Catherine Parrish Lake
Catherine Parrish Lake helps businesses and individuals develop, protect and utilize intellectual property rights. Catherine advises clients on acquiring, registering, maintaining, licensing and enforcing trademarks, copyrights and trade secrets. She also counsels clients on branding strategies, e commerce and Internet issues, intellectual property infringement problems and privacy concerns. Her practice includes advising franchise clients with regard to franchise disclosure documents and compliance with state and federal franchise laws and regulations, as well as guiding nutritional supplement companies through regulatory compliance issues.
Utah to Consider Privatization Models
The recent move by Washington voters to end state control of liquor sales, combined with ongoing corruption scandals within the Utah Department of Alcoholic Beverage Control, is causing Utah lawmakers to renew privatization discussions. Support appears to be growing to limit the state’s involvement in liquor sales at least to some degree.
Utah is among the minority of states that control wholesale and retail liquor sales. Several Utah state legislators have expressed an interest in privatizing the retail business. Some have also expressed interest in privatizing wholesale sales. Governor Herbert has expressed interest in retail change but appears reluctant to remove control of the wholesale system. Wholesale privatization appears less likely than retail privatization, because of a perception that state control over distribution and pricing results in fewer alcohol-related problems.
Utah currently allows some private retail alcohol sales through “package agencies.” Package agencies are located in resorts and rural areas and offer a modest selection of products. Similar to liquor licenses, package agency contracts are granted based on population with one package agency allowed per 18,000 people. Expanding the package agency system, for instance to allow grocery stores to operate liquor outlets, could act as a bridge to full privatization.
Any privatization reforms will have to clear several hurdles, including compensating for the substantial profit the state realizes from liquor sales.
Changes to Utah's Liquor Laws
The 2011 legislative session wrapped up last night with several changes being made to Utah’s liquor laws, including:
- Converting 40 tavern only licenses into 15 full restaurant licenses and 25 limited restaurant licenses (beer and wine only)
- Allowing a hotel guest to order one drink at a time through room service
- Permitting alcohol to be sold beginning at 11:30 a.m. (a change from noon for liquor and wine and 10:00 a.m. for beer)
- Increasing the fees for liquor licenses (for instance the initial and renewal fees for a limited restaurant license increased to $750 and $550 respectively)
- Banning the sale of mini-kegs
- Allowing existing licensees to sell liquor licenses, although not until after July 31, 2012, when that portion of the law goes into effect
- Creating a reception license for reception centers larger than 5,000 square feet that derive no more than 30% of gross sales from the sale of alcohol
- Eliminating any doubt that an establishment cannot allow drink specials
- Requiring dining club licenses to derive at least 60% of gross sales from food
- Increasing enforcement
The bill (S.B. 314) now awaits Governor Herbert’s signature, which is expected. While the new law will free up an additional 40 restaurant licenses, many observers doubt that this will alleviate demand for long. The state currently has issued 21 more licenses than allowed under current law because of an overestimation of census figures. This law preserves the licenses already granted, but it will take some time before population catches up with the number of licenses already granted let alone freeing up additional licenses.
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.
