STATE OF IOWA BEFORE THE DEPARTMENT OF COMMERCE ALCOHOLIC BEVERAGES DIVISION DOCKET NO. A DIA NO. 11ABD068

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1 STATE OF IOWA BEFORE THE DEPARTMENT OF COMMERCE ALCOHOLIC BEVERAGES DIVISION IN RE: Forest Market Convenience Store, LLC d/b/a Forest Market Convenience Store 2105 Forest Des Moines, Iowa Liquor License No. LE-1546 DOCKET NO. A DIA NO. 11ABD068 PROPOSED DECISION On May 23, 2011, the Des Moines City Council (local authority) denied the renewal application for Class E Liquor License LE-1546, filed by Forest Market Convenience Store, LLC., d/b/a Forest Market Convenience Store (licensee). The licensee filed a timely Notice of Appeal with the Iowa Alcoholic Beverages Division (division). The hearing was held before the undersigned administrative law judge on July 11, 2011 at 1:00 p.m. Assistant City Attorney Doug Philiph represented the local authority. The licensee was represented by attorney Valerie Cramer. The hearing was recorded. THE RECORD The record includes the electronic renewal application with attachments; Roll Call 5/23/2011; Division s Notification of the Denial; Notice of Appeal; Notice of Hearing; Local Authority Exhibits 1-11; and Licensee Exhibits A and C (Exhibit D was excluded for lack of foundation and Exhibit F was excluded on relevancy grounds; Exhibits B and E were not offered.) The local authority presented the testimony of Deputy Zoning Enforcement Officer SuAnn Donovan. The licensee presented the testimony of owners Adelaziz Abdelkarim and Haytham Hamid. ISSUES Whether the local authority properly denied the licensee s renewal application for lack of good moral character when the licensee s compliance with the local authority s zoning ordinance depended on the licensee limiting its alcohol sales

2 Page 2 to 50% or less of total sales, and when the licensee failed to comply with the terms of its written Agreement with the city to maintain and produce detailed financial records to verify that its business was in compliance with the 50% requirement? FINDINGS OF FACT 1. Section of the city of Des Moines City Code provides that in the C- 2 general retail and highway-oriented commercial district, the following shall apply to the sale of liquor, wine and beer: No business holding a liquor license or a beer or wine permit which is not operated as either (i) a grocery store or pharmacy at least half of whose gross income is derived from the sale of merchandise other than liquor, wine or beer; or (ii) a restaurant, at least half of whose gross income is derived from the sale of prepared food and food-related services, may be located upon any premises, unless such business shall first have received a conditional use permit from the board of adjustment after a public hearing. Notice of such hearing shall be provided to all owners of record of property within 250 feet of the subject property. (Local Authority Exhibits 2, 3; Testimony of SuAnn Donovan) 2. Forest Market Convenience Store, LLC d/b/a Forest Market Convenience Store (licensee) was initially issued Liquor License LE-1546 for the premises located at 2105 Forest in Des Moines, Iowa on June 9, Adelaziz Abdelkarim and Haytham Hamid each own 50% of Forest Market Convenience Store, LLC. (Electronic Renewal Application) Prior to receiving the liquor license, Adelaziz Abdelkarim signed a written Liquor License or Beer Permit Agreement ( Agreement ) with the city of Des Moines. The Agreement acknowledged, in relevant part, that 2105 Forest Avenue is in an NPC zoned district and that the location complies with the city s zoning regulations for predominant use as a grocery store, convenience store, or pharmacy. Mr. Abdelkarim agreed that at least half of the gross (revenue) from the business would be derived from the sale of merchandise other than liquor, wine or beer.

