U.S. Department of Agriculture Food and Nutrition Service Administrative Review Branch FINAL AGENCY DECISION ISSUE

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1 U.S. Department of Agriculture Food and Nutrition Service Administrative Review Branch Noreen s Deli, Appellant, v. Case Number: C Retailer Operations Division, Respondent. FINAL AGENCY DECISION The U.S. Department of Agriculture, Food and Nutrition Service (FNS), finds that there is sufficient evidence to support the decision by the Retailer Operations Division to withdraw the authorization of Noreen s Deli (hereinafter Appellant) to participate in the Supplemental Nutrition Assistance Program (SNAP). ISSUE The issue accepted for review is whether the Retailer Operations Division took appropriate action, consistent with 7 CFR and 278.1(l)(1)(iii), in its administration of the SNAP, when it withdrew the authorization of Appellant to participate in SNAP by letter dated February 21, AUTHORITY 7 U.S.C and its implementing regulations at 7 CFR provide that [A] food retailer or wholesale food concern aggrieved by administrative action under 278.1, or may file a written request for review of the administrative action with FNS. CASE CHRONOLOGY In a letter dated February 21, 2017, the Retailer Operations Division informed Appellant that its application to participate as an authorized retailer in SNAP was being withdrawn because the documentation in its possession indicated that the firm did not meet the definition and eligibility requirements of a retail food store established by Federal regulations at 7 CFR 278.1(b)(1). This action was taken because the Retailer Operations Division had determined the Appellant business was primarily a restaurant and as such failed to meet the definition of an eligible firm. This withdrawal action was based on observations during an onsite store visit on December 5, 1

2 2016. Specifically, the February 21, 2017, letter from the Retailer Operations Division to Appellant states the following, in relevant part: It is the determination of the Food and Nutrition Service that your firm is primarily a restaurant. Hot and/or cold prepared, ready-to-eat foods that are intended for immediate consumption, either for carryout or on-premises consumption, and requiring no additional preparation, comprise more than 50% of the total sales at your firm. Restaurants are not eligible to participate in SNAP except in certain States that operate special restaurant programs allowing the elderly, disabled, and homeless participants to use SNAP benefits in restaurants. Your Store is not located in a state with a restaurant program. Appellant was informed that the firm could not submit a new application to participate in SNAP for a period of six months as provided in 278.1(k)(2). Appellant, through counsel, appealed the Retailer Operations Division decision and requested an administrative review of this action in a request dated March 2, The appeal was granted. Counsel requested two extensions of time to prepare a response and both were approved. Subsequent correspondence was received from Appellant dated May 2, STANDARD OF REVIEW In appeals of adverse actions, Appellant bears the burden of proving by a preponderance of the evidence that the administrative actions should be reversed. That means Appellant has the burden of providing relevant evidence which a reasonable mind, considering the record as a whole, would accept as sufficient to support a conclusion that the matter asserted is more likely to be true than not true. CONTROLLING LAW The controlling statute in this matter is contained in the Food and Nutrition Act of 2008, as amended, 7 U.S.C and 278 of Title 7 of the Code of Federal Regulations (CFR). Part 278.1(k)(1) establishes the authority upon which the application of any firm to participate in SNAP may be denied if it fails to meet the definition of an eligible firm. 7 CFR states, inter alia that Retail Food Store means: An establishment that sells food for home preparation and consumption normally displayed in a public area, and either offers for sale, on a continuous basis, a variety of foods in sufficient quantities in each of the four categories of staple foods including perishable foods in at least two such categories (Criterion A) or has more than 50 percent of its total gross retail sales in staple foods (Criterion B) Entities that have more than 50 percent of their total gross sales in hot and/or cold prepared, ready-to-eat foods that are intended for immediate consumption, and require no additional preparation, are not eligible for SNAP participation as retail food stores under 278.1(b)(1) of this chapter. Accessory food items including, but not limited to, coffee, tea, cocoa, carbonated, and uncarbonated drinks, candy, condiments, and spices shall not be considered staple foods for the purpose of determining the eligibility of any firm. 2

