Eat Drink Pay

Will the Limited Service Restaurant License Benefit Your Clients?

For many years, the Tennessee Alcoholic Beverage Commission (TABC) and the state's restaurants have played a game to determine how much food a restaurant must serve for the serving of meals to be the principal business conducted.[1] Restaurants, and especially the state's entertainment venues, many of which are licensed as restaurants, have long struggled to ensure that patrons purchase food in order to satisfy that requirement. Until recently, the TABC had permitted establishments licensed as restaurants to pay a fine if the service of food did not seem to be the principal business conducted. More recently, many establishments located in downtown areas became concerned when the TABC suspended the licenses of several facilities for failing to meet the standard.

This year the Tennessee General Assembly passed legislation creating the "limited service restaurant license" that may end years of arguments over whether olives are food and whether a good Saturday night selling cocktails should require a restaurant owner to pay a fine to the TABC.[2] The law became effective July 1, 2010.[3]

Requirements for Limited Service Restaurant Licenses

The law sets forth a tiered licensure scheme for limited service restaurants but retains the current statute for licensure of restaurants that derive more than 50 percent of their gross revenue from the sale of food. The most important requirement of the new law is the establishment of a hard floor of 15 percent for the gross revenue derived from the service of food.[4] This floor will be advantageous for many entertainment venues and a problem for others. Tennessee law previously required the serving of meals to be the "principal business conducted each day the restaurant is open" for licensure as a restaurant. This language has now been replaced with the requirement that "more than 50 percent of the gross revenue of the restaurant is generated from the serving of meals."[5]

Establishments that do not derive 50 percent or more of their gross revenues from the service of food can apply for a limited service restaurant license. The cost for such a license is based on the establishment's gross sales of food as follows:

(i)       at least 30 percent but not more than 50 percent of gross sales       $2,000
(ii)       at least 20 percent but not more than 30 percent of gross sales       $3,000
(iii)       at least 15 percent but not more than 20 percent of gross sales       $4,000


Given this new law, any establishment that is currently licensed as a restaurant should immediately determine its gross sales of food as compared to liquor sales. However, if a restaurant determines that its food sales fall below 50 percent, it does not follow that it should immediately apply for a limited service restaurant license. As explained further below, the law allows for several transition options, each with its own benefits and drawbacks.

A limited service restaurant must make a menu of prepared food available to patrons.[6] In the past, the TABC has interpreted the term "prepared food" to mean food prepared on the premises of the establishment. The law pertaining to licensure of limited license restaurants omits any language requiring that the establishment maintain kitchen facilities. Although the TABC has not issued interpretive guidance, a limited license restaurant should now have the option of obtaining a license without preparing food on the premises as long as it provides food that is either prepared on site or at an off-site location. The provisions of this law make clear that the sale of snack items such as chips, popcorn, pretzels, or peanuts may not be included in gross revenue for the sale of prepared food.[7] In practical effect, this means that every establishment licensed as a limited service restaurant must serve some amount of food and must aggressively market its food sales to meet the 15 percent requirement.

There are several requirements in the new law that may be satisfied by the submission of an affidavit stating that the establishment complies.[8] Each establishment applying for a limited service restaurant license must provide proof that it complies with provisions in Tennessee law regarding prohibited sexual or pornographic conduct. The affidavit must also set forth that the establishment provides adequate security and that sleeping accommodations are not provided at the establishment.

Each applicant will also need to show that it is located within the jurisdictional boundaries of a city or county that has authorized the sale of alcoholic beverages for consumption on the premises.[9]

The new law adds a requirement that applicants provide proof that the site is properly zoned.[10] This requirement is likely to require some further rulemaking and policy development by the TABC. For the time being, applicants should obtain the zoning information about the location of the establishment from local governments to submit with the application.

License Transition Provisions

There are three ways that a current licensee may transition its license from a restaurant license to a limited service restaurant license. First, any establishment may immediately voluntarily transition its license if its gross sales of food are below 50 percent. Second, if an establishment is audited and the commission makes a finding that it should receive a license as a limited service restaurant, the establishment is provided with 30 days to elect to exchange its license. Third, an establishment may wait to transition its license at its next renewal date. Each of these options should be carefully considered by the establishment.

Tenn. Code Ann.  § 57-4-201(b) allows an establishment to transition its license by filing a sworn statement indicating the gross revenue derived from food sales and liquor sales. The law directs that this statement will provide the basis for what license fee shall be paid. An establishment must then pay the difference between the current restaurant license fee and the fee to be paid as a limited license restaurant. This amount will be prorated to take into account the amount of time left on the license renewal. Depending on the renewal date of the license and the new classification of the license, the licensure fee may be several thousand dollars. This may give some establishments incentives to delay transitioning their licenses.