3 Page 3 In order to verify compliance with the Agreement, the licensee was required to submit a certified financial statement prepared and verified by a Certified Public Accountant upon request. Pursuant to the terms of the Agreement, the certified financial statement was to include: 1) Financial statements including gross receipts, beer sales receipts, wine and liquor sales receipts, other sales and services receipts, beer, wine and liquor purchases, and any other purchases. The financial statement must be supported by itemized invoices and receipts. 2) Itemized invoices and receipts used to prepare the financial statements. 3) Itemized list of selling prices for all types of items sold during the statement period, as well as an explanation of specialized terms, such as happy hour. By signing the Agreement, Adelaziz Abdelkarim acknowledged that the failure to comply with its requirements may cause his liquor license to be reviewed by the Des Moines City Council and lead to a possible revocation of his license or permit. Mr. Abdelkarim further acknowledged that further audits may be required in the current or any future license or permit year. (Local Authority Exhibit 4; Testimony of SuAnn Donovan; Adelaziz Abdelkarim) Owner Haytham Hamid signed an identical Agreement with the city on May 24, 2010, when the Forest Market Convenience Store liquor license was up for its annual renewal. (Testimony of Haythem Hamid; Local Authority Exhibit 10) 3. In October 2010, the Des Moines Police Department asked the city s Deputy Zoning Officer (SuAnn Donovan) to conduct an audit of the Forest Market Convenience Store because the police department did not believe that the business was deriving at least 50% of its revenue from the sale of items other than liquor, wine or beer. (Testimony of SuAnn Donovan) On October 11, 2010, Ms. Donovan sent a letter to the licensee in care of its Registered Agent, attorney Valerie Cramer. Copies of the letter were also sent to owners Adelaziz Abdelkarim and Haytham Hamid. The letter notified them that the city was requiring an audit of their financial records to verify that their business is operating as a convenience store. The licensee was asked to provide a certified financial statement, prepared and verified by a Certified Public Accountant, as well as all of the financial statements, receipts, invoices, and

4 Page 4 pricing information specified in the Agreement. (Local Authority Exhibit 4; Testimony of SuAnn Donovan) 4. The licensee did not submit a certified financial statement in response to the city s October 11, 2010 letter. Rather, the licensee s attorney and registered agent contacted the city attorney to find out if there was any less costly financial documentation that the city would accept in lieu of a certified financial statement. They city attorney agreed to an alternative procedure to show compliance. On December 2, 2010, SuAnn Donovan sent a second letter to the licensee that outlined the following procedure that could be used to audit the licensee s financial records: You will need to have an independent person to compile all the tape register receipts data onto quick books, or a compatible program, as income and categorize each sale according to the register receipts. You will need to prepare reconciled bank statements and regular financial statements. Then the CPA will need to verify the revenue compiled from the register receipts to the bank statements. The CPA would do an analytical procedures from the cost of goods sold (which the goods purchased) to verify that the percentages of revenue match the cost of goods sold to determine the percentage according to accounting industry agreed upon procedures. (Testimony of SuAnn Donovan; Local Authority Exhibit 5) 5. On January 19, 2011, the licensee s attorney sent an to the city attorney reporting that they had given their accountant (Steve Baker) all of the cash register receipts and the bank statements showing the deposits from the sales, and he made sure that the numbers on the bank statements and the totals given in the attached sheets equaled each other. (Local Authority Exhibit 11) The city attorney quickly responded to the and wrote that it was important for Mr. Baker to confirm that he used the procedures that they had agreed upon in compiling the data. The city attorney requested a statement from Mr. Baker confirming that the records were compiled by an independent person and reviewed by a CPA, consisting of:

