for retail spirits sales. Our colleague Hunter O. Ferguson provided the following update:
I. WASAVAP v. State
A. Entry of Final Judgment by the Cowlitz County Superior Court
On March 19, the Cowlitz County Superior Court granted the Costco-led intervenors’ and the State’s motion for reconsideration and, in turn, granted summary judgment upholding I-1183 in its entirety
B. Proceedings before the Washington Supreme Court
After the trial court entered final judgment, the plaintiffs promptly filed a notice of appeal. On March 28, they filed with the Washington Supreme Court a “statement of grounds for direct review”, which is a motion for the state supreme court to address the validity of I-1183 directly, bypassing the usual process of appealing first to the state court of appeals. Contemporaneously, the plaintiffs filed a motion for injunctive relief seeking to halt the implementation of I-1183 until final resolution on appeal, as well as a request for an expedited briefing schedule. The Supreme Court, through its Commissioner (which is a court officer empowered to rule on procedural matters) will hold a hearing on the plaintiffs’ motion for injunctive relief and expedited review this Thursday, April 5. As of Friday, Costco and the State have not filed responsive pleadings. Presumably, they will present substantially the same arguments they made in the trial court
II. Teamsters Local No. 174 v. State
As you probably recall, there is also a parallel challenge to I-1183 pending in King County Superior Court here in Seattle. The plaintiffs in this action are unionized employees of the Liquor Control Board who stand to lose their jobs upon the full implementation of I-1183. The court entered an order staying proceedings in this case pending resolution of WASAVP v. State, and the Court of Appeals rejected the plaintiffs’ motion for discretionary review of that ruling.
The plaintiffs now have moved to lift the stay on the ground that the Cowlitz County Superior Court has entered final judgment. Costco and the State have urged the court to maintain the stay in favor of waiting for a decision by the state supreme court.
"At Rest" Proposal for New York
There is a proposed bill pending before the New York Senate, S2473-2011 that would require, under certain circumstances, out-of-state shipments of alcohol into New York to be stored in-state for at least 48 hours at a licensed New York storage facility before being distributed to New York retailers. This “at rest” requirement means that an out-of-state winery could no longer ship wine to a New Jersey warehouse to store the wine until the wine is distributed from the New Jersey warehouse directly to New York retailers. Rather, the out-of-state winery would need to ship directly to a New York warehouse or ship the wine to New Jersey, but the wine would then need to be shipped to a New York storage facility and remain there for at least 48 hours before it could be distributed to New York retailers. The proposed regulation would have no ramifications on the ability to ship directly to New York consumers.
The justification for the bill is to, supposedly, put New York on equal footing with other states that require “at rest” periods. The “at rest” period requirement would only be triggered if the out-of-state shipper was from a state that also had an “at rest” requirement. However, the proposal has small distributors crying foul and the industry concerned that this change could, among other possibilities, decrease the volume of wine sold in New York, impact the availability of smaller producers’ wines, and increase the price of wine.
Cowlitz County Superior Court Denies Motion For Preliminary Injunction Against I-1183
Defenders of I-1183 received a holiday gift last week from the Cowlitz County Superior Court. On Thursday, December 22, 2011, the Court issued two important rulings in the declaratory judgment action challenging the constitutionality of I-1183.
First, the Court granted the motion to intervene brought a group of supports of I-1183 led by Costco and the Washington Restaurant Association. In so ruling, the Court observed that those entities’ economic interests were implicated by challenge to I-1183 and that their interests were distinct from those of the State. Those entities now will be able to participate fully in the defense of I-1183.
Second, the Court denied the motion for preliminary injunction to block implementation of I-1183. The Court explained that I-1183 is the law of Washington and that Plaintiffs had not carried their heavy burden for altering that status quo.
