TITLE 3. ALCOHOLIC BEVERAGE AND CANNABIS CONTROL

VIRGINIA ALCOHOLIC BEVERAGE CONTROL AUTHORITY

Fast-Track Regulation

Title of Regulation: 3VAC5-70. Other Provisions (amending 3VAC5-70-60).

Statutory Authority: §§ 4.1-103, 4.1-111, and 4.1-204 of the Code of Virginia.

Public Hearing Information: No public hearing is currently scheduled.

Public Comment Deadline: June 19, 2024.

Effective Date: July 5, 2024.

Agency Contact: LaTonya D. Hucks-Watkins, Senior Legal Counsel, Virginia Alcoholic Beverage Control Authority, 7450 Freight Way, Mechanicsville, VA 23116, telephone (804) 213-4698, FAX (804) 213-4574, or email latonya.hucks-watkins@virginiaabc.com.

Basis: Section 4.1-101 of the Code of Virginia establishes the Virginia Alcoholic Beverage Control Authority. Section 4.1-103 of the Code of Virginia enumerates the powers of the Board of Directors of the Virginia Alcoholic Beverage Control Authority, which includes the authority to adopt regulations and to do all acts necessary or advisable to carry out the purposes of Title 4.1 of the Code of Virginia; specifically, § 4.1-103 (i) states that the board may delegate or assign any duty or task to be performed by the authority to any officer or employee of the authority; (ii) permits the board to promulgate regulations; and (iii) establishes authority for the board to collect fees for all permits as set forth in the Alcoholic Beverage Control Act (§ 4.1-100 et seq. of the Code of Virginia), including fees associated with applications for such permits. Section 4.1-111 of the Code of Virginia provides the board with the authority to adopt reasonable regulations to carry out the provisions of the Alcoholic Beverage Control Act and to amend or repeal such regulations.

Purpose: The amendments are essential to protecting the health, safety, and welfare of citizens because those interests are protected through consistent application of regulations and practices, and the amendments achieve consistency between current practices and the text of the regulation. Inconsistencies between the regulation and actual practices have the potential to create confusion in the regulated community, and these amendments are intended to prevent any confusion.

Rationale for Using Fast-Track Rulemaking Process: This rulemaking is expected to be noncontroversial because § 4.1-103 of the Code of Virginia states that the board has the authority to establish and collect fees for all permits as set forth in the Alcoholic Beverage Control Act, and permittees have been paying this fee already. Additionally, this revision ensures the regulation aligns with the practice that has already been implemented.

Substance: The amendments add language that states applicants for industrial permits will be charged a fee established by the authority.

Issues: The primary advantage to the public and the Commonwealth is that the regulation will be consistent with the current authority practice. There are no disadvantages.

Department of Planning and Budget's Economic Impact Analysis:

The Department of Planning and Budget (DPB) has analyzed the economic impact of this proposed regulation in accordance with § 2.2-4007.04 of the Code of Virginia and Executive Order 19. The analysis presented represents DPB's best estimate of the potential economic impacts as of the date of this analysis.¹

Summary of the Proposed Amendments to Regulation. The Virginia Alcoholic Beverage Control Board of Directors (board) proposes to replace the dollar amounts for two fees (the application fee, and the permit fee for industrial use of alcohol) with the phrase that the fees are "in an amount established by the authority."

Background. Until May of 2022, the application fee for an industrial alcohol permit was $10 and the yearly permit fee was an additional $10 ($20 total) for orders in excess of 110 gallons; for lesser volumes the amounts were $5 for the application fee and $5 for the permit fee ($10 total). The industrial permit is required for shipment and transportation of alcohol or other alcoholic beverages from the authority to the purchaser. This type of permit is needed for the use of alcohol or alcoholic beverages for industrial purposes, scientific research or analysis, manufacturing of articles under § 4.1-200 of the Code of Virginia, and for use in a hospital or home for the aged.

The Virginia Alcoholic Beverage Control Authority (authority) issued a General Notice in April 2022 informing stakeholders of the new amounts of various application and permit fees.² Among other fee adjustments, the general notice indicated that effective May 1, 2022, the authority would charge a $50 application fee and a $50 permit fee ($100 total) for all industrial permits regardless of the volume. The notice included a 21-day public comment period. The authority did not receive any comments and the permit fees went into effect on May 1, 2022.