Although there is no statutory directive for an establishment to voluntarily transition their license, the TABC may take the position that an establishment that does not immediately comply with the new law is in violation and therefore subject to fines. Tenn. Code Ann.  § 57-4-201(b) empowers the TABC to make a finding that the restaurant fails to meet the requirements of Tenn. Code Ann.  § 57-4-102(27)(A) (requiring that the establishment's principle business be the service of food), but that it does qualify as a limited service restaurant. If the TABC makes such a finding, the establishment is then given 30 days to exchange its license. Of course, if the TABC determines that an establishment has failed to meet the food service requirements of its licensure, it may also issue a fine or other disciplinary action against that establishment.

The deadline for an establishment to exchange its license for a limited service restaurant license will be the renewal of the license. All establishments applying for renewal of their license must submit a sworn statement "indicating the gross revenue derived from food sales and the gross revenue derived from liquor sales."[11] The TABC will then issue licenses for both restaurants and limited service restaurants based on those statements. The TABC will still conduct random audits of establishments and will almost certainly pursue disciplinary charges against establishments that falsify the gross revenue number on renewal applications.

New Applicants

All new applicants for a license as a limited service restaurant are now subject to a rebuttable presumption that the amount of gross sales from prepared food will be between 15 and 20 percent.[12] Therefore, establishments applying for licensure must provide additional documentation and affidavits sufficient to overcome this presumption and establish a higher ratio of food service.

County and Municipality Taxes

Many counties and municipalities charge a privilege tax on the sale of alcoholic beverages. Currently the amount of that tax is regulated by Tenn. Code Ann.  §57-4-301(b)(2), which limits the amount that may be collected by the county or municipality to the level of the 2003 licensure fees. The statute allows counties and municipalities to set the tax higher, but requires that all amounts collected over the 2003 levels be remitted to the state. For restaurant owners, this is a sliding scale based on the number of seats that ranges from $600 to $1,000 per year.

Many restaurant owners have been concerned that paying the increased license fee for the limited service restaurant license will increase the county or municipality privilege tax. Given the current restriction in the state law, it is unlikely that a county or municipality would seek to change any ordinance that sets the privilege tax on sales of alcoholic beverages since the county or municipality will not see any of the proceeds from any increases past the statutory limits.

Interpretive Guidance

On Oct. 21, 2010, the TABC issued informal interpretive guidance to the staff that clarified four aspects of the law regarding the issuance of licenses.

(a)       Limited Service Restaurants will be required to have adequate kitchen facilities to store and prepare the "prepared food" that is served at the establishment. These facilities do not necessarily have to be a full kitchen, but must be adequate to serve the food on the menu.
(b)       An establishment applying to exchange its current license for a limited service license must be able to show that it meets the 15-percent food service requirement at the time of the application. It will not have to show that it met the 15-percent food sales requirement for the entirety of the prior year.
(c)       For the purposes of calculating food and alcohol sales percentages, the terms "gross sales" and "gross revenue" do not include the amount collected for sales tax and liquor by the drink taxes that are remitted to the Department of Revenue.
(d)       For purposes of calculating food and alcohol sales percentages, the comparison will be between food sales and alcoholic beverage sales. Sales of clothing, beer, or other merchandise will not be included for the purposes of calculating food sales.

Notes

  1. See, former Tenn. Code Ann.  §57-4-102(27)(A).
  2. Public Chapter 1133 of the Public Acts of 2010.
  3. Id.
  4. Tenn. Code Ann.  §57-4-301(b)(1)(V).
  5. Tenn. Code Ann.  §57-4-102(27)(A).
  6. Tenn. Code Ann.  §57-4-102(39)(A)(ii).
  7. Tenn. Code Ann.  §57-4-102(39)(A)(iii).
  8. Tenn. Code Ann.  §57-4-102(39)(A)(iv), (v), and (vi).
  9. Tenn. Code Ann.  §57-4-102(39)(B).
  10. Tenn. Code Ann.  §57-4-102(39)(C).
  11. Tenn. Code Ann.  § 57-4-201(b)(3)(D).
  12. Tenn. Code Ann.  § 57-4-201(b)(3)(E).

MATTHEW SCANLANMATTHEW SCANLAN is an attorney with the law firm Gullett, Sanford, Robinson, and Martin PLLC in Nashville. His practice focuses on government relations, commercial and regulatory transactions, and corporate services. He lobbies for the Tennessee Hospitality Association and represented them before the Tennessee General Assembly in advocating for this legislation.