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  • Writer's pictureRyan Hughes

TABC Closes Loophole Breweries Were Using to Open Patios, But Also Helps Them Qualify as Restaurants

Updated: Oct 12, 2020

On July 17, 2020, the TABC issued an industry notice that allowed some businesses closed under Governor Abbott's June 26th Executive Order ("GA-28") the ability to partially operate for dine-in services (sort of). Between July 17th and July 22nd, many breweries across the state planned to use the loophole to open their patios to customers while GA-28 was still in effect. As of July 22, 2020, the TABC closed that loophole by modifying its temporary modification of a licensed premise policy. But then on July 24, 2020, the TABC issued an industry notice that excludes off-premise alcohol sales in determining whether a business qualifies as a restaurant and can operate for dine-in services under GA-28.

off-premise patio

Licensed Premise Reduction Loophole and How it Was Closed

Below is a more detailed explanation of the temporary loophole and how it was closed by the TABC:

  • June 26, 2020: Paragraph 7 of Governor Abbott's GA-28 executive order defines businesses with a TABC permit and over 51% alcohol sales as bars and prohibits people from visiting them, except for to-go sales only;

  • July 17, 2020: TABC issued an industry notice allowing TABC permit holders the ability to "temporarily modify their current licensed premises to either expand or contract the area it covers..." The notice further stated that once the required forms and fees had been submitted, "If the modification is related to COVID-19, you do not have to wait for TABC approval;"

  • July 17 - July 22, 2020: Many breweries across the state reportedly planned to reduce the size of their licensed premises to exclude their patios, which would have allowed patrons the ability to purchase alcohol & food to-go and then dine on the newly classified off-premise patios. Side note-this loophole applied to all retailers and manufacturers, not just manufacturers;

  • July 22, 2020: The TABC modified its July 17, 2020 industry notice to allow manufacturers and retailers the ability to only expand, but not contract, their licensed premises, thus closing the to-go sales, off-premise patio, loophole.

Since, the July 17th Industry Notice originally allowed all retailers and manufacturers the ability to unilaterally reduce their licensed premise (before it was amended on July 22), any bar (selling alcohol to-go with food), brewery or winery could have essentially reduced the size of their licensed premise to only the bar and kitchen areas and then allowed persons to consume "off-premise" in the dining & patio areas. The allowed reduction loophole was not limited to brewery patios; it's just the predominant way businesses were initially planning to use it.

The ability to temporarily contract a licensed premise was so broadly written, it could have theoretically been used by gas stations and liquor stores to reduce their licensed premises to only the cash register and coolers, and then customers could have taken their beverages "to-go" and consumed inside the liquor store or gas station.

Allowing businesses this much flexibility would have essentially given them the green light to skirt the restrictions under GA-28 altogether, while also giving businesses designed to only sell alcohol to-go the opportunity to allow alcohol consumption in and around their businesses. Further, the July 17th loophole, as originally written, presented public safety risks. For example, when the sale is for on-premise consumption, businesses can serve a person a maximum of 2 alcoholic drinks at a time, but there is no such restriction when alcohol is sold for off-premise consumption. Other than checking the ID of the person purchasing a 6 pack, employees wouldn't have been able to determine whether the people consuming alcohol on or near their businesses were over 21. The off-permise loophole also likely would have caused Dram Shop liability issues, difficulty determining liability for breaches of the peace, and an inability to monitor whether someone was being served while showing signs of intoxication.

Unfortunately, the to-go-sales-off-premise loophole was unworkable as it was written on July 17th and the TABC was forced to amend it's temporary modification of a licensed premise policy. While GA-28 is still in effect, businesses that currently have a TABC permit or license and over 51% alcohol sales are still limited to selling alcohol - along with food prepared at the premises - to-go. However, after closing the July 17th premise-reduction-loophole, on July 24th the TABC relaxed the way the 51% restaurant determination is made, allowing many breweries and other businesses to qualify as restaurants - and in turn operate for dine-in services - when they didn't initially.

TABC Changes 51% Calculation

On July 24, 2020, the TABC issued an industry notice that stated:

  • "Executive Order GA-28 limits on-premises sale of alcohol to restaurants that have less than 51% of their gross receipts from the sale of alcoholic beverages. The Texas Alcoholic Beverage Commission has determined that the 51% calculation of gross receipts should only include the sale of alcohol for on-premise consumption. Therefore, the calculation should exclude to-go, retail and wholesale sales of alcoholic beverages."

It's important to note that all of the gross non-alcohol revenue generated at licensed premise counts towards a business' alcohol v. non-alcohol ratio; not just its taxable non-alcohol revenue. A district court confirmed this distinction in a case litigated by Griffith & Hughes in 2017: (Docket No. DC-16-16507; New Millennium Restaurants Group Inc. d/b/a Sports City Café v. Texas Alcoholic Beverage Commission; In the District Court of Dallas County; 68 Judicial District).

Before July 17th, most breweries with full kitchens and dining areas were unable to qualify as restaurants because the alcohol sold to retailers or distributors was also included in the alcohol vs. non-alcohol ratio in determining whether the business could operate for dine-in services under GA-28. The July 24th policy change will allow many breweries - and possibly other types of business - the ability to comply with the narrow definition of restaurant in GA-28, and, in turn, sell alcohol for on-premise consumption.

Thoughts on Moving Forward

The Governor Should Start by Changing the Definition of a Restaurant in GA-28

Although the TABC has made several exceptions and modifications to its normal rules and policies in an effort to help struggling businesses since Executive Order GA-08 was issued on March 19th, and, in my opinion, the solution to this issue rests with Governor Abbott, not the TABC; Abbott should start by amending the definition of a restaurant to eliminate the under 51% alcohol sales requirement. In fact, over the last several weeks, the Texas Restaurant Association has been actively lobbying Governor Abbott to adopt its definition of a restaurant, which eliminates the 50% non-alcohol revenue requirement and requires a full kitchen to qualify. Many Texas Senators have also written a letter to the Governor requesting that the TRA's restaurant definition be adopted.

Since Larger corporations are more likely to be able to find creative ways to increase their non-alcohol revenue, the arbitrary 50% non-alcohol-revenue requirement benefits larger companies over their smaller competitors.

All TABC Permit Holders Should be Given the Opportunity to Operate

Setting aside the definition of restaurant vs. bar, all on-premise permit holders should be given the opportunity to open their doors, feed their families and comply with the intent of GA-28; to abide by the social distancing and mask requirements in an effort to slow the spread of Covid-19. A bar or brewery can easily implement policies where patrons can only be served when seated. When it comes down to it, whether a business has a full fire suppression system or can maintain 50% non-alcohol revenues makes no difference in determining whether they'll comply with the social distancing requirements imposed by the state.

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