The authority states that it held several stakeholder meetings to discuss license reform (which included the implementation of new permit fees and increases to existing permit fees). These meetings were open and held over several months. According to the authority, it received overwhelming support from the stakeholders for the increase in licensing fees and existing permit fees as well as the creation of permit fees for permits that did not previously have a fee. The authority relates that stakeholders found these fees to be fair and appropriate given the fees were directly tied to the amount of time and effort put into the investigation and regulation of permittees that is required of the authority's Bureau of Law Enforcement.

This regulatory change is being proposed to remove the dollar amounts of fees from the regulation that applies specifically to the industrial permits and to insert language that the fees are "in an amount established by the authority" so that the regulatory text comports with current practice following the authority's implementation of these new fees on May 1, 2022.

Estimated Benefits and Costs. The $10 and $5.00 fees in the text of the regulation were established in November 1986 and were not updated until May of 2022. The fee amounts adjusted for inflation since November 1986 are $27.10 and $13.55 respectively for the $10 and the $5.00 amounts.³ The inflation adjusted total (application fee plus the permit fee) fees equate to $54.20 for orders in excess of 110 gallons and $27.10 for lesser amounts as of February 2023. Thus, the current total industrial permit fee amount of $100 is 85% higher than the inflation-adjusted amount for larger orders and 269% higher than the inflation-adjusted total fee for smaller orders. It appears the current fees should be sufficient to cover increases in administrative and enforcement costs if such costs grew at the same rate as inflation. At the current fee levels, the authority expects to collect $13,900 per year from the 139 applications it estimates would be received. In essence, the adjustment aspect of fees would help the authority recover a larger portion of the increase in administrative and enforcement costs that likely occurred since 1986 and the applicants would be required to contribute more to such costs involved in application review, issuance, and enforcement of industrial permits.

An additional aspect of the proposed changes is removal of the dollar amount of fees from the text of the regulation and replacing this with a process where fee amounts are established by the authority outside of the regulatory process. This change would allow the authority to make fee adjustments more expeditiously by effectuating them through a General Notice and accompanying comment period (as is currently done) or without any notice if the authority chooses not to provide a general notice of such a change. In contrast, if the fee amounts were in the regulation, any adjustment to the fees would be expected to follow the steps required by the Administrative Process Act (APA). Generally speaking, under an APA-compliant process there are one or more regulatory stages that offer the public and any stakeholders an opportunity to provide a comment to which the authority is required to respond to and take into consideration in the rulemaking. In this sense, removing the fees from the regulation would decrease the amount of time the authority must spend when adjusting the fees, but at the same time may decrease the opportunity for the stakeholders and especially potential applicants to provide input and possibly object to such adjustments.

Businesses and Other Entities Affected. The proposed amendments primarily affect industrial permit applicants. The authority expects 139 such applications per year. The current fees reflect a larger (inflation-adjusted) percentage increase (269% vs 85%) for permits involving fewer than 110 gallons compared to permits involving more than 110 gallons. Other than that, none of the applicants appear to be disproportionately affected.

The Code of Virginia requires DPB to assess whether an adverse impact may result from the proposed regulation.⁴ An adverse impact is indicated if there is any increase in net cost or reduction in net revenue for any entity, even if the benefits exceed the costs for all entities combined. As noted, the proposal would take the dollar amounts of industrial permit fees out of the regulation and would instead insert language to the effect of "the fee amounts established by the authority" which is currently done through a general notice. Depending upon whether the authority continues to use a General Notice to announce such changes, this aspect of the change may limit the opportunities available to the stakeholders and especially to the permittees to provide input for the fee adjustments or object to such adjustments compared to the opportunities required to be provided by the APA. Additionally, this change would indirectly incorporate the fee increases occurred effective May 1, 2022. Thus, an adverse impact on industrial permit applicants is indicated.

Small Businesses⁵ Affected.⁶ The Authority does not track which of the affected licensees would qualify as a small business. However, a review of the list of active industrial permit holders provided by the Authority suggests some permit holders may be small businesses.

Types and Estimated Number of Small Businesses Affected. The small businesses involved with the industrial alcohol permit fee would likely be industrial, manufacturing, research and analysis, and medically oriented businesses. There is no specific number of businesses that proposed amendments affect.

