Food, Beverage and Hospitality Alert

There are no bars in North Carolina. No, it’s not the beginning to a country song. What most people consider a “bar,” the North Carolina Alcoholic Beverage Control Commission deems a private club. But that is about to change.

Under a recent North Carolina law affecting how the ABC Commission classifies establishments, many private clubs will now be classified as a “private bar.” This change will impact the way many establishments apply for and maintain permits to serve alcoholic beverages, and it may well alter the very notion of what it means to be “private.”

This article first provides a brief overview of ABC permitting laws and regulations in North Carolina governing bars. Second, this article explains the process of transitioning from private club to private bar. Third, it discusses how forthcoming regulations could affect what it means to be a private establishment. Finally, it provides recommendations for remaining compliant with ABC laws and regulations in the midst of these changes.

Background

Under North Carolina law, businesses must hold an ABC permit to serve alcohol on the premises. These permits, however, can only be issued to certain classes of establishments, including restaurants, hotels, breweries, and country clubs, among others. Interestingly though, bars are not within the class of establishments that can hold an ABC permit. In fact, the ABC Commission does not even recognize the existence of “bars” as a class of establishments. As a result, many bars are actually classified as “private clubs” unless they earn a certain portion of their revenue from food service (in which case they are a restaurant). Until recently, private clubs were defined as establishments “organized and operated solely for a social, recreational, patriotic, or fraternal purpose and that is not open to the general public, but is open only to the members of the organization and their bona fide guests.” Establishments operating as such must therefore have the characteristics of a private establishment, including a membership base, an application process, membership dues, and even membership cards. Patrons, whether they realize it or not, apply for membership upon their first visit when they are asked to provide their name and other basic information. Additionally, what might look like a cover charge is actually membership dues.

With the recent passage of Senate Bill 11, the General Assembly made two changes to the list of establishments that can hold a permit to serve alcohol. First, “private club” is redefined to mean an establishment that qualifies as exempt from federal income tax under § 501(c) of the Internal Revenue Code and that has been in operation for a minimum of 12 months prior to application for an ABC permit. Second, SB 11 created a new category of establishment, the “private bar,” which is defined as “an establishment that is organized and operated as a for-profit entity and that is not open to the general public but is open only to the members of the organization and their bona fide guests for the purpose of allowing its members and their guests to socialize and engage in recreation.” Private bars, like private clubs, are exempt from regulation as a food and lodging establishment.

Transitioning from Private Clubs to Private Bars

It is apparent that many establishments formerly classified as a private club must now become a private bar. The transition from private club to private bar should not be too burdensome for most. Establishments that were issued an ABC permit as a private club prior to June 26, 2019, may continue normal operations under such permit until it expires, at which time the establishment should renew its permit as a private bar unless it meets one of the following two exceptions:

  1. An establishment that qualifies as tax exempt under § 501(c) of the Internal Revenue Code and has operated as such for at least one year may remain a private club.
  2. Country clubs that fall within the definition of N.C. Gen. Stat. § 18B-1000(8) may renew as a “sports club.”

Effects on Day-to-Day Operations

Changes to the notion of what it means to be “private” could have real effects on the day-to-day operations of bars in North Carolina. On the one hand, the definition of “private bar” seemingly simplifies the requirement that bars must be organized and operated for a specific purpose. Now, private bars may simply exist “for the purpose of allowing its members and their guests to socialize and engage in recreation.” However, bigger changes to the notion of “private” could be on the way.

Day-to-day operations of North Carolina bars are heavily influenced by ABC Commission regulations, which currently impose special requirements on both the permitting and operation of private clubs, as previously defined. These regulations shed light on what it means to be private. As of the time of this writing, the ABC Commission has yet to update these regulations to reflect SB 11, though it will surely do so eventually. It is unclear whether private bars under these forthcoming regulations will be subject to the same requirements as private clubs prior to SB 11. However, there is at least some reason to hope that the requirements attendant to being private will be relaxed. Indeed, the fact that SB 11 introduces the word “bar” into the regulatory lexicon and relaxes the list of acceptable purposes for which these establishments can exist suggests a possible push to characterize these establishments according to how they actually exist and serve their communities.

At the same time though, it is possible that the mere passage of SB 11 could spark a resurgence in enforcement by both the ABC Commission and Alcohol Law Enforcement, regardless of how the forthcoming regulations shake out. Heightened enforcement could be detrimental to bars that flout what it means to be a private establishment. For example, administrative courts have affirmed the ABC Commission’s refusal to issue permits to an establishment where an inspection of the premises by Alcohol Law Enforcement revealed that the bar was missing membership applications, its patrons were not carrying membership cards while on the premises, and an employee of the bar confessed that he did not even know he was working at a private club that was open only to members and their guests. Kirkley v. N.C. Alcoholic Beverage Control Comm’n, 08 ABC 2629, 2009 WL 2385440 (N.C.O.A.H. 2009).

Recommendations for Remaining Compliant

The following are things that all North Carolina ABC permit holders should do to remain compliant in the midst of these changes:

  1. All permit holders should be on the lookout for new regulations, which will be posted on the ABC Commission website. Forthcoming regulations could affect more than just private clubs.
  2. Private clubs should use this opportunity to ensure your policies comply with ABC regulations, including but not limited to 14B N.C. Admin. Code 15B.0107, 14B N.C. Admin. Code 15B.0225, and 14B N.C. Admin. Code 15B.0513. Moreover, ensure that your employees are (1) aware of your status as a private establishment and (2) trained to perform their duties accordingly. Taking the time to review your compliance now can ensure a smoother renewal process.
  3. All permit holders should remember that some permits, including mixed beverage and brown-bagging permits, expire annually and must be renewed before April 30.
  4. Most private clubs should renew their permits upon expiration as a private bar unless they qualify as exempt from federal income tax under § 501(c) of the Internal Revenue Code and have been in operation for at least one year.
  5. Country clubs currently registered as a private club may be able to renew as a sports club.
  6. Restaurants should ensure that gross receipts from food and nonalcoholic beverage sales constitute at least 30% of all total receipts from food, alcoholic beverage, and nonalcoholic beverage sales combined.

Conclusions

In summary, North Carolina bars that operate as private clubs should be mindful of recent changes in the law that will affect how they reapply for permits. More importantly, though, these changes open the door for the ABC Commission to update the regulations to better reflect the realities of bars in North Carolina and their role in our communities. In the meantime, establishments should brace for heightened scrutiny from the ABC Commission and Alcohol Law Enforcement by taking the opportunity to review their compliance with applicable laws and regulations.