COMMISSION MEETING September 26, 2017

Texas Alcoholic Beverage Commission 5806 Mesa Drive

Austin, Texas 78731

Kevin J. Lilly, Presiding Officer Member Ida Clement Steen, Member Houston Vacant San Antonio

TEXAS ALCOHOLIC

BEVERAGE COMMISSION Texans Helping Businesses & Protecting Communities

TABLE OF CONTENTS

TITLE PAGE

Agenda--TABC Commission Meeting – September 26, 2017 ..........................1

Minutes--TABC Commission Meeting – September 26, 2017..........................3

Attachment 1: Commission Report: Agency Activities, Budget Issues,Staff Achievements, Legislative Activities

Attachment 2: Tax and Marketing Practices Division Update Attachment 3: Audit and Investigations Division Update Attachment 4: Education and Prevention Division Update Attachment 5: Administrative Rules, Agenda Items 11-14

Certification of Minutes.....................................................................................25

AGENDA

REGULAR COMMISSION MEETING

10:00 a.m. – September 26, 2017

5806 Mesa Drive Austin, Texas 78731

Kevin J. Lilly Presiding Officer – Houston

Ida Clement Steen Member – San Antonio Commission Member Vacant

A. Bentley Nettles Executive Director

Tuesday, September 26, 2017 10:00 a.m.

Agenda

1. Call to Order Kevin J. Lilly

2. Oath of Office Administered to A. Bentley Nettles, New TABC Executive Director

Kevin J. Lilly

3. Oath of Office Administered to Matthew Chaplin, New TABC Deputy Executive Director

Kevin J. Lilly

4. Reception to Honor New Executive Director A. Bentley Nettlesand Deputy Executive Director Matthew Chaplin

Kevin J. Lilly

5. Approval of Commission Meeting Minutes of July 25, 2017 and September 1, 2017

Kevin J. Lilly

6. Commission Report: Agency Activities, Budget Issues, StaffAchievements, Legislative Activities

Bentley Nettles

7. Follow Up on Prior Internal Audit Recommendations Monday Rufus

8. Tax and Marketing Practices Division Update Thomas Graham Andrea Maceyra

9. Audit and Investigations Division Update Dexter Jones

10. Education and Prevention Division Update Mindy Carroll

11. Approve Adoption of Proposed Amendments to Rule §37.61, Suspensions

Martin Wilson

12. Approve Publication of Proposed Amendments to Rule §33.5, Food and Beverage Certificate

Martin Wilson

13. Approve Publication of Proposed Amendments to Rule §45.71, Definitions

Martin Wilson

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TEXAS ALCOHOLIC

BEVERAGE COMMISSION Texans Helping Businesses & Protecting Communities

14. Approve Publication of Proposed Amendments to Rule §45.85, Approval of Labels

Martin Wilson

15. Executive Session to consult with legal counsel: regarding settlement proposal in D. Houston, Inc. D/B/A Treasures v. Texas Alcoholic Beverage Commission, Docket No. 17-0546 in the Supreme Court of Texas, pursuant to Government Code §551.071(1)(B);regarding pending litigation in Texas Alcoholic Beverage Commission v. Live Oak Brewing Co., LLC, Docket No. 03-16-00786-CV in the Court of Appeals for the Third Judicial District, pursuant to Government Code §551.071(1)(A); and to receive legal advice pursuant to Government Code§551.071(2).

Kevin J. Lilly

16. Action on Items Discussed in Executive Session Kevin J. Lilly

17. Public Comment Kevin J. Lilly

18. Next Meeting Date: Tuesday, November 28, 2017 Kevin J. Lilly

19. Adjourn Kevin J. Lilly

Note: Items may not necessarily be considered in the order they appear on the agenda. Executive session for advice of Counsel (pursuant to §551.071 of the Government Code) may be called regarding any agenda item. Action may be taken on any agenda item.

NOTICE OF ASSISTANCE AT PUBLIC MEETINGS

Persons with disabilities who plan to attend this meeting and who may need auxiliary aids or services (such as interpreters for persons who are deaf, hearing impaired readers, large print, or Braille) are requested to contact Luann Dickerson at (512) 206-3221 (voice) (512) 206-3203 (fax). Relay Texas at 1-800-735-2989 (TTY/TDD), at least three (3) days prior to the meeting so that appropriate arrangements can be made.

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MINUTES

REGULAR COMMISSION MEETING

10:00 a.m. – September 26, 2017

5806 Mesa Drive Austin, Texas 78731

COMMISSION MEETING MINUTES September 26, 2017

The Commissioners of the Texas Alcoholic Beverage Commission (TABC) met in Regular Session on Tuesday, September 26, 2017, at TABC Headquarters, 5806 Mesa Drive, Austin, Texas.

COMMISSIONERS Kevin J. Lilly PRESENT: Ida Clement Steen

STAFF PRESENT: Bentley Nettles, Executive Director

Josh Alexander, Audit Supervisor, Marketing Investigations Unit Julie Allen, Deputy General Counsel, Legal Division John Altum, Lieutenant, Enforcement Gene Bowman, Director, Audit & Investigations Division Mindy Carroll, Director, Education & Prevention Division Dustin Carter, Quality Assurance Specialist, Ports of Entry

Division Cathleen Cavazos, Major, Arlington Enforcement Regional

Office Matthew Chaplin, Deputy Executive Director, Executive Division Amanda Collins, Regional Supervisor, Arlington Regional Audit Office Julie Davis, Program Specialist, Education Prevention Division Marc Decatur, Major, Houston Regional Enforcement Office Roger Devine, Staff Sergeant, Training Division Luann Dickerson, Executive Assistant, Executive Division Diana Figueroa, Executive Assistant, Office of Professional

Responsibility Keon Flowers, Recruiter, Human Resources Division Joe Garcia, Lieutenant, Special Investigations Unit

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TEXAS ALCOHOLIC BEVERAGE COMMISSION

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Segbe Golanyon, Assistant Regional Supervisor, Arlington Regional Audit Office

Thomas Graham, Director, Excise Tax and Marketing Practices Division

Henry Guevara, Sergeant, San Antonio Financial Crimes Unit Toni Hale, Program Specialist, Seller Training Division Gary Henderson, Project Management Office Manager,

Innovation and Technology Division Joe Iagnemmo, Web Design Administrator, Innovation &

Technology Division Stacy Jackson, Supervisor, San Antonio Regional Audit Office Ricardo Jauregui, Major, San Antonio Regional Enforcement

Office Ashleigh Jons, Seller Server Coordinator, Seller Training

Division Dexter Jones, Chief, Audit & Investigations Division JoAnn Joseph, Director, Licensing Division Victor Kuykendoll, Acting Chief of Enforcement, Field

Operations Division Andrea Maceyra, Marketing Practices Supervisor, Excise Tax

& Marketing Practices Division Vanessa Mayo, Chief Financial Officer, Business Services

