Insight Idaho Liquor License Update
By Amy M. J. Knight,
During the final days of the 2023 term of the Idaho legislative session, Senate Bill 1120 (“SB1120”) was passed and signed into law. SB1120 makes substantive and serious changes to Idaho liquor law within Idaho Code § 23-903. This blog gives a general overview and analysis of the changes, as of June 13, 2023.
“QUOTA” LIQUOR LICENSES:
In Idaho, alcoholic beverages by the glass are sold under separate licensing systems: beer and wine under one system, and liquor by the drink under another.
Most liquor licenses are “quota” system licenses which are issued to business premises located within city limits, on a basis of 1 license for each 1,500 of population of each city or fraction thereof. The population per city is determined by the last annual census. A person or entity wishing to obtain a quota liquor license must apply to the Alcohol Beverage Control Bureau (“ABC”), a division of the Idaho State Police. An applicant pays a nominal fee to ABC, and if the applicant and the to-be licensed premises are not otherwise disqualified, the applicant receives a license, if there is one available. Availability is one of the main issues discussed in this alert.
The quota license provides its holder a usufructuary right—meaning that the right exists only so long as the holder properly puts the license to continuous use in the licensed premises. If the holder fails to place the license into use or to keep the license in use, the license may be revoked. Each quota license is issued for a one-year term, to a named licensee for a discrete licensed premises. These two key elements of the license (licensee and licensed premises) are critical to the license’s use. Under Idaho law, except for a few specific variances, only the named licensee may serve liquor by the drink, and the named licensee may do so only at the corresponding licensed premises.
AVAILABILITY PROBLEM AND PRIORITY LISTS:
Under the original law, quota licenses in many cities were quickly consumed up to the limit set by the census. As a result, in such cities, quota licenses became unavailable. The law was revised to require ABC to maintain a priority list for each incorporated city, but that did not solve the demand versus supply dilemma; it simply made the wait for a license more orderly.
When an applicant completes the application process and is determined to be qualified, the applicant is placed on the applicable city’s priority list. ABC offers licenses to applicants on the priority list as licenses become available. Licenses become available by an increase in population, or because existing licensees have surrendered or lost their licenses. Some licenses are lost because ABC has revoked the licenses in enforcement actions.
ABC records show that the priority lists for many cities move very slowly, if at all. For example, in Boise, as of May 2023, there are 119 applicants on the list, and the applicant at the top has been waiting for 10 years. In Garden City, the applicant at the top of the list has been waiting since 1997; in Twin Falls, the applicant at the top has been waiting since 1975.
LICENSE TRANSFERS AND LEASING:
Changes to the licensee’s name or the licensed premises shown on a license are needed regularly and for a variety of reasons. For example, a licensee may want to move its business from one location to another. So, the licensee will need to change the licensed premises on its liquor license. Or, a property owner who leases a restaurant or bar to a bad tenant may need to evict the bad tenant and bring in a new tenant. In that case, the property owner will need to change the licensee’s name on its liquor license. Under Idaho Code and administrative (IDAPA) rules applicable to liquor licenses, a change in the named licensee and/or the licensed premises may only be made by applying for such change to ABC. ABC has viewed all such changes as “transfers”—either of the license’s ownership, or of the licensed premises location. These changes or transfers have historically been permissible under Idaho law and were often accomplished by leasing liquor licenses.
Businesses are often structured to take advantage of the license-leasing option. It is common for a business owner to own some of the assets of the business, such as the business’s land, individually or in a family trust or other entity, and to hold other assets, such as a liquor license, in another entity. A business owner would so for a variety of reasons, including to allocate liability, for estate planning, or to enable the owner to have different partners for different purposes. In such a situation, the business owner may lease the premises and/or the liquor license to its bona fide operator entity of the restaurant or bar business.
The license-leasing option also solves a number of practical problems that arise because of time constraints under Idaho law. For example, when ABC notifies an applicant that a liquor license is available to it, that applicant must, within 10 days, accept the license; the applicant then has a period of 180 days in which to fully prepare for issuance of the license, including obtaining and readying its licensed premises, with a possible 90 day extension (see IDAPA 11.05.01.013.02). This gives a business owner a scant 6 or 9 months to obtain a property, build or renovate a restaurant or bar, and open its doors to the public. Another rule provides that in the event of a loss of the licensed premises, the licensee has 90 days to secure and occupy a new premises, with a possible 60 day extension (see IDAPA 11.05.01.010.01). This is an even shorter period to obtain and open a new business location. The rule also applies to business closures, which are not allowed to exceed 90 days (or 150 with the extension), or the license may be revoked. How does a restaurant recover from a casualty loss or complete a remodel in such a period?