Following that ruling and recognizing that the challenge to I-1183 turns largely, if not exclusively, on pure legal arguments, the Court set the following expedited schedule for summary judgment briefing and a trial date if necessary:
- January 20, 2012: Opening Summary Judgment Briefs Due
- February 10, 2012: Responsive Briefs Due
- February 17, 2012: Reply Briefs Due
- March 5, 2012: Summary Judgment Hearing
- April 16, 2012: Trial
In setting this schedule, the Court stated that it welcomed extensive briefing on the issues presented. Thus, there might be an opportunity for the filing of amicus briefs.
We will continue to monitor developments in the case. If you have any questions, please do not hesitate to contact us.
I-1183 Faces Legal Challenges
Despite Washington voters’ approval of I-1183 in the November 2011 election, the effort to privatize the wholesale distribution and retail sale of liquor in Washington faces another hurdle. Last week, two lawsuits were filed in Washington courts challenging the validity of I-1183. The plaintiffs in both cases contend that the newly enacted law violates the single-subject rule for legislative bills and ballot initiatives under the Washington Constitution. Article II, § 19 of the Washington Constitution, which applies to both legislative bills and ballot initiatives, provides that “[n]o bill shall embrace more than one subject, and that shall be expressed in the title.” The plaintiffs allege a violation of that constitutional provision because the terms of I-1183, in addition to paving the way for private retailers to sell liquor, affect fines for selling alcohol to minors, taxes, and the wine distribution and pricing scheme.
Some past single-subject challenges to ballot initiatives have been successful. For instance, in 2000 a group of plaintiffs succeeded in repealing an initiative that addressed both the fees for car license tabs and required voter approval for all future state and local tax increases. But I-1183 differs from that initiative because it did not join together two completely separate subjects but instead deals entirely with various aspects of state regulation of alcohol distribution and retail sales. Thus, the key issue in the litigation appears to be whether I-1183 conforms to the single-subject rule when the provisions deal with the same general subject.
One of the challenges to I-1183 was filed in King County Superior Court, and the other in Cowlitz County Superior Court. The King County case was brought by two labor unions and is named General Teamsters Local Union No. 174 v. State. The Cowlitz County case was brought by the Washington Association for Substance and Violence Prevention, a property owner who leases a liquor store to the state, and two grocery stores. It is named WASAVP v. State. Both groups of plaintiffs seek declaratory and injunctive relief blocking the implementation of I-1183. The plaintiffs in the WASAVP case have also filed a motion for preliminary injunction, which is scheduled to be heard in Cowlitz County Superior Court on Friday, December 16.
Even though both lawsuits are against the Washington state government, it is very likely that businesses or associations whose interests are affected by I-1183 will have the opportunity to intervene in the litigation. We will continue to monitor the proceedings. If you have any questions, please don’t hesitate to contact us.
Court Upholds San Diego County's Winery Ordinance
On April 15th, a California Superior Court Judge denied a challenge to San Diego County’s new Winery Ordinance. The Ordinance, passed in 2010 and available here, eases restrictions on tasting rooms and sales for smaller producers and allows others to essentially “fast-track” registration as a “small winery” with such designation allowing for pre-approved events, such as weddings.
The challengers claimed that the Ordinance’s Environmental Impact Report (“EIR”) under the California Environmental Quality Act (“CEQA”) was inadequate. Judge Timothy Taylor disagreed, stating “[t]he Board of Supervisors was, by the EIR, adequately informed about the consequences of its decisions. The public (including petitioner) was provided with adequate information regarding the decisions of their elected leaders.”
The challengers have 30 days from the issuance of the ruling to appeal.
Washington Wine Law Legislative Update
For those interested in the status of Washington State wine legislation, the Washington Wine Institute provided this useful legislative update to various wine-related bills moving through the House and Senate.
Conjunctive Labeling Comes to Sonoma County
With the turn of the calendar and after nearly a year of political wrangling, conjunctive labeling will be the norm for Sonoma County wineries beginning in 2014. Passed by unanimous vote in both the state assembly and senate in August and signed by Governor Schwartzenegger at the end of September, AB 1798 will require wineries using the name of any of the 13 recognized American Viticulture Areas (AVA) within Sonoma County on their labels to include “Sonoma County” as well. The bill is not retroactive as it applies only to wines bottled after January 1, 2014. Failure to comply is considered a misdemeanor and subjects the violator to possible revocation of their ABC license. To achieve compliance, it will be necessary to file for and receive a new Certificate of Label Approval (COLA) from the TTB for those labels already approved.