Division Mark Menn, Major, Lubbock Regional Enforcement Office Mariann Morelock, Director, Communications and

Governmental Relations Alejandra Nieto, Sergeant, Training Division Chris Porter, Public Information Officer Yvette Price, Regional Supervisor, San Antonio Regional Licensing Office Paula Reed, Deputy Chief Financial Officer, Business

Services Division Albert Rodriguez, Captain, Training Division Audrey Rosales, Project Manager, Business Services Division Julie Ross, Supervisor, Licensing Division Donn Rupp, Director, Human Resources Division Robert Saenz, Deputy Executive, Enforcement Operations Sonia Salinas, Lieutenant, Waco Regional Enforcement Office Reynaldo Santos, Auditor, Audit and Investigations Administration Ron Swenson, Captain, Special Investigations Unit/Financial

Crimes Unit Todd Talley, Audit Regional Supervisor, Austin Regional Audit

Office Carla Thompson, Captain, Houston Regional Enforcement

Office Jay Webster, Director, Innovation & Technology Division David Whitt, Agent, Houston Regional Enforcement Office Martin Wilson, Assistant General Counsel, Legal Division

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GUESTS PRESENT: Jason Bienski, Mayor, City of Bryan Vic Brooks, Vice President, Republic National Distributing

Company Missy Cary, Chief of Staff, Office of Attorney General Colonel Greg Chaney, Chief of Staff, Texas Military

Department Megan Andersen Chaplin Colonel Robert DeJong (Retired) Rick Donley, President, The Beer Alliance of Texas Kyle Frazier, Texas Wine and Grape Growers Association Tucker Frazier, Kyle Frazier Consulting Steve Greinert, Wholesale Beer Distributors of Texas Bobby Gutierrez, Bryan Chamber of Commerce Brig. Gen Patrick Hamilton, Command Domestic Operations Task Force, Texas Military Department Amy Harrison Cheri B. Huddleston, Legislative Consultant, Southern

Glazer’s Chelsy Hutchison, Consultant, Republic National Distributing

Company Shawn Jordan Kyle Kacal, State Representative Gary D. Miller, General Manager, Bryan Texas Utilities Henry Nettles Peter Nettles Tracy Nettles Kean Register, City Manager, City of Bryan, TX Tyler Rudd, Central States Counsel, Wine Institute Alan Sandersen, Sandersen & Scheffer PLLC Peter Salatich, Senior Policy Analyst, Senate Committee-

Business and Commerce John Scott, Former Deputy Attorney General Ryan Skrobarczyk, Legislative Director Tom Spilman, Executive Vice President, Wholesale Beer

Distributors of Texas Gilbert Turrieta, Lobbyist, Texas Package Store Association Kelsey Vela, Analyst, Legislative Budget Board Karen Watkins, Assistant Attorney General. Office of

Attorney General Terra Willett Raymond Winter, Assistant Attorney General, Office of

Attorney General Randy Yarbrough, Consultant, Wholesale Beer Distributors

of Texas

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CALL TO ORDER

The meeting of the Texas Alcoholic Beverage Commission was called to order at 10:18 a.m. by Presiding Officer Kevin J. Lilly. A quorum is present.

Presiding Officer Lilly stated that before he began the meeting he wanted to take a moment to recognize the efforts the individuals in this room and within the agency offered the citizens of the State of Texas in support during Hurricane Harvey. He mentioned the Director of the Department of Transportation came to him and stated they needed help and if some of the agents could assist them in Houston. Presiding Officer Lilly inquired how many agents he needed. The response was “How about all of them?” Presiding Officer Lilly stated they were able to provide 140 agents to assist at the NRG center in Houston. He added, he himself was also deployed for his State Guard commitment during that time and was able to visit the TABC agents on duty at the NRG. He noted this was not a glamourous assignment but providing security and safety to 8,000 individuals under great distress and despair, who lost everything showed the agency’s collaborative spirit working with other organizations. He wanted to congratulate General A. Bentley Nettles, Deputy Executive Director Robert Saenz and Major Decatur and everyone else who rallied to help the citizens of Houston. He added, Houston is resilient and is on the path to rebuilding the lives that were shattered by the tragedy. He again thanked everyone for their efforts.

Presiding Officer Lilly recognized the special guests in attendance and extended his thanks for their presence.

Presiding Officer Lilly stated in the search for a new Executive Director he wanted someone that had a military background, could relate to the law enforcement side but also have a legal background to understand the legal ramifications in aspects of the regulatory capacity in which the agency operates. He commented it would be difficult to find that combination, but fortunately General A. Bentley Nettles fit that profile. Presiding Officer Lilly conveyed in detail General Nettles’ background and extensive military, business and law experience, including many honorable military decorations.

OATH OF OFFICE ADMINISTERED TO A. BENTLEY NETTLES, NEW TABC EXECUTIVE DIRECTOR

Presiding Officer Lilly called for A. Bentley Nettles to step forward for the recitation of the Oath of Office for Executive Director.

A. Bentley Nettles recited the Oath of Office for Executive Director and stated it was an honor and privilege to be asked to help lead the agency. He recalled that he received an email from a retired agent that lives alone near the Victoria area. In the email, the retired agent stated during the flooding, the internet was down and phone service was spotty and he wasn’t able to let people know he was okay. One day he looked outside his window and saw a TABC vehicle had pulled up. It was Sergeant Farmer out of the Bryan office that went to check on him which he greatly appreciated. Executive Director

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Nettles expanded this is the type of organization TABC is, not only do we care about the job the State of Texas has asked us to do, but it cares about the employees, current and former. He added, his job for the next 468 days before we go before the legislature is to tell the story of this agency. He stated we do a lot of great things for this organization, we just don’t do a very good job about telling people about it.

Executive Director Nettles discussed in detail Matthew Chaplin’s background and extensive State, business and law experience.

OATH OF OFFICE ADMINISTERED TO MATTHEW CHAPLIN, NEW TABC DEPUTY EXECUTIVE DIRECTOR

Presiding Officer Lilly called for Matthew Chaplin to step forward for the recitation of the Oath of Office for Deputy Executive Director.

Matthew Chaplin recited the Oath of Office for Deputy Executive Director. Deputy Executive Director Chaplin thanked Chairman Lilly, Commissioner Steen and Executive Director Nettles for the opportunity. He also thanked his wife, Megan for her support. He noted she’s seen him change jobs frequently to assist agencies in crisis and he appreciated her patience and understanding. He added he’s proud of the agency’s mission and agrees with Executive Director Nettles that we need to educate others about what the agency does. He ended stating he was looking forward to working with everyone and is very honored to be here today.