3 7 CFR defines staple food, in relevant part, as those food items intended for home preparation and consumption... Prepared, ready-to-eat foods cannot be counted as staple foods in determining if a store is eligible to participate in the SNAP These are typically freshly made prepared foods, such as sandwiches and salads, which are ready-to-eat. They are usually prepared and/or found in the deli section of stores, but could be in other places such as salad bars or in the fresh vegetable section of the store. 7 CFR 278.1(b)(1)(iv) states, in part, that, Firms that do not meet the eligibility requirements in this section or that do not effectuate the purpose of the SNAP shall not be eligible for program participation. New applicant firms that are found to be ineligible will be denied authorization to participate in the program, and authorized retail food stores found to be ineligible will be withdrawn from program participation. New applicant firms that are found to be ineligible will be denied authorization to participate in the program, and authorized retail food stores found to be ineligible will be withdrawn from program participation. Ineligible firms under this paragraph include, but are not limited to, stores selling only accessory foods, including spices, candy, soft drinks, tea, or coffee; ice cream vendors selling solely ice cream; and specialty doughnut shops or bakeries not selling bread. In addition, firms that are considered to be restaurants, that is, firms that have more than 50 percent of their total gross retail sales in hot and/or cold prepared foods not intended for home preparation and consumption, shall not qualify for participation as retail food stores under Criterion A or B. This includes firms that primarily sell prepared foods that are consumed on the premises or sold for carryout. Such firms may qualify, however, under the special restaurant programs that serve the elderly, disabled, and homeless populations, as set forth in paragraph (d) of this section. Section 9 of the Food and Nutrition Act of 2008, as amended, states in part, [a] retail food store or wholesale food concern that is denied approval to accept and redeem benefits because the store or concern does not meet criteria for approval... may not, for at least 6 months, submit a new application to participate in the program. STORE BACKGROUND The record reflects that the Appellant business was automatically withdrawn as a SNAP retailer on July 25, 2013, for failure to respond to requests to submit a reauthorization application. A reauthorization application was submitted and the business was reinstated on August 7, 2013, and authorized as a convenience store. The reauthorization application estimated that staple foods accounted for 40 percent of the firm s total retail sales. The accessory other food items showed an estimate of 35 percent of the firm s total retail sales. Ownership estimated that 25 percent of retail sales came from nonfood items such as tobacco, alcohol, lottery, hot foods, and other items. APPELLANT S CONTENTIONS In the request for administrative review and in the subsequent correspondence, Appellant has stated as its position in the matter the following: 3

4 The owner disagrees that the business is a restaurant and requests FNS reverse its decision. The business is a small convenience/grocery store in a low to moderate income neighborhood and has operated in the same manner for approximately 50 years. The current owner is a naturalized citizen who emigrated from Egypt in 1983 and has been running the store for almost 20 years as a minority-owned/female-owned small business. While the business operates almost exclusively as a convenience/ grocery store, it does serve some ready-to-eat foods that are intended for immediate consumption, but this aspect of the business does not constitute more than 50 percent of the business; In conversations by counsel with the Retailer Operations Division, the withdrawal determination was made based on the license, sales receipts, how the business is perceived by the public, inventory, and the understanding of the business as conveyed by a conversation with the owner [on 2/21/2017]. The business was operating under a restaurant business license for a time, but this was an error by the licensure department and when the owner contacted a supervisor at the licensure department this classification error was rectified and a new convenience store business license issued; The store s sales receipts are not completely clear. The business has an old cash register that has been in operation since the current owner purchased the business nearly two decades ago. The POS system does not utilize scanners and the register does not designate the specific items sold and does not designate whether the sale is one of prepared foods for immediate consumption or otherwise. The business also does not have bookkeeping or sales software that can generate a concise report containing this information. According, reliance on the sales receipts is not applicable. The available evidence demonstrates that less than 50 percent of sales come from the sale of prepared foods. Considering that almost all of the non-taxable sales come from the grocery business and a large portion of the taxable sales (tobacco, alcohol, sodas, etc.) are not restaurant products, it is clear that less than 50 percent of sales are derived from the sale of prepared foods ready for immediate consumption. The owner s affidavit provides sworn proof that the business does not derive more than 50 percent of its totals sales from prepared, ready-to-eat foods intended for immediate consumption. Additionally, receipts from Sysco showing deli items ordered (40 percent of which are sold by the pound) illustrate that the deli items ordered comprise a relatively small percentage of the store s cost of goods sold. The preponderance of the evidence shows that the business is not a restaurant and its SNAP authorization should not be withdrawn; Appellant disagrees that the business is perceived by the public as a restaurant. The store s interior is approximately 1,575 SF. Of that, there are only two small booths for eating and a small area for sandwich preparation. The business has five windows and two doors that allow for signage and the only indication that the business even sells prepared foods is a regular sized menu posted on one of the windows. The remainder of the signage is dedicated to advertisements for the lottery, alcohol (none of which is sold as a restaurant item), grocery items, and local events. The business does not hold itself out to the public as a restaurant and the evidence clearly demonstrates that the public perception of the business is that of a convenience store; The business s inventory is consistent with that of a convenience store and not a restaurant. The store has three double-sided isles [sic], large coolers against the walls, behind-the-register racks for tobacco and other items, items in a deli case, and boxes of produce that can be purchased for at-home preparation. Compared to the large inventory 4

