THE MISSISSIPPI LEGISLATURE

The Joint Committee on

Performance Evaluation and Expenditure Review

Report # 473

The State Tax Commission’s Office of Alcoholic Beverage Control: A Management Review and Policy Analysis

Executive Summary

Introduction

The PEER Committee reviewed the State Tax Commission’s Office of Alcoholic Beverage Control in response to citizens’ complaints.

Part One of the report is the PEER Committee’s management review of the State Tax Commission’s Office of Alcoholic Beverage Control (hereafter referred to as ABC). PEER sought to determine whether ABC has the systems in place to direct and control the wholesale distribution of wine and spirits and to enforce the state’s alcoholic beverage control laws. Part One begins with a follow-up assessment of ABC’s response to PEER’s findings and recommendations in the 1989 report A Limited Operational Review of the Alcoholic Beverage Control Division. Part One also addresses ABC’s wholesale operations, enforcement of state alcoholic beverage control laws, permit renewal process, and vehicle management.

Part Two of the report is the PEER Committee’s policy analysis of the feasibility of privatizing all or part of the state’s alcoholic beverage control program. PEER identified three privatization options and analyzed the feasibility of each option in light of the state’s current policy environment.

Background

In 1966, the Legislature re-announced prohibition of liquor and wine as the policy of the state in MISS. CODE ANN. Section 67-1-1 et seq. (1972), known as the Local Option Alcoholic Beverage Control Law. Although prohibition is the state’s official policy, this law allows individual counties, judicial districts, and certain municipalities to opt for legal sales of liquor and wine within their legal boundaries.

In that same year, the Legislature created the Alcoholic Beverage Control Division of the State Tax Commission (Chapter 540, Laws of 1966), now known and referred to as the Office of Alcoholic Beverage Control. ABC’s two main purposes are to supervise the distribution and sale of alcoholic beverages and to enforce the state’s alcoholic beverage control laws.

ABC regulates and supervises the manufacture, sale, distribution, possession, and transportation of alcoholic beverages from the point at which the initial order is taken through delivery to the retail permittee. ABC bases its warehousing, sales, distribution, and transportation operations at the Distribution Center in Gluckstadt.

ABC also enforces alcoholic beverage control laws statewide, including both “wet” and “dry” jurisdictions.

Part One: Management Review of the Office of Alcoholic Beverage Control

Follow-up on ABC’s Response to Conclusions of the 1989 PEER Report

Since PEER’s 1989 review, the Office of Alcoholic Beverage Control has addressed four of the six operational weaknesses identified, but has not addressed remaining weaknesses in internal audit and warehouse security.

In 1989, PEER concluded that the State Tax Commission’s lack of an internal audit function contributed to ABC’s internal control weaknesses. Although the State Tax Commission established an internal audit function subsequent to PEER’s 1989 review, the position does not currently comply with generally accepted internal auditing standards or the Mississippi Internal Audit Act. Thus, the STC does not provide the required level of internal oversight of ABC’s operations.

PEER also concluded in 1989 that ABC’s warehouse security devices did not safeguard against the unauthorized consumption or removal of alcoholic beverages. The Office of Alcoholic Beverage Control has not corrected all weaknesses in warehouse security at the distribution center, with components of the security system remaining inoperable. Also, ABC has not analyzed its current warehouse security needs to determine whether the original security system, if updated and optimized, would meet the needs of the facility.

Distribution and Sale of Alcoholic Beverages

Although PEER found areas in which ABC could take specific management actions to assure accountability in warehouse operations, the Office of Alcoholic Beverage Control has procedures in place with which to operate a successful wholesale distribution program.

PEER reviewed ABC’s procedures for distribution and sale of alcoholic beverages and found order processing, shipping and delivery, and pricing procedures to be basically sound. Further, through sampling, PEER found that ABC’s inventory location plan, accounts payable, accounts receivable, and collection procedures function without significant error.

However, ABC does not: audit contractors’ delivery notes, formally track loss or damage to warehouse inventory over time, employ proper internal controls over the warehouse petty cash fund or use it in a proper manner, have a formal training plan for non-enforcement employees, utilize a meaningful performance monitoring program, or ensure that distribution and sales policies are updated. Improvement in these specific areas of concern would reduce the risks inherent in any wholesale distribution operation and would improve ABC’s already successfully functioning program.