RECEPTION TO HONOR NEW EXECUTIVE DIRECTOR A. BENTLEY NETTLES AND DEPUTY EXECUTIVE DIRECTOR MATTHEW CHAPLIN

Presiding Officer Lilly called for agenda item 4 - Reception Honoring TABC New Executive Director Bentley Nettles and Deputy Executive Director Matthew Chaplin. The meeting adjourned at 10:38 a.m. for the reception.

The meeting reconvened at 11:02 a.m.

APPROVAL OF COMMISSION MINUTES OF JULY 25, 2017 AND SEPTEMBER 1, 2017.

Presiding Officer Lilly called for approval of the Commission meeting minutes of July 25, 2017 and September 1, 2017. Presiding Officer Lilly so moved to approve the minutes as written. Commissioner Ida Steen seconded the motion and the motion passed.

COMMISSION REPORT: AGENCY ACTIVITIES, BUDGET ISSUES, STAFF ACHIEVEMENTS, LEGISLATIVE ACTIVITIES

Presiding Officer Lilly called upon Executive Director Bentley Nettles to present the Commission Report: Agency Activities, Budget Issues and Staff Achievements, and Legislative Activities.

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Executive Director Nettles began his presentation by reviewing the new reorganization of the agency. He stated the peace officers fall under the Deputy Executive Director of Enforcement, Chief Robert Saenz. Deputy Executive Director, Chief of Staff Matt Chaplin is responsible for Business Services, Innovation and Technology, Human Resources, Audit and Investigations, and Marketing Investigations. Deputy Executive Director, Dennis Beal is responsible for Business and Revenue Operations, or any area that generates revenue which includes Licensing, Tax and Marketing Practices, Education and Prevention. The Training Division is also included under Deputy Executive Director Beal’s direction. Executive Director Nettles added, the shifting of divisions to a more equal distribution for each Deputy Executive Director will be easier to manage and truly lead them and move the agency forward.

Executive Director Nettles reintroduced Matt Chaplin as the new Deputy Executive Director - Chief of Staff.

Executive Director Nettles introduced Colonel Dennis Beal (Ret.) Director of Business and Revenue Operations and detailed his extensive financial, business and military background. He added he looks forward to Colonel Beal raising the bar on revenues and being a strategic partner.

Executive Director Nettles introduced new General Counsel, Clark Smith and detailed his extensive legal background. He welcomed him to the agency and stated General Counsel Smith has already implemented some positive changes for the agency.

Executive Director Nettles gave a review of the assistance TABC provided during Hurricane Harvey. He stated within 24 hours, TABC deployed 23 agents to Victoria, TABC was the first agency to respond outside of the Victoria resource area. He stated agents assisted with humanitarian efforts by performing traffic direction and security at points of distributions, local hospitals, and other key locations necessary for the relief efforts. In addition, TABC also responded to an assistance request for the Dickenson

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area, some residences were flooded as high as ten feet. Ten agents worked 12-16 hour shifts assisting with checkpoints, enforcing curfew, and patrolling neighborhoods.

Executive Director Nettles detailed the assistance provided to Houston. TABC received a request from Texas DPS Department of Emergency Management (TDEM) to assist the Houston Police Department and Harris County Precinct 1’s Office with security at the NRG Center which had been transitioned over to a shelter for evacuees. Agents worked 12 hour shifts day and night providing internal and external security for the many thousand evacuees who sought refuge at the shelter and the many volunteers working there. He stated between September 2-23, 2017, 153 agents (77% of our CPOs) were deployed to Houston.

Executive Director Nettles stated he made field visits to the Victoria and Houston operations to provide lunch and thank the agents for their support during the aftermath of Hurricane Harvey.

Executive Director Nettles remarked TABC staff made efforts to limit loss of both personal and State properties. He noted some TABC Staff were affected directly by Hurricane Harvey. Damage ranged from total loss of personal residences and vehicles, to moderate and minor wind and water damage to homes, personal vehicles and two State vehicles. He added at one point from Corpus Christi to Beaumont areas, 5 TABC offices were closed with the Beaumont office sustaining the most water damage.

Executive Director Nettles discussed the actions taken to assist the industry affected by Hurricane Harvey. He stated we educated retailers about products that may have come into contact with flood waters which pose a health risk and are unsuitable for consumer consumption. He also stated the agency made exceptions for permittees regarding payment of renewal late fees. He added permittees have a 30-day grace period after expiration for which they can still file for renewal without having to file an original application. The commission, as authorized under Section 6.04 of the Code and in accordance with Administrative Rule 33.6, assesses a late fee of $100 per permit upon

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applying for renewal of their permit after its expiration date. Permittees affected by Hurricane Harvey holding permits that expire August 23, 2017, through September 30, 2017, will be granted an exception from paying the $100 late fee to alleviate additional financial burden due to the permittees’ inability to file for renewal as a result of hurricane-related complications.

Executive Director Nettles stated regarding Excise Tax Reports, permittees affected by the hurricane will not be penalized if they are unable to file their report and/or submit payment by the statutory due date of the 15th of each month. He added the Credit Law was temporarily suspended for the 54 counties from August 1 – September 15th. A Houston Chronicle article incorrectly reported TABC was holding people accountable for the Credit Law violations. Executive Director Nettles reached out to the reporter to correct the error, as well as the Permit Holder mentioned in the article. The Permit Holder responded that he’s never had problems with TABC and thought we were doing everything to help him. Executive Director Nettle noted for the Storage and/or Transfer of Salvaged Alcohol, on a case-by-case basis, TABC allowed certain permit holders to temporarily move their product if the location was unable to be secured or able to be back in business. They could move their product to another location through an affiliated permit number to be sold. He stated for Local Distributors and Beer Territorial Assignments, once notifying TABC, allowed the distributors to move product to adjacent locations outside of the affected counties.

Executive Director Nettles stated for Upper Tier Members that were a manufacturer, damaged and could not go back into production, we allowed them to transfer product between locations, distributors, and wholesalers in order to get back into business as soon as possible. He added for Distilled Spirits Identification Stamps, the Excise Tax and Marketing Practices division worked with TABC Field Operations to hand deliver stamps to local distributors to replace stamps that were damaged in the hurricane.

Executive Director Nettles gave an update on the POETCS, the Ports of Entry Collection System. He noted in May 2017, the Innovation and Technology Division (ITD) created a contract for a POE Tax Collection Managed Application Services and issued a request for Proposal. The request closed on June 30, 2017 with no response. He stated in August 2017, the Ports of Entry and IT divisions met with the current vendor that supports POETCS and requested a proposal for an upgrade to the current system. They are currently waiting for a response from the vendor. He explained that we may need to pivot and engage the Comptroller or Department of Information Resources (DIR) and see if there are other options. He added since a portion of this system is to collect cigarette taxes, it may be inquired if the Comptroller can assist in funding a better system.

Executive Director Nettles gave an overview of key personnel promotions and new hires.

Executive Director Nettles concluded his presentation and inquired if the Commissioners had questions. There were none.

