A performance audit of the Department of Liquor Licenses and Control : report to the Arizona State Legislature

              STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
A PERFORMANCE AUDIT
OF THE
DEPARTMENT OF LIQUOR LICENSES
AND CONTROL
OCTOBER 1983
A REPORT TO THE
ARIZONA STATE LEGISLATURE
REPORT 83- 19
DOUGLAS R. NORTON. CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
October 14, 1983
Members of the Arizona Legislature
The Honorable Bruce Babbitt, Governor
Mr. Lloyd H. Robert son, Superintendent
Department of Liquor Licenses and Control
Transmitted herewith is a report of the Auditor General, A Performance
Audit of the Department of Liquor Licenses and Control. This report is i n
response t o the January 18, 1982, resolution of the Joint Legislative
Budget Committee.
The blue pages present a summary of the report; a response from the
Department of Liquor Licenses and Control is found on the yellow pages
preceding the appendices.
My s t a f f and I w i l l be pleased t o discuss or c l a r i f y i t e m s i n the report.
Respect f u l l y submitted ,
Doug !! a s R. Norton
Audit or General
Staff: William Thomson
Steve H. Thacker
Dawn B, - Sinelair
Deborah A. Baldwin
Richard B. Booth
Nancy Espelin
Shannon DeConcini
Enclosure
1 1 1 WEST MONROE SUITE 600 PHOENIX. ARIZONA 85003 ( 602) 255- 4385
OFFICE OF THE AUDITOR GENERAL
A PERFOP. MANCE AUDIT OF THE
DEPARTMENT OF LIQUOR LICENSES AND CONTROL
A REPORT TO THE
ARIZONA STATE LEGISLATURE
REPORT 83- 19
TABLE OF CONTENTS
SUMMARY
INTRODUCTION AND BACKGROUND
SUNSET FACTORS
FINDINGS
FINDING I
The Department can more e f f e c t i v e l y u t i l i z e local
police agencies t o enforce liquor laws.
CONCLUSION
RECOMMENDATIONS
FINDING I1
R e s t r i c t i o n s on l i q u o r l i c e n s e issuances should be
removed because they a r e i n e f f e c t i v e and c r e a t e
a r t i f i c i a l b a r r i e r s t o entry.
J
CONCLUSION
RECOMMENDATIONS
FINDING I11
The S t a t e can r e a l i z e s i g n i f i c a n t a d d i t i o n a l revenue
by revising license t r a n s f e r s t a t u t e s . J
CONCLUSION
RECOMMENDATIONS
FINDING I V
Luxury tax r a t e s should be increased.
?
CONCLUSION
RECO~ rnNDATION
- Page
i
1
7
TABLE OF CONTENTS ( Concl'd)
FINDING V
Lottery s t a t u t e s do not allow applicants an equal
opportunity of obtaining a license.
CONCLUSION
RECOMMENDATION
FINDING V I
The Department's licensing process can be improved
by eliminating most o r i g i n a l l i c e n s e hearings.
CONCLUSION
RECOMMENDATION
OTHER PERTINENT INFORMATION
AREAS FOR FURTHER AUDIT WORK
WRITTEN RESPONSE TO AUDITOR GENERAL'S REPORT
APPENDICES
APPENDIX I
Legislative Council Memorandum of July 1, 1983
APPENDIX I1
- Page
5 9
Consultant ' s Review of the P r o b a b i l i t i e s of
Selection i n the Liquor License Lottery
LIST OF TABLES
Page
TABLE 1 - Liquor Licenses Issued as of May 1983 3
TABLE 2 - DLLC Revenues, Expenditures and FTE P o s i t i o n s
F i s c a l Years 1979- 80 through 1983- 84
TABLE 3 - S t a t u t o r y R e s p o n s i b i l i t i e s f o r Liquor Law
Enforcement
TABLE 4 - Reports Received from Law Enforcement Agencies
During 1981, 1982 and 1983
TABLE 5 - Analysis of Incidents Reported and Subsequent
Actions by DLLC f o r Four Liquor Establishments
TABLE 6 - A Comparison of R e s t r i c t e d and Unrestricted
R e t a i l Licenses as of May 1983
TABLE 7 -
TABLE 8 -
TABLE 9 -
TABLE 10 -
R e s t r i c t e d License Issuances as of May 1983
Total Costs f o r Original Issuances and Transfers
Transfer VS New License Processing
P o t e n t i a l Additional Annual Revenues Forgone
i n 1982 Due t o Low License Transfer Fees
TABLE 11 - Comparison of Arizona's Luxury Tax Rates t o t h e
National Average and Other Western License S t a t e s '
Average Luxury Tax Rates
TABLE 12 - P o t e n t i a l Additional Revenues Resulting from Three
A l t e r n a t i v e Luxury Tax Increases
TABLE 13 - P r i c e Increases Resulting from a 10 Percent Tax
Increase f o r D i s t i l l e d S p i r i t s
TABLE 14 - Additional Revenue Resulting from a 10 Percent
Tax Increase and a 1 Percent Consumption Decline
TABLE 15 - DLLC Warnings and C i t a t i o n s Involving Sales t o
Minors
TABLE 16 - P e n a l t i e s Imposed f o r S e l l i n g t o Minors
The Office of the. Auditor General has conducted a performance audit of the
Department of Liquor Licenses and Control ( DLLC) i n response t o a January
18, 1982, resolution of the Joint Legislative Oversight Committee. This
performance audit was conducted a s part of the Sunset Review set f o r t h i n
Arizona Revised Statutes ( A. R. S.) $ 341- 2351 through 41- 2379.
The Department is responsible f o r 1) licensing alcohol beverage suppliers ,
wholesalers and r e t a i l e r s ; 2) a s s i s t i n g S t a t e o f f i c i a l s and p o l i t i c a l
subdivisions i n collecting liquor- related taxes; 3) investigating
compliance with liquor laws and a s s i s t i n g the Department of Public Safety
and a l l local law enforcement agencies i n liquor law enforcement; and 4)
conducting hearings and imposing sanctions f o r violations of liquor laws.
The Department Can More ~ f f ect i v e l 4
U t i l i z e Local Police Agencies t o 4
Enforce Liquor Laws ( see page 13) ,,/
DLLC has not f u l l y u t i l i z e d l o c a l police agencies i n the enforcement of
liquor laws. DLLC's control over liquor establishments ( on- sale
all- liquor r e t a i l e r s ) is largely limited by t h e quality of enforcement
done by local law enforcement agencies. In many instances DLLC has been
unable t o t a k e a c t i o n a g a i n s t l i c e n s e e s because of inadequate
investigations and/ or reports from local agencies. In some instances
reports have not been sent t o DLLC, even though required by law. Many
o t h e r r e p o r t s do not contain enough information and/ or a r e sent t o DLLC so
l a t e that s o l i d c a s e s cannot be prepared f o r administrative action.
However, u n t i l recently DLLC has taken l i t t l e action t o correct these
conditions. More s p e c i f i c a l l y , DLLC has not been following up with l o c a l
agencies t o determine why reports are not being sent or t o discuss the
inadequacies of reports sent.
During t h e audit DLLC began t o e s t a b l i s h a l i a i s o n with each l o c a l
enforcement agency t o improve the reporting of liquor violat ions. DLLC
should give even more emphasis t o t h i s l i a i s o n role, including a more
extensive t r a i n i n g program.
Greater emphasis on t h i s l i a i s o n role should generate a greater number of
a c t i o n a b l e r e p o r t s from local agencies. Therefore, additional s t a f f may
be needed t o process these reports and handle t h e r e s u l t i n g d i s c i p l i n a r y
caseload.
The Legislature should consider reviewing again the enforcement a c t i v i t i e s
of DLLC i n approximately two years a f t e r the reporting of liquor
violations has improved.
Restrict ions on the Number of Liquor
Licenses Should Be Removed ( see page 29)
R e s t r i c t i o n s on the number of l i q u o r l i c e n s e s issued should be
eliminated. These r e s t r i c t ions are i n e f f e c t i v e i n achieving the
t r a d i t i o n a l goals of promoting temperance and aiding enforcement. Due to
h i s t o r i c a l exclusions and exceptions t o t h e quota, r e s t r i c t i o n s have not
limited the number of r e t a i l o u t l e t s . Arizona ranks fourth i n alcohol
I --
a v a i l a b i l i t y and currently has about- _ one o u t l e t f o r every 400 persons.
-- - - -
Recent research i n d i c a t e s t h a t consumption of alcoholic beverages is based
on numerous s o c i a l and economic f a c t o r s , and eliminating quotas should not
increase consumption. In addition, a s the number of r e t a i l o u t l e t s is not
expected t o increase s i g n i f i c a n t l y , eliminating quotas should not hinder
law enforcement. License issuances could then be based on need and)
convenience rather than a r t i f i c i a l b a r r i e r s t o entry t h a t protect t h e / I
industry .
Revision of License Transfer Statutes Would
Generate Significant Additional Revenues ( see page 43)
The State is not realizing s u f f i c i e n t revenues from t r a n s f e r s of
licenses. Transfer fees
\_. -- s
without appar t i f i c a t i rocessing work loads f o r t r a n s f e r s
and c a l and t r a n s f e r s afford licensees
the same privileges a s original licenses. Depending upon the outcome of
the recommendat ions i n the Finding concerning quotas, t r a n s f e r s should be
e i t h e r 1) eliminated or 2) r e s t r i c t e d t o quota licenses and t r a n s f e r f e e s
increased t o equal o r i g i n a l l i c e n s e f e e s . E i t h e r change would have
produced approximately $ 724,000 i n additional revenues i n 1982.
Luxury Taxes Should
Be Increased ( see page 51)
Increased liquor luxury tax r a t e s could produce s i g n i f i c a n t additional
revenues. Arizona's tax r a t e s a r e lower than other s t a t e s ' r a t e s and have
not increased i n a t l e a s t nine years. For instance, Arizona's beer tax is
38 percent lower than the 13- cents- per- gallon average of the other western
s t a t e s .
If Arizona's tax r a t e s were comparable t o other western s t a t e s ' r a t e s , the
State could generate additional revenues of a t l e a s t $ 5.2 million
annually. Tax r a t e s comparable t o the national average would generate an
additonal $ 14.7 million. An increase of 5 cents per gallon on beer
alone-- or 3 cents per six- pack-- would produce $ 4.5 million annually.
Lottery Statutes Do Not Allow
an Equal Opportunity of Obtaining
a License ( see page 59)
Although the Department ' s l o t t e r y drawing procedures appear adequately
controlled, s t a t u t e s do not e f f e c t i v e l y l i m i t the number of applications a
person can submit. Our review of written procedures and interviews with
Department s t a f f indicate t h a t , i n the absence of collusion, controls are
s u f f i c i e n t t o prevent abuse. However, l o t t e r y applicants are able t o
circumvent the s t a t u t o r y goal of giving a l l persons an equal opportunity
iii
of obtaining a license. By submitting a d d i t i o n a l a p p l i c a t i o n s under
business names and names of family members, a person is able t o increase
h i s chances of selection. We i d e n t i f i e d two persons who used t h i s
approach t o submit 15 applications i n 1980 and 1982. In one instance t h i s
number provided almost a 50 percent chance of being selected. According
t o a Department employee, as many as 25 applications have been submitted
by an individual f o r a single l o t t e r y . The Legislature should consider
amending t h e s t a t u t e s t o more e f f e c t i v e l y r e s t r i c t the number of
applications an individual may submit.
Most Original License
Hearings Are Unnecessary ( see page 65)
Most o r i g i n a l l i c e n s e hearings held by the Liquor Board and the hearing
o f f i c e r a r e unnecessary and can be eliminated. Original license hearings
f o r nonprotested, city- approved applications are unnecessary f o r the
following reasons. F i r s t , similar licenses issued f o r t r a n s f e r s a r e not
subject t o e i t h e r Board or hearing o f f i c e r hearings. Second, l o c a l
hearings provide f o r s u f f i c i e n t public input on these applications.
Third, hearing o f f i c e r hearings do not ensure t h a t licensees w i l l comply
with s t a t u t o r y requirements. Fourth, numerous other s t a t e s do not require
hearings under similar conditions. In addit ion, these s t a t u t o r i l y
required hearings inconvenience license applicants and a r e an i n e f f i c i e n t
use of s t a f f time. The Legislature should consider amending t h e s t a t u t e s
t o eliminate mandatory hearings f o r o r i g i n a l l i c e n s e s , except when a local
governing body recommends disapproval or when there are public protests or
other problems.
Enforcement A c t i v i t i e s Relating t o
Sale of Liquor t o Minors ( see page 71)
Because of l e g i s l a t i v e i n t e r e s t , we reviewed DLLC a c t i v i t i e s r e l a t i n g t o
t h e s a l e of liquor t o minors. The r e s u l t s of our analysis a r e presented
a s " Other Pert inent Inf ormat ion" beginning on page 71.
INTRODUCTION AND BACKGROUND
The Office of the Auditor General has conducted a performance audit of the
Department of Liquor Licenses and Control i n response t o a
January 18, 1982, resolution of t h e J o i n t Legislative Oversight
Committee. This performance audit was conducted a s part of the Sunset
Review s e t forth i n Arizona Revised Statutes ( A. R. S.) $ 541- 2351 through
41- 2379.
Liquor has been taxed or otherwise regulated i n Arizona since the l a t e
nineteenth century. The 1864 Howell Code, Arizona's f i r s t law
compilation, provided f o r license taxes f o r vendors of wines and d i s t i l l e d
s p i r i t s . In 1919, the 18th amendment t o the United States Constitution
created a national Prohibition, eliminating the need f o r regulation a t the
s t a t e level. Upon repeal of Prohibition i n 1933, the authority t o license
and regulate the manufacture and sale of liquor was placed i n the
Temperance Enforcement Commission under the State Tax Commission. In
1939, the Legislature established the Department of Liquor Licenses and
Control ( DLLC) and vested responsibility f o r administration and
enforcement of liquor laws i n the superintendent. A three- member State
Liquor Board was added i n 1967, and i n 1979 the number of board members
was increased t o five.*
Both the superintendent and the Board are appointed by the Governor. The
superintendent serves concurrently with the Governor; Board members serve
three- year terms. Only one of the five Board members may be engaged i n
the liquor business. Board members receive compensation on a per diem
basis.
* According t o DLLC s t a f f , one position on the Board has been vacant a
t o t a l of nine months between August 1982 and September 1983.
Although t h e enabling l e g i s l a t i o n does not e x p l i c i t l y s t a t e t h e
L e g i s l a t u r e ' s i n t e n t i n regulating l i q u o r , s e v e r a l c o u r t c a s e s have
defined t h e purpose of regulation.
" The l e g i s l a t u r e , i n c r e a t i n g the department of l i q u o r
l i c e n s e s and c o n t r o l , intended t o c r e a t e and e s t a b l i s h
stat e- wide c o n t r o l over t h e t r a f f i c i n i n t o x i c a t i n g
liquors." Mayor and Common Council of City of Prescott
v. Randall, 670 Ariz. 369, 196 P. 2d 477 ( 1948)
" The l i q u o r laws a r e p l a i n l y designed t o p r o t e c t
welfare, h e a l t h , peace, temperance, and s a f e t y of a l l
t h e c i t i z e n s by providing f o r s t r i c t r e g u l a t i o n and
c o n t r o l of t h e manufacture, s a l e , and d i s t r i b u t i o n of
a l c o h o l i c beverages. " Mendelsohn v. Superior Court i n
and f o r Maricopa County 76 Ariz. 163, 261 P. 2d 983
( 1953)
The Department is responsible f o r 1) l i c e n s i n g alcohol beverage s u p p l i e r s ,
wholesalers and r e t a i l e r s ; 2) a s s i s t i n g S t a t e o f f i c i a l s and p o l i t i c a l
subdivisions i n c o l l e c t i n g liquor- related taxes; 3) i n v e s t i g a t i n g
compliance with l i q u o r laws and a s s i s t i n g t h e Department of Public Safety
and a l l l o c a l law enforcement agencies i n l i q u o r law enforcement; and 4)
conducting hearings and imposing sanctions f o r v i o l a t i o n s of liquor laws.