5 Page 5 1. Transferring tape register receipt data onto quick books, or a compatible program, as income categorizing each sale according to the register receipts. 2. Reconciled bank statements and regular financial statements. The city attorney also asked that Mr. Baker confirm that he compared the revenue compiled from the register receipts to the bank statements, and used analytical procedures comparing the cost of goods purchased to verify that the percentages of revenue match the percentages of cost of goods sold to determine the percentage according to accounting industry agreed upon procedures. The licensee s attorney replied to the city attorney s the following day and described a number of problems that they had encountered with the licensee s financial records. According to this , the licensee provided Mr. Baker with the business cash register receipts, which were rung up by categories of liquor, beer, food, misc., and tobacco products. However, Mr. Baker discovered some sales that had been entered incorrectly (miss-keyed). For example, one item was entered as a $10,000 sale. In addition, several weeks of receipts were missing and could not be found. Mr. Baker then took the bank deposits and tried to tie them to receipts, but there were discrepancies. They attempted to estimate the percentages of income for the missing weeks using the information that they did have. However, no one could certify the accuracy of the numbers because of the errors on the register tapes and the missing register receipts. In addition, the business did not have an accurate beginning inventory but did have an ending inventory and invoices from vendors from which they planned to construct a beginning inventory. The licensee s attorney reported that she asked Mr. Baker to provide a statement as to what he had done but he told her that would be considered an audit, and he was not licensed to do an audit. (Testimony of SuAnn Donovan; Local Authority Exhibit 11) 6. On March 1, 2011, SuAnn Donovan sent a follow-up letter to the licensee asking for an audit performed by a CPA. (Local Authority Exhibit 6) In a letter dated March 7, 2011, the licensee s attorney stated: they had produced information from their accountant showing that less than 50% of the sales were from liquor;

6 Page 6 they could not provide audited financial statements because the cost was prohibitive and because they were missing several weeks of register receipts out of eleven months; there was also miss-keyed information on the register tapes, such as an entry that should have been $12.70 being entered as $127,000; the licensee s accountant took out the miss-keyed items and figured out that the register receipts for liquor were less than 50%; and the licensee used a different register to ring up clothing which did not generate a copy and would increase the non-liquor percentage. The licensee s attorney further stated that they and the CPA were willing to meet with the city attorney to explain the documents that were provided. (Local Authority Exhibit 7) 7. On March 15, 2011, the licensee s attorney sent SuAnn Donovan a Schedule of Sales by Department for January 10, 2010 to October 10, 2010 that was prepared by Baker & Associates, LLP on January 19, The cover memo submitted by Baker & Associates, LLP with the document states: We have compiled the accompanying Schedule of Sales by Department of Forest Market Convenience Store LLC for the period of January 10, 2010 to October 10, 2010 in accordance with Statements for Accounting and Review Services issued by the American Institute of Certified Public Accountants. Our compilation was limited to presenting in the form of the financial information, information that is the representation of management. We have not audited or reviewed the accompanying schedule of sales by department and, accordingly, do not express an opinion or any other form of assurance on it. The schedule of sales by department is presented in accordance with the requirements of the owners of Forest Market Convenience Store LLC, which differ from generally accepted accounting principles. Accordingly, the schedule of sales by department is not designed for those who are not informed about such differences. The attached Schedule of Sales showed sales from January 10, 2010 through October 10, 2010 totaling $732, The total sales listed for beer (Dept. #1)

7 Page 7 and liquor (Dept. #2) were less than 50% of the total. There were a number of blanks in the columns for Dept. ##7, 9, 11, and 16. (Local Authority Exhibit 8; Testimony of SuAnn Donovan) 8. SuAnn Donovan met with the city s accounting department, the city manager, and representatives of the Des Moines Police Department to review the Schedule of Sales prepared by the licensee s CPA. The accounting department determined that the information provided did not prove that alcoholic beverage sales were less than 50% of total sales because the information used to prepare the schedule was provided by the owners without any independent review. Ms. Donovan notified the licensee s attorney of this conclusion in a letter dated April 7, (Testimony of SuAnn Donovan; Local Authority Exhibit 9) 9. At its meeting on May 23, 2011, the Des Moines City Council voted to deny the renewal application for liquor license LE-1546 based on the licensee s failure to comply with Section (1) to show that at least half of its gross revenue was from sale of food or food-related services. (Local Authority Exhibit 1). The licensee appealed the denial to the Alcoholic Beverages Division. (Notice of Appeal) 10. At hearing, the licensee submitted some additional financial documents that had not been previously provided to the city. The first document (Licensee Exhibit C, p. 4) was entitled Sales by Department Summary and contained the same information as the Schedule of Sales previously submitted with percentages added for each column. According to this document, sales of beer and liquor were 45.53% of total sales for the period from January 10, 2010 to October 10, At hearing, the licensee also submitted worksheets for January-October 2010 that were reportedly assembled by the accountant, Mr. Baker. The highlighted areas (they appear gray on the copy) on Exhibit C, p. 6 are the days for which cash register tapes are missing. More than 100 days are highlighted on this worksheet. For the months with missing register tapes, the licensee used its average department percentages multiplied by the deposited totals to estimate total sales. The worksheet shows the total sales per tapes as $794, The worksheet also shows that the licensee collected $17, in sales taxes which brought total sales to $812, for this ten month period.