Costs and Other Effects. To the extent any of the industrial permit applicants are small businesses, the proposed amendments may adversely affect them by potentially limiting their ability to participate in the fee adjustment process to the same degree as would be required under an APA-compliant process, as well as due to higher fees effectuated by this proposal. Thus, an adverse impact on small businesses appears to be indicated.

Alternative Method that Minimizes Adverse Impact. The alternative method that would minimize the adverse impact of adjusting fee amounts outside the regulation would be to keep the fee amounts in the regulation so that all the opportunities afforded by the APA in determining and establishing fee amounts would be available to entities who need to obtain permits from the Authority pursuant to this regulation.

Localities⁷ Affected.⁸ The proposed amendments do not disproportionally affect any particular locality and do not introduce costs for local governments.

Projected Impact on Employment. The proposed amendments do not appear to be significant enough to affect total employment.

Effects on the Use and Value of Private Property. No impact on the use and value of private property is expected in light of the fact that the higher fees are already implemented effective May 1, 2022. Similarly, no impact on real estate development costs is expected.

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¹Section 2.2-4007.04 of the Code of Virginia requires that such economic impact analyses determine the public benefits and costs of the proposed amendments. Further the analysis should include but not be limited to: (1) the projected number of businesses or other entities to whom the proposed regulatory action would apply, (2) the identity of any localities and types of businesses or other entities particularly affected, (3) the projected number of persons and employment positions to be affected, (4) the projected costs to affected businesses or entities to implement or comply with the regulation, and (5) the impact on the use and value of private property.

² https://townhall.virginia.gov/L/ViewNotice.cfm?gnid=2386.

³ https://www.bls.gov/data/inflation_calculator.htm.

⁴Pursuant to § 2.2-4007.04 D: In the event this economic impact analysis reveals that the proposed regulation would have an adverse economic impact on businesses or would impose a significant adverse economic impact on a locality, business, or entity particularly affected, the Department of Planning and Budget shall advise the Joint Commission on Administrative Rules, the House Committee on Appropriations, and the Senate Committee on Finance. Statute does not define "adverse impact," state whether only Virginia entities should be considered, nor indicate whether an adverse impact results from regulatory requirements mandated by legislation.

⁵Pursuant to § 2.2-4007.04, small business is defined as "a business entity, including its affiliates, that (i) is independently owned and operated and (ii) employs fewer than 500 full-time employees or has gross annual sales of less than $6 million."

⁶If the proposed regulatory action may have an adverse effect on small businesses, § 2.2-4007.04 requires that such economic impact analyses include: (1) an identification and estimate of the number of small businesses subject to the proposed regulation, (2) the projected reporting, recordkeeping, and other administrative costs required for small businesses to comply with the proposed regulation, including the type of professional skills necessary for preparing required reports and other documents, (3) a statement of the probable effect of the proposed regulation on affected small businesses, and (4) a description of any less intrusive or less costly alternative methods of achieving the purpose of the proposed regulation. Additionally, pursuant to § 2.2-4007.1 of the Code of Virginia, if there is a finding that a proposed regulation may have an adverse impact on small business, the Joint Commission on Administrative Rules shall be notified.

⁷"Locality" can refer to either local governments or the locations in the Commonwealth where the activities relevant to the regulatory change are most likely to occur.

⁸Section 2.2-4007.04 defines "particularly affected" as bearing disproportionate material impact.

Agency's Response to Economic Impact Analysis:

The Virginia Alcoholic Beverage Control Authority (VA ABC) concurs with the Department of Planning and Budget's (DPB) economic analysis; however, the authority takes exception to the discussion of the Administrative Process Act (APA) rules included in the section titled "Benefits and Costs." Not only is that discussion irrelevant, but it is prejudicial to the authority and fails to take into account, or even mention, the relevant portions of the Code of Virginia that exempt fees associated with permits from the APA.

