“We are continually looking for ways to be more business-savvy. We understand that time is money for our licensees and we want them in our community and in our state,” said Nida Samona, chairperson of the Michigan Liquor Control Commission (MLCC). “We are a quasi-business ourselves. We are in the hospitality industry, providing customer service to our licensees.”
Since 1997, Michigan, perhaps more than any other control state, has blended private business with state control. While the MLCC is the sole wholesaler of spirits in the state of Michigan, it “does not physically handle the liquor,” explained Steve Robinson, acting director of the MLCC’s Financial Management Division.
In January of 1997, the MLCC privatized its warehouse and delivery functions. The state now uses six private companies referred to as Authorized Distribution Agents or ADAs for this work. Suppliers need approval from the MLCC to have products available for sale in the state. The supplier then contracts with an ADA. The ADAs keep stocks of their suppliers’ products in their own warehouses. This product is, in essence, in bailment. The ADAs never own the product that they warehouse and deliver. The MLCC buys it from the suppliers when licensees put in orders for it through the ADAs.
When a licensee puts in an order — either by phone or through the Internet — three things happen: the ADA, in a summary at the end of each day, sends a record of the licensee orders it received to the MLCC, and it, in turn, buys that product from the suppliers; then, the ADA delivers the product, usually in two to three days, to the licensee. This weekly delivery is free for the licensees. When paying, the licensees make their checks out to the State of Michigan and the ADA deposits those checks in special state accounts on a daily basis.
When the MLCC makes its purchases from suppliers, it pays the cost of the product plus $6.97 per case. That’s the state’s contribution to the per-case fee that is ultimately paid to the ADAs. The supplier is required to add to that per-case fee, to bring it up to a minimum of $8.32 per case, and pass the entire fee along to the ADA.
MLCC licensees must sell their spirits for at least a certain minimum price. They can sell it for more, but they cannot sell it for less, except under the special circumstance of clearing out a discontinued product, for which they need MLCC approval. The formula for determining the retail price of a spirit product in the state of Michigan can look a bit daunting. “You’ll need a spreadsheet and five or six math calculations,” joked Robinson.
Basically, the MLCC takes the price the supplier charged it for the product and adds a 65% mark-up, which includes the MLCC’s expenses, its profits as well as the licensee’s profit. Then the MLCC adds four taxes, computed on the cost plus mark-up to the cost and mark-up total. On a product with a $10 retail price, the licensee’s minimum profit is $1.50, and the MLCC’s profit is $1.97, with an additional $1.21 being collected in tax.
In fiscal year 2006-2007, the MLCC had a preliminary total net revenue of $321.6 million, which includes its profits from the sale of spirits and the taxes, licensing fees and fines it collected. This was an increase of 1.58% from the previous year. Its preliminary gross spirit sales in 2006-2007 were $889.9 million, for over 6.4 million cases of product.
The Commission’s Responsibilities
The MLCC is an agency under the Department of Labor and Economic Growth, formerly the Department of Commerce. The MLCC is a Type 1 agency, meaning that it makes independent decisions.
The actual commission has five members: Nida Samona, chairperson; two other administrative commissioners, Patrick Gagliardi and Don Weatherspoon; and two hearing commissioners, Virgie Rollins and Judy Allen. The administrative commissioners, working out of the MLCC’s headquarters in Lansing, make decisions regarding license applications, new product listings and other business of the MLCC. They also serve as an appeal board for licensees contesting violations who have already received a decision from the hearing commissioners. The hearing commissioners travel the state to hear cases where licensees are contesting a violation they’ve received. “We act as administrative judges,” explained Virgie Rollins, the hearing commissioner who works out of the MLCC’s Farmington office. “If [the licensee] wants an explanation or if they have a reason why, for instance, their check to the MLCC was late, they ask for a hearing.” Roughly 46% of all licensees receiving violations request such a hearing.
“Quite frankly, when I walk into a hearing, I don’t know whether it will last one hour or five hours,” said Judy Allen, the other hearing commissioner. The violations range from fights and brawls to failure to renew a license or place it in escrow within 30 days of closing the business. In some cases, the licensee acknowledges the violation or pleads no contest during the hearing. In others, both sides bring witnesses.
All five commissioners convene in Lansing on a quarterly basis to hear a legislative report and reports from each division of the MLCC. All five are also present for the public hearings required for proposed rule changes.
Six assistant attorneys general work with the commission, reviewing all violations, presenting all hearing cases and serving as the commission’s legal counsel, such as in a recent case brought by a strip club about the MLCC’s nudity rules, which do not allow total nudity in licensed establishments.
Four Commission Units
The MLCC is made up of four divisions: executive services, financial management, licensing and enforcement. It employs 149 full-time and two part-time people. MLCC employees “are across the state, doing a variety of work,” said Samona. “They are a great group. They take great pride in what they do.”