8 Page 8 The licensee s worksheet further shows that deductions were then made for possible over-rings in 6 of the 10 months. The possible over-rings were significant and totaled $316, The worksheet at Exhibit C, p. 6 provides an adjusted total per tapes of $496, after the over-rings were deducted. However, the total reported bank deposits ($791,688.81) were much higher than the adjusted total per tapes ($496,162.51). (Testimony of Adelaziz Abdelkarim; SuAnn Donovan; Licensee Exhibit C, pp. 4-6) 11. The licensee owns a clothing store that is located next store to Forest Market. The clothing store is not part of the Forest Market convenience store, and its sales cannot be used to offset sales of beer, wine, or liquor at the convenience store. The clothing store has a separate entrance and a separate cash register, but the receipts from the clothing store are deposited in the same bank account as the convenience store. (Testimony of Adelaziz Abdelkarim) CONCLUSIONS OF LAW I. Administrator s Authority to Review License Denials by Local Authorities Iowa Code section (2011) provides the public policy underlying the Iowa Alcoholic Beverages Control Act: This chapter shall be cited as the Iowa Alcoholic Beverages Control Act and shall be deemed an exercise of the police power of the state, for the protection of the welfare, health, peace, morals, and safety of the people of the state, and all its provisions shall be liberally construed for the accomplishment of that purpose. It is declared to be public policy that the traffic in alcoholic liquors is so affected with a public interest that it should be regulated to the extent of prohibiting all traffic in them, except as provided in this chapter. Local authorities shall either approve or disapprove the issuance of a liquor control license,...and shall endorse its approval or disapproval on the application and shall forward the application with the necessary fee and bond, if required, to the division. 1 1 Iowa Code section (2)(2011).

9 Page 9 An applicant for a liquor control license, wine permit, or beer permit may appeal from the local authority's disapproval of an application for a license or permit to the administrator. In the appeal the applicant shall be allowed the opportunity to demonstrate in an evidentiary hearing conducted pursuant to chapter 17A that the applicant complies with all of the requirements for holding the license or permit. 2 Therefore, in this appeal the burden of proof is on the licensee to establish its compliance with the requirements for holding a liquor license. II. Local Authorities May Regulate the Location of Licensed Liquor Establishments Within Their Jurisdiction Through Zoning Ordinances. Local authorities may adopt ordinances or regulations for the location of the premises of retail wine or beer and liquor control licensed establishments. 3 Liquor licensees are required to comply with all ordinances and resolutions enacted by the local authority, including ordinances related to zoning. No liquor license shall be issued for premises that do not conform to all applicable laws, ordinances, resolutions, and health and fire regulations. 4 The city of Des Moines has adopted an ordinance restricting the location of businesses holding liquor licenses or beer or wine permits. Section of the Des Moines City Code provides that in the C-2 district, any business holding a liquor license or a beer or wine permit must have received a conditional use permit from the board of adjustment after a public hearing, unless the business is operated as either (i) a grocery store or pharmacy at least half of whose gross income is derived from the sale of merchandise other than liquor, wine, or beer; or (ii) a restaurant, at least half of whose income is derived from the sale of prepared food and food-related services. In order to provide a means to verify compliance with the ordinance, the city has entered into a written agreement with the licensee. As a condition of receiving its license, the licensee agreed to maintain and provide certain financial records and a certified financial statement prepared and verified by a Certified Public Accountant, upon request. The licensee cites Iowa Code section (which requires every holder of a liquor license to keep a daily record of gross receipts of the holder s business) and Iowa Grocery Industry Association v. City of Des Moines 5 to support its 2 Iowa Code section (7)(2011). 3 Iowa Code section (2)(2011); 185 IAC Iowa Code section (2)(2011) N.W.2d 675 (Iowa 2006).