The types and numbers of l i c e n s e s issued a s of May 1983 a r e presented i n
Table 1.
TABLE 1
License Type
Distiller ' s License
( In- State)
Brewers License
( In- State)
Vintners License
( In- Stat e)
Wholesaler, All
Liquors
Wholesaler, Wine
and Beer
On- Sale R e t a i l e r ,
All Liquors
On- Sale R e t a i l e r ,
Wine and Beer
On- Sale R e t a i l e r ,
Beer
Off- Sale Retailer,
All Liquors
Off- Sale R e t a i l e r ,
Wine and Beer
Off- Sale R e t a i l e r ,
Beer
LIQUOR LICENSES ISSUED AS OF MAY 1983
Number of
Licenses Issued License Type
12. Railroad Train License
13. A i r l i n e License
14. P r i v a t e Club License
15. Hot el/ Mot e l License
16. Restaurant License
17. Distillers License
( Out- of - State)
18. Brewers License
( Out- of - State)
19. Vintners License
( Out- of- State)
20. Importers, Exporter
o r R e c t i f i e r
21. Government License
22. Domestic Farm Winery
Total Liquor Licenses
Issued
Number of
Licenses Issued
0
The Department of Liquor Licenses and Control receives a General Fund
appropriation. Revenues a r e generated from l i c e n s e f e e s , f i n e s ,
salesman r e g i s t r a t ions and other miscellaneous sources. The
Department ' s revenues and expenditures f o r f i s c a l years 1979- 80
through 1983- 84 a r e shown i n Table 2.
TABLE 2
DLLC REVENUES, EXPENDITURES AND FTE POSITIONS
FISCAL YEARS 1979- 80 THROUGH 1983- 84
Actual Actual Actual Estimated Estimated
1979- 80 1980- 81 1981- 82 1982- 83" 1983- 84 a
FTE s 16.5 19.5 20.5 24.5 25.5
Revenues
Expenditures :
Personal s e r v i c e s
Employee r e l a t e d
Professional and
out s i d e s e r v i c e s
Travel :
In- St ate
Out- of - State
Other operating
Equipment
Sub- t ot a1
I n v e s t i g a t i o n s unit
Total
Sources : S t a t e of Arizona Appropriations Reports and DLLC Budget Requests f o r f i s c a l
years 1981- 82 through 1983- 84.
* Amount includes $ 116,200 appropriated by HB 2420 ( Chapter 329, Laws of 1982) t o
provide a full- time hearing o f f i c e r and t o e s t a b l i s h a s e p a r a t e i n v e s t i g a t i o n s unit
t o ensure compliance with l i q u o r laws, p a r t i c u l a r l y t h o s e p e r t a i n i n g t o minors. The
b i l l a l s o appropriated $ 36,600 t o t h e Attorney General t o provide the s e r v i c e s of
one full- time attorney t o t h e Department.
Scope of Audit
The scope of our a u d i t included most Department operat ions and functions.
Our major a u d i t o b j e c t i v e s were t o determine:
1. Whether t h e current l e v e l of r e g u l a t i o n is appropriate and i n t h e best
i n t e r e s t of the public h e a l t h , s a f e t y and welfare;
2. Whether liquor- related taxes and f e e s should be increased;
3. I f c u r r e n t l i c e n s i n g procedures a r e e f f e c t i v e and e f f i c i e n t ; and
, J
J
i i
4. I f current enforcement and d i s c i p l i n a r y a c t i v i t i e s a r e adequate.
We i d e n t i f i e d s e v e r a l o t h e r a r e a s where f u r t h e r audit work may be needed.
Due t o time and s t a f f i n g c o n s t r a i n t s , we were not able t o address these
areas, which a r e l i s t e d i n t h e Areas f o r Further Audit Work s e c t i o n ( s e e 7
page 77).
The Auditor General and s t a f f express a p p r e c i a t i o n t o t h e S t a t e Liquor
Board members, the superintendent and t h e i r s t a f f f o r t h e i r cooperat ion
and a s s i s t a n c e during t h e a u d i t .
SUNSET FACTORS
In accordance with A. R. S. $ 41- 2354, the Legislature should consider the
following 11 f a c t o r s i n determining whether the Department of Liquor
Licenses and Control should be continued or terminated.
1. Objective and purpose i n establishing the agency
Neither the 1933 l e g i s l a t i o n creating the Temperance Enforcement
Commission nor the 1939 l e g i s l a t i o n establishing the Department of
Liquor Licenses and Control explictly s t a t e l e g i s l a t i v e i n t e n t .
Authoritative l i t e r a t u r e , Arizona case law and DLLC' s statements of
objectives support protection of the public health, safety and welfare
a s the purpose of liquor regulation. According t o the Superintendent,
the Department's primary objective is t o " regulate the industry through
the l i c e n s e c o n t r o l process, c o l l e c t f e e s and taxes f o r the maintenance
of government, and enforce s t a t u t e s i n order t o maintain the health and
welfare of the community ."
2. The effectiveness with which the agency has met its objective and
purpose and the efficiency with which the agency has operated
DLLC can improve its regulation of the liquor industry by working more
aggressively with local law enforcement agencies t o obtain the
reporting needed f o r effective d i s c i p l i n a r y a c t i o n s ( s e e Finding I,
page 13). The efficiency of DLLC's operation can be improved by
eliminating most o r i g i n a l l i c e n s e hearings. These hearings are
unnecessary for q u a l i f i e d a p p l i c a n t s with unprotested, locally approved
applications ( see Finding V I , page 65).
The extent t o which the agency has operated within the public i n t e r e s t
DLLC a c t i v i t i e s serve the public i n t e r e s t by protecting the public's
safety and welfare. DLLC screens license applicants t o ensure only
legitimate and qualified persons operate i n the industry and enforces
liquor laws which protect the public.
The quota licensing system does not appear t o serve the public
i n t e r e s t , as was intended. Restrictions on the number of liquor
licenses issued are not e f f e c t i v e i n achieving the t r a d i t i o n a l goals
of promoting temperance and aiding enforcement. Instead, these
r e s t r i c t i o n s c r e a t e a r t i f i c i a l b a r r i e r s t o entry which protect the
industry and do not allow new o u t l e t s where public need is shown ( see
Finding 11, page 29). Furthermore, contrary t o s t a t u t o r y i n t e n t , the
l o t t e r y system f o r d i s t r i b u t i n g quota licenses does not provide an
equal opportunity f o r a l l applicants t o obtain a l i c e n s e ( s e e Finding
V, page 59).
The extent t o which rules and regulations promulgated by the agency
are consistent with the l e g i s l a t i v e mandate
The State Liquor Board and the superintendent have promulgated r u l e s
a s required by A. R. S. $ 4- 112, Subsections A and B. The rules were
reviewed and approved by the Attorney General's Off i c e f o r consistency
with the s t a t u t e s . During our audit we found no apparent
inconsistencies between DLLC regulations and the s t a t u t e s .
5. The extent t o which the agency has encouraged input from the public
before promulgating its rules and regulations and the extent t o which
it has informed the public as t o its actions and t h e i r expected impact
on the public
The Department has complied with Open Meeting Law minimum requirements
but should t a k e o t h e r steps t o notify the public. While DLLC1s
e f f o r t s t o s o l i c i t input and inform licensees of its actions are
adequate, the Department's procedures f o r notifying the general public
are limited.
8
The Department informs l i c e n s e e s of r u l e s hearings and a c t i v e l y
s o l i c i t s input from l i c e n s e e s before promulgating r u l e s . Industry
a s s o c i a t i o n s and a t t o r n e y s p r a c t i c i n g i n t h e l i q u o r i n d u s t r y r e c e i v e
copies of proposed r u l e s and are n o t i f i e d of hearings. The
a s s o c i a t i o n s n o t i f y l i c e n s e e s through a r t i c l e s and not i c e s i n t r a d e
publicat ions.
However, DLLC has not used a d d i t i o n a l means of notifying t h e general
public. Notices a r e posted i n the Occupational Licensing Building,
but t h e Department uses no other means of n o t i f i c a t i o n such as sending
notices t o the pressroom i n the Capitol or notifying public i n t e r e s t
groups. Attorney General guidelines regarding t h e Open Meeting Law
encourage agencies t o use such other means of notifying the public.
6. The extent t o which t h e agency has been able t o i n v e s t i g a t e and
resolve complaints t h a t a r e within its j u r i s d i c t i o n
DLLC's i n v e s t i g a t i o n of complaints appears t o be adequate. A. R. S.
54- 210, Subsection C charges the superintendent w i t h i n v e s t i g a t i n g and
resolving complaints of alleged l i q u o r law v i o l a t i o n s . A l l complaints
a r e investigated or ref erred t o DPS, including anonymous complaints.
According t o DLLC records, it received 504 complaints i n f i s c a l year
1981- 82. DLLC s t a f f report they received 556 complaints i n f i s c a l
year 1982- 83. Approximately 277 of t h e s e complaints were r e f e r r e d t o
DPS f o r i n v e s t i g a t i o n . Most complaints i n v e s t i g a t e d by DLLC were
resolved i n t h r e e t o four days.
7. The extent t o which the Attorney General or any other applicable
agency of S t a t e government has the authority t o prosecute actions
under enabling l e g i s l a t i o n
The Department appears t o have adequate enforcement powers. In
addition t o administrative action against licensees, the s t a t u t e s
allow the superintendent and Board t o seek injunctive r e l i e f against
persons operating without licenses. Further, the s t a t u t e s provide
criminal penalties f o r violation of S t a t e liquor laws. County
attorneys or t h e S t a t e Attorney General serve a s prosecutors i n these
cases .
8. The extent t o which the agency has addressed d e f i c i e n c i e s i n t h e
enabling s t a t u t e s which prevent it from f u l f i l l i n g its s t a t u t o r y
mandate
DLLC has consistently sought s t a t u t o r y changes t o enable it t o more
e f f e c t i v e l y a t t a i n its objectives. Between 1979 and 1983, DLLC
supported b i l l s which
Provided f o r hearings and appeals,
Increased d i s c i p l i n a r y options by providing f o r injunctive
r e l i e f and increasing f i n e s ,
Required DLLC t o maintain l i a i s o n with law enforcement a
o f f i c i a l s and required law enforcement agencies t o report
liquor law violations t o DLLC,
Established a s e p a r a t e i n v e s t i g a t i o n s u n i t within the
Department , 0
a Required c e r t a i n licensees t o post bonds,
Restricted corporate stock t r a n s f e r s , and
Revised the quota system t o more accurately r e f l e c t population
changes.
According t o the superintendent, several s t a t u t o r y changes a r e s t i l l
needed :
Statutory language concerning bonding should be c l a r i f i e d and
proposed l e g i s l a t i o n addressing t h e problem was withdrawn i n
1983 when a nonrelated amendment was attached;
The Department's a u t h o r i t y t o subpeona records should be
broadened ; and
The Department's r o l e i n f i l i n g l i e n s should be defined.
DLLC plans t o request l e g i s l a t i o n addressing t h e f i r s t two i s s u e s
during t h e next session.
9. The extent t o which changes a r e necessarv i n t h e l a w s of t h e agency t o
adequately comply with t h e f a c t o r s l i s t e d i n t h e Sunset Law
As explained i n t h e findings of t h i s r e p o r t , we recommend t h e
following s t a t u t o r y changes:
Amend A. R. S. 54- 206 t o eliminate quota r e s t r i c t i o n s on type
6,7 and 9 l i c e n s e s ( see page 29);
Amend t h e s t a t u t e s t o require bonding of a l l l i c e n s e e s ( see
page 39);
I f quotas a r e eliminated, amend A. R. S. s4- 203( F) t o eliminate
a l l t r a n s f e r s ; and i f the quota system is r e t a i n e d , amend
A. R. S. $ 4- 209(~) t o make t r a n s f e r l i c e n s e fees equal t o
o r i g i n a l l i c e n s e f e e s ( see page 43);
Amend A. R. S. $ 42- 1204(~) t o provide f o r higher l i q u o r luxury
tax r a t e s ( see page 51);
Amend the s t a t u t e s t o more e f f e c t i v e l y r e s t r i c t the number of
l o t t e r y applications an individual may submit ( see page 59);
and
e Amend A. R. S. s4- 201(~) t o eliminate mandatory hearings f o r
o r i g i n a l licenses which are locally approved and nonprotested
( see page 65).
10. The extent t o which the termination of the agency would s i g n i f i c a n t l y
harm the public h e a l t h , s a f e t y and welfare
Regulation of the liquor industry is necessary f o r the protection of
the public health, safety and welfare. The need f o r control over the
s a l e of liquor is well established. A l l 50 s t a t e s regulate the liquor
industry, although regulatory s t r u c t u r e s vary dramatically. We
evaluated the f e a s i b i l i t y of t r a n s f e r r i n g DLLC' s licensing and
enforcement functions t o the Department of Revenue or the Department
of Public Safety ( similar t o several other s t a t e s ) but could not
i d e n t i f y s i g n i f i c a n t benefit s t o warrant a consolidat ion.
11. The extent t o which the l e v e l of regulation exercised by the agency is
appropriate and whether l e s s or more stringent l e v e l s of regulation
would be appropriate
Licensure appears t o be an appropriate l e v e l of regulation. Licensing
provides a screening mechanism t o ensure that negative influences,
such a s organized crime, do not operate i n the industry. The threat
of license suspension or revocation also provides incentives f o r
licensees t o comply with liquor laws and regulations.
Statutory r e s t r i c t i o n s on the number of licenses issued, however,
should be eliminated. These r e s t r i c t i o n s do not a t t a i n t h e i r intended
objectives and generally serve the industry r a t h e r than the public
i n t e r e s t ( see page 29).
FINDING I
THE DEPARTMENT CAN MORE EFFECTIVELY UTILIZE LOCAL POLICE AGENCIES TO
ENFORCE LIOUOR LAWS.
DLLC has not f u l l y u t i l i z e d l o c a l police agencies i n the enforcement of
liquor laws. DLLC' s control over liquor establishments is largely limited
by the quality of enforcement done by l o c a l law enforcement agencies. In
many instances, DLLC has been unable t o take action against licensees
because of inadequate or untimely i n v e s t i g a t i v e reports from l o c a l
agencies. U n t i l r e c e n t l y , however, DLLC has taken l i t t l e action t o
c o r r e c t t h e s e conditions. To improve the quality of reporting, DLLC
should c u l t i v a t e an ongoing l i a i s o n with these agencies and provide more
t r a i n i n g . More emphasis i n t h e s e a r e a s would improve liquor law
enforcement throughout the State.
Enforcement Responsibilities
and A c t i v i t i e s
DLLC, DPS and local law enforcement agencies share responsibility f o r
enforcing liquor laws. The s t a t u t o r y d u t i e s of each agency are summarized
i n Table 3.