Enforcement of Alcoholic Beverage Control Laws

The ABC’s Enforcement Bureau has a proactive enforcement system with the intelligence, investigative, and permitting functions in place to enforce the state’s alcoholic beverage control laws.

ABC has the organization, staffing, training, management information system, and financial management practices in place with which to accomplish its responsibilities. From January 1, 2003, through September 20, 2004. ABC’s enforcement agents filed 1,421 charges; of those charges filed, 1,269 (89%) resulted in felony or misdemeanor convictions.

Deficiencies in the State Tax Commission’s Oversight of ABC

Because the Office of Alcoholic Beverage Control is part of the State Tax Commission, the STC is ultimately responsible for ABC’s implementation of the state’s alcoholic beverage control policy. During the course of PEER’s management review, the Committee noted the following areas of deficiency regarding the STC’s oversight of ABC.

The State Tax Commission does not ensure that permittees continue to meet initial qualifications set forth in MISS. CODE ANN. Section 67-1-57 (a) (1972) as a condition of annual alcoholic beverage permit renewal.

State law sets regulations as to how, when, and under what circumstances alcoholic beverage permits will be issued or renewed and approves those permits. In conducting permitting activities, the ABC Enforcement Bureau implements the permitting regulations that STC adopts.

MISS. CODE ANN. Section 67-1-57 (a) (1972) sets forth requirements for alcoholic beverage permit applicants. The law requires that to receive a permit, an individual must be of “good moral character;” be a “peaceable, law-abiding” citizen; be at least twenty-one years old; and, must not have a federal or state felony conviction. When individuals initially apply for permits, the bureau conducts criminal history checks on those individuals to ensure that they meet the requirements of the law. However, the STC does not require, prior to permit renewal, that the ABC determine whether permittees continue to meet all qualifications.

The State Tax Commission does not ensure that the ABC makes the most efficient and effective use of state-owned vehicles assigned to its administrative staff. Also, the ABC has not complied with some state laws regarding state-owned vehicles and has not properly addressed their taxability.

The STC has a documented vehicle management program for its enforcement vehicles, but not for its administrative vehicles. For vehicles assigned to the ABC Director and Warehouse Operations Manager, the State Tax Commission does not have written operational policies or procedures or a requirement for driver documentation or management reporting of vehicle use, mileage, and operating costs.

The STC has not complied with some state laws regarding state-owned vehicles. Because the ABC Director uses her unmarked state vehicle for purposes other than those approved by the Governor, her use of this state-owned vehicle does not comply with MISS. CODE ANN. Section 25-1-87 (1972). Also, the ABC Director and Warehouse Operations Manager use state-owned vehicles for commuting, a practice no longer allowed by state law.

The State Tax Commission has not properly addressed the taxability of the vehicles provided to its ABC Director or ABC Warehouse Operations Manager. As a result, based on PEER’s interpretation of the Internal Revenue Code and regulations, these individuals could be liable for unpaid taxes on unreported income. Also, the STC and these individuals could be subject to interest and penalties.

PEER found that the management and use deficiencies of the two ABC vehicles also apply to the nine administrative vehicles of the State Tax Commission, since they were used in a similar manner.