The Financial Management Division employs 17 and manages the MLCC’s relationships with its six ADAs as well as the commission’s budgets and its money flow. Besides the people in direct contact with the ADAs, two people process the tax payments from beer and wine, one is in charge of paying the liquor vendors or suppliers, one follows up on and collects on bad checks, two accountants produce monthly financial statements, one person is the customer-service contact for licensees with complaints about an ADA and one person keeps the Financial Management Division’s computer systems, which include Internet ordering and electronic funds transfer (EFT) payment capabilities used by licensees, running smoothly.
For the past several years, the Financial Management Division has used computerized systems to handle many of its tasks. “It used to be paper, stacks and stacks of paper. Creating our quarterly liquor price books was a nightmare,” remembered Acting Director Robinson, a 23-year veteran of the MLCC. “Now, we do almost everything electronically.”
Suppliers wishing to introduce a new product into the state, for example, use an electronic-quotation system to do so. “They fill out the form online, then email us a copy of the label; it’s all done electronically,” explained Robinson. In fact, the latest feature added to the Financial Management’s system is the ability to pull up an image of the Federal label approval certificate for the new product directly from the Alcohol and Tobacco Tax and Trade Bureau. The supplier no longer has to fax or email an image of this, just supply their approval number.
The listing process, which includes submitting the new product request to the Financial Management Division and then getting approval from the Commission, is relatively easy for suppliers. The MLCC does not decide how many vodkas are listed in the state or attempt to predict how well a product might sell. While the Commission approves or rejects new products, it is looking mostly at the product’s label and packaging to make sure it is not offensive or that the product is not meant to appeal to minors. “The marketplace determines its success,” said Don Weatherspoon, commissioner. There are currently about 5,000 spirits products listed in the MLCC’s 90-plus page price book, which is available and searchable online.
That said, however, the MLCC does go through a delisting process every six months, looking for products that are not selling a certain minimum amount and can be dropped from the state’s price book. Most of the time, the required minimum is three standard cases in a six-month period. Value-added products, such as holiday gift packs, must sell six cases over a year, and products that retail for $200 or more per bottle must sell at least one bottle per year.
This delisting process is basically a housecleaning operation, explained Robinson. The ADAs are required to stock every product their suppliers have that has been approved for sale in the state. If something is not selling, it is simply sitting in the ADA’s warehouse taking up space. “A lot of the time, the suppliers don’t care about the product, and have forgotten about the stock,” said Robinson. “If they say, ‘Oh, no, please don’t delist it, here’s why,’ then we usually won’t.”
Rigorous Licensing Process
A cornerstone of the MLCC’s control is its rigorous licensing process. The Licensing Division, headed by Sharon Martin, acting director, employs 40 people. Every year, this division processes more than 8,700 applications for new licenses and transfers, over 18,000 renewal applications, prepares approximately 10,000 applications for review by the Administrative Commissioners and processes over 10,000 Beer and Wine Product Registrations. The licenses run the gamut of all three tiers, from licensing breweries and wineries and their wholesalers to licensing the six ADAs, from processing applications for the new direct shipper license (which allows out-of-state wineries and wine wholesalers to ship limited amounts of wine directly to consumers) to the over 5,000 Special, or one-day, licenses the MLCC issues to nonprofit organizations for special events. The Licensing Division collects over $13 million every year in licensing fees. At the retail level, about 9,200 businesses — restaurants, bars, hotels, resorts and clubs — in the state hold a license allowing the sale of beer, wine and liquor for consumption on- premise, while about 8,000 businesses hold an off-premise or take-out license.
When an applicant submits the completed licensing forms, the information is reviewed to make sure it is complete and a search of the names on the application is done on a Licensing Division database, which lists any other licensed businesses the applicants may have and the violation history of those businesses.
Once authorized, the application is then sent for investigation to the MLCC’s Enforcement Division. The local legislative body and the local law-enforcement agency, where the proposed licensed establishment will be, are contacted. They must submit recommendations on the application to the MLCC. “This is their chance to say no. Perhaps the business is not in compliance with zoning or other codes or ordinances,” explained licensing deputy director Martin.
Enforcement Division Focus
The Enforcement Division’s investigation of license applications is thorough. Ricky Perkins, director of the Enforcement Division, estimates that about 65% of the MLCC’s 44 investigators’ time is spent on licensing investigations. “We check their financial resources and verify the source of their funding,” he explained. “We sometimes meet with their attorney, their bookkeeper or CPA, or their financial institution.” The investigators might look at checking account statements and tax returns. The purpose is to make sure that there are no hidden owners, that the person being licensed is, indeed, the true owner of the business. The process includes interviews of the applicant and also inspection of the premises. A licensed establishment must be a certain distance away from other licensees and also from churches and schools, for instance.