Executive Director Nettle’s report is supported by a PowerPoint presentation. (Attachment 1)

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FOLLOW-UP ON PRIOR INTERNAL AUDIT RECOMMENDATIONS

Presiding Officer Lilly moved to agenda item 7, and called Mr. Monday Rufus for the follow-up on prior Internal Audit Recommendations.

Mr. Rufus stated they reviewed the status of our internal audit recommendations related to the following as of August 22, 2017:

• Field Operations Audit Administration (Original Report January 4, 2016) • Information Systems - Security (Original Report August 22, 2016)

Field Operations Audit Administration

Finding 1: The Field Training Manual Procedures Are Not Being Complied With In The Training of Audit Unit Probationary Auditors.

Follow-up Results: Auditors reviewed the TABC Field Probationary Auditor Training Manual (updated 02/09/2016) posted on the agency’s intranet.

TABC has established a virtual folder for each Probationary Auditor trainee in the agency’s intranet to document and account for all the training activities within each of the five (5) phases of the Field Training Program. Auditors selected a sample of Probationary Auditors in the Field Training Program to determine if corrective action had been implemented on the audit recommendations. Based on our testing results, it appears the TABC management has implemented all our recommendations. No further work is deemed necessary in this area at this time.

Information Systems - Security Audit

Finding #1: Ensure TABC Complies with the Information Security Standards.

Follow-up Results: Auditors determined the TABC has established the Information Security Officer (ISO) position. Reviewed the job description and interviewed the ISO regarding the requirements of the position. Based on the results of our procedures, it appears the TABC management has implemented our recommendation. No further work is deemed necessary in this area at this time.

Finding #2: Design and Implement Periodic Review of User Access to Agency Systems.

Follow-up Results: Auditors inquired of TABC management about the implementation status of our recommendation related to User Access. Determined that a SharePoint site has been established to document periodic review of user access to the TABC system. Auditors reviewed the SharePoint site and reviewed user access reviews performed in Fiscal Year 2017. Based on the results of our procedures, it appears our recommendation has been implemented. No further work is deemed necessary in this area at this time.

Mr. Monday Rufus concluded his presentation and inquired if the Commissioners had any questions. There were none.

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TAX AND MARKETING PRACTICES DIVISION UPDATE

Presiding Officer Lilly moved to agenda item 8 and called Director Thomas Graham for the Tax and Marketing Practices Division update.

Director Graham introduced Supervisor Andrea Maceyra and remarked she was his right hand. He gave an overview of the Label Approval Team, Excise Tax and Marketing Practices staff.

Director Graham stated the Excise Tax Division is responsible for collecting, processing and reviewing excise tax payments and reports as well as other reports. Excise tax is paid by the wholesaler/distributor upon sale to the retailer and/or by the manufacturer upon sale to the retailer or direct to consumer. He noted in FY2017, 57,809 reports were received and reviewed. He added account examiners reconcile reports and auditors conduct 120 comprehensive tax audits annually.

Director Graham reviewed the CY2016 Compliance Numbers for In-State Manufacturers slide.

Permit Type Total Number Total Gallons Average Gallons Winery (G) 417 3,836,433 9,200 Distillery (D) 105 21,218,398 202,080

License/Permit Type Total Number Total Barrels Average Barrels Brewery (B)* 117 413,000 3,591 Manufacturer (BA)* 58 82,846 1,479 Brewpub (BP) 160 78,389 490 *B/BA combined produce less than 225,000 barrels

Director Graham stated there are three other breweries in the state, whose production numbers are not included in these total barrels. If he had included them it would add another 20 million barrels to the total. Presiding Officer Lilly inquired which three breweries were not included. Director Graham responded Miller/Coors in Fort Worth, Anheuser-Busch in Houston and Spoetzl in Shiner. Presiding Officer Lilly inquired of the 413,000 barrels, what were the top 5-10 breweries. Director Graham stated he didn’t have that information with him but would provide a list of the top 10 breweries to Presiding Officer Lilly, as well as wineries and distilleries.

Director Graham stated Excise Tax is moving to an online submission for reports. This is not an automated system. The license/permit holder can submit payment online via Texas.gov and attach a scanned report using the existing online system utilized by Label Approval and Licensing. He noted the larger tax paying entities already have to pay EFT through the comptroller’s office so they have another method than writing a check. This online submission process will increase productivity and eliminate processes and procedures across multiple divisions.

Director Graham stated for FY 2017 $231.7 million was collected in Gross Excise Taxes in Texas. He added overall there was a 1.83% growth in revenues collected. He gave a breakdown of revenues collected by beverage class. He stated Beer pays the majority

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http:Texas.gov

of taxes at $108 million (47%), Distilled Spirits pays $91 million (39%), Wine pays $16 million (7%), and Malt Liquor pay $15 million (7%). He added most of these taxes are paid by Wholesalers and Distributors level and also by some Manufacturers that are able to sell directly to the general public or retailers in the State.

Director Graham reviewed the Wholesale Sales in Gallons by Beverage Class with Beer making up 75% of total gallons that come into the State. He added the per capita numbers are based on the Comptroller’s report in terms of population in Texas, indicate the average individual consumes about 20 gallons of beer a year, a gallon and a half of distilled spirits and 2 gallons of wine and 2 gallons of ale.

Director Graham reviewed the Tax ID Stamps and Temporary Memberships slide. He explained that ID stamps are supplied to package stores in the State that have the ability to sell mixed beverage and private club permittees. Mixed beverage permittees, restaurants, private clubs and bars buy their distilled spirits from package stores that have a local distributors permit. Wholesalers sell to package stores and they sell to these restaurants, etc., sometimes referred to as fourth tier in the State. TABC by law provides Tax Stamps via an online ordering system. Local Distributors, and permittees, logon to the online system and order tax stamps and the Excise Tax Divisions looks at their history to confirm it aligns with what the amount of tax stamps they are requesting and track the information. The tax stamps provide several purposes it: 1) marks a bottle indicating it was purchased via proper channels which creates a paper trail that the Comptroller and/or TABC can look at how much product a bar or restaurant has purchased. 2) This amount is then compared to what they reported was sold, which in turn tells the State how much taxes are owed. 3) The tax stamps serve as a tool to the agents, that allows a visual indication that the products were purchased legally, helps them track product on whether a bottle has been refilled or substituted, and how long the product was on the shelf and where it came from. He added in additional tax stamps, the Tax Division issues temporary membership cards for private clubs. Private clubs can pay on an unlimited basis or others pay a lesser fee based on the members they want to have. If a private club rents out their venue, they can purchase additional temporary memberships as required by statute.

Presiding Officer Lilly inquired what the gross percentage of taxes a consumer pays which includes sales taxes and excise taxes. He added he’d like to know the “real” margin of taxes that go to the Retailer, Wholesaler, Package Store, etc. Director Graham indicated he did not have that information with him but he would provide it to him at a later date.