5 of convenience store items, there is only one area of pre-packaged foods for immediate consumption and the small sandwich counter. Coupled with the inventory lists available from sales receipts, these photographs show that the inventory is heavily weighted towards convenience store items; The business displays SNAP regulations signage near the prepared food area and has never received any complaints or charge letters, never committed any violations, and (other than the current action) has never had any adverse action taken against it. In contrast to other referenced cases, the business has racks and coolers full of groceries and the per pound prices of deli meats and cheeses clearly displayed on the deli counter. The owner recalls the telephone call with the Retailer Operations Division and told them that the business is not a restaurant, but a convenience store with a deli. To the extent that the owner was unclear in the information she provided during this call, a sworn affidavit is provided with regards to store operations; and, The business is a minority/female owned business that has participated in the SNAP program for several decades providing valuable services to the surrounding community. It operates as a convenience store, not a restaurant and more than 50 percent of its sales are not derived from the sale of prepared foods intended for immediate consumption. The owner disagrees with the conclusion that the business is a restaurant. The Appellant has clearly met its burden of providing evidence which a reasonable mind considering the record as a whole, would accept as sufficient to support a conclusion that it is more likely to be true than not true that the business is a convenience store and not a restaurant. Appellant submitted copies of the firm s 2016 and 2017 State of Florida Annual Food Permit as a convenience store with significant food service, a notarized affidavit by the store owner, 20 pages of invoices from Sysco, a sketch of the store s layout, and 13 pages of photographs of the firm s exterior and interior in support of these contentions. Appellant submitted no other evidence or rationales in support these contentions. The preceding may represent a summary of Appellant s contentions in this matter. However, in reaching a decision, full attention and consideration has been given to all contentions presented, including any not specifically recapitulated or specifically referenced herein. ANALYSIS AND FINDINGS With regards to Appellant s contentions above, the authorization of a business to participate in SNAP must be in accord with the Act, as amended, and regulations. These requirements of law cannot be waived. Thus, it is important to clarify for the record that the purpose of this review is to either validate or to invalidate the earlier decision of the Retailer Operations Division, and that it is limited to what circumstances existed at the time of the withdrawal action by the Retailer Operations Division. Changes to store layout, food inventory, business practices, or other changes made subsequent to the time of this decision do not provide any valid basis for dismissing or modifying the action imposed. SNAP regulations at 7 CFR 278.1(b)(1)(iv) state, in part, that, Firms that do not meet the eligibility requirements in this section or that do not effectuate the purpose of the SNAP shall not be eligible for program participation.... In addition, firms that are considered to be restaurants, that is, firms that have more than 50 percent of their total gross retail sales in hot and/or cold 5