Once the Enforcement Division’s investigation is done and the three recommendations — from Enforcement, from the local governmental body and from local law enforcement — are in, the file is reviewed and scheduled for a slot in the administrative commissioners’ docket. “We meet almost daily, in some form,” said Administrative Commissioner Patrick Gagliardi. “About 25,000 licenses pass before us every year.”
In 2004, a new law required the MLCC to make a decision on a completed license application within 90 days. While the commission is, by and large, able to do this, it is looking at ways to streamline the process. “So much has changed over the years,” explained Kim Peters, supervisor of the Escanaba district office of the Enforcement Division. “When I started, back in 1985, the businesses involved were mom-and-pops. Now, they are corporations and LLCs (limited liability companies). It can be quite a treasure hunt, finding out who has an interest in the liquor license.”
Sylvester Jackson, supervisor of the Farmington district office for the Enforcement Division, agreed. “You need a flow chart to keep track,” he joked. “We’ve evolved from the days of Prohibition and Al Capone. Now, we’re dealing with licensing entities that are much more complex. We are dealing with corporations and limited-liability partnerships rather than individual proprietors.”
Enforcement director Perkins also agreed. “Thirty years ago, we might be looking at a passbook savings account — remember those? — or a loan from the local bank. Now, the way people’s money is moved around and handled electronically, it’s so much more involved,” he said. “We are looking at ways to become more efficient with these new challenges.”
Part of that process is looking at areas that do not have to be investigated as thoroughly as they are currently. Sometimes, for example, a licensee wants to “add space” or “drop space,” meaning change what part of the building is being used by the licensed business. A business may expand into the storefront next door or it may want to start storing its alcohol in a different building on its property. “We’re trying to streamline the process we go through when they do that,” explained Tom Hagan, supervisor of the Grand Rapids district office for the Enforcement Division. “If it’s an established licensee who is just trying to improve their business, perhaps we don’t have to have such an involved investigation.”
Streamlining Where Possible
And the MLCC is looking at ways to verify the information it has on licensees in a more efficient manner. “If someone has already been licensed and is buying a new business, do we need to start from scratch on the new license application? If the entity is a big, publicly traded corporation, do we need financial reports from every stockholder or would an affidavit be sufficient?” said Samona. “We are looking at making the process a little quicker, without losing our enforcement powers.” Currently, the MLCC is working on modifying and updating its forms and making even more of them available online.
In addition to its work investigating license applications, the MLCC’s Enforcement Division, with three regional offices — Escanaba, Farmington and Grand Rapids — as well as the MLCC’s headquarters in Lansing, does routine inspections of licensees, follows up on complaints from the public and runs decoy operations, to help verify that licensees are not selling to minors [see sidebar]. The MLCC enforcement staff also holds training sessions for law-enforcement agencies of various types to make sure that officers are familiar with the state’s liquor laws and also with how they can work with the MLCC on cases.
For instance, MLCC investigators have the right of search and seizure when dealing with licensees. Law enforcement officers don’t. “But they can accompany us,” said Hagan of Grand Rapids. The MLCC does several training sessions with law enforcement personnel every year. They also provide training to licensees and other groups, such as beer and wine wholesalers.
MLCC Enforcement investigators do not have arrest powers. They enforce the liquor control code and administrative rules on licensees. About half of the 2,500 violation reports received annually by the Commission, from its own investigators and from law enforcement agencies, involve minors.
Among the violations Enforcement investigators see regularly are illegal gambling, often with video gambling machines, and licensees who have purchased their alcohol elsewhere [see sidebar].
Tracking Video Gaming
Video gambling machines are not illegal in the state of Michigan, as long as no one is giving any cash or other valuable prizes to the winners. “These can be awfully tricky to catch, though some people are quite blatant,” said Perkins. One thing investigators look for is whether the machines allow the proprietor to control the scores and the number of credits the game has awarded players. “Someone wins, they pay them and then they wipe the credits out to begin again,” explained Perkins. Of the 18 investigators in the Farmington office, seven people specialize in video gambling devices, in addition to their other duties. “Not everyone is familiar with the inner workings of these machines,” explained Sylvester Jackson. During an investigation into whether such a device is being misused, the investigators often need to have a U-Haul truck ready to take the machine away.
The Executive Services Division of the MLCC “handles all the functions not covered by the other divisions,” explained Ken Wozniak, director. Mainly, Executive Services, a division of 16, “functions as a direct arm of the Commission,” he said. It is Executive Services that schedules the violation and appeal hearings heard by the Commission and handles all processes related to those hearings. Twelve of the 16 Executive Services staff have involvement, some exclusively, with this task, including two court reporters. Other Executive Services employees include a communication specialist, who maintains the MLCC’s website, and staff members who are responsible for customer relations, maintenance of the official records of the Commission, and who analyze bills affecting the MLCC for the governor’s office and testify regarding legislation.