Response to the new requirements has been mixed. Pushed heavily by the Sonoma County Winegrape Commission and the Sonoma County Vintners, Nick Frey, the Commission’s president, stated, “In this increasingly competitive wine market, building awareness for Sonoma County and the wine regions within the county is critical to Sonoma County grape growers and the wineries they supply. AB 1798 will ensure that consumers recognize every bottle of wine produced from Sonoma County grapes.” However, several large, well-known wine producers in the region see the legislation as diluting their already well-established brands, in addition to the added cost and confusion of including “Sonoma County” on an often already crowded label.
Some of the better known of Sonoma’s AVAs are the Russian River Valley, Sonoma Coast and Dry Creek Valley. California requires conjunctive labeling for three other viticulture areas: Napa Valley, Lodi, and Paso Robles.
Audit Supports More Liquor Permits for Utah
A recent legislative audit made several strong recommendations for reforming Utah’s liquor laws, in particular the quota system for granting alcohol permits. The audit echoes reports that the current shortage of alcohol permits is stifling economic development and does not reflect the state’s changing population.
Utah is in the small minority of control states that grant liquor permits based on population. Of the states polled, the audit commission found that only two other states, Pennsylvania and Idaho, use a state-wide quota for liquor permits. Idaho allows one permit per 1,500 people for clubs and restaurants and has no quota for beer and wine. Pennsylvania allows one permit per 3,000 people regardless of permit type. In contrast, Utah allows one permit per 7,850 people for clubs and one permit per 5,200 for restaurants.
According to the audit, quota numbers have not changed since 1990. In the meantime, the state’s population has increased by 22 percent with significant demographic changes. For instance, the percentage of the state’s population that were reported to be members of the Church of Jesus Christ of Latter Day Saints, whose observant members do not consume alcohol, has shrunk from 70% in 1989 to 58% in 2009. Further, alcohol consumption rose 54% from 2001 to 2009. The audit also reports an increase in the number of people who are eating out. These changes make the state appealing to restaurant and bar development. Many restaurateurs, including large chains, have, however, expressed reluctance to develop businesses in Utah given the uncertainty over obtaining a liquor permit.
The audit recommends increasing the number of overall liquor permits, and in particular restaurant permits. As previously reported, a bill to allow current permit holders to sell their alcohol permits is being considered for the next legislative session, which begins in January. Another proposal would allow resorts to obtain one license to cover the range of alcohol services provided rather than the current system that requires a separate permit for each service. This could free up numerous additional permits; one resort alone reportedly holds 17 permits to cover its restaurants, bars and other services.
In response, the Executive Director of the Utah Department of Alcoholic Beverage Control suporrted the audit’s recommendations. The Utah Restaurant Association and Utah Hospitality Association also embrace such reforms. It is still unclear, however, whether the state legislature will support any of the recommended reforms. Stay tuned for updates.
More Liquor Permits Possible for Utah
Senator John Valentine (R – Orem) has announced that he intends to introduce a bill in the next Utah legislative session that would establish a property right in liquor permits, allowing restaurants with current liquor permits to sell them. Use of any purchased permit would be conditioned upon approval by the state liquor-control board. The intended bill will also convert about 25 of the 50 unused tavern permits (which allow only the sale of 3.2 beer) into restaurant permits. Senator Valentine currently has no plans to make any changes to the state’s club permits.
Utah limits liquor permits based upon population and ran out of restaurant and club permits earlier this year. The proposed legislation may help alleviate the resulting logjam if existing businesses that are struggling elect to sell or if other restaurants elect to stop serving alcohol. Questions remain as to whether the bill will pass. Legislators have expressed reluctance to increase the number of permits granted, so the proposed legislation may create a work around. The Church of Jesus Christ of Latter Day Saints, a major stakeholder in Utah’s liquor policy, also has yet to weigh in on the proposed change.
