By Oscar Porter.
According to the Arizona Restaurant Association, the COVID-19 pandemic wiped out around 1,000 to 1,200 Arizona restaurants in 2020. Last year, in order to help restaurants stay afloat, Governor Ducey relaxed rules around serving to-go cocktails, specifically for restaurants. Now, restaurants have convinced state lawmakers to codify a version of these new rules. As of October 1, 2021, HB 2773 allows restaurants to sell cocktails to-go if they meet certain conditions. While the new law has significant support from the restaurant industry, it has been met with opposition arguing that the benefits to restaurants come at the expense of bars and liquor stores.
BACKGROUND: GOVERNOR’S ORDER
In March of 2020, to help struggling restaurants that couldn’t serve customers in-person due to the lockdown Governor Ducey issued an executive order relaxing the rules around the sale and delivery of to-go alcoholic beverages. The order was eagerly welcomed by restaurant owners, who claimed the rule relaxation would help them. With almost all business coming from takeout orders, being able to serve cocktails to-go was a great source of revenue for the struggling restaurants.
Some bar and liquor store owners objected, however, claiming the order violated state law. Before the order, businesses had to have a series 6 liquor license in order to sell to-go drinks (that is, alcoholic beverages to be consumed off-premises). Bar and store owners argued that serving to-go alcohol was a privilege they paid for with their Series 6 liquor licenses, which are much more expensive than the Series 12 restaurant licenses restaurants typically hold.
Before the order, a Series 12 restaurant license required that food comprise at least 40% of the restaurant’s sales and that all alcohol sold be consumed on the premises. A Series 12 license cost around $2,000 and was relatively easy to acquire. A more expensive Series 6 license, costing around $100,000, did not have a food sales requirement and allowed the holder to sell beer, wine, and liquor for off-premises consumption. By allowing restaurants to sell drinks for off-site premises consumption, the order allegedly devalued the expensive Series 6 liquor licenses. In their suit, the Series 6 holders argued that the Governor’s emergency powers did not allow him to issue orders in violation of existing law, and because his order violated current law limiting off-premises liquor sales to Series 6 license holders, the order was invalid.
The Maricopa County Superior Court sided with the Series 6 license holders, ruling that the sale of to-go alcohol by restaurants was illegal and that Governor Ducey had acted beyond the scope of his authority. Despite the loss, Arizona restaurants attempted to revive the temporary right they had gained during the pandemic. Backed by the Governor, the Arizona Restaurant Association eventually managed to convince state legislators to permanently enact a law making it legal for them to sell cocktails to-go without a Series 6 license. The legislature worked for months to come up with a new law that satisfied both restaurants and Series 6 license holders (bars and liquor stores). The result was House Bill 2773, which provides Arizona businesses without a Series 6 license the opportunity to sell to-go cocktails.
NEW LAW: HB2773
After months of negotiations involving both sides, state lawmakers came up with an elaborate compromise in HB 2773. The goal was to help restaurants and bars recover from the lockdown, without devaluing existing superior liquor licenses or depriving liquor stores of critical revenue.
Under the new law, Series 6 license holders will continue to be entitled to sell alcohol for off-premises consumption. However, through the end of 2025, Series 12 license holders will also be permitted to sell to-go alcohol provided they lease the right from a Series 6 license holder in the same county. A restaurant acquiring such a lease can sell to-go beer, wine, and cocktails with an order of food. In addition, a restaurant can buy an additional permit to deliver alcoholic drink orders using third-party delivery services.
The new law, however, has restrictions on what a lease-holding restaurant can do: A restaurant will not be allowed to sell to-go cocktails after its kitchen stops selling food. The sales of to-go cocktails cannot exceed 30% of the sales price of “on-sale spirituous liquors by the licensee at the premises.” Also, most notably, to-go cocktails can’t be sold in a container exceeding 32 ounces.
The Arizona Department of Liquor will administer the leases, collecting fees and processing applications. According to an FAQ on the Department’s website, they did not begin accepting applications for leases until October 1, 2021. The lease system will randomly pair up Series 6 licensees looking to lease their licenses with Series 12 licensed restaurants. Interestingly, the Department will establish a standard lease amount that will apply across the board. According to State Representative Jeff Weninger, the House member who introduced the bill, about 3,000 Arizona restaurants should be able to acquire leases to sell cocktails to go. Each lease agreement will be valid for one year, with annual renewals available.
After 2025, however, the system will change. Beginning January 1, 2026, restaurants will be able to apply directly to the Department for a license to sell to-go alcohol.
Allowing restaurants to serve to-go alcohol may have helped them stay afloat when their dinings rooms were closed. Now that a scheme for restaurants to sell to-go alcoholic beverages has been put into law, it remains to be seen how HB 2733 will impact Series 6 license holders. It may be a great compromise that will protect the value of liquor licenses while expanding business opportunities across the state. However, the new law will not help Series 6 license holders if the leasing fees the Department establishes do not compensate them for revenue losses resulting from restaurants’ to-go alcohol sales or if the issuance of the new to-go alcohol licenses for restaurants overtakes Series 6 holders’ current sales.