U u o
C1- I ' H
a Wa ; 1
aJ1- I c c l
0 4 a-u
' d
rlL- Iu ( d o c
,"' 2% A a J a
DLLC A c t i v i t i e s - To f u l f i l l its s t a t u t o r y enforcement r e s p o n s i b i l i t i e s ,
DLLC has established an i n v e s t i g a t i o n s s e c t i o n . * Investigators perf orm
these major types of enforcement a c t i v i t i e s :
Conduct routine license inspections ( RLIs) t o determine compliance
with T i t l e 4 and DLLC rules and regulations. RLIs are announced
v i s i t s during which inspectors determine whether the establishment
is licensed and review f o r such items a s tax stamps on b o t t l e s and
propriety of advertising.
Investigate complaints received from t h e public and industry.
Follow up on i n v e s t i g a t i v e reports received from DPS and local law
ezlforcement agencies t o o b t a i n a d d i t i o n a l information needed f o r
d i s c i p l i n a r y actions.
Conduct i n v e s t i g a t i o n s o r i g i n a t i n g from other sources, such as
p o t e n t i a l ownership problems i d e n t i f i e d by discrepancies on
license applications.
Perform restaurant a u d i t s t o determine whether licensees are
operating as bona f ide restaurants.**
While performing investigations or inspections, DLLC may d e t e c t p o t e n t i a l
tax problems, such a s skimming or wholesale s a l e s by r e t a i l e r s . Potential
tax problems a r e referred t o DOR f o r audits t o determine t h e amount of tax
l i a b i l i t y .
* In 1982 t h i s section consisted of three i n v e s t i g a t o r s plus a chief
i n v e s t i g a t o r . One of these i n v e s t i g a t o r s , however, was acting a s
o f f i c e manager over the c l e r i c a l s t a f f and thus was not performing
i n v e s t i g a t i v e d u t i e s . During 1983 the section increased t o s i x
i n v e s t i g a t o r s plus the chief.
** A. R. S. $ 4- 205.02., Subsection G r e q u i r e s r e s t a u r a n t s t o derive a t
l e a s t 40 percent of gross revenues from food s a l e s .
DPS and Local A c t i v i t i e s - Most " s t r e e t " enforcement is performed by DPS
and local law enforcement agencies. DPS's Division of Liquor Control has
56 o f f i c e r s whose primary duty is t o enforce liquor laws. These o f f i c e r s
are dispersed throughout the State. According t o a DPS report, i n 1981
DPS personnel spent nearly 50,000 man- hours i n the following
liquor- relat ed a c t i v i t i e s :
Liquor Investigations - These include both overt and covert
i n v e s t i g a t i o n s t o detect liquor violat ions. Many investigations
are i n i t i a t e d by requests from other S t a t e or local agencies
( including DLLC) or c i t i z e n complaints. A covert operation is
aimed at detecting " on view" violations such a s serving liquor t o
minors.
Routine License Inspections - Similar t o RLIs conducted by DLLC.
Inspection r e s u l t s a r e forwarded t o DLLC.
Prelicensure Investigations - DPS screens each l i q u o r l i c e n s e
applicant f o r criminal involvement by checking DPS records
( including f i n g e r p r i n t checks) and contacting other S t a t e
agencies. A DPS agent also v i s i t s the proposed location of the
establishment t o verify that it meets licensing requirements
( e. g., adequate distance from schools and churches). Results of
both the background check and the location survey are reported t o
DLLC .
Statewide, there are approximately 5,000 c e r t i f i e d peace o f f i c e r s serving
with l o c a l law enforcement agencies. Although no estimates are available 0
of the time these o f f i c e r s may spend i n liquor- related enforcement
a c t i v i t i e s , under the provisions of A. R. S. 541- 1794 they c o n s t i t u t e a
s i g n i f i c a n t resource f o r the enforcement of liquor laws.
Both criminal prosecution and administrative action can r e s u l t from
i n v e s t i g a t i v e work performed by DPS and local law enforcement o f f i c e r s .
Administrative action ( i. e., action against a l i q u o r l i c e n s e ) is i n i t i a t e d
by sending a n i n v e s t i g a t i v e report of p o t e n t i a l l i c e n s e e v i o l a t i o n s t o
DLLC. DLLC enforcement s t a f f review the report t o determine whether 1)
the violations are within DLLC's j u r i s d i c t i o n and 2) the report contains
s u f f i c i e n t evidence on which t o proceed with a hearing. DLLC d i s c i p l i n a r y
options include f i n e s and actions against the liquor l i c e n s e
( suspension/ revocat ion). The provisions of A. R. S. $ 41- 1794 enacted i n
1982" require a l l DPS and local law enforcement o f f i c e r s t o forward
i n v e s t i g a t i v e reports of p o t e n t i a l licensee violat ions t o DLLC. This has
increased the number of reports sent t o DLLC, a s shown i n Table 4. During
the f i r s t half of calendar year 1983 DLLC received 24 percent more reports
than during the e n t i r e year 1982 and 41 percent more than during 1981.
* House B i l l 2420
TABLE 4
REPORTS RECEIVED FROM LAW ENFORCEMENT
AGENCIES DURING 1981, 1982 AND 1983
J u r i s d i c t i o n
Apache County Sheriff
Apache Junction P. D.
Avondale
Bisbee P. D.
Buckeye P. D.
Casa Grande P. D.
Chandler P. D.
Clifton P. D.
Cochise County Sheriff
Coconino County Sheriff
Coolidge P. D.
Cot tonwood P . D.
Douglas P. D.
Eager P. D.
El Mirage P. D.
Eloy P. D.
F l a g s t a f f P. D.
G i l a County Sheriff
Gilbert P. D.
Glendale P . D.
Globe P. D.
Guadalupe P. D.
Holbrook P. D.
Huachuca P. D.
Jerome P. D.
Kingman P. D.
Lake Havasu P. D.
Marana P. D.
Maricopa County Sheriff
Mesa P. D.
Mohave County Sheriff
Navajo County Sheriff
Paradise Valley P. D.
Parker P. D.
Payson P. D.
Peoria P. D.
1983
as of
June 24
TABLE 4 ( Concl ' d)
REPORTS RECEIVED FROM LAW ENFORCEMENT
AGENCIES DURING 1981, 1982 AND 1983
J u r i s d i c t i o n
Phoenix P. D.
Pima County Sheriff
Pinal County Sheriff
Prescott P . D.
Prescott Valley P. D.
San Luis P. D.
Scottsdale P. D.
Show Low P. D.
Superior P. D.
South Tucson P. D.
Surprise P. D.
Tempe P. D.
Tucson P. D.
Wickenburg P. D.
Wilcox P. D.
Winslow P. D.
I) Yavapai County Sheriff
Yuma P. D.
Yuma County Sheriff
DPS
Total
1983
as of
- 1982 June 24
Due t o the number and geographical dispersion of licensed establishments,
and considering the small s i z e of its own s t a f f , DLLC can most e f f e c t i v e l y
and e f f i c i e n t l y exercise its enforcement authority by relying on DPS and
local law enforcement agencies throughout the State. Even now the vast
majority of DLLC's administrative actions against licensees are based on
i n v e s t i g a t i v e work done by these other agencies. In f a c t , during 1982
only 9 percent of a l l administrative actions originated with DLLC
investigators.
Unable t o Take Action
Against Licensees
In many instances DLLC has been unable t o t a k e a c t i o n against licensees
because of inadequate investigative reports from local law enforcement
agencies. Many reports do not contain enough information and/ or are sent
t o DLLC so l a t e that s o l i d c a s e s cannot be prepared for administrative
action.
During the audit, several sources indicated that DLLC was not taking
s u f f i c i e n t a c t ion against establishments with h i s t o r i e s of repeated
violence related t o liquor consumption. We selected four bars which had
reputations a s " problem bars" and reviewed DLLC f i l e s t o determine what
potential violat ions have been reported and what follow- up act ions have
been taken by DLLC. The history for each bar-- particularly relating t o
violence*-- is summarized i n Table 5 f o r calendar year 1982 and part of
1983.
* A. R. S. § 4- 210 s t a t e s , i n part:
" A. The Board may suspend, revoke, refuse t o renew and
the superintendent may suspend any license issued pursuant
t o t h i s chapter f o r any of the following reasons:
1. There occurs on the licensed premises repeated a c t s
of violence or disorderly conduct."
R4- 15- 213 s t a t e s , i n part:
" A licensee upon whose licensed premises an act of
violence occurs s h a l l make a d e t a i l e d , w r i t t e n report
within 24 hours of such act of violence t o the Department
of Liquor Licenses and Control."
TABLE 5
ANALYSIS OF INCIDENTS REPORTED
AND SUBSEQUENT ACTIONS BY DLLC
FOR FOUR LIQUOR ESTABLISHMENTS
Liquor Period Covered by Total Number Number Involving Violence** Disciplinary Action by DLLC
Establishment Reports i n of Reports Inside Outside Total Number and Nature of Final Disposition
Auditor's Analysis* - Bar - Bar - Citations/ Warnings Issued
Bar A Jan. 1982- Jul. 1983 2 7
Bar B
Bar C
Bar D
Jan. 1982- Dec. 1982 4 6
Jan. 1982- Mar. 1983 27
Jan. 1982- Jun. 1983 74
13 7 20 1 c i t a t i o n issued 7/ 8/ 82 Licensee consented t o $ 700
containing 9 charges, f i n e f o r 1 charge of
including unreported a c t s unreported violence; other
of violence, overserving and charges dismissed
repeated a c t s of violence
1 c i t a t i o n issued 9/ 14/ 82
containing 1 charge of
exposure and 2 charges of
touching
1 warning l e t t e r f o r employee
drinking
10 36 6 warning l e t t e r s , mostly f o r
violence
11 23 1 warning l e t t e r f o r unreported
violence
Licensee c , o ~ e p t ~ ; ~ ~ ~ ~ $ 3 0 _ 0 ~
f i n e f o r 1 charge of touching;
other charges dismissed
1 c i t a t i o n issued 4/ 27/ 83 Informal conference with
containing 7 charges, including licensce pending as of
unreported violence, overserving, of 9/ 8/ 83
locked front doors and repeated
a c t s of violence
11 25*** 1 c i t a t i o n issued 4/ 27/ 83 Hearing pending as of 9/ 8/ 83
containing 24 charges, including
15 for unreported a c t s of violence
and 5 f o r overserving
1 warning l e t t e r f o r allowing
intoxicated person t o remain on
premises
* The periods specified are based upon t h e d a t e s of t h e i n c i d e n t s reported by the local agencies. We reviewed only those reports which were i n
the licensee's permanent f i l e s at the time of the analysis. Other more c u r r e n t r e p o r t s were i n d i f f e r e n t stages of review by DLLC s t a f f and
thus were not available f o r our review. ** Many of these reports involviw violence also noted other p o t e n t i a l liquor law violations, such as overserving ( serving t o an intoxicated
person) and allowing an intoxicated person t o remain on the premises. 2 *** Of the other 49 reports not involving violence ( 74- 25= 49), 11 were drug r e l a t e d , 3 were p r o s t i t u t i o n r e l a t e d , 7 were a r r e s t s f o r outstanding , (
warrants and 4 were related t o pick- pocketing incidents.
I
We questioned t h e DLLC Superintendent and Attorney General represent a t ive
t o determine why t h e Department did not take more action against these
licensees. Various reasons were given f o r inaction. For example, some
violence is inevitable and is therefore dismissed i f 1) the police report
indicates t h a t the l i c e n s e e ' s employees responded properly t o stop the
disturbance or 2) t h e r e were no i n j u r i e s a s defined by the regulations."
Oftentimes a f i g h t has ended before t h e police a r r i v e and no one is
willing t o t e s t i f y that the incident occurred or how it s t a r t e d .
Frequently f i g h t s have moved outside before police a r r i v e , making it more
d i f f i c u l t f o r the o f f i c e r s t o e s t a b l i s h t h e f a c t t h a t t h e violence began
on the " licensed premises. "**
According t o t h e Superintendent and Attorney General represent a t ive, DLLC
could t a k e d i s c i p l i n a r y action i n more instances i f p o l i c e i n v e s t i g a t i o n s
and reports were more complete. In many instances a l l the evidence needed
f o r administrative action may have been a t hand when the p o l i c e a r r i v e d ,
but because of inadequate investigations and/ or reports DLLC could not
prepare solid cases. For example, take a t y p i c a l s i t u a t i o n i n which a
f i g h t between two intoxicated persons s t a r t s i n a bar but moves outside
before the police a r r i v e . Apparently these persons were overserved i n the
bar, which is also a v i o l a t i o n of the liquor statutes.*** However, when
the police a r r i v e the persons a r e no longer on the " premises" a s defined
i n A. R. S. ' 34- 101. Therefore, i n order t o document the violence and
overserving v i o l a t i o n s , the o f f i c e r s should take the f i g h t e r s i n t o the bar
and attempt t o obtain s u f f i c i e n t testimony that these persons had i n f a c t
been served and s t a r t e d fighting i n t h a t bar. I f the o f f i c e r s f a i l t o do
t h i s , then DLLC is faced with the choice of e i t h e r dismissing the matter
or conduct ng a time- consuming follow- up i n v e s t i g a t i o n t o gather the
evidence needed f o r a d m i n i s t r a t i v e a c t i o n . The l a t t e r is often impossible
* R4- 15- 213 defines violence a s ". . . any disturbance i n which bodily
i n j u r i e s , f a t a l or not, are sustained by any person. . . ."
** A. R. S. 54- lOl( 17) defines the " licensed premises" a s ". . . the area
from which the licensee is authorized t o s e l l , dispense, or serve
s p i r i t u o u s l i q u o r s under the provision of the license."
*** A. R. S. $ 4- 244( 14)
because witnesses are no longer available. The d i f f i c u l t y of obtaining
evidence is compounded i f the police report i s not sent t o DLLC u n t i l
several months a f t e r t h e incident.
One of the four bars reviewed i l l u s t r a t e s the importance of sending
i n v e s t i g a t i v e reports t o DLLC i n a timely manner. In November 1981 DLLC
suspended Bar D ' s l i c e n s e f o r 10 days f o r various violations. This action
was based on reports submitted by t h e l o c a l police department. After the
suspension ended, no reports were sent t o DLLC f o r approximately 18
months. During t h i s period numerous r e p o r t s a l l e g i n g liquor violat ions by
Bar D were written by the local o f f i c e r s , but these were not sent t o DLLC
because of a misunderstanding within the police department. Finally, a
l o c a l newspaper story noted the frequent violence occurring a t Bar D and
c r i t i c i z e d DLLC for not taking more action against the licensee. DLLC
subsequently contacted the local police department and requested t h a t t h e
past reports be sent, many of which were more than a year old .* Based on
t h e s e r e p o r t s , DLLC has issued a c i t a t i o n t o the licensee noting 24
potential violations; a s of September 8, 1983, a hearing is pending.
According t o the Attorney General represent a t ive many other apparent
violations noted on the p o l i c e r e p o r t s were dropped because the passage of
time since the incidents occurred made it impossible t o locate witnesses.
DLLC Should Work More Closely
with Local Enforcement Agencies
DLLC can improve the quality of local reporting-- and hence the
effectiveness of liquor law enforcement-- by working more closely with
local l a w enforcement agencies. To f r e e more resources f o r t h i s role,
DLLC should eliminate restaurant audits.
* Of t h e 74 reports shown i n Table 5 f o r t h i s establishment, 37 were
received by DLLC more than 6 months a f t e r the incidents occurred.
Liaison with Other Agencies - As explained e a r l i e r , DLLC must rely on DPS
and local law enforcement agencies f o r most " s t r e e t " enforcement work.