The proposed change is likely to put small and start-up restaurants at a distinct disadvantage to well-funded chains. Senator Valentine is quoted in a Salt Lake Tribune article as acknowledging this issue and indicated that some permits could be set aside for small businesses.
Attorneys in our Salt Lake City office are closely following this issue. Please send us an email here if you would like to receive regular updates.
Update on Utah's Privatization Process
As we previously reported, Utah is considering privatizing at least some aspects of its liquor control. On Wednesday, August 25, John Freeman, the Deputy Director of Operations for The Utah Department of Alcoholic Beverage Control (“DABC”) appeared before the Privatization Board to answer questions.
Mr. Freeman presented four reasons to maintain the status quo. First, he contended that privatization would decrease the state’s net revenue from alcohol sales. As previously reported, Utah garnered $59 million in profit and $41 million in tax receipts from liquor sales in 2009. Mr. Freeman cited the findings of the Alcohol Research Group, a California-based division of the Public Health Institute, which indicate that control states like Utah generate three times the revenue of non-control states. Members of the Board appeared reluctant to accept these findings, focusing instead on the state’s hard costs to run the liquor stores. As the Salt Lake Tribune reported, Randy Simmons, the Board’s chair, indicated that the primary question for him was whether the money spent to run the liquor stores (estimated at $21 million) could be put to better use. The Board did not discuss how the state would compensate for the millions of dollars in lost revenue, which appear to be far greater than the estimated savings.
Second, Mr. Freeman contended that private retailers would not have the same buying power the state has, and therefore, could not offer the same selection of products. Mr. Freeman specifically cited the state’s ability to stock stores with niche wines, indicating that more than 4,000 wines were available in the state. The Board questioned, however, whether the state is responsive to customer preferences. While there was some confusion among Board members as to whether privatization for both wholesale and retail aspects of alcohol sales were options, it appears that only the retail side is currently under discussion. Thus, the question of choice in products is likely moot as the state would still control selection and would maintain its current buying power.
Third, Mr. Freeman argued that consumers would pay more under privatization. As it stands, Utah marks products up by a statutorily-mandated 86%. Private retailers would need to add sufficient amounts to the price to cover their costs and be profitable. The discussion indicated that wages are one area that would likely cost private retailers more. Currently, the state legislature sets wages for store employees, which average barely above minimum wage.
Finally, Mr. Freeman argued that DABC’s primary responsibility was to ensure public safety and that any form of privatization would create more alcohol-related problems in the state. The Alcohol Research Group study supported these claims, showing that consumption rates in non-control states are higher than in control states, due in part to more outlets and longer hours. The Board questioned the study’s findings regarding alcohol-related problems in Utah, with Randy Simmons stating that he had read conflicting studies. The Board did not address whether the state would continue to mandate the number of outlets and their hours under privatization.
Because of time constraints, the session abruptly ended with both sides promising to forward on their sources and to continue the conversation regarding privatization. We will keep you updated as these issues develop.
Possible Privatization of Utah Liquor Stores
The sixteen-member Utah Privatization Policy Board was created by the legislature to determine what services currently provided by the state can be privatized. State liquor stores are one of many state functions that the Board is examining.
Utah is one of 18 states, and two Maryland counties, that currently use a state run retail system, commonly called control states. The other 32 states issue licenses to private companies to sell liquor. Four control states (Washington, Virginia, North Carolina and Utah) are currently considering privatization. See Susan Johnson’s blog for a terrific discussion of the Washington initiative process. Utah also controls the wholesale market for liquor, which is not under discussion for privatization.
The debate thus far has centered on the economics of privatization and the level of state control exercised over liquor sales. There seems to be consensus that privatization will occur only if shown to be both profitable and to allow for sufficient state control.