6 prepared foods not intended for home preparation and consumption, shall not qualify for participation as retail food stores under Criterion A or B. This includes firms that primarily sell prepared foods that are consumed on the premises or sold for carryout. The Appellant business is classified as a convenience store, yet its SNAP redemptions 7 U.S.C (b)(6) & (b)(7)(c) per month substantially exceed the monthly redemption average 7 U.S.C (b)(6) & (b)(7)(c) for Manatee County convenience stores for the period August 2016 through January U.S.C (b)(7)(e). A comparison of Appellant s overall SNAP redemptions to the six nearest convenience stores showed similar results. 7 U.S.C (b)(6) & (b)(7)(c). There also is a medium grocery store located near Appellant s business that specializes in fresh meats, poultry, and seafood. This store is double the size of the Appellant business and carries a full line of SNAP eligible food items in all four staple food categories that include a large variety of fresh fruit and vegetables and a large selection of deli meats and cheeses. This business also offers a number of different meat packages, its food prices appear comparable to or less than those at the Appellant business, it has shopping carts/hand baskets to facilitate large purchases, and wide, uncluttered aisles, 7 U.S.C (b)(7)(e). The only notable area in which this medium grocery store does not surpass the Appellant business is that it does not sell hot/cold, ready-to-eat prepared foods. The Retailer Operations Division considered these to be indicators of unusual and suspicious activity. The extremely high SNAP redemptions for the Appellant business are not supported by the store s inventory. The store report, food inventory, and photographs from the FNS store visit conducted on December 5, 2016, show the store with an extremely limited stock of staple foods consisting of a very small number of canned goods, an equally small number of pre- packaged and single serving items with the majority of store inventory in accessory foods (primarily sodas, candy, and other drinks), snack foods, and ineligible items. The store was also found to be borderline deficient in the meat/poultry/fish and dairy product staple food categories during this most recent visit. Appellant s contention that the business has three aisles of shelving and coolers on two walls is accurate; however, this shelving almost exclusively contains snack foods, drinks, and ineligible items, such as cleaning and paper products while the coolers contain sodas, other drinks, and ineligible items such as beer; this was confirmed by both Appellant s photographs and those from the FNS store visit. As evidenced by the FNS store visit report, the business has a large kitchen in the rear of the store with a cold storage area and food prep areas in addition to the deli area in the store with a heated display case containing hot foods, a refrigerated deli case containing desserts and salads, a large cold sandwich prep area with plastic tubs containing prewrapped portioned meats and cheese for sandwiches, a large salad bar with fresh vegetable toppings, hot boiled peanuts, and a hot soup area with three crock pots. The store s deli area contained no packaged deli meats or cheeses in the refrigerated deli case as the FNS store visit report notes these are stored in the cold storage area in the rear. The FNS photographs also show extensive interior signage advertising many hot/cold, ready-to-eat prepared sandwiches, boiled peanuts, soups, salads, desserts, party trays, and kegs of beer. While one menu board does note that deli meats and cheeses are available for sale by the pound, there is no price list and the refrigerated deli case does not contain any packaged deli meats or cheeses. The December 5, 2017, FNS store report specifically notes that there was no price list posted in the store and also that the packaged deli meats, cheeses, and other foods were stored in the cold storage area in the rear of the store and that they were not reflected in the store inventory as they were used solely 6

7 for the preparation of hot/cold prepared foods. This is further supported by notes in the FNS store record of a telephone call between the Retailer Operations Division and the store owner on February 21, 2017, during which the owner stated that deli meats and cheeses were not sold by the pound and that the majority of store sales were in the deli section. These notes were entered into the FNS data base with an entry date of February 21, 2017, and the data base does not allow backdating of entries so their legitimacy is not suspect. That the owner s affidavit dated April 28, 2017, after the store s SNAP authorization had been withdrawn now states otherwise is likely due to the fact that during the February 21 telephone call the owner was not aware that her statements could place the store s SNAP authorization at risk and now is remembering the conversation differently. A review of internet sites such as tripadvisor.com, menupix.com, hub biz.com, local.com, menuclub.com, and groupon.com show the business categorized as a restaurant, deli restaurant, or a deli with reviews focusing on hot/cold foods. The business s page on yelp.com is noted as being claimed by the owner and categorizes the business as a deli with reviews focusing on hot/cold foods. The business s facebook.com page also categorizes the business as a deli and the reviews and photographs focus on hot/cold foods. The business s facebook.com site contradicts the owner s statement that the store does not hold itself out to the public as a restaurant by stating, We specialize in subs & sandwiches, but also carry a large selection of soups, salads, beverages. We have an open salad bar and boiled peanuts. The majority of photographs submitted by Appellant of the business s exterior and interior are consistent with photographs taken during the FNS store visit and show a business offering an extremely limited stock of staple foods with the majority of inventory in accessory foods (primarily soda, candy, and other drinks), snacks, and ineligible items (hot foods, beer, tobacco, and lottery). However, Appellant s photographs fail to include any photographs of the extensive interior signage advertising hot/cold sandwiches, salads, chili, soups, salad bar, and boiled peanuts or of the large sandwich preparation area and the kitchen area. They also show a small stand on the refrigerated deli case with a piece of paper stating that the store carries fruits and vegetables and containing a deli meat and cheese price list. While this same stand was visible in the FNS store visit photographs it contained a different piece of paper listing hot dog and other prices. No fresh produce is listed on the FNS store visit inventory and none is visible in the FNS photographs with the exception of those used in the salad bar and for hot/cold prepared foods. While Appellant s photograph showing the hot/cold food menu taped to the store s exterior window is accurate and matches a similar photograph taken during the FNS store visit, Appellant s statement that there is no exterior signage advertising prepared foods other than this menu is inaccurate. Appellant fails to mention or include a photograph of the very large, lighted exterior pole sign advertising Noreen s Deli Home of the Famous Godfather (a sandwich the business is noted for selling). This pole sign also lists beer, soda, cigarettes, daily fresh sandwiches, but not groceries. There is no exterior signage that mentions groceries. The Sysco Corporation invoices dated August 2016 through December 2016 show a wide range of products used in the preparation and sale of hot/cold, ready-to-eat prepared foods. The large unit of issuance for these items shows that they are designed for use in commercial food preparation (e.g. one gallon cans of mayonnaise and relish, five pound bags of shredded cheese, etc.). The fact that the Sysco Corporation does not sell wholesale items to businesses to be resold as retail grocery items is confirmed by an excerpt from the Sysco Corporation s web site 7