Director Graham gave a review of the Marketing Practices Team and the function they serve. This includes being a point of contact for the industry, answering industry questions, conducting reviews of programs and industry promotions to determine compliance with requirements, laws, regulations, policies and procedures.

Director Graham gave a review of the Label Approval Team. They process applications for malt beverages, low wine, wine, and distilled spirits. The team chemist, tests malt beverage and low wine samples for label approval, and tests seized evidence from the field.

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Presiding Officer Lilly inquired how many samples are tested. Tax and Marketing Supervisor Andrea Maceyra responded on average, 100 products come into the lab for testing a month. Presiding Officer Lilly inquired if the chemist would be assisting on the analysis of tainted alcohol from flood damage. Director Graham said he could possibly assist, but that analysis may go through a different process.

Director Graham explained the label approval process. He expanded by statute, no person may ship or cause to be shipped into the State of Texas any alcoholic beverage unless the product has received label approval from the Commission. The division issues a certificate of label approval. Wine, beer and spirits are treated differently because they are regulated separately under the law. Wine and spirits first go to the federal Tax and Trade Bureau and seek label approval from them first, we use their certificates to determine whether they are compliant with Texas state laws. The State applications are filed along with the federal certificates and we issue approvals from there. This makes for a speedy process for them and helps to ensure we register everything. Malt beverage applications are looked at more closely, agency code rules and regulations are checked for compliance and we test them for alcohol content.

Director Graham reviewed the Label Approval: Volume and Growth slide. He indicated in FY2017, 21,659 labels were approved. Malt Beverages has grown about 249% since 2012.

Director Graham reviewed the Label Approval: Applications Processed by Beverage Class slide. He stated 61% of labels processed are for wine, 23% for Malt Beverages (4-5% more than last year), and 15% for Spirits.

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Director Graham reviewed the Label Approval: Average Day to Process applications slide. He stated in 2016 the total average for wine, spirits and beer was 20 days. In 2017, we’re down to 15 days. Malt Beverages alone were averaging 35 days in 2016. He noted in May 2017 they borrowed staff from two other divisions to work on the backlog of applications. For example, right now for malt beverage there is about an 8 day turnaround, if the application is error free, we approve in about 5 days. Distilled spirits currently average 11 days.

Director Graham reviewed his final slide and stated a few years ago we implemented an online label approval process. Online applications do not go through the mailroom or BSD. We set a goal to get at least 75% participation by August 2018 and right now we’re at 68%, we don’t foresee any problems meeting the goal. He added nearly 90% of the malt beverage producers use the online process.

Direction Graham noted that in 2016 his division went through an Internal Audit, Mr. Monday Rufus did not find any deficiencies. He concluded his presentation and asked if there were any questions.

Commission Ida Steen inquired what Director Graham’s division needed to approval labels faster, what was holding them up. Director Graham responded that Malt Beverage approvals are more complex and require more time. The explosion of beer in the market place has caused a need for more staff to review those applications. He added the two additional people they “borrowed” really helped them get the processing time down. Maintaining staff has been an issue but they are growing their staff little by little which will help to keep that backlog down. He added the holiday season adds additional work due to the seasonal beers that come through.

Presiding Officer Lilly inquired about the ability to hire interns or temps to assist during the holidays. Executive Director Nettles stated interns can be utilized during the holidays, he would have to do some research if temp workers could be hired. Presiding Officer Lilly requested a hard copy of Director Graham’s presentation. He asked for clarification on why wine was the biggest growth on labels and the smallest number in gallons. Director Graham clarified wine is the biggest majority of labels and they send a new label for every product, which is the largest selection of varieties. Presiding Officer Lilly inquired how many wine manufacturers there were in Texas. Director Graham responded that in 2016 there were 417 wineries. Presiding Officer Lilly inquired if these wineries were geographically dispersed. Director Graham stated they are located throughout the state. Presiding Officer Lilly had no further questions and thanked Director Graham for his report.

Director Graham’s report is supported by a PowerPoint presentation. (Attachment 3)

AUDIT AND INVESTIGATIONS DIVISION UPDATE

Presiding Officer Lilly moved to agenda item 9 and called Chief Dexter Jones for the Audit and Investigations Division update.

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Chief Jones stated the primary responsibility of the Audit Unit is to ensure compliance with regulatory and tax/financial requirements under authority of the Commission by initiating a variety of audits, conducting inspections, and administering education initiatives all aimed at seeking voluntary compliance from taxpayers.

Chief Jones reviewed the Audit and Investigations Division staff and introduced them to the commissioners. He elaborated that the division has moved from primarily conducting tax audits to conducting administrative/regulatory duties associated with the following activities:

• Cash and Credit Law • Confiscated Property • Licensing • Marketing Practices • Educational Initiatives • Administrative Case Settlements • Complaint Investigations • Regulatory & Tax Audits •Assist Special Investigations Unit, •Compliance Inspections Financial Crimes Unit, Marketing Investigations Unit and Enforcement with various investigations.

Chief Jones reviewed the FY17 Audit Unit activities and stated 33% of time is utilized by conducting Tax & Regulatory Audits/Investigations. He added 25% of time is spent on Administrative Duties (confiscating seized property, assisting customers, phone calls). This area is being analyzed to see how the time spent can be reduced.

Presiding Officer Lilly asked for an example of a confiscated property. Chief Jones stated during an Enforcement operation, if an individual is selling illegal alcohol or has an illegal weapon, we can confiscate the property.

Presiding Officer Lilly inquired if an individual is selling alcohol out of his vehicle, would the agency be able to confiscate the vehicle. Chief Jones indicated if the act was a felonious activity we would be within our authority. He note SIU has confiscated vehicles that were transporting drugs being passed through the border.

Presiding Officer Lilly inquired if one of the border officers seizes illegal alcohol coming from Mexico, can TABC confiscate it as opposed to having them throw it out. Chief Jones stated that function is handled by Ports of Entry, the individual can abandon the property in which it becomes the responsibility of TABC to destroy. Ports of Entry, Chief John Reney stated the product would be disallowed. He noted if it’s a full bottle, we confiscate the product after we give them the paperwork. After a week or so of the disallowed product being collected, an Enforcement Agent will destroy the product.

Presiding Officer Lilly recalled the recent seizure of tainted (believed to contain a toxin) alcohol at the border and inquired if any punitive action was taken against the individuals carrying the alcohol. Chief Reney stated none was taken because the POE Tax Compliance Officers are civilians, not officers and have no law enforcement authority. Chief Reney stated if it is believed a product is tainted with drugs, we will ask for assistance from the Customs and Border Patrol partners. If drugs are found, they will handle the seizure from that point on.

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Chief Jones reviewed the FY17 Audit Unit Accomplishments and stated they exceeded all the annual goals.

