The Utah Department of Alcoholic Beverage Control has failed to adequately monitor the taxes and fees collected through on-site stores at breweries, distilleries and wineries, a state audit released Thursday shows.
If the monitoring of these retail outlets — known as package agencies — does not improve, it could cause lost revenue to the state, according to the special financial audit for procedures performed during fiscal 2019.
“We consider the existing monitoring procedures inadequate and are concerned with the lack of care of certain DABC personnel to ensure proper collection of taxes and fees,” the audit states. “Inadequate monitoring of these types of package agencies could create incentive for the manufacturers to underreport their sales, distorting the competitive landscape as well as resulting in a loss of remittances to the state.”
An audit conducted in 2015 showed a similar lack of inventory control of state package agencies, which differ from larger, state-owned stores in that they are privately run outlets. The state has five types.
Type 3 package agencies are in rural areas, with populations too small to warrant a state store. Utah also has licensed package agencies at ski/recreational resorts (Type 1), rural grocery stores (Type 2), and hotels and sports arenas (Type 4).
The Type 5 package agencies are located in breweries, wineries and distilleries and allow the producer to sell products made on-site.
Package agencies must provide monthly sales reports to the DABC, which are used to determine the taxes and fees owed to the state. The agency conducts annual audits to validate reporting.
“The numbers in these monthly sales reports are not verified by DABC on a monthly basis,” auditors said, “and do not appear to be adequately verified during DABC’s annual compliance audit.”
Seven of these Type 5 package agencies were reviewed during the review. At two locations, “inventory was transferred in a manner that did not comply with existing regulations.”
Auditors also found that DABC personnel failed to notice an incomplete sales report. “As a result, the DABC under-invoiced that package agency by $5,407.64.”
Later, a DABC finance employee identified the error and sent out a corrected invoice.
The agency has already begun to address the problem, Executive Director Sal Petilos said in a written response included with the audit.
He said the DABC has formed a four-member team whose primary focus is to communicate with — and provide assistance to — the package agencies.
The department also has developed a web-based application that will ensure the reporting is done in a timelier manner and more accurate monitoring.
The audit also reviewed inventory controls for rural Type 2 and Type 3 package agencies.
The owners of these stores are compensated based on the number of bottles bought from the DABC, the audit said. “Tracking monthly sales is important to ensure package agencies aren’t improperly stockpiling inventory. "
After reviewing invoices, auditors determined that DABC bottle counts were inaccurate. The bottle count of certain cases had shifted over time, but that change was not reflected in DABC’s accounting system.
“As a result, in some situations the bottle counts were undercounted while in others they were overcounted,” the report said. " This could have the effect of undercompensating certain package agencies and possibly overcompensating others.”
When the DABC discovered the error, it was corrected, the audit states. The agency also created new contracts with the correct bottle count — but only after owners complained.
“It is concerning that DABC initially ignored the petitions of certain package agencies who pointed out these errors,” the audit said. “We also recognize that while DABC has the stronger negotiating position, fairness dictates that package agencies should be compensated under an accurate bottle-count arrangement and not compensated based on erroneous statistics.”
Petilos said the DABC has a added a new point-of-sale system that allows for “greater accuracy of bottle counts and increased reporting capabilities.”