These agencies are already generating most of DLLC's d i s c i p l i n a r y cases by
forwarding reports involving l i q u o r law v i o l a t ions. However, these
agencies apparently have the p o t e n t i a l t o provide much b e t t e r enforcement
than is now occurring. To achieve t h i s p o t e n t i a l DLLC should strengthen
its l i a i s o n role, including more emphasis i n the t r a i n i n g area. By t h i s
means DLLC can help l o c a l law enforcement o f f i c e r s improve the quality of
i n v e s t i g a t i o n s and reports involving liquor establishments .
U n t i l r e c e n t l y DLLC has done r e l a t i v e l y l i t t l e t o improve the quality of
liquor enforcement by local agencies. According t o the DLLC chief
i n v e s t i g a t o r , i f an agency's reports were c o n s i s t e n t l y l a t e or inadequate,
no one contacted the agency t o determine why or t o explain how the reports
could be improved. Our contacts with the local agencies i n whose
j u r i s d i c t i o n the four " problem bars" are located confirm t h i s statement.
One agency said it was unaware DLLC considered its reports t o be
inadequate. A second agency, lacking specific feedback from DLLC
regard ing its report s, maintained t h a t its reports a r e adequate f o r DLLC
t o act on. Another agency, not related t o the bars mentioned above, said
t h a t DLLC had recently commented on a lack of documentation i n its
reports; but when it questioned DLLC, it was not given guidelines f o r
correcting the problem. ( I
In addition, a s i l l u s t r a t e d by the e a r l i e r example ( Bar D), no one was
reviewing the DLLC report log t o identify agencies with unusually low
numbers of reports. This simple a n a l y t i c a l t a s k could help DLLC identify a
local agencies which might not be f u l f i l l i n g the reporting requirement of
A. R. S. $ 41- 1794, For example, Table 4 ( page 18) shows the number of
reports from each local enforcement agency i n 1981, 1982 and part of
1983. The f l u c t u a t i o n s f o r several agencies could indicate a reporting
problem. I n p a r t i c u l a r , Kingman sent 33 reports i n 1981 but only 2 i n
1982 and only 1 i n 1983 ( as of June 24). Payson sent 23 reports i n 1981
but only 2 i n 1982 and none i n 1983 ( as of June 24). By contacting these
two agencies we were told Payson was unaware t h a t a mandatory reporting
requirement existed. The Ringman o f f i c i a l told us he was unaware that h i s
department had not been sending reports and t h a t there must have been an
administ r a t ive mistake.
During the audit, DLLC began a program t o e s t a b l i s h a l i a i s o n with each
l o c a l agency. In June 1983 the superintendent began assigning his
i n v e s t i g a t o r s t o separate areas of the State. The investigators are t o
periodically contact each l o c a l police agency and inspect each licensee
within t h e i r d i s t r i c t s . The superintendent estimates t h a t each
enforcement agency should be contacted about every two months. According
t o the c h i e f i n v e s t i g a t o r , once i n i t i a l contacts have been made, then h i s
s t a f f w i l l take a problem- solving approach i n l a t e r contacts such as a
discussion of reporting problems.
DLLC has provided some training t o l o c a l agencies, but p o t e n t i a l l y could
provide much more. For example, i n a recent 18- month period DLLC s t a f f
were involved i n training only 38 days. Half of those sessions involved
law enf orcement agencies and half involved liquor r e t a i l e r s . According t o
the chief investigator, DLLC1s training program is being explained t o each
local agency during the i n i t i a l contacts described above.
Eliminate Restaurant Audits - DLLC could devote more s t a f f time t o t h i s
l i a i s o n and training role by eliminating restaurant audits, which a r e
c o s t l y and unnecessary. According t o the superintendent, one DLLC
i n v e s t i g a t o r had been assigned nearly full- time t o these a u d i t s i n the
past. ( Prior t o t h i s year, t h i s represented 25 percent of the enforcement
s t a f f .) However, these a u d i t s do not appear t o d e t e r noncompliance
because few licensees are subject t o audit. The 45 a u d i t s done i n 1982
represent only 5 percent of a l l licensed restaurants. The fact that 17 of
those audited ( 38 percent) were not i n compliance with the food
requirement suggests t h a t the minimal coverage has l i t t l e deterrent effect
on the other licensees.
If quotas are eliminated, a s recommended i n Finding 11, then there w i l l be
no need f o r the 40 percent food requirement* and thus no need f o r
restaurant audits. If quotas are continued, DLLC should consider an
a l t e r n a t i v e method f o r encouraging compliance. One solution might be a
c e r t i f i c a t i o n program. A r e s t a u r a n t l i c e n s e e could be required t o submit
evidence, c e r t i f i e d by a CPA, a t t e s t i n g t o the breakdown of s a l e s between
food and a l c o h o l i c d r i n k s . DLLC could adopt regulations specifying the
procedures the CPA should follow t o verify that the requirement is met.
Thus, with a minimal amount of s t a f f time and follow- up, DLLC could expand
its monitoring e f f o r t t o include a l l restaurant licensees.
More Staff May Be Needed - DLLC may need more s t a f f t o handle the
increasing number of reports from law enforcement agencies. Additional
emphasis on training combined with the e f f e c t of the 1982 law is l i k e l y t o
continue, increasing the number of i n v e s t i g a t i v e reports forwarded t o
DLLC. Thus, DLLC may need additional enforcement s t a f f t o review and
follow up on these reports and additional c l e r i c a l s t a f f t o prepare
c i t a t i o n s and handle the paperwork resulting from administrative
hearing s . **
CONCLUSION
DLLC's a b i l i t y t o regulate type 6 licensees ( i . . , on- sale all- liquor
r e t a i l e r s ) depends largely on the quality of i n v e s t i g a t i o n s and reporting
by local law enforcement personnel. Better and more timely reports from
t h e l o c a l agencies would enable DLLC t o t a k e d i s c i p l i n a r y a c t i o n i n more
cases. DLLC can help these agencies improve t h e i r reporting by placing
more emphasis on its l i a i s o n and training roles.
* Apparently the r a t i o n a l e f o r the 40 percent food requirement is t h a t
it prevents a person from opening a restaurant t o circumvent the
current r e s t r i c t i o n s on the number of on- sale a l l - l i q u o r licenses. ** The number of administrative c i t a t i o n s has already increased
s u b s t a n t i a l l y i n the past year. DLLC issued 164 administ r a t ive
c i t a t i o n s i n 1981, 207 i n 1982 and 213 a s of September 12, 1983.
- / #
RECOMMENDATIONS , 5' ,-*'
\
1. To improve t h e q u a l i t y of reporting by local law enforcement agencies,
DLLC should give more emphasis t o its l i a i s o n role by a) contacting
each agency on a regular, frequent basis and b) increasing its
t r a i n i n g e f f o r t s .
2. To provide g r e a t e r resources f o r more c r i t i c a l enforcement a c t i v i t i e s ,
DLLC should eliminate restaurant a u d i t s and consider a l t e r n a t i v e
methods of encouraging compliance with the s t a t u t o r y food
requirement. One solution might be t o require licensees t o submit
c e r t i f i c a t i o n a t t e s t e d by a CPA.
3. The Legislature should consider providing DLLC additional s t a f f t o
process the increased number of reports from law enforcement agencies.
4. The Legislature should consider reviewing again the enforcement
a c t i v i t i e s of DLLC i n approximately two years t o evaluate DLLC's
e f f e c t i v e n e s s once the reporting of l i q u o r v i o l a t i o n s is improved.
FINDING I1 '
RESTRICTIONS ON LIQUOR LICENSE ISSUANCES SHOULD BE REMOVED BECAUSE THEY
ARE INEFFECTIVE AND CREATE ARTIFICIAL BARRIERS TO ENTRY.
R e s t r i c t i o n s on t h e number of l i q u o r l i c e n s e s issued should be
eliminated. These r e s t r i c t i o n s a r e i n e f f e c t i v e i n achieving the
t r a d i t i o n a l goals of promoting temperance and aiding enforcement.
R e s t r i c t i o n s have not decreased the number of r e t a i l o u t l e t s . Research
i n d i c a t e s t h a t eliminating quotas should not increase consumption or place
an a d d i t i o n a l burden on enforcement. License issuances could then be
based on public need and convenience r a t h e r than a r t i f i c i a l b a r r i e r s t o
entry t h a t protect t h e industry.
Background
A. R. S. $ 4- 206 r e s t r i c t s , based on county population, t h e number of r e t a i l
l i q u o r establishments which a r e permitted t o sell a l l s p i r i t o u s l i q u o r s .
Neither t h e t o t a l number of on- sale ( type 6) l i c e n s e s nor t h e t o t a l number
of off- sale* ( type 9) l i c e n s e s within a s i n g l e county a r e permitted t o
exceed :
* A. R. S. 34- 101, Subsections 14 and 15 d e f i n e off- sale and on- sale
r e t a i l e r s as follows :
" 14. " Off- sale r e t a i l e r " means any person operating a
bona f i d e regularly e s t a b l i s h e d retail l i q u o r s t o r e
s e l l i n g s p i r i t ous l i q u o r s , wines and beer, and any
e s t a b l i s h e d r e t a i l s t o r e s e l l i n g commodities other than
s p i r i t u o u s l i q u o r s and engaged i n t h e s a l e of s p i r i t u o u s
l i q u o r s only i n t h e o r i g i n a l package, t o be taken away
from t h e premises of t h e r e t a i l e r and t o be consumed off
t h e premises.
" 15. " On- sale r e t a i l e r " means any person operating an
establishment where s p i r i t u o u s l i q u o r s a r e sold i n the
o r i g i n a l container f o r consumption on o r off t h e premises
and i n i n d i v i d u a l p o r t i o n s f o r consumption on the
premises."
" 1. One license f o r each one thousand inhabitants f o r
the f i r s t twenty- f our thousand inhabit ants within the
county, and i n addition
2. One license for each two thousand inhabitants f o r
the population within the county from twenty- five
thousand through one hundred thousand inhabitants, and
i n addition
3. One license for each two thousand f i v e hundred
inhabitants f o r the population within the county from
one hundred thousand inhabit ants"
In addition, on- sale wine and beer licenses ( type 7) a r e r e s t r i c t e d t o one
license f o r each 500 inhabitants. Type 6 licenses a r e included i n the
count for determining a v a i l a b i l i t y of type 7 ' s because type 6 licenses also
permit t h e s a l e of wine and beer.
Because licenses which allow the sale of a l l alcoholic beverages, both on-and
off - sale, have the highest demand, t h e s e l i c e n s e s have reached t h e i r
statutory l i m i t s i n most counties. Theref ore, only county population
increases allow issuances of new type 6 and 9 licenses. Because the number
of applicants for new 6 and 9 licenses is greater than the number of
available licenses, the Department of Liquor Licenses and Control ( DLLC)
i n s t i t u t e d a n annual l o t t e r y i n 1975. The l o t t e r y drawing process
determines which applicants w i l l be considered f o r the type 6 and 9
licenses created by population growth.* In 1982, o r i g i n a l type 6 licenses
were issued i n only two counties and original type 9 licenses were issued
i n only four counties.**
* Finding V describes l o t t e r y drawing procedures. ** Although type 7 licenses are r e s t r i c t e d , they have not reached quota
l i m i t s and are therefore not included i n t h e l o t t e r y .
Restrictions Are Ineffective
i n Attaining Goals
License issuance r e s t r i c t i o n s are not effective i n attaining the
t r a d i t i o n a l goals of promoting temperance, protecting the liquor industry
and aiding enforcement. Due t o current exclusions and h i s t o r i c a l
statutory exemptions from quotas, the t o t a l number of r e t a i l o u t l e t s is
not limited. Arizona has high alcoholic beverage a v a i l a b i l i t y , the number
of o u t l e t s t o be policed is large and quotas have f a i l e d t o protect
businesses from financial d i s t r e s s .
Goals - Although t h e s t a t u t e s do not s p e c i f i c a l l y s t a t e the intent of
creating quotas, a u t h o r i t a t i v e sources indicate t h a t such r e s t r i c t ions
were o r i g i n a l l y placed on licenses t o 1) p__ rpmote-- ternperanc~ e~,,_ J)- p, r, ot~ ct
- th. e - li. qu- o- r -- -- / An Arizona court case
c i t e s temperance as a reason f o r r e s t r i c t i n g licenses. A 1938 Tax
Commission* report requested l i m i t s on license issuances t o protect the
liquor industry and t o aid law enforcement. According t o a 1973 report by
the Joint Committee of t h e S t a t e s t o Study Alcoholic Beverage Laws, s t a t e s
l i m i t licenses t o aid enforcement by ensuring licensees a c e r t a i n
financial security. The report s t a t e s i n part:
". . . Most s t a t e s attempt t o keep the number of
licensed out l e t s within such l i m i t s that operating
licensees are not in perennial f i n a n c i a l d i s t r e s s
because of extensive competition, since t h i s could lead
t o the s o c i a l e v i l s t h a t t h e liquor laws seek t o
eliminate. "**
* DLLC's predecessor, the Temperance Enforcement Commission, was part of
the Tax Commission.
** Joint Committee of the States t o Study Alcoholic Beverage Laws,
Alcoholic Beverage Control, 1973, page 21.
Exclusions and Exceptions - Due t o exclusions and h i s t o r i c a l exceptions t o
the quota, t h e t o t a l number of r e t a i l o u t l e t s is not l i m i t e d . Numerous
l i c e n s e types are not r e s t r i c t e d and issuances exceed quota l i m i t s a s a
r e s u l t of various l e g i s l a t i v e actions.
Not a l l l i c e n s e s a r e subject t o population r e s t r i c t i o n s . As shown i n
Table 6, quotas a r e placed on only t h r e e of eight r e t a i l l i c e n s e types.
Hotel/ motel l i c e n s e s were kept under quota from 1939 u n t i l 1950, at which
time the r e s t r i c t i o n was removed. Restaurants were r e s t r i c t e d as an
on- sale establishment u n t i l the e a r l y 1960s when they were made a separate
u n r e s t r i c t e d l i c e n s e type. Unrestricted l i c e n s e s now account f o r about 40
percent of a l l r e t a i l l i c e n s e s and may serve t o circumvent quota
r e s t r i c t i o n s . For example, A. R. S. $ 4- 205,2( G) requires r e s t a u r a n t s t o
derive a t l e a s t 40 percent of t h e i r gross revenues from food s a l e s . In
1982 DLLC audited 45 selected r e s t a u r a n t s and found 38 percent f a i l e d t o
meet the food s a l e s requirement .*
H i s t o r i c a l l y , s t a t u t o r y exceptions t o t h e quota have a l s o contributed t o
t h e system's i n e f f e c t i v e n e s s i n reducing the number of o u t l e t s . When
quotas were e s t a b l i s h e d f o r h o t e l s and on- premise all- beverage l i c e n s e s i n
1939, e x i s t i n g l i c e n s e s were grandfathered and allowed t o continue
operat ion. I n 1941, grandf athering a l s o occurred when off - premise
all- beverage ( type 9) l i c e n s e s were placed under quota. The grandf a t hered
l i c e n s e s were counted i n determining l i c e n s e s a v a i l a b l e f o r issuance.
The 1961 lease- replacement b i l l which prohibited l e a s i n g l i q u o r l i c e n s e s
t o t h i r d p a r t i e s f u r t h e r compounded t h e problem. Both l e s s o r s and
o r i g i n a l l i c e n s e e s were allowed t o keep t h e i r l i c e n s e s . Until 1980, these
l e a s e replacements were excluded from t h e counts f o r determining l i c e n s e
a v a i l a b i l i t y .