Inspections: Goal - 23, 200 Actual - 24,252 Audits: Goal - 1,585 Actual - 1,600 Education: Goal - 55,000 Actual - 56,410 Investigations: Opened - 2,587

Closed - 2,573 Closed within 60 days - 86.01%

Administrative Cases: Filed - 624 (Sustained - 93.45%)

Chief Jones introduced Captain Ron Swenson of the Special Investigations/Financial Crimes Units (SIU/FC). He explained with recent changes, SIU/FC will be transitioning from Audit and Investigations to the Enforcement Division.

Chief Jones stated the mission of SIU is to identify and investigate habitual patterns of at-risk behavior of permittees primarily through covert operations.

Chief Jones reviewed the SIU organization chart and noted the areas of responsibility.

Chief Jones reviewed the current 209 on-going investigations, most of the investigations are on Narcotics Violations, followed by Money Laundering and Human Trafficking investigations. He added the SIU unit has cancelled for cause 97 permits, this does not include cases closed with a civil penalty, pending in legal or closed protest investigations. He gave an example of a FY17 SIU case, TNT, which was operating within a drug-free zone (in and around an elementary school). It took approximately two years and 200 undercover operations to get the six locations cancelled. 86 Administrative Violations were assessed with 49 felony warrants on 17 individuals. To date most of those individuals have been arrested with the assistance of El Paso PD, Department of Public Safety and Homeland Security.

Presiding Officer Lilly inquired over what period of time were the 200 undercover operations performed. Chief Jones responded the operations spanned over 2015 to 2017. He noted when similar operations result in Closure for Cause there is typically a positive impact in the community and Calls for Service by local police significantly drop.

Commissioner Steen inquired if the locations were owned by the same people. Chief Jones responded that they were all different individuals.

Chief Jones reviewed the SIU/FCU Performance Measures slide. He noted the average cost per Organized Criminal Activity/Joint Operation was about $2300 and over 641 investigations were conducted statewide.

Chief Jones stated the mission of the Financial Crimes Unit is to focus its efforts primarily on the prevention, investigation and detection of financial related crimes that have a nexus to the Alcoholic Beverage Industry. Also, to gather and analyze financial intelligence for the investigatory purpose for any financial crimes that have a nexus to the alcoholic beverage industry and may or may not be linked to Organized Criminal Activity (OCA), and to provide auxiliary support to the Special Investigations Unit (SIU),

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Auditing, Licensing Division, Ports of Entry Division, and Enforcement Division for the purpose of joint investigations of a financial nature.

Chief Jones gave an overview of the Financial Crimes unit staff. Team Lead, Henry Guevara is located in San Antonio, the other Investigators are located in Dallas, El Paso, Harlingen and Houston. All the members of the FC unit serve on local task forces which serves as a force multiplier.

Chief Jones highlighted a Financial Crimes unit case out of the Arlington area that involved subterfuge. A licensing service remitted $7420.00 in payment for fees associated with obtaining a TABC permit. The subterfuge owners were identified as attempting to obtain permit(s) on behalf of a known drug trafficking organization member. The Financial Crimes unit identified the source transaction and executed a search warrant to seize the illicit funds that were used to apply for a permit for the purpose of attempting to traffic narcotics through a licensed location.

Presiding Officer Lilly inquired what would be a basic example of how a bar or restaurant would be used for money laundering. Chief Jones responded that primarily cash businesses are used to money launder, in some cases taxes are overstated. Depletion analysis are conducted to compare inventory and purchases to what should be paid in taxes.

Presiding Officer Lilly inquired if there was a way to quantify the dollars that are laundered in Texas through average businesses. Chief Jones stated there are tools used such as a software Fence In, or looking at their books, examining their purchases and depletion of alcohol. Chief Jones noted he doesn’t believe the dollars have ever been quantified but there are ways to do it in the future. Presiding Officer Lilly indicated the unit was busy enough and if it required more work to quantify that number not to create work. Sergeant Henry Guevera added that being able to quantify the dollars is difficult because money laundering by nature is done secretively. Chief Jones recalled a case where an individual was suspected of money laundering over $100 million through eight bars. He expanded the individual had shell companies set-up for deposits but when drive-by visits were made at the locations they were boarded up and abandoned although bank records indicated regular deposits were being made.

Chief Jones concluded his presentation and inquired if the Commissioners had any additional questions. They had none.

Chief Jones’ report is supported by a PowerPoint presentation. (Attachment 4)

EDUCATION AND PREVENTION DIVISION UPDATE

Presiding Officer Lilly moved to agenda item 10 and called Director Mindy Carroll for the Education and Prevention Division update.

Director Carroll began her presentation by giving an overview of the budget, staff and responsibilities. She stated the division budget is $385,147 with grants supplementing the programming budget. The division is comprised of seven employees who oversee

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Seller Server Training and Grant/Education Programs and materials. She added the division falls under Colonel Dennis Beal, Deputy Executive Director of Business and Revenue Operations’ responsibility.

Director Carroll stated Seller Server Training generates revenue and is established in Texas Alcoholic Beverage Code Sec. 106.14, TABC Texas Administrative Rules Chapter 50. She added Ashleigh Jons runs the Seller Server program and assists with the Education programs as well.

Director Carroll stated in FY17 over 402,000 Seller Server certificates were issued and that number continues to grow. The number of programs continue to decline, this is due to individuals taking the course online. She noted it doesn’t take as many programs to operate if classrooms aren’t needed in the individuals cities. She expanded that in FY2017, 85% of certificates issued were through On-line programs, in Classrooms 5.29% certificates were issued, and In-House 9.46% certificates were issued. Which indicates the program is moving to primarily On-line model. She added that only 28.3% of the providers were On-line; 51.7% were Classroom and 20% were In-House.

Director Carroll gave a review of the Revenue Breakdown.

Director Carroll noted the certificates are good for two years for the trainees and the applications to operate the schools and to train. Industry members are allowed to own their own school but are required to have a minimum of 500 employees. Examples of those types of places are HEB and 7-11, they can operate their own schools.

Director Carroll stated the FY18 TXDOT Grant for $548,839 for Educational Funding and Overtime for Enforcement to do inspections at licensed locations has been secured. At this time, the JAG grant totaling $404,581 have yet to be awarded. We are waiting to hear from the Governor’s Office if we will be receiving that funding. She noted last year’s TXDOT Grant (Oct 2016-Sept 2017) focused on Auditing and Marketing Practices which involved quite a bit of training for the auditor’s and paid for 15 more CFE certifications and specialized training. She added the JAG Equipment Grant funded needed Lab equipment and Training Division needs. Director Carroll stated this year’s TXDOT Grant (Oct 2017-Sept 2018) is for Under 21 Community Education, it is

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switching over to school-based educational programming. As mentioned before, the JAG Grants for Equipment, and SRT/Investigations/POE overtime is pending.