Recommendations: Part One

• ABC should formally reactivate its advisory group, made up of representatives of organizations such as the Mississippi Restaurant Association and Package Store Association, to receive input regarding its service to permittees.
• Using existing resources, ABC should conduct a needs assessment and create a detailed warehouse security plan. ABC should include in the needs assessment a review of whether the costs would outweigh the benefits of operating and monitoring internal security cameras. A warehouse security plan that specifically lists the type of equipment needed, cost per equipment item, and the cost of additional personnel, if necessary, should be included in any future funding requests to the Legislature.
• ABC should seek to amend its contract with its distribution contractors (i.e., Shippers Express and M&J Transport) and should require in future contracts that both shipping companies obtain signatures and dates from retailers confirming the date of receipt of goods on the bill of lading and/or delivery notes. Also, ABC should periodically audit these dated delivery notes to ensure that shipping contractors are fulfilling their contractual obligation of next-business-day shipping.
• ABC management should set a periodic policy review cycle and require all division directors to update policy and procedure manuals and log all changes and reviews pertaining to their respective divisions and present these revisions for ABC management approval. Division directors should also update policies as any changes in process occur.
• ABC should develop a written, task-based inventory procedures manual to implement ABC’s new warehousing and distribution system implemented in 2003.
• ABC management should require ABC’s Warehouse Operations Manager to prepare a damage loss report which details the number of damaged and repackaged cases by item number, item name, and value. The report should be produced on a weekly, monthly, quarterly, and annual basis and should be used to address security and management issues.
• ABC should cease the use of its Warehouse Petty Cash Fund as presently operated and then choose one of the following options:
  
  Option A
  
  Obtain a procurement card and make all small purchases through the state purchasing system, using purchase orders.
  
  or;
  
  Option B
  
  Make larger, recurring purchases through the state purchasing system and pay for such purchases through accounts payable. Retain the petty cash fund for the purchase of small items such as inspection stickers and postage, but reduce the amount maintained in the account from $1,000 to an amount sufficient to meet minor expenditures of not more than two months (suggested amount: $250). Operate the account as a checking account and authorize two individuals to make purchases on the account using a debit card. Develop a formal, written policy for managing the fund. Regardless of the option chosen, ABC should make all purchases in accordance with the MAPP Manual.
• Should ABC choose Option B, the agency should improve its internal controls over petty cash, including arranging for signatures of two staff members on the petty cash account with a third party to administer it, write checks, maintain the account balance, and reconcile monthly bank statements against receipts and expenses.
• Using existing resources, ABC should analyze training needs of ABC employees, addressing the training needs for each division or department and each job title. According to the training needs identified, ABC should make training available to all employees with the same job title. ABC should include cross-training in its analysis and document all cross training of employees. If training will not be provided internally, all employees should be made aware of the procedures to request training.
• The Office of Alcoholic Beverage Control (ABC) should create and monitor performance measures that reflect program improvement from year to year, showing progress toward achieving the goals of the agency, instead of performance measures that count transactions performed or dollars collected. Examples of such desired performance measures would be: X% decrease in damage/loss rate, X% decrease in overages/shortages at inventory, X% decrease in orders taken that cannot be delivered because they are out-of-stock, X% increase in revenue transferred to the general fund relative to operating expenses, or X% increase in orders completed and delivered the next business day.
• The State Tax Commission should comply with the requirements of MISS. CODE ANN. Section 25-65-1 et seq. (1972). If and when the agency fills its internal audit position, that individual’s job duties should include ensuring that financial, compliance, electronic data processing, and operational and efficiency audits of the ABC program and other Tax Commission programs are conducted as authorized in MISS. CODE ANN. Section 25-65-13 (1972).
• The State Tax Commission should revise its permit renewal application to obtain fingerprint cards from the permit renewal applicant in order to conduct a criminal history check for permit renewals of permittees to ensure that they continue to meet the initial permitting qualifications in MISS. CODE ANN. Section 67-1-57 (a) (1972). The State Tax Commission should determine whether the applicant’s filing fee, set in MISS. CODE ANN. Section 27-71-5 (1972), is sufficient to cover the costs of the applicant’s permit renewal investigation. If it is not, the STC should seek a statutory amendment for the necessary amount.
• The State Tax Commission should develop and implement a vehicle fleet management program to organize and operate its vehicles for official business while providing the management information necessary to operate the vehicles efficiently and effectively and in compliance with state and federal laws. Appendix F of the report contains a discussion of critical components of a model vehicle management system.
• The State Tax Commission should perform a documented needs analysis with a breakeven cost analysis for the four individuals who commute in state vehicles. These analyses should determine whether the STC Commissioner, STC Deputy Commissioner, ABC Director, and ABC Warehouse Operations Manager have a compelling need for:
  
  -- the assignment of a state vehicle on a seven-day per week, twenty-four-hour basis; and,
  