* P r i o r t o July 1982 s4- 205.2( G) required r e s t a u r a n t s t o derive a t l e a s t
25 percent of t h e i r gross revenues from food s a l e s , r a t h e r than the
c u r r e n t 40 percent requirement.
Table 6
A COMPARISON OF RESTRICTED
AND UNRESTRICTED RETAIL LICENSES
AS OF MAY 1983
R e s t r i c t e d Licenses U n r e s t r i c t e d L i c e n s e s
Consumption Consumption
On/ Of f Types of Number of On/ Of f Types of Number of
License Type Premises Liquor Sold Licenses License Type Premises Liquor Sold Licenses
On/ Of f All 1531 5 p e 16 On
( Restaurant)
On/ Of f Beer 8 wine 1349
only
Off A1 1
Type 15 On
( Hotel/ Motel)
All 868
All 104
On/ Of f Beer only 496
Off Beer & wine 1253
only
Type 11 Off Beer only 210
Due t o t h e s e exclusions and exceptions t o quota r e s t r i c t i o n s , many
counties exceeded quota l i m i t s when quotas were e s t a b l i s h e d and continue
t o exceed l i m i t s f o r r e s t r i c t e d l i c e n s e types. As of May 1983, type 6
l i c e n s e s exceeded quota l i m i t s i n 11 of 15 c o u n t i e s , while type 9 were
overissued i n 5 of 15 c o u n t i e s , a s shown i n Table 7.
TABLE 7
RESTRICTED LICENSE ISSUANCES AS OF MAY 1983
Apache
Cochise
Coc onino
Gila
Graham
Greenlee
LaPaz**
Maricopa
Mohave
Navajo
P ima
Pinal
Santa Cruz
Yavapai
Yuma
Number of
Licenses
Permitted*
5 p e 6
Issuances
Percent Over
Amount
Permitted
Percent Over
Type 9 Amount a
Issuances Permitted
* Counties a r e permitted t h e same number of l i c e n s e s f o r both Type 6 and Type 9 .
l i c e n s e s .
** LaPaz County was a p o r t i o n of Yuma County u n t i l January 1983. LaPaz l i c e n s e
issuances exceed t h e number permitted a s a r e s u l t of dividing the county. a
A v a i l a b i l i t y - Arizona ranks high i n alcoholic beverage a v a i l a b i l i t y . A
study reported i n t h e Journal of Studies on Alcohol compared a l l 50 s t a t e s
and t h e D i s t r i c t of Columbia using 8 a v a i l a b i l i t y f a c t o r s , including
l i m i t a t ions on on- premise and off - premise s a l e s . The study r e s u l t s showed
t h a t Arizona ranks f o u r t h i n t h e U. S. f o r alcohol a v a i l a b i l i t y . Arizona
has about 1 r e t a i l o u t l e t f o r every 400 persons.
Financial Security Not Assured - Quotas have not e f f e c t i v e l y protected
liquor businesses from f i n a n c i a l d i s t r e s s . As discussed e a r l i e r , the
number of r e t a i l o u t l e t s has not been severely r e s t r i c t e d . Further, the
industry is highly competitive, a s evidenced by a high turnover i n r e t a i l
o u t l e t s . According t o t h e DLLC superintendent, about 30 percent of t h e
o u t l e t s t u r n over annually. I n a d d i t i o n , an o f f i c i a l i n a private lending
i n s t i t u t i o n stated t h a t liquor establishments are high- risk businesses.
No Negative Impact from
Removing Quota s
@ Eliminating quota r e s t r i c t i o n s should not increase consumption or
adversely impact enforcement. According t o recent research, consumption
does not appear t o be a function of a v a i l a b i l i t y ; therefore, an increase
i n the number of o u t l e t s w i l l not increase consumption. In addition, the
number of o u t l e t s is a l s o not l i k e l y t o increase i n t h e long run because
demand is a r e l a t i v e l y constant f a c t o r and the market i s already highly
competitive. Theref ore, the impact on law enforcement should be minimal.
Availability and Consumption - Eliminating quota r e s t r i c t i o n s should not
increase demand since alcohol consumption does not appear t o be a function
of a v a i l a b i l i t y . According t o several s t u d i e s , the major determinants of
alcohol use are product price, personal income, degree of urbanism,
r e l i g i o u s and socio- cultural background, youthfulness and i n t e r s t a t e
t r a v e l . These studies a l s o indicate t h a t c o n t r o l p o l i c i e s , i n general,
have l i t t l e or no e f f e c t on consumption.
Arizona should not have a large increase i n the number of o u t l e t s i f quota
r e s t r i c t i o n s were removed. According t o a 1982 study* the average number
of per c a p i t a licenses i n s t a t e s with or without these r e s t r i c t i o n s does
not d i f f e r s i g n i f i c a n t l y . Of 31 license s t a t e s surveyed by our Office, 14
s t a t e s stated that they had no l i m i t on t h e number of r e t a i l license
issuances.
* Smith, Janet om, " An Analysis of S t a t e Regulations Governing
Liquor Store Licenses," Journal of Law and Economics, Vol. XXV,
October 1982.
Impact on Enforcement - As the number of r e t a i l o u t l e t s is not expected t o
increase s i g n i f i c a n t l y , eliminating quotas should not hinder law
enforcement . To maintain a large, permanent increase i n out l e t s ,
consumption must rise t o a level which would support more o u t l e t s .
However, a s explained e a r l i e r , research suggests t h a t consumption may not
be a function of a v a i l a b i l i t y . Further, the current r e t a i l o u t l e t
turnover r a t e of 30 percent suggests the market may already be saturated.
A short- run o u t l e t increase is possible, as r e f l e c t e d i n the number of
l o t t e r y applicants each year.* However, t h i s possible increase w i l l be
short- lived, a s alcohol demand w i l l s e t a natural market equilibrium. In
addition, any short- run rise i n o u t l e t s w i l l bring i n additional revenues
from license fees that could be used t o support any necessary additional
enforcement .
Licensing Should Be Based on
Public Need and Convenience
Licenses should be issued based on public need and convenience rather than
on a quota system which a c t s a s an a r t i f i c i a l b a r r i e r t o entry that
protects the industry. Although quotas have not provided complete
f i n a n c i a l protection f o r existing licensees, they protect the industry t o
some extent against new e n t r a n t s who may s h i f t business away from existing
licensees. Although r e s t r i c t i o n s c r e a t e an a r t i f i c i a l paper value which
f u r t h e r r e s t r i c t s entry, the S t a t e can remove these l i m i t s . Further, the
quota system does not always allow new out l e t s where public need is shown.
* Numerous persons apply f o r t h e l o t t e r y each year. However, we were
unable t o determine the number of applicants, a s individuals may
submit more than one application. Additional information on t h e
l o t t e r y is contained i n Finding V.
Industry Favors Quotas - Quotas are supported by the liquor industry f o r
several reasons including limiting competition. During t h e l i q u o r reform
movement i n the 1960s, the industry lobbied a g a i n s t r e p e a l of the quota
law. According t o a newspaper a r t i c l e published a t t h e time:
" Their chief argument seems t o be that without quotas,
i r r e s p o n s i b l e persons w i l l open bars by t h e dozens and
ruin t h e economic s t a t u s of present bar owners.""
In 1983, both the Arizona Licensed Beverage Association and the Wholesale
Beer and Liquor Association continue t o oppose the repeal of the quota.
The Wholesale Beer and Liquor Association favors quotas and believes
removal of quota r e s t r i c t i o n s on type 6 and 9 l i q u o r licenses would 1)
spread the r e t a i l market too t h i n and cause more businesses t o f a i l , 2)
possibly cause wholesalers t o receive more bad checks from r e t a i l e r s , and
3) cause delivery costs t o increase due t o a p o s s i b l e i n c r e a s e i n the
number of r e t a i l liquor out l e t s .
The Arizona Licensed Beverage Association f e e l s quotas are necessary
because 1 ) the value of the license ensures t h a t licensees run t h e i r
businesses i n a proper manner, 2) t h e value of one license d e t e r s
nonpayment of taxes, and 3) quotas provide licensees an opportunity t o
make a living by ensuring t h a t there is not " a liquor store on every
I, corner.
* Cooper, J i m , " Everyone Tried t o Get Into Liquor License Act ," Tucson
Daily Citizen, April 18, 1961.
Paper Value - Quotas present additional b a r r i e r s t o entry by creating
a r t i f i c i a l paper values on licenses. Although t h i s paper value c r e a t e s a
property right between the licensee and t h i r d p a r t i e s , the State can
remove these l i m i t s since a liquor l i c e n s e is a privilege granted by the
State. Bonding could be implemented f o r a l l licenses t o prevent tax
l o s s e s t o the State.
Quota r e s t r i c t i o n s c r e a t e an a r t i f i c i a l paper value on type 6 and 9
licenses which is much higher than the DLLC license issuance fee. License
f e e s f o r types 6 and 9 licenses are $ 1,500 and $ 1,000, respectively.
Currently, types 6 and 9 licenses have a market value as high a s $ 25,000
t o $ 35,000. This a r t i f i c i a l value is caused by quota r e s t r i c t i o n s since
prospective licensees must generally buy licenses from existing owners.
Although elimination of quotas would diminish the a r t i f i c i a l value of
l i c e n s e s , the State can t a k e such action. A l i q u o r license is a privilege
t o engage i n business subject t o regulation of the State. However, it is
a property right between a licensee and a t h i r d party. According t o a
July 1, 1983, Legislative Council memorandum,* the State has the authority
t o eliminate quotas and such elimination would not deprive a licensee of
property without just compensation. The memorandum s t a t e s i n part:
* Appendix I contains the memorandum t e x t .
3 8
". . . it appears t h a t eliminating quotas i n the
issuance of liquor licensees by repealing A. R. S. $ 4- 206
would f a l l within the broad power of the s t a t e t o
regulate t h e s a l e of intoxicating liquors and would not
c o n s t i t u t i o n a l l y deprive a l i q u o r l i c e n s e e of property
without just compensation. Such action by the
l e g i s l a t u r e would not be an a c t u a l taking of property
i t s e l f since the licensee would s t i l l r e t a i n t h e a c t u a l
use of the license but would only decrease the value of
the l i c e n s e , a value t h a t has been a r t i f i c i a l l y
increased by previous l e g i s l a t i v e act ion. "
If quotas are eliminated, a l l licensees could be bonded t o protect the
State against losses from tax delinquencies. Due t o the a r t i f i c i a l paper
values of type 6 and 9 l i c e n s e s , l i c e n s e e s are c a r e f u l about payment of
taxes t o avoid license revocation. If licenses a r e revoked due t o
delinquent taxes, the Department of Revenue ( DOR) can auction the
licenses. Unrestricted licenses have an increased likelihood of tax
delinquency because l i c e n s e e s l a c k the incentive of the a r t i f i c i a l paper
value. However, restaurant and hotel/ motel licenses once had a high
incidence of s a l e s t a x l o s s . L e g i s l a t i o n was recently enacted requiring
restaurant hotel/ motel licensees t o be bonded t o ensure tax payment. A
similar requirement could be implemented f o r a l l r e t a i l license types.
Public Need and Convenience - Although A. R. S. 54- 203 currently provides
f o r considerat ion of need and convenience, t h e quota system can prevent
the establishment of new o u t l e t s i n areas showing public need. By
eliminating quota r e s t r i c t i o n s , a l l licenses could be issued based on need
and convenience, thus b e t t e r ensuring t h a t t h e public i n t e r e s t is served.
A. R. S. s4- 203, Subsect ion A requires that applicant s prove that licensure
is i n the best i n t e r e s t s of the community:
" The board s h a l l issue a s p i r i t u o u s l i q u o r l i c e n s e only
a f t e r s a t i s f a c t o r y showing of the c a p a b i l i t y ,
q u a l i f i c a t i o n s and r e l i a b i l i t y of the applicant and,
with the exception of club licensees, that t h e public
convenience requires and that the best i n t e r e s t of the
community w i l l be s u b s t a n t i a l l y served by t h e issuance."
The quota system can prevent the establishment of o u t l e t s i n areas showing
public need. Maricopa County i l l u s t r a t e s t h i s point. Maricopa County is
experiencing population growth i n many communities. As new licenses are
only available through annual quota drawings, individuals cannot obtain
r e s t r i c t e d licenses except through a t r a n s f e r . Even when licenses are
available, the l o t t e r y selection does not ensure t h a t licenses are issued
t o the growing areas where there is need.
The public can control o u t l e t number through the l o c a l and S t a t e protest
and hearing process. Although market saturation cannot be quantified , the
need and c onvience clause and natural market forces are s u f f i c i e n t
controls t o b e t t e r ensure the public i n t e r e s t is served.
CONCLUSION
R e s t r i c t i o n s should be removed on the number of liquor licenses issued,
because these r e s t r i c t i o n s are i n e f f e c t i v e i n promoting temperance and
aiding l i q u o r law enforcement. Removing these r e s t r i c t ions w i l l not
increase problems associated with alcohol consumption or enforcement.
Licenses should be available on t h e basis of public need and
convenience-- removing a r t i f i c i a l b a r r i e r s t o entry i n t o the liquor
industry .
RECOMMENDATIONS
The Legislature should consider :
1. Amending A. R. S. $ 4- 206 t o eliminate quota r e s t r i c t i o n s on type 6, 7 P
and 9 licenses.
2. Amending t h e s t a t u t e s t o require bonding a l l licenses.
FINDING I11
THE STATE CAN REALIZE SIGNIFICANT ADDITIONAL REVENUE BY REVISING LICENSE
TRANSFER STATUTES.
The S t a t e is not r e a l i z i n g s u f f i c i e n t revenues from t r a n s f e r of licenses.
Transfer f e e s a r e considerably l e s s than o r i g i n a l l i c e n s e f e e s without ---...-
apparent j u s t i f i c a t ion. The processing work loads f o r t r a n s f e r s and
o r i g i n a l l i c e n s e s a r e almost i d e n t i c a l and t r a n s f e r s a f f o r d l i c e n s e e s the
same p r i v i l e g e s a s o r i g i n a l l i c e n s e s . Depending upon the outcome of the
recommendations i n Finding I1 concerning quotas, t r a n s f e r s should be
e i t h e r 1 ) eliminated or 2) r e s t r i c t e d t o quota l i c e n s e s and t r a n s f e r f e e s
increased t o equal o r i g i n a l l i c e n s e fees. E i t h e r change would
produced approximately $ 724,000 a d d i t i o n a l revenues i n 1982.
Arizona Revised S t a t u t e s ( A. R. S.) $ 4- 203, Subsection F provides f o r the
t r a n s f e r of a l l l i c e n s e s except club, hot ellmot e l , r e s t a u r a n t , government
and domestic farm winery l i c e n s e s . When a business with a t r a n s f e r a b l e
l i c e n s e is sold, the new owner may apply f o r a t r a n s f e r and r e c e i v e a n
i n t e r i m permit allowing the business t o continue operating u n t i l the
t r a n s f e r is approved.* When a business with a nontransferable l i c e n s e is
sold, t h e new owner must apply f o r an o r i g i n a l l i c e n s e . As i n t h e case of
a t r a n s f e r , the new owner may operate under an interim permit u n t i l the
new l i c e n s e is approved.