From an economic perspective, state liquor stores are one of the few profitable government agencies in Utah. Estimates indicate that state liquor stores sold $269 million dollars worth of product in 2009, yielding $59 million in profit and $41 million in tax receipts, with $27 million going to the school lunch program. Information gathered by the Board so far indicates that privatization could result in $21 million dollars in annual savings from lowered payroll, operational and liability costs. The potential cost savings are more than offset by last year’s profit levels, however, which exceeded the potential annual savings by $38 million. It is not clear that tax receipts would remain consistent either. Both Montana and Maine, two states that recently privatized, have reported a drop in sales (and thus tax receipts) due to increased prices. It is not clear whether a privatization of Utah liquor stores would be likely to result in increased prices. Although privatization could lead to a decrease in revenues for the state from profits and tax receipts, privatization would bring in new streams of revenue, such as real estate taxes on liquor store properties, which are currently exempt. The state would also realize one-time gains from selling the current liquor store businesses and property. The Privatization Policy Board will need to consider whether these revenue streams would be sufficient to replace any lost revenues associated with lost profits and tax receipts.
With regard to control, the primary question is how to balance free-market principles with moral regulations. Many supporters of privatization equate state-run liquor stores to socialism. Opponents question whether a loosening of state control would result in increases in impaired driving and alcohol consumption, particularly by minors. One Board member, Senator Howard Stephenson, Republican from Draper, has indicated that liquor stores lend themselves to privatization, but that all of the current controls should remain in place. It is unclear whether business would be able to operate profitably if the state maintains current restrictions on advertising, locations, hours and days of operation. Further, as long as the state keeps its monopoly on wholesale liquor distribution, the state would maintain control over the brands offered and any volume discounts negotiated, which could limit the ability of retailers to compete based on selection and price. It is unclear what effect, if any, consumers would experience other than new names on the liquor stores.
Stoel Rives will be monitoring the privatization debate in Utah. We will post an update after the next Board meeting, expected to be held in late September.
Dueling Liquor Privatization Initiatives in Washington State: What do the Initiatives Say and Who are the Players?
Word is out that enough signatures have likely been gathered to ensure that an initiative backed by Costco will make it on the on the ballot in Washington State in November. The Costco backed initiative would transition sales of spirits in Washington State from state operated liquor stores to private retail stores and allow manufacturer to retailer direct sales and volume discounts.
A second initiative backed by distributors would also move spirits sales from state operated stores to private retail stores, but would preserve the role of distributors in a traditional three tier system, has until July 2nd, to amass enough signatures to make it on the ballot.
A third group is raising money to oppose any attempts to change the current state administered system. Combined contributions of over $1,200,000 have been reported to the Washington State Public Disclosure Commission in support of and opposition to privatization.
We have assembled the following information so that you can read the actual initiatives, explore the proponents and opponents, and form your own opinion.
1. Initiative No. 1100 was filed by Modernize Washington, is financially backed by big box retailer Costco, and has statements of support from other groups that retail liquor such as the Northwest Grocery Association and the Washington Restaurant Association.
- Where to Follow updates: Modernize Washington on Facebook
- Reported Contributions: > $700,000
2. Initiative No. 1105 was filed by Washington Citizens for Liquor Reform and is financially backed by alcohol distributors Young’s Market Company and Odem Southern Holdings.
- Where to Follow updates: Yes on 1105 on Facebook
- Reported Contributions: $400,000
3. Keep our Kids Safe is leading efforts to preserve the existing state operated system. Washington Association for Prevention of Substance Abuse filed fund raising reports for Keep our Kids Safe with the Public Disclosure Commission. The reports identify the union that the state liquor store employees belong to, United Food and Commercial Workers as the source of the funds. UFCW 21, with the endorsement of other organizations, has issued a fact sheet outlining rationales for preserving the current system of state run liquor stores.
- Reported Contributions: $38,000
We will report back in a few weeks to let you know if one or both privatization initiatives make on to the ballot and the status of efforts to promote preservation of the existing state operated system.