  -- the most cost-efficient method for the state to reimburse these individuals for business trips after normal duty hours--i.e., to provide a state vehicle or to pay travel mileage.
• Using existing resources, the State Tax Commission should ensure that the SABER System includes collection of the Fuelman operational costs in weekly reports in order to provide a total vehicle operational cost for its vehicles. This information could be used to conduct periodic performance audits to measure the effectiveness and efficiency of the system.
• The State Tax Commission should comply with MISS. CODE ANN. Section 25-1-87 (1972) and use the two unmarked police vehicles exclusively for the gubernatorially approved function of law enforcement.
• When the State Tax Commission has to purchase additional passenger automobiles for administrative use, it should purchase mid-size, fuel-efficient five-passenger automobiles.
• Using existing resources, the State Tax Commission should develop a written policy and procedure that completely and specifically details the process of discounting ABC inventory, including the individual or individuals who have authority to discount products.
• The Legislature should amend MISS. CODE ANN. §27-71-5 (g) to define wine for on-premises retailers as having more than five percent alcohol by weight, but not more than twenty-one percent alcohol by weight. MISS. CODE ANN. §27-71-5 (g) currently defines wine for on-premises retailers as more than four percent alcohol by volume, but not more than twenty-one percent alcohol by volume. The proposed amendment would make the definition of wine in §27-71-5 consistent with MISS. CODE ANN. §67-1-5 that defines wine of more than five percent alcohol by weight as an alcoholic beverage.

Part Two: Policy Analysis of Options to Privatize Mississippi’s Alcoholic Beverage Control Program

Considering the state’s current policy environment, PEER concludes that the only feasible option of those considered for privatization of alcoholic beverage control would be to contract out wholesale operations. However, the ultimate success of this option would be contingent on the ability to develop a contract that saves the state at least ten percent on operating costs while providing the same level of service as is currently provided by ABC’s recently renovated wholesale distribution system.

PEER analyzed whether it would be feasible to privatize all or part of the state’s alcoholic beverage control system.

PEER developed three criteria to judge the feasibility of privatization options. PEER assumed that each option must have the potential to:

• generate at least the same amount of revenue to the state that is currently provided by ABC;
• not rely on increased alcohol consumption to generate enough revenue; and,
• provide at least the same level of service to permittees and consumers that ABC currently provides.

The options PEER analyzed were: fully divesting the state’s wholesale distribution of wine and spirits; franchising the state’s wholesale distribution; and, contracting out ABC’s wholesale operations, including warehousing and order processing.

PEER analyzed the three options by determining other states’ experiences with privatization and projecting each option’s performance on the established criteria. Based on the criteria PEER developed, the only feasible option of the options studied for privatizing the state’s wholesale distribution under the state’s current policy environment is to contract out wholesale operations.

If this option is implemented, it should allow the current ABC operation to compete with private organizations through a request for proposals that outlines the most efficient organization and the necessary service provisions. As a general rule, privatization is not implemented unless a private organization can save the state at least 10% in operating expenses while providing the same service as the state.

Recommendations: Part Two

1. As long as the current policy environment of the state remains the same regarding alcoholic beverage control, the state should maintain control of wine and spirits wholesale, not privatizing through divestment or franchise of wine and spirits wholesale.
2. If the State Tax Commission wishes to determine the cost-savings potential of contracting out, it should publish a request for proposals for contracting out warehousing, order-taking, and purchasing to determine whether the state would realize operating cost savings by contracting out those functions. In considering privatization, the State Tax Commission should require that:
• at minimum, the same level of quality of service (e.g., delivery time, flexibility in method of ordering) be delivered from contractors (quality levels should be specified in the request for proposals);
• contractors provide the same order-processing and delivery timeframe;
• the functions generate the same revenue collection and mark-up for the state;
• proposals from contractors compete with the operation currently in place at ABC; and,
• proposals only be considered if they can maintain the same level of service with at least a 10% operating cost savings to the state.

The State Tax Commission may wish to consider methods of privatization described in the PEER Committee report The Privatization Potential of Mississippi’s State Programs and Services (Report #286; November 30, 1992).

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