Low Transfer Fees
Are Not Just i f ied
License t r a n s f e r f e e s a r e considerably lower than o r i g i n a l l i c e n s e f e e s
without apparent j u s t i f i c a t i o n . These d i f f e r e n c e s a r e not based on
variances i n processing c o s t s o r i n t h e p r i v i l e g e s granted under each
l i c e n s i n g scheme.
* Interim permits are not permitted i f the l i c e n s e is being t r a n s f e r r e d
t o a new l o c a t i o n which has not been previously approved.
Higher Fees - Original license fees can be a s much a s $ 1,400 higher than
t r a n s f e r fees. Applicants f o r o r i g i n a l licenses must pay an issuance fee,
an annual fee and a $ 100 application fee when they apply f o r licenses.
Transfer applicants pay a t r a n s f e r f e e and the $ 100 application fee but do
not pay the annual fee. However, the issuance fee f o r an o r i g i n a l license
is a s much a s 10 t i m e s higher than the t r a n s f e r fee. Total c o s t s f o r
o r i g i n a l issuance and t r a n s f e r s a r e shown i n Table 8.
TABLE 8
License Type
D i s t i l l e r ' s License
( I n - S t a t e )
Brewers License
( I n - S t a t e )
Vintners License
( I n - S t a t e )
Wholesaler, A l l
Liquors
Wholesaler, Wine
and Deer
On- Sale R e t a i l e r ,
A l l Liquors
On- Sale R e t a i l e r ,
Wlne and Beer
On- Sale R e t a i l e r , Beer
Off- Sale R e t a i l e r ,
A l l Liquors
Off- Sale R e t a i l e r ,
Wine and Beer
Off- Sale R e t a i l e r ,
Beer
Railroad Train License
A i r l i n e License
P r i v a t e Club License
HotelIMotel License
R e s t a u r a n t L i c e n s e
D i s t i l l e r s License
( Out- of- State)
Brewers License
( Out- of- State)
V i n t n e r s License
( Out- of- State)
I m p o r t e r s , Exporter
o r R e c t i f i e r
Government License
Domestic Farm Winery
TOTAL COSTS FOR ORIGINAL ISSUANCES ADD TRANSFERS
D i f f e r e n c e Between
O r i g i n a l License Fee Person- to- Person T r a n s f e r Fee T o t a l O r i g i n a l and
Issuance Fee Annual Fee* Application Fee T o t a l T r a n s f e r Fee Application Fee T o t a l T o t a l T r a n s f e r Fees
* If a p p l i c a t i o n is i s s u e d on o r a f t e r July 1, t h e annual f e e is one- half t h e annual f e e shown.
** No t r a n s f e r s a r e allowed f o r t h e s e l i c e n s e s .
Processing Cost Differences Are Negligible - The s l i g h t work load
d i f f e r e n c e s between o r i g i n a l and t r a n s f e r a p p l i c a t i o n processing do not
c r e a t e c o s t d i f f e r e n t i a l s which would account f o r t h e l a r g e d i s p a r i t y i n
l i c e n s e f e e s . License t r a n s f ers require almost i d e n t i c a l processing a s
o r i g i n a l l i c e n s e s . The major d i f f e r e n c e between t r a n s f e r s and o r i g i n a l s
is t h a t o r i g i n a l l i c e n s e s require a l o c a t i o n inspection and a formal
hearing. I f t h e l i c e n s e t r a n s f e r involves a new l o c a t i o n , t h e Department
of Public S a f e t y ' s l i q u o r enforcement personnel inspect the s i t e at no
cost t o t h e DLLC.* If t h e l i c e n s e t r a n s f e r is being issued t o a
p r e v i o u s l y l i c e n s e d e s t a b l i s h m e n t , no l o c a t ion check is required.
Further, t h e cost of hearings is small compared t o t h e d i f f e r e n c e i n
fees.** Application processing requirements a r e summarized i n Table 9.
Process
TABLE 9
TRANSFER VS NEW LICENSE PROCESSING
Application accepted
DPS background and f i n g e r p r i n t check
Locat i o n i n s p e c t i o n
Posting of a p p l i c a t i o n f o r 20 days
City recommendation of approval o r
disapproval
F i l e review by designated r e p r e s e n t a t i v e
Formal hearing
Required f o r Required f o r
Transfers? Originals?
Yes Yes
Yes Yes
New l o c a t i o n Yes
only
Ye s Yes
Yes
Yes
No( l)
Yes
Yes
Yes
( 1) A hearing may be held i f t h e t r a n s f e r is p r o t e s t e d , c i t y disapproved
or has other d i s q u a l i f y i n g f a c t o r s .
* The inspection determines i f 1 ) a building e x i s t s or is under
c o n s t r u c t i o n , 2) t h e r e is a kitchen f o r a r e s t a u r a n t or a Hotel/ Motel
l i c e n s e ( s e r i e s 1 5 and 16), 3) t h e s t r u c t u r e is g e n e r a l l y a p p r o p r i a t e
f o r business, and 4) t h e building is t h e proper d i s t a n c e from a church
or school.
** Hearings f o r unprotested, l o c a l l y approved a p p l i c a t i o n s a r e
unnecessary. I f h e a r i n g s were eliminated ( page 65), administrative
c o s t s f o r processing o r i g i n a l s and t r a n s f e r s should be i d e n t i c a l .
P r i v i l e g e s Are I d e n t i c a l - Since holders of l i c e n s e s issued a s t r a n s f e r s
or o r i g i n a l s enjoy the same p r i v i l e g e of s e l l i n g l i q u o r , low t r a n s f e r f e e s
a r e not j u s t i f i e d and a r e inequitable. For example, the new owner of an
e x i s t i n g beer- only bar can obtain a l i c e n s e f o r $ 150 by t r a n s f e r r i n g the
l i c e n s e held by the previous owner. However, the new owner of a beer- only
bar at a new l o c a t i o n must pay $ 325 f o r an o r i g i n a l license."
Transfers Can Be Eliminated
or R e s t r i c t e d t o Ouota Licenses
The extent t o which t r a n s f e r s can be eliminated depends upon whether the
quota system is eliminated.** I f t h e current quota system is continued,
t r a n s f e r s w i l l be necessary f o r r e s t r i c t e d l i c e n s e types; however, the
t r a n s f e r f e e should be increased. Unrestricted l i c e n s e t r a n s f e r s can be
eliminated. If the quota system is removed, no t r a n s f e r s a r e needed.
R e s t r i c t e d Licenses Require Transfers - If quotas continue, r e s t r i c t e d
l i c e n s e s should be allowed t o t r a n s f e r t o aid t h e s a l e of a business.
Current demand f o r type 6 and 9 l i c e n s e s c r e a t e s a shortage of these
l i c e n s e types because l i c e n s e s must be obtained from a n e x i s t i n g licensee
or through t h e l o t t e r y s e l e c t ion process. Transferring t h e s e l i c e n s e s
ensures the purchaser of a previously licensed establishment t h a t he w i l l
be able t o operate the business during the time he is awaiting Board
approval of h i s l i c e n s e . However, t h e t r a n s f e r f e e should equal t h e
o r i g i n a l l i c e n s e issuance and annual f e e s t o promote e q u i t a b i l i t y and
r a i s e St a t e revenue.
* The t r a n s f e r applicant pays the $ 50 t r a n s f e r f e e and a $ 100
a p p l i c a t i o n fee. The o r i g i n a l l i c e n s e applicant pays a $ 200 l i c e n s e
f e e , a $ 25 annual f e e and a $ 100 a p p l i c a t i o n f e e , t o t a l i n g $ 325 f o r a
new l i c e n s e . ** Under t h e current quota system, DLLC may i s s u e only a limited number
of l i c e n s e s i n t h e s e c a t e g o r i e s : on- sale r e t a i l e r , a l l l i q u o r ( s e r i e s
6 ) , on- sale r e t a i l e r , beer and wine ( s e r i e s 7) and off- sale r e t a i l e r ,
a l l liquor ( s e r i e s 9). There a r e no r e s t r i c t i o n s on other l i c e n s e
types. Eliminating the quota system is recommended i n Finding I1 ( see
page 29).
Unrestricted License Transfers Can Be Eliminated - There is no valid
reason t o allow unrestricted licenses t o t r a n s f e r . According t o a DLLC
o f f i c i a l , licenses are t r a n s f e r r a b l e t o allow new owners t o operate the
business a s an on- going concern. Applicants f o r t r a n s f e r s may be issued
an interim permit allowing them t o operate u n t i l the license t r a n s f e r is
approved. However, restaurants and hotel/ motels, which must obtain
o r i g i n a l l i c e n s e s , are also allowed t o operate on interim permits a s
on- going concerns. Eliminating transf e r of u n r e s t r i c t e d l i c e n s e s would
increase State revenues as the licenses would be issued as an o r i g i n a l
license a t a higher fee.
Transfers Are Not Needed i f Quotas Are Eliminated - If the quota system is
eliminated, a l l l i c e n s e types would be unrestricted. Under these
circumstances, t h e t r a n s f e r option would not be needed t o ensure t h e s a l e
of an on- going concern.
Changes Would Generate
Additional Revenue
The S t a t e could r e a l i z e s i g n i f i c a n t additional revenues i f license
transf e r s were eliminated or t r a n s f e r f e e s were increased. By eliminating
t r a n s f e r s , a l l licenses would be considered o r i g i n a l licenses and
applicants would pay the higher o r i g i n a l l i c e n s e f e e . If some licenses
remain transf e r r a b l e ( types 6, 7 and 9), then t h e f e e s on the license
t r a n s f e r should be increased t o that of t h e o r i g i n a l l i c e n s e issuance and
annual f e e s . E i t h e r change would have generated approximately $ 724,000
additional revenues i n 1982. This p o t e n t i a l additional revenue ( based on
1982 t r a n s f e r data) is summarized i n Table 10.
TABLE 10
POTENTIAL ADDITIONAL ANNUAL REVENUES FORGONE I N
1982 DUE TO LOW LICENSE TRANSFER FEES
License Types
Potential
Add it ional Total
Revenue per Number of Potential
Transfer Transfers Revenue
Restricted licenses
6- On- sale r e t a i l e r , a l l liquors $ 1,312.50 374 $ 490,875.00
7- 0n- sale r e t a i l e r , wine & beer 206.25 215 44,343.75
9- Off- sale r e t a i l e r , a l l liquors 937.50 147 137,812.50
Subtotal, r e s t r i c t e d licenses 673,031.25
Unrestricted licenses*
4- Wholesaler, a l l liquors 1,187.50 9 10,687.50
8- On- sale r e t a i l e r , beer 168.75 4 8 8,100.00
10- Off- sale r e t a i l e r , wine 6 beer 237.50 116 27,550.00
11- Of f - sale r e t a i l e r , beer 168.75 24 4,050.00
20- Import er , exporter or r e c t i f i e r 137.50 2 275.00
Subtotal, unrestricted licenses 50,662.50
Total p o t e n t i a l a d d i t i o n a l revenue $ 723,693.75
* During 1982, there were no t r a n s f e r s of other u n r e s t r i c t e d l i c e n s e types.
CONCLUSION
The S t a t e could r e a l i z e s i g n i f i c a n t a d d i t i o n a l revenues i f license
t r a n s f e r s were eliminated or t r a n s f e r fees were increased. These
t r a n s f e r s require almost i d e n t i c a l work loads a s o r i g i n a l licenses and
endow licensees with the same p r i v i l e g e s , yet t r a n s f e r licenses have much
lower fees. Transfers can e i t h e r be eliminated or r e s t r i c t e d t o quota
licenses. By making t r a n s f e r and o r i g i n a l license fees more equitable,
the State could have realized an additional $ 724,000 i n 1982.
RECOMMENDATIONS
1. If quotas a r e eliminated, the L e g i s l a t u r e should consider amending
A. R. S. $ 4- 203, Subsection I? t o eliminate a l l t r a n s f e r s .
2. If the quota system is maintained, the L e g i s l a t u r e should consider
amending a ) A. R. S. $ 4- 203, Subsection F t o eliminate the t r a n s f e r of
a l l u n r e s t r i c t e d l i c e n s e s and b) A. R. S. $ 4- 209, Subsection F t o
increase t r a n s f e r f e e s f o r r e s t r i c t e d l i c e n s e s ( types 6, 7 and 9) t o
equal t h e o r i g i n a l issuance and annual l i c e n s e fees.
FINDING I V
LUXURY TAX RATES SHOULD BE INCREASED.
Increased liquor luxury tax r a t e s could produce s i g n i f i c a n t a d d i t i o n a l
revenues. Arizona's tax r a t e s are lower than other s t a t e s ' r a t e s and have
not increased i n a t l e a s t nine years. If Arizona's tax r a t e s were
comparable t o other s t a t e s , t h e State could generate additional revenues
of a t l e a s t $ 5.2 million annually.
Arizona's Tax Rates Are
Lower than Other S t a t e s ' Rates
Arizona Revised Statutes ( A. R. S.) 542- 1204, subsection A prescribes the
following liquor luxury taxes :
$ 2.50 per gallon f o r d i s t i l l e d s p i r i t s ,
8 cents per gallon f o r beer,
0 42 cents per gallon f o r wine containing 24 percent alcohol o r
l e s s , and
$ 2 per gallon f o r wine containing more than 24 percent alcohol.
These r a t e s a r e lower than both the national average and the average r a t e
assessed by other western license states.* For example, Arizona's beer
tax is 38 percent lower than t h e 13- cents- per- gallon average of the other
western license s t a t e s . Only the tax on t a b l e wine** is comparable t o the
other western license s t a t e s ; however, that r a t e is 21 percent lower than
the national average. A comparison of Arizona's r a t e s t o the national
average and other western s t a t e s ' averages is shown i n Table 11.
* Western license s t a t e s include a l l l i c e n s e s t a t e s west of the
Mississippi River. In license s t a t e s , alcohol beverages are sold by
p r i v a t e r e t a i l e r s licensed by the s t a t e . ** Wine containing l e s s than 14 percent alcohol.
TABLE 11
COMPARISON OF ARIZONA'S LUXURY TAX RATES TO THE NATIONAL AVERAGE
AND OTHER WESTERN LICENSE STATES' AVERAGE LUXURY TAX RATES
Other
West ern**
Arizona's National Arizona1 s License Arizona' s
Tax Rate* Average* Rate Is: S t a t e s ' Averages* Rate Is:
D i s t i l l e d s p i r i t s $ 2.50 $ 2.78 - 10% $ 2.65 - 6%
Beer .08 .22 - 64% .13 - 38%
Wine***
Less than 14%
alcohol .42 .53 - 21% .41 + 2% •
14- 21% alcohol .42 .68 - 38% .65 - 35%
Champagne,
sparkling wine .42 .78 - 46% .75 - 44%
* Per g a l l o n ** Arkansas, C a l i f o r n i a , Colorado, Kansas, Minnesota, Missouri, Nebraska,
Nevada, New Mexico, North Dakota, Oklahoma, South Dakota and Texas. *** 23 s t a t e s d i f f e r e n t i a t e t a x rates f o r types of wine. For example, 8 s t a t e s
a s s e s s one r a t e f o r t a b l e wine, a higher rate f o r vermouth and d e s s e r t wine
( 14- 21% alcohol) and t h e highest r a t e f o r champagne and sparkling wine. 0
Other s t a t e s ' tax r a t e s f o r wine with alcohol content over 24% a r e not
a v a i l a b l e .
Source: Public Revenues From Alcohol Beverages, 1980/ 1981, D i s t i l l e d S p i r i t s
Council of the United S t a t e s
Tax Rate Has Not Changed
i n Recent Years
Because Arizona t a x e s l i q u o r a t a f l a t r a t e and r a t e s have not increased
i n recent years, revenues have not kept pace with p r i c e changes. Prices
have increased s i g n i f i c a n t l y and i n f l a t i o n has reduced t h e value of l i q u o r
t a x d o l l a r s .