Another Executive Services employee, the server training coordinator, oversees the server training classes provided by approved organizations to MLCC licensees. In 2001, the state of Michigan began to require server training of supervisors for new on-premise establishments and for new owners of existing on-premise establishments. A trained supervisor has to be present whenever alcohol is being served at the business. In addition, the Commission itself often orders licensees with violations to undergo server training.
The Commission cannot require server training of all licensees. That would require a change in law. “There has always been talk about increasing server training [requirement],” said Samona. When the Commission orders a licensee with a history of violations to undergo server training — or when it orders it to use age-verification devices, it’s “because it would help,” said Samona. “We are looking for ways to arm employees so they know how to sell responsibly.”
Running the MLCC “is about balance all the time,” Samona concluded, the balance between allowing the growth of healthy businesses in the state and controlling the sale of beverage alcohol. The MLCC strikes the balance between government control and private enterprise.
Because Michigan shares borders with states where the prices for alcohol are lower, smuggling or bootlegging can be a problem. “It is becoming more and more serious,” said MLCC chairperson Nida Samona. “We’ve had smugglers so sophisticated that they have their own ordering sheets printed.” Smugglers will establish a market for themselves, businesses who will buy alcohol from them rather than pay more through the state system. They then stop at stores across the border and load up. The MLCC investigators will get tips and will watch the border. “We and the Excise Police will watch stores on the other side of the border, watch for Michigan-plated cars loading up and then follow them back across,” said enforcement supervisor Tom Hagan.
In its audits and inspections of licensed establishments, the MLCC’s Enforcement Division is looking at the business’s inventory of spirits for signs of buying bootlegged product. Since last January, the MLCC has been working with spirits suppliers to use marked containers for the shipment of
product through the MLCC system. This will help Enforcement investigators and other law-enforcement agencies to recognize when a licensee’s products have been legitimately obtained — through the MLCC — and when they have not.
“The border issue is critical,” said Samona. “We want our licensees to know that being involved in bootlegging, purchasing this product, is a serious violation and will result in their licenses being pulled.”
History of the Michigan Liquor Control Commission
December 1933 The Michigan Liquor Control Commission (MLCC) was
created via a change in the Michigan Constitution after the repeal of Prohibition.
January 1997 The MLCC
privatized its warehousing and ordering operations.
1998 The Enforcement Division of the MLCC began to do its own decoy operations.
August 2001 The State of Michigan implemented a mandatory server training requirement for new on-premise licensees and for new owners of on-premise establishments. Server-trained supervisors must be on site when alcohol is being served in these establishments.
2003 Michigan changed its driver’s license format, for
people under the age of 21, to a vertical format, with the
driver’s birthdate and the fact that they are under 21 printed in red beneath the photograph.
July 2004 Legislation required that the MLCC issue or deny a license within 90 days of receiving a completed
2005 Supreme Court
decision reached in Granholm v. Heald.
2006 The MLCC implemented a new direct shipper license, licensing 338 out-of-state wineries and wine wholesalers in the first year. The license allows its holders to ship limited quantities of wine directly to consumers.
January 2007 To combat bootlegging from across the state’s borders, the MLCC, in cooperation with spirit suppliers, began shipping its ordered product in identifiable
containers. This was done as a means of verifying that the
spirits were legally ordered through the MLCC.
February 2007 The MLCC, with the Century Council, launched a statewide campaign called, “We Don’t Serve Teens!”
July 2007 Siesta Village Market, a Florida retailer, filed a lawsuit against the State of Michigan, arguing that if in-state retailers can deliver to consumers, out-of-state
retailers should be allowed to do so. The case, at press time, is still pending.
In the MLCC’s Enforcement Division, decoy operations — 18- and 19-year-olds, working with investigators — are sent into on- and off-premise establishments to try to buy alcohol. When buying, these decoys use legitimate IDs listing their real ages. In 2006, the MLCC did 2,215 decoy stops. “And our stats have improved dramatically,” said Ricky Perkins, enforcement director. When decoy operations were first started in 1998, about 29% of all licensees sold to the underage decoys. Now, the sell rate is down to approximately 16%.
Said Perkins, “At 16%, it is about half what it used to be, but it is still disturbing and perplexing.”
In 2006, 65% of the sales made to decoys were after the clerk/server checked the ID of the decoy. This is even more disturbing, Perkins noted, knowing that the State of Michigan switched to a vertical driver’s license in 2003 for persons under 21 years of age. While the overall violation rate has dropped to nearly 16%, the rate of sales made after reviewing the now vertical driver’s license is 65%, down only slightly from a high of 70% under the old horizontal driver’s license.