Chapter 1113 of the 2020 Acts of Assembly amended § 4.1-103 of the Code of Virginia. The chapter established, among other things, that VA ABC has the inherent authority to establish and collect fees for all permits set forth in the ABC Act, including fees associated with applications for such permits. DPB's economic impact analysis includes considerable discussion about an "APA-compliant process" that includes various opportunities for public comment but fails to discuss that VA ABC permit fees are not subject to those APA requirements despite the numerous references to the changes in § 4.1-103 mentioned in the ABC background statement and in various conversations between the economic analyst and VA ABC's regulatory coordinator to that effect. The economic analyst further speculates that VA ABC's exercise of its authority pursuant to the Code of Virginia to establish and collect permit fees without going through the APA process "may limit the opportunities available to the stakeholders and especially to the permittees to provide input for the fee adjustments or object to such adjustments compared to the opportunities required to be provided by the APA," despite the fact that when VA ABC did seek public input regarding the changes in permit fees, the authority received zero comments and has not received any objections to the industrial permit fees since they were adopted. Furthermore, despite being provided with spreadsheets from VA ABC that indicate there has not been any indication of a decrease in industrial permits issued since the implementation of the fees, the economic analyst again speculates an "adverse impact on industrial permit applicants."

DPB's economic impact analysis is a five-page document that includes one paragraph that actually discusses the costs associated with the proposed amendment and the rest consisting primarily of the analyst's thoughts as to why VA ABC should follow APA requirements that are not applicable to this matter. VA ABC objects to the portions of the economic impact analysis that consist of the irrelevant portions of the APA and objects to those portions used in consideration in determining whether or not the promulgation of the regulatory amendment may proceed.

Summary:

The amendments state in regulation the current fee for industrial permits.

3VAC5-70-60. Alcoholic beverages for hospitals, industrial and manufacturing users; permits; fees; storage; suspension or revocation.

A. The board Virginia Alcoholic Beverage Control Authority (authority) may issue a yearly permit authorizing the shipment and transportation direct to the permittee of orders placed by the board authority for alcohol or other alcoholic beverages for any of the following purposes:

1. For industrial purposes pursuant to a permit issued under 3VAC5-70-200;

2. For scientific research or analysis;

3. For manufacturing articles allowed to be manufactured under the provisions of § 4.1-200 of the Code of Virginia; or

4. For use in a hospital or home for the aged (alcohol only).

Upon receipt of alcohol or other alcoholic beverages, one copy of the bill of lading or shipping invoice, accurately reflecting the date received and complete and accurate records of the transaction, shall be forwarded to the board authority by the permittee.

The application for such permits shall be on forms provided by the board authority.

B. Applications for alcohol shall be accompanied by a fee of $10, where the order is in excess of 110 gallons during a calendar year, or a fee of $5.00 for lesser amounts an application fee in the amount of $50 and permit fee in the amount of $50. Applications for other alcoholic beverages shall be accompanied by a fee of 5.0% of the delivered cost to the place designated by the permittee. No fee shall be charged to agencies of the United States or of the Commonwealth of Virginia or eleemosynary institutions.

C. A person obtaining a permit under this section shall:

1. Store such alcohol or alcoholic beverages in a secure place upon the premises designated in the application separate and apart from any other articles kept on such premises;

2. Maintain accurate records of receipts and withdrawals of alcohol and alcoholic beverages at the permittee's place of business for a period of two years; and

3. Furnish to the board authority, within 10 days after the end of the calendar year for which he the person was designated a permittee, a statement setting forth the amount of alcohol or alcoholic beverages on hand at the beginning of the previous calendar year, the amount purchased during the year, the amount withdrawn during the year, and the amount on hand at the end of the year.

D. The board authority may refuse to designate a person as a permittee if it shall have the authority has reasonable cause to believe either that the alcohol or alcoholic beverages would be used for an unlawful purpose, or that any cause exists under § 4.1-222 of the Code of Virginia for which the board authority might refuse to grant the applicant any license.

E. The board authority may suspend or revoke the designation as a permittee if it shall have the authority has reasonable cause to believe that the permittee has used or allowed to be used any alcohol or alcoholic beverages obtained under the provisions of this section for any purpose other than those permitted under the Code of Virginia, or that the permittee has done any other act for which the board authority might suspend or revoke a license under § 4.1-225 of the Code of Virginia.

F. The board authority and its special agents shall have free access during reasonable hours to all places of storage and records required to be kept pursuant to this section for the purpose of inspection and examining such place and such records.