The d i s t i l l e d s p i r i t s t a x has not changed i n nine years although l i q u o r
p r i c e s have increased a t l e a s t 20 percent during the past f o u r y e a r s
alone. Due t o i n f l a t i o n , the $ 2.50 d i s t i l l e d s p i r i t s t a x assessed i n 1974
is worth only $ 1.24 i n today's d o l l a r s . The last increase i n 1974 was
only the f o u r t h such change since P r o h i b i t i o n was repealed 50 years ago.
Beer and wine t a x rates have remained unchanged f o r even longer. The
t a x e s on beer and wine with l e s s than 24 percent alcohol have not
increased i n 21 years. The t a x r a t e f o r wine containing more than 24
percent alcohol was l a s t increased 16 years ago i n 1967. Several recent
e f f o r t s t o increase luxury taxes have been unsuccessful. Four b i l l s
introduced i n 1980, 1981 and 1983 f a i l e d .
Increased Tax Rates Would
Produce Additional Revenue
The S t a t e could r e a l i z e s i g n i f i c a n t a d d i t i o n a l revenues from increased t a x
rates. Such increases a r e unlikely t o reduce consumption.
Additional Revenues - Increasing Arizona's luxury tax r a t e s t o a l e v e l
comparable t o other western s t a t e s would generate at l e a s t $ 5.2 m i l l i o n i n
a d d i t i o n a l revenues annually. Such a change would increase t h e t a x on
d i s t i l l e d s p i r i t s 1 5 c e n t s per g a l l o n and t h e tax on beer 5 c e n t s per
gallon. Wine taxes, already comparable t o other western s t a t e s , would not
change." Other a l t e r n a t i v e s , including increasing t a x e s t o the n a t i o n a l
average, a r e presented i n Table 12.
* The tax on t a b l e wine, which c o n s t i t u t e s t h e l a r g e s t segment of wine
s a l e s , is comparable t o other western s t a t e s . Differences i n t h e t a x
on d e s s e r t wine and champagne and sparkling wine a r e not considered
because these items represent only a small amount of t o t a l s a l e s .
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No Adverse Impact on Demand - An increase i n luxury tax should not a f f e c t
demand f o r alcoholic beverages. Luxury tax increase opponents have argued
t h a t r a i s i n g t a x e s w i l l reduce revenues by reducing consumption. Our
review indicates t h a t consumption and revenues a r e unlikely t o be affected
i n t h i s manner. F i r s t , demand f o r some alcoholic beverages is not
responsive t o price changes. Second, f o r other beverages which a r e
somewhat s e n s i t i v e t o price changes, t a x i n c r e a s e s should not r a i s e price
enough t o discourage consumption t o the point of decreasing revenues.
Last, experiences i n other s t a t e s indicate t h a t an increased t a x r a t e can
support consumption similar t o or g r e a t e r than Arizona's.
The demand f o r beer, which provides almost half of Arizona's liquor luxury
tax revenue, is unlikely t o decline due t o price increases. According t o
recent research, the primary determinant of demand is youthf ullness, not
price. * Demand is price- inelastic , o r r e l a t i v e l y unresponsive t o price
changes. When demand is p r i c e - i n e l a s t i c , a price increase produces a
less- than- proportionat e demand decline and t o t a l revenues increase.
Although price increases f o r d i s t i l l e d s p i r i t s w i l l generate equivalent
demand declines because demand has unitary price e l a s t i c i t y , * * higher
taxes should increase t o t a l revenues. A given percent tax increase w i l l
not produce a similar percent p r i c e increase or consumption decline. The
price increase w i l l be much smaller. P r i c e i n c r e a s e s r e s u l t i n g from a 10
percent tax increase a r e i l l u s t r a t e d i n Table 13.
* Stanley I. Ornstein and Dominque M. Hanssens, " Alcohol Control Laws,
Consumer Welfare and the Demand f o r D i s t i l l e d S p i r i t s and Beer,"
U. C. L. A. Working Paper Series, Center f o r Marketing Studies, Paper No.
102, March 1981. The study was supported by a grant from t h e
California Department of Alcohol and Drug Abuse with additional
support from the Research Program i n Competition and Business Policy,
Graduate School of Management, U. C. L. A. ** Ibid.
TABLE 13
PRICE INCREASES RESULTING FROM A 10 PERCENT
TAX INCREASE FOR DISTILLED SPIRITS
Brand A Brand B Brand C Brand D Brand E
Cost Per Gallon* $ 17.98 $ 18.96 $ 20.78 $ 21.54 $ 27.93
Tax per g a l l o n 2.50
Cost at current
tax r a t e
Additional tax at a
10 percent increase
t o $ 2.75 gallon .25 .25 .25 .25 .25
Cost with 10 percent
tax increase $ 20.73 $ 21.71 $ 23.53 $ 24.29 $ 30.68
Cost increase as a
percentage of cost
under current r a t e 1.2% 1.2% 1.1% 1.0% .8%
* Actual manufacturers' p r i c e s t o wholesalers as of June 1, 1983.
A 10 percent tax increase t o $ 2.75 p e r g a l l o n , accompanied by a 1 percent
consumption d e c l i n e , would generate almost $ 1.3 m i l l i o n i n a d d i t i o n a l revenue
annually, a s shown i n Table 14.
TABLE 14
ADDITIONAL REVENUE RESULTING FROM A 10 PERCENT TAX
INCREASE AND A 1 PERCENT CONSUMPTION DECLINE
1982 consumption with 1 percent
decline ( gallons) 5,640,030
x Tax a t 10 percent increase
( per gallon) $ 2.75
Projected t o t a l d i s t i l l e d s p i r i t s
tax revenues
1982 consumption ( gallons)
x Current tax r a t e ( p e r g a l l o n )
1982 d i s t i l l e d s p i r i t s tax
revenue
Additional d i s t i l l e d s p i r i t s tax
The specific f a c t o r s affecting the demand f o r wine are unknown. However,
even i f wine were assumed t o have unitary price e l a s t i c i t y ( as with
d i s t i l l e d s p i r i t s ) an increase i n luxury taxes t o the national average
would r e s u l t i n l e s s than a 1 percent increase i n price.
Other s t a t e s ' experiences indicate that similar or g r e a t e r consumption can
be maintained with higher tax r a t e s . Ten of the f o u r t e e n o t h e r s t a t e s
assessing higher taxes on d i s t i l l e d s p i r i t s have per c a p i t a consumption
r a t e s a t l e a s t a s great a s Arizona's. For example, Florida charges $ 4.75
per gallon, compared t o Arizona's $ 2.50 per gallon r a t e , and ranks 5th i n
consumption compared t o Arizona's 2 7th ranking. Thirty- f our other s t a t e s
assess higher taxes on beer; f i v e of these have s i m i l a r or g r e a t e r
consumption. Of the 23 s t a t e s charging higher taxes on wine, 6 support
consumption similar t o or g r e a t e r than Arizona.
CONCLUSION
Increasing liquor luxury taxes t o a l e v e l comparable t o other western
license s t a t e s would generate a t l e a s t $ 5.2 million annually i n additional
revenues .
RECOMMENDATION
The Legislature should consider amending A. R. S. $ 42- 1204, subsection A t o
provide f o r increased liquor luxury tax r a t e s .
FINDING V
LOTTERY STATUTES DO NOT ALLOW APPLICANTS AN EQUAL OPPORTUNITY OF OBTAINING
A LICENSE.
Although the Department ' s l o t t e r y drawing procedures appear adequately
controlled, s t a t u t e s do not e f f e c t i v e l y l i m i t the number of a p l i c a t i o n s a
person can submit. Our review of w r i t t e n procedures and interviews with
Department s t a f f indicate t h a t , i n the absence of collusion, controls are
s u f f i c i e n t t o prevent abuse. However, l o t t e r y applicants a r e able t o
circumvent the s t a t u t o r y g o a l of giving a l l applicants an equal
opportunity of obtaining a license. By submitting additional applications
under business names and names of family members, applicants are able t o
increase t h e i r chances of selection. At l e a s t two other s t a t e s have more
e f f e c t i v e controls over the number of applications submitted per person.
State law and Department regulations provide f o r random selection when the
number of applicants exceeds available licenses. * Separate l o t t e r y
drawings are held by county and license type. In 1982, six drawings were
held-- two f o r type 6 licenses and four f o r type 9. A. R. S. $ 4- 203 requires
DLLC t o use a random selection procedure which provides a l l applicants an
equal opportunity t o obtain a license. Subsection B s t a t e s :
". . . the board s h a l l , i f there are more applicants
than the number of a v a i l a b l e s p i r i t u o u s l i q u o r
licenses, provide a method of random s e l e c t i o n within a
county t o determine which applicant or applicants s h a l l
be considered f o r issuance of a l i c e n s e . The random
selection method s h a l l allow each applicant within the
county an equal opportunity of obtaining the available
license o r l i c e n s e s . "
* A. R. S. $ 4- 206, Subsections A, B and C l i m i t s the number of on- sale
a l l liquor ( type 6), on- sale beer and wine ( type 7) and off- sale a l l
liquor ( type 9) licenses which DLLC may issue i n each county. None
of the counties have reached the maximum allowable number of type 7
licenses. Finding I1 contains additional information concerning the
quota system ( see page 29).
Administrative Rule R4- 15- 109 e s t a b l i s h e s a l o t t e r y drawing which matches
randomly selected names and numbers. These numbers correspond t o t h e
number of a v a i l a b l e l i c e n s e s plus an equal number of a l t e r n a t e s and
i n d i c a t e t h e order i n which DLLC w i l l consider a p p l i c a t i o n s . S e l e c t i o n
g r a n t s only the r i g h t t o be considered f o r l i c e n s u r e . Successful l o t t e r y
a p p l i c a n t s are subject t o background checks and t h e l o c a l hearing process
and thus may be denied l i c e n s e s .
Lottery Drawing s Appear
Adeauatelv Controlled
The Department appears t o have adequate c o n t r o l s over t h e l o t t e r y
drawings. DLLC uses standard entry forms placed i n a transparent
container. The names a r e read aloud before e n t r i e s a r e put i n the
container and a p p l i c a n t s may inspect t h e i r forms and drop them i n t h e
container themselves. Two c l e r i c a l employees from a temporary employment
agency simultaneously draw a name and a number. The selected name and
number a r e then read aloud and v e r i f i e d and recorded by Department
employees. The drawing i s open t o t h e public and media and is
tape- recorded by t h e Department.
Although drawing procedures appear adequately c o n t r o l l e d , questions have
been raised as t o why c e r t a i n a p p l i c a n t s a r e selected* i n successive
l o t t e r i e s o r twice i n t h e same l o t t e r y . At l e a s t 12 such events have
occurred during t h e past 3 years. For example, t h e wife of a man selected
i n 1980, 1981 and 1982 was a l s o selected twice i n 1981. One grocery s t o r e
chain was selected f o r two l i c e n s e s i n 1980, two l i c e n s e s i n 1981 and
t h r e e l i c e n s e s i n 1982.
* " Selected" a p p l i c a n t s r e f e r s t o both winners and a l t e r n a t e s .
Alternates a r e selected t o be considered f o r l i c e n s u r e i f a winner
e i t h e r chooses not be considered or is d i s q u a l i f i e d .
Applicants are able t o circumvent the s t a t u t o r y goal of giving a l l
applicants an equal opportunity of obtaining a license. Statutes do not
prevent a person from applying under business names and names of family
members. In r e a l i t y , those applicants who 1) are aware of t h i s " loophole"
and 2) can afford t o pay f o r additional applications ($ 100 each) can
greatly increase t h e i r chances of winning.
Statutes Allow Additional Applications - Some l o t t e r y applicants have
increased t h e i r odds of selection by submitting a d d i t i o n a l a p p l i c a t i o n s
under business or family names. A. R. S. s4- 203, Subsection C permits a
person t o make as many applications a s there are licenses available, t o a
maximum of f i v e : *
" C. If there are more applicants than t h e number of
a v a i l a b l e s p i r i t u o u s l i q u o r l i c e n s e s within a county,
the following l i m i t a t i o n s s h a l l apply:
1. No person s h a l l make more applications than the
number of s p i r i t u o u s l i q u o r l i c e n s e s available.
2. If there are more than f i v e s p i r i t u o u s l i q u o r
licenses t o be issued, notwithstanding t h e provisions
of paragraph 1 of t h i s subsection, no person s h a l l make
more than f i v e applications." ( emphasis added)
A person may submit more than f i v e applications, however, by submitting
additional applications under business names. This is l e g a l because of
the way " person" is defined i n A. R. S. § 4- 101, paragraph 16:
"' Person' includes partnership, association, company or
corporation, a s well a s a natural person."
* An applicant must pay a $ 100 f e e f o r each application.
61
There is a l s o no r e s t r i c t i o n against submitting additional applications
under the name of a spouse, son or daughter. Thus, i n addition t o
submitting f i v e applications a s an individual, a person can submit another
f i v e applications f o r each business name he wishes t o use, f i v e
applications under h i s spouse's name, e t c . We i d e n t i f i e d 2 persons who
used t h i s approach t o submit 15 applications i n 1980 and 1982. According
t o a Department employee, a s many a s 25 applications have been submitted
by an individual f o r a s i n g l e l o t t e r y .
Additional Applications Increase Chances - Additional applications can
greatly i n c r e a s e a person's chances of selection. A s t a t i s t i c i a n from
Arizona S t a t e University analyzed the p r o b a b i l i t i e s of selection f o r
s e v e r a l a p p l i c a n t s i n the 1980, 1981 or 1982 l o t t e r i e s . According t o his
analysis, although several of these applicants won i n successive years,
these wins were not unusual based on the p r o b a b i l i t i e s associated with the
multiple applications. * The e f f e c t of additional applications on the
p r o b a b i l i t i e s of winning is shown i n the following example. The 1980
Maricopa County drawing f o r type 6 licenses had 860 applications with 27
winners and 8 a l t e r n a t e s :
1. An applicant with one application had a 4 percent chance of
select ion.
2. An applicant with f i v e applications had a 19 percent chance of
s e l e c t ion.
3. An applicant with 15 applications had a 46 percent chance of
selection.**
Other S t a t e s Have More
Effective Control
At l e a s t two other s t a t e s have more e f f e c t i v e controls over the number of
applications per person. We contacted s e v e r a l o t h e r s t a t e s t o learn how
they d i s t r i b u t e r e s t r i c t e d licenses. Some s t a t e s do not use a l o t t e r y
system a t a l l but instead allow the counties or c i t i e s t o decide how the
* See Appendix I1 f o r the s t a t i s t i c i a n ' s f u l l report. ** At l e a s t one applicant submitted 15 applications f o r t h i s drawing
and was subsequently drawn.
licenses w i l l be d i s t r i b u t e d . California and Florida hold drawings by
county but have t i g h t e r r e s t r i c t i o n s than Arizona on the number of
applications per person. In California, the number of r e s t r i c t e d licenses
issued is based on a county's population. An individual may submit - only
- one application per l o t t e r y ; he may - not a l s o apply under a business name,
nor can h i s spouse apply. In Florida, an individual can have i n t e r e s t i n
only one application per l o t t e r y . Thus, i f a person submits an
application under h i s own name, he cannot also have an i n t e r e s t i n any
other application. Florida uses computer analysis t o detect applicants
with multiple i n t e r e s t s.