Director Carroll stated planning has started for a future State Farm Grant for Emergency Response and promoting DWI Government curriculum. The planning for FY2019 Grants for TXDOT and JAG has begun, these are typically due between December 2017 and early February 2018.

Director Carroll stated her division is responsible for Education Programs and Materials for all the different areas such as retailers, school-based, college-based and some law enforcement. She stated staff has moved to printed materials that are distributed, the Federal Government stated in 2015 they would no longer approve printed items such as pencils or other trinkets.

Director Carroll gave an overview of items created by her division for distribution among retailers, high school, college and community level, and for law enforcement curriculum. In FY17 eight social media campaigns via Twitter and Facebook were completed. She added they hosted Retailer Marketing Practices training with Director Graham’s group in Houston for the Super Bowl and also completed a “Train the Trainer” program for the new retailer education program.

Director Carroll stated the College-based Community project is partnership between TABC, Texas A&M Transportation Institute (TTI) and Texas State University – San Marcos (TxSTAT). She noted TTI is currently conducting Focus Groups to Retailers to provide information for base-line data for effectiveness. Enforcement has conducted Minor Sting Operations in the area for base-line data. She added in FY2018, TTI and TxSTAT will conduct student driven focus groups and surveys to continue base-line

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data. The three partners will implement an educational program driven by the data in March & Sept 2018. The information will be consolidated and the program will be re-evaluated and the findings shared. The program will hopefully be expanded to other college areas.

Director Carroll reviewed the Education Programs planned for FY18 which included increasing Social Media presence, updating the www.2young2drink.com website and creating a video series for school-based programs along with creating additional curriculum for teachers.

Presiding Officer Lilly stated as a parent himself, he thinks the biggest culprit in teenage drinking is the parents. The parent’s belief that “drinking in my house, it’s okay”, or “I’d rather my teenager drink in front of me, than drink somewhere else”. He has discussed this concern with Deputy Executive Director Saenz and Major Marc Decatur. He would like to consider a long-term parent initiative across the state that would provide a video or information at Parent/Teacher Conferences educating them on the legal consequences if a child is drinking in their house with their knowledge. The ramifications for providing the teenager with alcohol and the teenager is injured or the teenager goes out and injures someone else. He hasn’t seen an initiative like that and would like to see it, something that stresses the liability. Director Carroll stated that initiative can be added into the Grant she is currently writing. She noted she is also aware of that issue. She added we already have materials that can be used for that initiative as a tool-kit. Any additional resources needed for that initiative can be written into the Grant as long as it is approved through the chain-of-command. Presiding Officer Lilly stated that approval wouldn’t be a problem. He inquired if Commissioner Steen had any comments on the issue. She stated she also was concerned with that issue as she now has grandchildren she worries about.

Director Carroll concluded her presentation.

Director Carrol’s report is supported by a PowerPoint presentation. (Attachment 5)

Presiding Officer Lilly called upon Assistant General Counsel Martin Wilson for the presentation of agenda Item 11.

APPROVE ADOPTION OF PROPOSED AMENDMENTS TO RULE §37.61, SUSPENSIONS

Assistant General Counsel Martin Wilson stated agenda item 11 is to adopt amendments to §37.61, relating to Suspensions, without changes to the proposed text as published in the August 11, 2017 issue of the Texas Register (42 TexReg 3948). No comments were received.

Generally, Alcoholic Beverage Code (Code) §11.64(a) requires the agency to allow an offender to pay a civil penalty in lieu of having a permit or license suspended. However, that same section lists certain offenses for which the agency may exercise discretion in deciding whether to allow payment of a civil penalty in lieu of suspending the permit or license.

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http:www.2young2drink.com

House Bill No. 1612, 85th Regular Session of the Texas Legislature amended Code §11.64(a) to add any offense relating to “controlled substances or drugs” to the list of offenses for which the agency may exercise discretion regarding the civil penalty option.

The adopted amendments include in rule §37.61 the offenses added by House Bill No. 1612 to those violations for which Code §11.64(a) allows the agency discretion concerning whether a civil penalty should be allowed in lieu of a suspension. The offenses listed in the rule as amended match the offenses listed in the code as amended.

Presiding Officer Lilly moved to Approve Adoption of Proposed Amendments to Rule §37.61, Suspensions. Commissioner Steen seconded the motion and the motion passes.

Presiding Officer Cuevas called upon Assistant General Counsel Martin Wilson for the presentation of agenda Item 12.

APPROVE PUBLICATION OF PROPOSED AMENDMENTS TO RULE §33.5, FOOD AND BEVERAGE CERTIFICATE

Assistant General Counsel Martin Wilson stated agenda item 12 is to propose amendments to §33.5, relating to Food and Beverage Certificate. He noted a Stakeholder meeting was held and there were questions that were answered, but no comments made. He added a public hearing is scheduled for October 26, 2017.

House Bill No. 2101, 85th Regular Session of the Texas Legislature amended Alcoholic Beverage Code (Code) §§25.13, 28.18, 32.23 and 69.16 to provide more uniform treatment of food and beverage certificates regardless of their associated primary permit or license.

For purposes of rule §33.5, one of the significant changes was to eliminate the requirement that the permit or license holder was responsible for food preparation. For some permits or licenses, the premises formerly had to be primarily a food service establishment. Under the Code as amended, food has to be available at the location (the designated physical address of the permitted or licensed premises), but the food need not be provided by the permit or license holder. And although permanent food service facilities are required, the location need not be primarily a food service establishment. The proposed amendments to rule §33.5 are intended to conform the rule to the new Code requirements. In addition, stylistic and grammatical changes are made throughout.

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Presiding Officer Lilly moved to Approve Publication of Proposed Amendments to Rule §33.5, Food and Beverage Certificate. Commissioner Steen seconded themotion and the motion passes.

Presiding Officer Cuevas called upon Assistant General Counsel Martin Wilson for the presentation of agenda Items 13 and 14.

APPROVE PUBLICATION OF PROPOSED AMENDMENTS TO RULE §45.71, DEFINITIONS

APPROVE PUBLICATION OF PROPOSED AMENDMENTS TO RULE §45.85, APPROVAL OF LABELS

Assistant General Counsel Martin Wilson stated agenda item 13 proposes amendments to §45.71, relating to Definitions. He stated agenda item 14 proposes amendments to §45.85, relating to Approval of Labels. These rules are related at which 13 defines what a qualified lab is, and item 14 implements it. This rule went before a Stakeholder meeting and there were no questions or comments.

House Bill No. 2299, 85th Regular Session of the Texas Legislature amended Alcoholic Beverage Code §101.67 regarding testing of malt beverages to verify alcohol content. Prior to the House Bill No. 2299 amendments, such testing had to be conducted by an independent, reputable laboratory or by the commission. The amendments deleted the reference to the reputation of independent laboratories, and added another category of laboratories eligible to verify alcohol content, i.e., laboratories certified by the U.S. Alcohol and Tobacco Trade Bureau as qualified for the analysis of beer for export.