10 Page 10 argument that the city of Des Moines is preempted from requiring liquor licensees to provide more extensive financial records and financial statements than those required by Iowa Code section This argument is without merit. In Iowa Grocery, the Iowa Supreme Court held that, subject to a handful of exceptions, the general assembly reserved in itself the power to regulate Iowa s alcoholic beverage industry. 6 However, the Court recognized that the general assembly gave some limited regulatory power to local authorities. 7 The Court cited several examples of the regulatory power granted to local authorities, two of which apply to this case: Section (2) allows the local authority to refuse to issue the license or permit for premises which do not conform to all applicable laws, ordinances, resolutions, and health and fire regulations. Section (2) allows the local authority to suspend any retail wine or beer permit or liquor control license for a violation of any ordinance or regulation adopted by the local authority. It also allows local authorities to adopt ordinances or regulations for the location of the premises of retail wine or beer and liquor control licensed establishments. 8 In addition, the Iowa Alcoholic Beverages Control Act requires all liquor licensees to be persons of good moral character. 9 The statutory definition of good moral character requires the person to have such financial standing and good reputation as will satisfy the administrator that the person will comply with this chapter and all laws, ordinances, and regulations applicable to the person's operations under this chapter. 10 Clearly, local authorities are not preempted by the Iowa Alcoholic Beverages Control Act from enacting and enforcing zoning ordinances for the location of licensed liquor establishments within their jurisdiction. Not only is it reasonable for the city to require businesses to maintain and produce detailed financial records to prove 6 Id. at Id. 8 Id. at Iowa Code section (1)(a)(2011). 10 Iowa Code section 123.3(26)(a)(2011)(emphasis added).

11 Page 11 compliance with the zoning ordinance that limits alcohol sales, the licensee agreed to do so as a condition of receiving the liquor license. III. Discussion In order to qualify for renewal of its liquor license, Forest Market Convenience Store, LLC must be in compliance with Des Moines City Code Section Forest Market Convenience Store, LLC has elected not to apply for a conditional use permit for the premises at 2105 Forest. Without a conditional use permit, the only way that Forest Market can qualify for a liquor control license is to have at least half of its gross income come from the sale of merchandise other than liquor, wine, or beer. The written Agreements signed by Adelaziz Abdelkarim on May 22, 2009 and by Haytham Hamid on May 23, 2010 clearly placed the responsibility to prove compliance on the licensee. The Agreements clearly spell out the licensee s obligation to keep alcohol sales at no more than 50% of total sales and to verify the percentage of alcohol sales by maintaining and submitting, on request: a certified financial statement prepared and verified by a Certified Public Accountant; financial statements including gross receipts, beer sale receipts, wine and liquor sale receipts, other sales and service receipts, beer, wine, and liquor purchases, and other purchases; itemized invoices and receipts used to prepare the financial statements; and an itemized list of selling prices for all types of items sold during the statement period. In October 2010, the city elected to review Forest Market s liquor license and requested all of the financial documentation required by the Agreement. When the licensee reported it was unable to comply, the city agreed to accept an alternative procedure to prove compliance. However, the licensee was not able to provide sufficiently reliable financial documentation to satisfy even the alternative procedure. The licensee is missing numerous cash register tapes. In addition, apparently many sales were erroneously entered into the cash register (over-rings), leading to an inaccurate reporting of total sales. Moreover, no independent person was involved in compiling the tape register receipts data, as required by the city in its letter dated December 2, The CPA who prepared the Compilation Report/ Schedule of Sales specifically stated the compilation was