CONCLUSION
The Department's l o t t e r y drawing procedures appear adequately controlled,
however, s t a t u t e s do not e f f e c t i v e l y l i m i t the number of applications a
person can submit. Lottery applicants are able t o circumvent the
s t a t u t o r y g o a l of giving a l l applicants an equal opportunity of obtaining
a l i c e n s e .
RE COMMENDAT ION
The Legislature should consider amending s t a t u t e s t o more e f f e c t i v e l y
r e s t r i c t the number of l o t t e r y applications an individual may submit.
FINDING V I
THE DEPARTMENT'S LICENSING PROCESS CAN BE IMPROVED BY ELIMINATING MOST
ORIGINAL LICENSE HEARINGS.
Most o r i g i n a l license hearings held by t h e Liquor Board and the hearing
o f f i c e r are unnecessary and can be eliminated. These s t a t u t o r i l y required
hearings inconvenience license applicants and a r e a n i n e f f i c i e n t use of
s t a f f t i m e .
License Procedures
Arizona Revised Statutes ( A. R. S. ) $ 4- 201, subsection E requires the Liquor
Board t o hear and approve a l l o r i g i n a l l i c e n s e applications. The Board
issues numerous types of o r i g i n a l licenses. Including:
1. Nontransferable o r i g i n a l l i c e n s e s a r e issued t o clubs, hotel/ motels,
r e s t a u r a n t s and governmental bodies.
2. Original licenses may also be issued f o r r e s t r i c t e d license types*
which have not yet reached the s t a t u t o r y l i m i t s or i f new licenses are
available due t o population growth. These licenses may be t r a n s f e r r e d
t o new licensees.
3. Unrestricted, t r a n s f e r a b l e l i c e n s e s are issued t o producers,
wholesalers, off - and on- sale beer- only out let s , of f- sale beer and
wine o u t l e t s , r a i l r o a d s and a i r l i n e s . These may be e i t h e r o r i g i n a l
licenses or t r a n s f e r s . Additional information on original and
t r a n s f e r licenses is contained i n Finding I11 ( see page 4 3 ) .
* The number of on- sale a l l liquor, on- sale beer and wine and off- sale
a l l l i q u o r l i c e n s e s which DLLC may issue is s t a t u t o r i l y r e s t r i c t e d ,
based on county population. Additional informat ion concerning t h e
quota system is contained i n Finding I1 ( see page 29).
The application processing procedure follows s e v e r a l s t e p s . Applicants
for a liquor l i c e n s e supply DLLC with a completed application and
questionnaire and a set of f i n g e r p r i n t s . Once submitted, DLLC has 105
days t o approve or disapprove the application. Next, DLLC forwards a copy
of t h e a p p l i c a t i o n t o the c i t y i n which the applicant seeks licensure.
The c i t y c l e r k posts the application on the proposed premises f o r 20 days
a t which t i m e w r i t t e n arguments i n favor of or opposed t o license issuance
may be f i l e d with the clerk. After the 20- day posting, the governing body
of the c i t y or town recommends approval or disapproval of the application
and forwards the recommendations t o DLLC. In the meantime, DPS processes
f i n g e r p r i n t s t o determine i f the applicant has prior convictions and
inspects the proposed location. Once a l l qualifying information is
obtained, the application is s e t f o r hearing f o r e i t h e r the Board or the
hearing officer* who a c t s a s t h e Board ' s designated representative.
Currently, the Board delegates most o r i g i n a l license hearings
( nonprot ested, city- approved applications) t o t h e hearing o f f i c e r .
Applications which may be denied due t o c i t y disapproval, c i t i z e n
protests*" or other problems generally are heard by t h e Board.
The hearing o f f i c e r conducts formal hearings with the applicant usually
present. The hearing o f f i c e r 1) reviews the applicant's f i l e f o r
completeness, 2) b r i e f l y questions the applicant, and 3) recommends e i t h e r
approval or disapproval. After the hearing the Board is informed of the
recommendation and approves or disapproves the application.
* The hearing o f f i c e r f o r o r i g i n a l license hearings is the Assistant
Superintendent of the Liquor Department. ** Applications a r e subject t o local hearings prior t o Board approval.
Citizens may protest the application a t the l o c a l hearing. Local
governments are required t o approve or disapprove the application.
While c i t i z e n p r o t e s t s and local government disapprovals a r e not
binding on the Board, the Board must consider them i n its decision.
Hearings Are Unnecessary
Original license hearings f o r nonprotested, city- approved applications are
unnecessary. F i r s t , licenses issued f o r t r a n s f e r s are not subject t o
e i t h e r Board o r hearing o f f i c e r hearings. Second, l o c a l hearings provide
f o r s u f f i c i e n t public input on these applications. Third, hearing o f f i c e r
hearings do not ensure that licenses w i l l comply with s t a t u t o r y
requirements. Further, numerous other s t a t e s do not require hearings.
Hearings Not Required f o r Transfer Applications - Most licenses issued
through t r a n s f e r s are approved by the hearing o f f i c e r without a hearing.
Hearings are held only when a l o c a l governing body disapproves an
application, the t r a n s f e r i s protested or other problems e x i s t . These
t r a n s f e r s are e s s e n t i a l l y i d e n t i c a l t o o r i g i n a l licenses i n t h a t they
grant the same privileges a s o r i g i n a l l i c e n s e s . I n addition, both
t r a n s f e r and o r i g i n a l l i c e n s e s are issued t o new and previously licensed
premises, a s transf e r s can be issued f o r location changes.
Local Government Hearings Provide f o r Sufficient Public Input - The public
has an opportunity t o p r o t e s t l i c e n s e issuances a t local government
hearings. These hearings appear adequate f o r uncontested applications.
According t o the Superintendent, few applications a r e protested a t a DLLC
hearing which were unprotested a t t h e l o c a l level. Further, the
Department ' s Assistant Attorney General suggests g r e a t e r opportunity could
be given f o r public input a t l o c a l government hearings by lengthening the
posting period prior t o the hearings.
Hearings Do Not Ensure Restaurant License Compliance - Although the
hearing o f f i c e r f e e l s that hearings a r e needed t o determine i f restaurant
applicants intend t o operate a s bona fide* r e s t a u r a n t s , hearings a r e not
an e f f e c t i v e or e f f i c i e n t means of determining or ensuring compliance.
The hearing does not provide new information. The hearing o f f i c e r ' s
questions simply r e i t e r a t e the quest ions on the application. Further a l l
necessary information is contained on the l i c e n s e a p p l i c a t i o n reviewed by
* A bona f i d e restaurant must derive a t l e a s t 40 percent of its gross
revenue from food s a l e s .
the designated represent a t ive before the hearing. The sworn application
provides information on gross s a l e s representing purchase of meals and
floor- space footage designed f o r dining and includes a copy of the menu.
In addit ion, i n v e s t i g a t o r s could during routine l i c e n s e inspect i o n s , check
the premises t o ensure it is a bona f i d e restaurant.
Numerous r e s t a u r a n t s are not acting a s bona f i d e r e s t a u r a n t s . I n 1982,
DLLC i n v e s t i g a t o r performed restaurant audit s t o determine compliance with
the required food t o liquor r a t i o . About 38 percent were found t o be
noncompliant . The high violat ion r a t e indicates that prelicensure
hearings are not an e f f e c t i v e compliance t 001.
Other S t a t e s Do Not Require Hearings - Numerous other license s t a t e s do
not require hearings f o r unprot e s t ed applications. Fourteen of the
thirty- one license s t a t e s surveyed by our Office provide f o r automatic
issuance of such licenses.
The DLLC superintendent agrees t h a t prelicensure hearings f o r unprot ested ,
l o c a l l y approved applications a r e i n e f f i c i e n t . However, the
superintendent f e e l s t h a t a decision made by the Board, consisting of f i v e
individuals, i s less l i k e l y t o receive public c r i t i c i s m than a decision
made by one individual.
Hearings Cause Inconvenience t o Applicant s
Original l i c e n s e hearings f o r nonprotested, city- approved applications
cause inconvenience t o applicants through unnecessary t r a v e l . The
Department expects each applicant t o attend a hearing. I f t h e applicant
or a representative is not present a t the scheduled hearing e i t h e r t h e
hearing is rescheduled or the l i c e n s e is granted i n h i s absence.
Hearings f o r problem- free applications are an imposition on some
applicants. The individual hearings l a s t only about three minutes and
consist of a review of items already i n t h e a p p l i c a n t ' s f i l e . For
applicants i n outlying areas, t r a v e l t o the hearing is both time consuming
and costly.
For example, at one hearing attended by a member of t h e Auditor General
s t a f f , an i n d i v i d u a l drove from Flagstaff i n extreme weather conditions t o
a t t e n d a short hearing f o r a problem- free f i l e .
I n e f f i c i e n t Use of Staff
Original l i c e n s e hearings f o r problem- f r e e a p p l i c a t i o n s a r e a n i n e f f i c i e n t
use of s t a f f resources. Original l i c e n s e hearings require time from t h e
Board, its s e c r e t a r y , t h e hearing o f f i c e r and h i s s e c r e t a r y . The combined
time spent on unprotested, city- approved o r i g i n a l l i c e n s e hearings
c o n s t i t u t e s approximately one t h i r d FTE annually. Further, a s t h e number
of l i c e n s e s issued continues t o grow, the number of o r i g i n a l l i c e n s e
hearings and s t a f f t i m e spent on t h e hearings w i l l increase.
The hearing o f f i c e r ' s s e c r e t a r y ' s time, which is most a f f e c t e d , could be
used more e f f e c t i v e l y . The s e c r e t a r y spends approximately 30 percent of
a v a i l a b l e time, notifying applicant s of hearings, scheduling agendas,
t a p i n g h e a r i n g s and preparing Board orders. Eliminating mandatory
o r i g i n a l l i c e n s e hearings would allow the s e c r e t a r y t o a s s i s t i n preparing
tax and a d m i n i s t r a t i v e c i t a t i o n s , processing and f i l i n g l i c e n s e
a p p l i c a t i o n s and other d u t i e s . In a d d i t i o n , i f t r a n s f e r s a r e eliminated
a s suggested i n Finding 111, then a l l l i c e n s e s would be issued a s
" o r i g i n a l " l i c e n s e s .
CONCLUSION
Original l i c e n s e hearings should be held only i n c a s e s where t h e l i c e n s e
a p p l i c a t i o n may be denied due t o p o s s i b l e d i s q u a l i f y i n g f a c t o r s , such a s
city/ town disapproval or public p r o t e s t s . The majority of o r i g i n a l
l i c e n s e hearings a r e unnecessary. Although required by s t a t u t e , these
hearings inconvenience a p p l i c a n t s and a r e an i n e f f i c i e n t use of s t a f f time.
RECOMMENDATION
The L e g i s l a t u r e should consider amending A. R. S. $ 4- 201, subsection E t o
eliminate mandatory hearings f o r o r i g i n a l l i c e n s e s , except when a l o c a l
governing body recommends disapproval or when t h e r e a r e public p r o t e s t s or
other problems.
OTHER PERTINENT INFORMATION
Enforcement of Statutes Prohibiting
Sale of Liquor t o Minors
Legislative actions i n recent years indicate a heightened i n t e r e s t i n t h e
enforcement of s t a t u t e s prohibiting the s a l e of liquor t o underaged
persons. Because of t h i s i n t e r e s t , we reviewed DLLC a c t i v i t i e s i n t h i s
area. According t o our analysis, 1) the number of enforcement actions has
increased i n recent years, and 2) the superintendent has more d i s c r e t i o n
when determining penalties than his counterparts i n some other s t a t e s .
Recent Legislative Actions - In 1982 the Legislature amended A. R. S. $ 4- 112
t o place additional emphasis on the enforcement of s t a t u t e s prohibiting
the sale of liquor t o minors. This s t a t u t e s t a t e s , i n part :
" B. Except a s provided i n subsection A of t h i s
section, the superintendent s h a l l administer the
provisions of t h i s tit l e y including :
6. Taking such steps a s are necessary t o maintain
e f f e c t i v e l i a i s o n with the department of public safety
and a l l l o c a l l a w enforcement agencies i n the
enforcement of t h i s t i t l e includi~ lg the laws of t h i s
s t a t e against the consumption of s p i r i t u o u s l i q u o r by
persons under the age of nineteen years. I
C. The superintendent s h a l l e s t a b l i s h within the
department a s e p a r a t e i n v e s t i g a t i o n s unit which has a s
its s o l e r e s p o n s i b i l i t y the i n v e s t i- g a t i o n of compliance
with t h i s t i t l e including the investigation of
licensees alleged t o have sold or d i s t r i b u t e d
s p i r i t u o u s l i q u o r i n any £ om t o persons under nineteen
years of age. " ( emphasis added)
DLLC Enforcement A c t i v i t i e s - The number of DLLC enforcement actions i n
t h i s area ( i . e . , sale t o minors) has increased i n recent years. Most
violations of t h i s type are investigated and reported t o DLLC by DPS and
l o c a l law enforcement agencies. Public complaints a r e t h e source of many
investigat: ions. In 1982 DLLC received 88 complaints regarding underage
drinking; 85 of these were r e f e r r e d t o DPS f o r i n v e s t i g a t i o n .
P r i o r t o 1981, DLLC's most common response t o a reported v i o l a t i o n
involving a s a l e t o a minor was t o send a warning l e t t e r . For example,
Table 15 shows t h a t i n 1980 DLLC issued 160 warning l e t t e r s involving
s a l e s t o minors but only 33 c i t a t i o n s . According t o DLLC s t a f f , t h i s
p r a c t i c e changed sometime i n 1981. Thereafter t h e superintendent's normal
response was t o i s s u e an a d m i n i s t r a t i v e c i t a t i o n unless t h e p o l i c e r e p o r t
was too vague or incomplete f o r a s o l i d d i s c i p l i n a r y case. Table 15
i n d i c a t e s t h i s change i n p r a c t i c e . In 1982 DLLC issued 93 c i t a t i o n s
involving s a l e s t o minors but only 22 warning l e t t e r s . As of September
12, 1983, DLLC had a l r e a d y i s s u e d 100 c i t a t i o n s , exceeding t h e 1982
t o t a l . Nearly another 100 cases-- all received i n 1983-- are being held by
DLLC pending advice by its Assistant Attorney General. *
The t o t a l number of p e n a l t i e s imposed f o r s a l e s t o minors a l s o appears t o
be increasing. Table 16 summarizes t h e p e n a l t i e s imposed f o r cases
involving only s a l e s t o minors. Some DLLC c i t a t i o n s involved one o r more
other v i o l a t i o n s i n a d d i t i o n t o s a l e s t o minors, but the outcome of these
c i t a t i o n s a r e not included i n Table 16. Note t h a t t h e number of p e n a l t i e s
imposed i n 1982 increased over 1981. Although many c i t a t i o n s issued i n
1983 were s t i l l pending a s of August, it appears t h a t the trend is s t i l l
upward .
* These cases involve p o l i c e o f f i c e r s prearranging f o r underaged persons
t o buy l i q u o r .
TABLE 15
Warnings Involving
Sales t o Minors*
Citations Involving
Sales t o Minors*
DLLC WARNINGS AND CITATIONS
INVOLVING SALES TO MINORS
Calendar Year
1983
a s of
- 1979 - 1980 - 1981 - 1982 Sept. 12
* Some of these warnings and c i t a t i o n s involved other violations i n
addition t o sales t o minors.
TABLE 16
PENALTIES IMPOSED FOR SELLING TO MINORS*