8 states that, Sysco is the global leader in selling, marketing, and distributing food products to restaurants, healthcare and educational facilities, lodging establishments, and other customers who prepare meals away from home. Its family of products also includes equipment and supplies for the foodservice and hospitality industries. That the Appellant business purchases large amounts of food and food service products from Sysco further supports that the business is operating a restaurant preparing hot/cold, ready-to-eat prepared foods. As previously noted in the Controlling Law section, prepared ready-to-eat foods cannot be counted as staple foods in determining if a store is eligible to participate in the SNAP. The sales of hot and/or cold, ready-to-eat prepared foods cannot be included in determining if staple foods account for more than 50 percent of overall sales since these items do not count as staple foods. Store ownership was unable to substantiate the business s reported sales percentages and her responses to questions asked during the February 21, 2017, telephone call with the FNS Retailer Operations Division staff contradict the reported percentages. Ownership provided only 38 days of Z1 cash register sales receipts instead of the full timeframe of six months that were requested. Additionally, the business s Florida Sales and Use Tax Filing reports show monthly tax exempt sales that are nearly identical to the business s SNAP EBT sales as if the business only sells groceries to EBT customers. 7 U.S.C (b)(6) & (b)(7)(c). As such, the financial records provided do not support Appellant s contentions. Based on the business s layout, food inventory, interior/exterior signage, and internet presence, the business appears to be primarily a restaurant selling hot/cold foods for either take-out or onsite consumption and the business does portray itself to the public as a restaurant. Restaurants are not eligible to participate as SNAP retailers. Section 9 of the Food and Nutrition Act of 2008, as amended, states in part, [a] retail food store or wholesale food concern that is denied approval to accept and redeem benefits because the store or concern does not meet criteria for approval... may not, for at least 6 months, submit a new application to participate in the program. There is no agency discretion to impose a sanction less than six months when a firm does not meet the aforementioned eligibility requirements for authorization. Therefore, requests for a second store visit or to be reinstated as a SNAP retailer may not be granted. CONCLUSION After review of the pertinent documentation, and based on the discussion above, the initial decision by Retailer Operations Division to withdraw the authorization of Appellant to participate in the SNAP for a period of six months from the effective date of withdrawal is sustained. 8

9 RIGHTS AND REMEDIES Applicable rights to a judicial review of this decision are set forth in 7 U.S.C and 7 CFR If a judicial review is desired, the complaint must be filed in the U.S. District Court for the district in which Appellant s owner resides, is engaged in business, or in any court of record of the State having competent jurisdiction. This complaint, naming the United States as the defendant, must be filed within thirty (30) days of receipt of this decision. Under the Freedom of Information Act, we are releasing this information in a redacted format as appropriate. FNS will protect, to the extent provided by law, personal information that could constitute an unwarranted invasion of privacy. ROBERT T. DEEGAN June 12, 2017 ADMINISTRATIVE REVIEW OFFICER 9