12 Page 12 limited to presenting information that is the representation of management. The CPA did not audit or review the licensee s schedule of sales by department and did not express any opinion or other form of assurance on it. In fact, the CPA stated that the schedules of sales by department was presented in accordance with the requirements of the owners of Forest Market Convenience Store LLC, which differ from generally accepted accounting principles. There is no assurance whatsoever that the financial information provided by the licensee is in fact accurate. Based on this record, it is entirely unclear whether the licensee has in fact complied with its obligation to restrict its revenue from sales of liquor, wine, and beer to no more than 50% of total revenues. Adelaziz Abdelkarim believes his business was unfairly singled out for audit because of crime in the area surrounding his business. He claimed, based on the police department s maps and reports of selected crimes, that other convenience stores in high crime areas were not selected for audit. (Licensee Exhibit A) However, the licensee failed to establish that Forest Market was unfairly singled out for audit. SuAnn Donovan credibly testified that the police department asked her to conduct an audit because they did not think that at least half of Forest Market s sales were for merchandise other than liquor, wine, or beer. This was a reasonable basis for requesting an audit. In addition, Ms. Donovan testified that there were four other audit letters currently outstanding and that the city has conducted a number of other audits over the past three or four years. Based on this record, it cannot be concluded that Forest Market Convenience Store was unfairly singled out for audit or that the city had an improper motive or reason for requesting the audit. The licensee also argued that the city s enforcement action violates the equal protection clause of the United States Constitution. Constitutional claims must be raised in an administrative proceeding in order to preserve them, but administrative agencies are not authorized to decide constitutional issues. 11 ORDER The confusing and incomplete financial information provided by the licensee failed to establish that at least 50% of Forest Market s total revenue was from sales of merchandise other than liquor, wine, and beer. The local authority was justified in denying the liquor license renewal application based on the licensee s 11 Salsbury Laboratories v. Iowa Dep t of Envtl. Quality, 276 N.W.2d 830, 836 (Iowa 1979).

13 Page 13 failure to show its compliance with Section of the Des Moines City Code. IT IS THEREFORE ORDERED that the action of the Des Moines City Council denying the renewal application for Liquor License LE-1546, issued to Forest Market Convenience Store LLC, d/b/a Forest Market Convenience Store, is hereby AFFIRMED. Pursuant to the administrative rules of the division, any adversely affected party may appeal a proposed decision to the Administrator of the Alcoholic Beverages Division within thirty (30) days after issuance of the proposed decision. In addition, the Administrator may initiate review of a proposed decision on the Administrator's own motion at any time within thirty (30) days following the issuance of a proposed decision. 185 IAC 10.27(1) and (2). Requests for review shall be sent to the Administrator of the Alcoholic Beverages Division, 1918 S.E. Hulsizer, Ankeny, IA Unless otherwise ordered, each appealing party may file exceptions and briefs within thirty (30) days of the notice of appeal or order for review. Within thirty (30) days thereafter, any party may file a responsive brief. The Administrator may shorten or extend the briefing period as appropriate. The Administrator may resolve the appeal on the briefs or provide an opportunity for oral argument. 185 IAC 10.27(6). The administrator may affirm, reverse or modify the proposed decision. A party who is adversely affected by the proposed decision shall not be deemed to have exhausted administrative remedies unless the adversely affected party files a request for review of the proposed decision within the time provided and the Administrator has reviewed the proposed decision and has affirmed, reversed, or modified the proposed decision. Dated this 2 nd day of August, Margaret LaMarche Administrative Law Judge Department of Inspections and Appeals 3rd Floor, Wallace State Office Building Des Moines, IA CC: See Attached Mailing List

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