By David McPeak, Editor in Chief
The restaurant and bar industry faced severe hardship over recent years with reports of over 80,000 U.S. restaurants failing in the wake of Covid and government mandates.[1] As the country slowly emerges from this crisis, many enterprising individuals may see opportunity for restaurant startups or expansion. But many will quickly have their dreams dashed when confronting the heavy bureaucracy that exists in many jurisdictions. For example, an entrepreneur seeking to open a restaurant in New York City may have to obtain 30 permits, registrations, licenses, and certificates with as many as 23 different inspections.[2] If they’re lucky, the whole process will take 7 ½ months.[3] Such eye-popping endeavors are not uncommon in other major cities across the county. One major barrier that restaurant startups face in particular is navigating antiquated state liquor laws.
The sale of alcoholic beverages is a highly regulated business activity in the United States. Because the 21stAmendment gives states such broad authority to regulate the sale of alcohol, the provisions governing liquor licensing vary greatly.[4] Calls to reform licensing regimes have fallen on deaf ears in recent past, but the fall-out from Covid and the glaring light it shined on many cumbersome regulations may be forcing states to embrace reform.
One major barrier for startups is the cost of obtaining a liquor license. There are 17 states where liquor licenses are subject to per capita quota requirements.[5] Though most of these states allow for increases based on census reports, the ability to obtain a license directly from the state is most often illusory given the number of applicants on waiting lists.[6]
The problem is most acute in high-growth states such as Idaho, Florida, and Utah. Licensing authorities in those jurisdictions are confronted with increased demand that state liquor licensing quotas cannot meet. In Florida, the market price for a license is upwards of half a million dollars.[7] The only other option is for startups to try their luck in the State liquor license lottery. In 2020, there were more than 23,000 lottery applicants for the 63 licenses being awarded across all 30 Florida counties.[8] In Utah, the current quota limits issuance of bar licenses to one per 10,200 residents—creating a “crisis” according to industry observers.[9] In neighboring Idaho, the influx of residents has lead to an eight year waiting list for a direct issue license in the fast growing capital of Boise.[10] Some entrepreneurs may be able to lease a license in Idaho for thousands of dollars a month, but they are highly exposed to the risk of going “dry” in the event the license holder sells on the robust open market for hundreds of thousands of dollars instead of renewing the lease.[11]
Other states have embraced liquor code reform to spur development in economically depressed areas and to incentivize entrepreneurs. Pennsylvania is a prime example. In the past 15 years, it hammered away at regulations on businesses that manufacture alcoholic beverages to boost its agricultural sector and to provide greater economic opportunities generally.[12] Among these reforms, manufacturers such as craft breweries, distilleries, and wineries can obtain an on-premises license allowing them to operate outside the State’s quota system.[13] Tax reform has also incentivized development, providing up to $220,000 in annual tax reductions for capital investments.[14] The impact has been massive. Prior to reform efforts, only 10 breweries were operating across the Commonwealth.[15] Today, craft beer manufacturing is a booming industry in Pennsylvania with over 300 breweries having sprung up across the State.[16]
Other states are taking targeted approaches to spur similar development. For example, Michigan recently passed legislation providing for streamlined access to a liquor license outside its quota system in “development districts” where applicants make capital investments of at least $75,000.[17] And Indiana has empowered local jurisdictions to revive waterfronts by creating “riverfront districts” where a license can be obtained outside the quota system, without limits.[18]
The changes are not free from controversy. Reform in jurisdictions operating under quota systems typically meet pushback from the liquor lobby whose members have vested interests in maintaining tight limits. For many business owners, a liquor license is their most valuable asset. Without artificial limits imposed by state licensing regimes, the hundreds of thousands of dollars invested to obtain a license would evaporate. Thus, the economics of licensing reform creates tension between those wanting states to stop throttling economic growth—and those who want to protect their largest asset.[19]
In Cheyenne Wyoming, calls for reform are growing louder after the City received only one additional license after the 2020 census.[20] The City is considering 11 separate applications for the new license.[21] Some of these applicants have shovel ready projects that would allow progress to be made under Cheyenne’s redevelopment goals but are stifled by the State’s license quota.[22] Reforms to ameliorate this depressing economic effect in the coming legislative session are expected to meet pushback from lobbyists representing the interests of current license holders.[23]
Meanwhile, New Mexico recently made sweeping changes allowing new applicants to obtain a full-service license directly from the State for $10,000—effectively eliminating the quota system there.[24] Prior to that legislation, the price for the same license on the open market went for $500,000.[25] This obviously clears one major barrier for new businesses and creates great incentives for new development, but businesses holding a pre-reform license have been hit with a significant loss which the bill’s tax breaks fail to offset.[26]
[1] https://www.cato.org/policy-analysis/entrepreneurs-regulations-removing-state-local-barriers-new-businesses#restaurant-entrepreneurs-alcohol-licensing
[2] https://www.cato.org/policy-analysis/entrepreneurs-regulations-removing-state-local-barriers-new-businesses#restaurant-entrepreneurs-alcohol-licensing
[3] Id.
[4] Tennessee Wine and Spirits Retailers Assn. v. Thomas, 139 S. Ct. 2449, 2467 (2019).
[5] Robert Lewis, Fla.’s Migration Hangover: Limited Liquor Licenses Drive Up Costs, Box Out Small Business, The Palm Beach Daily Business Review, September 29, 2021at A8.
[6] Sally Krutzig, Mixed Feelings Over Mixed Drinks; Businesses and Lawmakers Struggle Over Liquor Licensing, Standard-Journal, March 13, 2020 at pg. A4.
[7] Id.
[8] Id.
[9] https://gastronomicslc.com/2021/12/01/utah-liquor-license-crisis-set-to-worsen-according-to-reports/.
[10] https://www.boisestatepublicradio.org/politics-government/2018-01-23/distilled-idaho-liquor-license-laws-a-tall-order-for-business-owners.
[11] Id.
[12] Patrick J. Stapleton III et. al., Pennsylvania Alcohol Laws Give Local Manufacturers a Huge Advantage, The Legal Intelligencer, February 22, 2022 at pg. 6.
[13] Evan Pappas, The Landscape of Liquor License Options for the Hospitality Entrepreneur, The Legal Intelligencer, February 22, 2022 at pg. 7.
[14] Patrick J. Stapleton III et. al., supra.
[15] Id.
[16] Id.
[17] Miller Canfield, Michigan Expands Development District Liquor License Availability, National Law Review, March 23, 2022.
[18] James D. Wolf Jr., Peoples Winery Becomes First To Get Riverfront District Liquor License, Pharos Tribune, November 18, 2021.
[19] Staff Editorial, State’s Liquor Laws Stifling City Redevelopment Efforts, The Wyoming Tribune-Eagle, March 13, 2022 Pg. 8
[20] Id.
[21] Id.
[22] Id.
[23] Id.
[24] https://kvia.com/news/new-mexico/2021/04/02/sweeping-liquor-reform-comes-to-new-mexico-including-home-delivery/.
[25] Id.
[26] Id.
