WSR 14-05-103

[Filed February 19, 2014, 11:46 a.m.]

During the process of implementing I-1183 the Board adopted new rules, and revised and repealed numerous existing rules in order to implement the new laws enacted by the initiative. The Board adopted rules on June 2, 2012, and August 26, 2012, to implement sections of I-1183.

Two legal challenges to two sets of rules were filed by the Washington Restaurant Association, Northwest Grocery Association and Costco Corporation, raising various legal issues. The cases were consolidated for briefing and hearing in Thurston County Superior Court. One of the challenges asserted was that the Board had improperly failed to prepare a Small Business Economic Impact Statement (SBEIS) to analyze the impact of the proposed rules on small businesses.

The Thurston County Superior Court found the Board had failed to prepare an SBEIS, and therefore found the rules invalid, but directed the Board to prepare a SBEIS. It stayed the effect of the ruling until an SBEIS could be prepared on the rules published in Washington State Register filing nos. 12-12-065 and 12-17-006. The Board prepared this SBEIS to comply with the court's direction.

The Rules Coordinator requests approval to file the SBEIS on rules to implement I-1183 with the Code Reviser's Office. A copy of the SBEIS was provided at the Board meeting on February 19, 2014, and is attached to this order.

If approved for filing, the Rules Coordinator will file the SBEIS on February 19, 2014.

Initiative 1183 (I-1183), was passed by majority vote on November 8, 2011. It set in place a series of events, designed to transfer the business of distributing and selling spirits at retail from the exclusive province of the Washington State Liquor Control Board (WSLCB) to the private sector. I-1183 created new license types including spirits distributor and spirits retailer licenses. It also directed the Board to create new licenses and authorities, including certificates of approval and endorsements allowing certain activities relating to spirits to be conducted by licensees. The initiative eliminated the authority of the Board to buy and sell liquor.

During the process of implementing I-1183 the Board adopted new rules, and revised and repealed numerous existing rules in order to implement the new laws enacted by the initiative. The Board adopted rules on June 2, 2012, and August 26, 2012, to implement sections of I-1183.

Two legal challenges to two sets of rules were filed by the Washington Restaurant Association, Northwest Grocery Association and Costco Corporation, raising various legal issues. The cases were consolidated for briefing and hearing in Thurston County Superior Court. One of the challenges asserted was that the Board had improperly failed to prepare a Small Business Economic Impact Statement (SBEIS) to analyze the impact of the proposed rules on small businesses.

The Thurston County Superior Court found the Board had failed to prepare an SBEIS, and therefore found the rules invalid, but directed the Board to prepare a SBEIS. It stayed the effect of the ruling until an SBEIS could be prepared on the rules published in Washington State Register filing nos. 12-12-065 and 12-17-006. The Board prepared this SBEIS to comply with the court's direction.

The WSLCB sent out the SBEIS survey to 1193 stakeholders via its Liquor Advisories Listserv on August 16, 2013. It requested responses to the seven questions below. In addition to the Listserv the SBEIS survey was sent via email to the agency's I-1183 Information, Rules 1 and Rules 2 email distribution lists. Due to requests received by various stakeholder groups and individual licensees the original deadline for submission was extended from August 30, 2013 to September 13, 2013.

Large and small businesses reported needing the following additional services to comply with the rules: accountant, service vendors, lawyer, tax consultant, point of sale equipment, system vendor to handle inventory management, recordkeeping, realtors, relocation specialists, storage facilities, bookkeepers, payroll service companies, credit card processing software and annual support fees, security system, electrician and additional liquor distributers.

Large and small businesses reported an increase in administrative and labor costs attributed to additional time/paperwork needed to locate specific products at multiple locations. Businesses of all sizes also reported an increase in the cost of goods, transportation costs due to 24 liter per day limitation, third party administrative fees and additional equipment.

The majority of business indicated the rules caused their business to lose sales or revenue, either directly or indirectly by having to change the way they operated their business. Large and small business reported they lost money due to the additional 17% fee on products and the 24 liter restriction. The majority of businesses were forced to use more than one distributor to purchase product.

Small businesses reported an increased cost of compliance because they were not able to enter into a co-op warehouse agreement with other small businesses. In many cases small businesses were forced to: purchase smaller quantities of products more frequently, purchase larger quantities, store more product than before. In addition, respondents referenced not being able to purchase any product because they couldn't afford the minimum order requirement. All of these answers resulted in increased prices for the consumer.

Some businesses reported the rules caused gaps in the supply chain and resulted in customers buying down.

The majority of responding large and small businesses indicated the rules caused their business to lose jobs or prevented them from hiring additional employees.

The number of employees reported by responding businesses ranged from 1 to 750 employees.

Due to the wide range of responding businesses (small and large) it is not possible to generate an accurate average of employee hours.

Less than half of the responding businesses indicated that they participated in the I-1183 rulemaking process.

The majority of the responses to the SBEIS focused on the private system of spirits sales created by the initiative rather than the rules adopted by the Board. Some small businesses responding to the survey suggested the rules be amended to reduce the 17 percent fee on all spirit sales created by the initiative. While the Board does not have the authority to amend the language of the initiative, they have tried to mitigate the impact of the fees by allowing businesses to pay on an agreed upon scheduled payment plan if they become delinquent in payments and are at risk of suspension of their spirits retail license.

Another mitigating technique suggested by small businesses in the survey was to allow businesses to organize a buying co-op in an effort to reduce the cost of product. The WSLCB does allow businesses to participate in a buying co-op under the rules in accordance with the parameters set out in the initiative.

During the transition of I-1183 the Board took several steps to avert harm to state and contract liquor stores that did not involve the rules and rulemaking progress. Contract liquor stores were able to transfer or sell their liquor stores to a qualified liquor applicant, including family members. State and contract stores planning on applying for a spirits retail license under I-1183 were allowed to move within a mile of their location without engaging in contract negotiations. On a case by case basis stores were given exceptions to move outside of the one mile radius if there was no existing competing store.

State and contract liquor store managers were given the option to purchase inventory in their stores below wholesale cost and pay over time. A 50 percent down payment on the value of the inventory was due to the WSLCB no later than Friday, May 11, 2012. The rest of the unpaid balance was due no later than Friday, June 22, 2012. The WSLCB provided a rebate of up to 60 percent of the winning bid amount or $30,000, whichever was less, determined by the number of former WSLCB employees hired and the amount of months they were employed by the business. The WSLCB also gave priority processing for state and contract stores applications for spirits retail licenses.

The WSLCB used several techniques to involve small business and other interested parties in the rulemaking process. The publication of the rule-proposal documents includes rule language available for comments, notices, a public hearing and comment period. Email distribution lists were used by the WSLCB to provide the public, small businesses and others with regular updates and information related to the proposed rules. The WSLCB maintains a website dedicated to the rule-making effort, that includes a timeline of the rule-making schedule, recently adopted rules and proposed rules.

Survey results did not demonstrate a disproportional negative impact on small businesses. The Board was not given discretion on many aspects of the rules, as the content was dictated by statutory provisions. One prime example is the 17 percent fee imposed on "all spirits sales." While the Board would have preferred to interpret this fee as imposed only on sales to consumers, the statutory language is unambiguous, and does not exempt sales of spirits between retailers from the payment of the 17 percent fee.