Additionally, by statute, ABC has 90 days to investigate and review an application (see I.C. § 23-907). This means that the applicant must wait up to three months for approval by ABC before it makes its investments based on expected receipt of a liquor license or take the chance that it may spend resources which will be lost if ABC rejects its application. This timing makes early preparatory steps risky.
Under these scenarios, the common workaround has been to obtain the liquor license early and lease the liquor license to an existing restaurant for an interim period while the permanent location is readied for business. The transferability of liquor licenses has made it possible for many Idaho entrepreneurs to do business and respond to market pressures in a smart, sophisticated way.
SECONDARY MARKET FOR LICENSE TRANSFERS:
Transferability has also worked as a pressure valve for the primary problem the quota system has created: a limited supply of, and high demand for, quota liquor licenses. The free market has created a secondary market for liquor licenses in which licenses could legally be transferred from one licensee to another for consideration. These transfers include purchases and sales of licenses, options to purchase licenses, and investment leasing of licenses (e.g., some businesses acquire and lease out licenses as investments in the same way they might acquire and lease out land). The price of liquor licenses fluctuate with demand in the market, but Ada County licenses have recently been trading in the range of $300,000-$500,000. ABC is aware of the secondary market, has administrated the transactions, and tracks the market prices, assessing 10% of every transfer as a fee which it uses for its general budget.
Owners of liquor licenses have viewed the licenses as important assets for use as leverage in commercial ventures, as collateral in loan transactions, and for retirement-savings and estate planning purposes. Liens are filed against liquor licenses, including by the tax bureaus. These flexibilities have allowed licensees to structure their businesses to maximize the economic value of the licenses and to reduce risk of losing other collateral.
SB1120 STATEMENT OF PURPOSE AND LEGISLATIVE INTENT:
The result of the quota system problem and the secondary market is that an Idaho entrepreneur needing a liquor license has two choices: either wait for years or decades on the priority list, or pay the fair market price to obtain an existing quota liquor license via a transfer. The former option assumes the entrepreneur can afford to wait to open its business for many years, or invest early in an enterprise that does not open, or open without liquor sales; the latter assumes that the entrepreneur can afford to pay the fair market rate for a transferable license. Critics of the quota system have argued that these realities have cut off access to the market for all newcomers. The legislative intent for SB1120 states, “[t]he Legislature recognizes that this form of regulation has unintentionally created a speculative market for the transferability of retail liquor by the drink licenses” and that the legislature sought to end such market. The Statement of Purpose adds, “[t]hrough attrition we can correct this flaw in the current licensing model.”
But SB1120, which became law on March 30, 2023, and goes into effect on July 1, 2023, neither addresses the market access dilemma nor its root cause—the quota system demand and supply disparity. Rather, SB1120 serves only to hamper the secondary market, which is the only working pressure valve, by dividing all quota system licenses into two categories: those existing before July 1, 2023 (known as “legacy licenses”), and those that may be issued on or after July 1, 2023 (known as “new licenses”). SB1120 also fails to recognize any of the complexities that exist in modern estate planning or business, real estate and lending transactions. SB1120 also ends the issuance of specialty licenses commonly known as 75-year “continuous use licenses” after 2028, but leaves open questions about how that termination will impact existing continuous use licenses.
SUMMARY:
The language of SB1120 will certainly change the manner in which liquor licenses can be sold or transferred and potentially seriously limits a license holder’s ability to sell or transfer its quota liquor license. In short, the market for selling and buying liquor licenses in Idaho ultimately will no longer exist.
What SB1120 otherwise does (for example, will a liquor license no longer be permitted to be leased?) remains to be seen. We do know that ABC is working on promulgating new temporary IDAPA rules to deal with SB1120, and until those come out, we cannot know or guess as to how ABC will interpret and enforce SB1120. Those IDAPA rules, when published by the Office of the Administrative Rules Coordinator here, will be subject to a 21-day public comment period but will be in force and effect immediately. (You can register to receive updates to such rules in the Bulletin at that website. The Notice of Proposed Rulemaking that publishes in the Bulletin specifies the time and manner in which written comments and requests for public hearings must be submitted to the agency on rulemaking.) We have also heard that efforts are underway state-wide to address and revise SB1120 in the next legislative session, but the impact that may have is also uncertain.
Suffice it to say, if you own or lease a legacy license or continuous use license, or are going to need to obtain a new license, you need to be mindful of these changes, read SB1120 and the updated IDAPA rules when made public, and should seek legal counsel before making any changes that may impact your liquor license and related business.
This blog is provided by Hawley Troxell Ennis & Hawley LLP for educational and information purposes only. It is intended to notify our clients and friends of certain events or issues. It is not intended to be, nor should it be, used as a substitute for legal advice regarding specific factual circumstances. © Hawley Troxell Ennis & Hawley LLP all rights reserved.