He stated the proposed amendments to rule §45.71 would conform the rule to Alcoholic Beverage Code §101.67 by deleting the reference to reputation in the definition of an independent laboratory, and by adding a definition of qualified laboratory.

Assistant General Counsel Wilson stated the proposed amendments to rule §45.85 would conform the rule to Alcoholic Beverage Code §101.67 by adding test results from qualified laboratories to those of independent laboratories which may be submitted in lieu of submitting a product sample in connection with an application for the approval of a label for a malt beverage.

Presiding Officer Lilly moved to Approve Publication of Proposed Amendments to Rule §45.71 and §45.85, as recommended. Commissioner Steen seconded the motion and the motion passes.

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EXECUTIVE SESSION TO CONSULT WITH LEGAL COUNSEL: REGARDING SETTLEMENT PROPOSAL IN D. HOUSTON, INC. D/B/A TREASURES V. TEXAS ALCOHOLIC BEVERAGE COMMISSION, DOCKET NO. 17-0546 IN THE SUPREME COURT OF TEXAS, PURSUANT TO GOVERNMENT CODE §551.071(1)(B); REGARDING PENDING LITIGATION IN TEXAS ALCOHOLIC BEVERAGE COMMISSION V. LIVE OAK BREWING CO., LLC, DOCKET NO. 03-16-00786-CV IN THE COURT OF APPEALS FOR THE THIRD JUDICIAL DISTRICT, PURSUANT TO GOVERNMENT CODE §551.071(1)(A); AND TO RECEIVE LEGAL ADVICE PURSUANT TO GOVERNMENT CODE §551.071(2).

Presiding Officer Lilly announced the regular open session of the Texas AlcoholicBeverage Commission will be recessed at this time, 12:32 p.m. September 26, 2017 and will go into closed session pursuant to Texas Government Code §551.071 to obtain the advice of legal counsel on agenda item number fifteen.Upon completion of the session with legal counsel the commission will remain in closed session in pursuant to Texas Government Code §551.074 to discusspersonnel matters under agenda item number fifteen.

The Texas Alcoholic Beverage Commission has concluded its executive session and is now in open regular session. The date is September 26, 2017 and the timeis 1:02 p.m.

ACTION ON ITEMS DISCUSSED IN EXECUTIVE SESSION

Presiding Officer Lilly stated there is no action on items discussed in the Executive Session.

PUBLIC COMMENT:

Presiding Officer Lilly opened the floor for additional comments before the Commission. No one came forward to address the Commission.

NEXT MEETING DATE: TUESDAY, NOVEMBER 28, 2017

Presiding Officer Lilly announced the next meeting date is scheduled for Tuesday, November 28, 2017.

ADJOURN

Presiding Officer Lilly announced that the meeting was adjourned at 1:03 p.m.

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Attachment 1

Commission Report:Agency Activities, Budget Issues,

Staff Achievements, Legislative Activities

9/26/2017

Texas Alcoholic Beverage Commission

Commission Meeting September 26, 2017

TEXAS ALCOHOLIC BEVERAGE COMMISSION April 13, 2018 2

People of Texas

Commissioners

Executive Director

Deputy Executive Director

Chief of Staff

General Counsel Internal Audit

Public Information Officer

Deputy Executive Director

Business & Revenue Operations

Deputy Executive Director

Enforcement

Licensing

Tax & Marketing Practices

Education & Prevention

Training

Law Enforcement

Special Investigations Unit

Financial Crimes Unit

Communications & Governmental Relations

Internal Affairs

Business Services

Human Resources

Innovation & Technology

Audit & Investigations

Ports of Entry

Governor

Marketing Investigations Unit

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Matt Chaplin Deputy Executive Director Matt Chaplin joined the TABC in 2017. In addition to supporting TABC's executive director, Matt will directly oversee many of the divisions which support theagency's daily mission of upholding public safety and regulating the alcoholic beverage industry. Matt is a veteran of Texas state government, havingworked at the Texas Health and Human Services Commission, the Texas General Land Office and the Texas Building & Procurement Commission. While working at the Health and Human Services Commission,Matt served as Director of System Contracting,responsible for the development, drafting and review of the system's legal agreements valued at more than $60 billion. He also worked directly the Texas State Auditor'sOffice to analyze, plan and implement revampedprocurement and contracting practices across the Health and Human Services System. Matt earned his bachelor's degree at Tulane University,along with law degrees from the University of Oregon and the University of Washington.

September 26, 2017 TEXAS ALCOHOLIC BEVERAGE COMMISSION

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Dennis Beal USMC (Ret.) Director of Business Operations Colonel Beal joined TABC in 2017 as Deputy Executive Director of Business and Revenue Operations. He oversees the Licensing, Tax and Marketing Practices, Education, Training and Ports of Entry Divisions. Colonel Beal retired from active duty in 2004 after 26 years as a Marine Corps officer, including 14 years as an acquisition/procurement officer and program manager of six top‐level $40‐$300 million dollar strategic business organizations that cover the expanse of engineering, technology development and conceptual design. Colonel Beal was Executive Director, Strategic Commercial Alliances / Programs for the Texas A&M University System where he had the institutional responsibility forproviding program management and outreach services to over 400 commercial and business partners. He was Senior Director for Strategic Business Operations and Advanced Programs at Northrop Grumman and Senior Director for ProgramDevelopment, Acquisitions, and Strategy for Ericsson Inc. USA. He led and directed a117 million dollar commercial business unit. As A Colonel in the Marine Corps he was the Executive Director of the Navy’s Office of Science and Technology which included 150 million dollars of future combatsystems and advanced technology programs for the Army and Marine Corps. Colonel Beal held 4 command positions and is a Level III Certified ACAT I ProgramManager for government programs in excess of $1 billion. Two combat tours.   

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Clark E. Smith General Counsel Clark Smith joined TABC in 2017 as General Counsel. Prior to joining the Commission, heworked in private practice representing clientsin administrative proceedings, appellate litigation, and public policy matters. His most recent public sector service was at theTexas Health & Human Services Commission,where he served as a senior deputy to the ChiefCounsel and Executive Commissioner. At HHSC,Clark managed an overhaul of the agency’s legalservices system and rewrote agencyadministrative processes. Clark practiced commercial and employment litigation in Houston before joining HHSC in2015. He graduated from the University of Texaswith a Bachelor of Arts in 2004 and a J.D. in 2008.

April 13, 2018 TEXAS ALCOHOLIC BEVERAGE COMMISSION

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9/26/2017

TABC Response to Dickinson

• TABC Deployment 8/30/17 through 9/3/2017 • 10 Agents worked 12-hour shifts and assisted with checkpoints,

humanitarian efforts, patrol duties, and enforced a city wide curfew

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April 13, 2018 TEXAS ALCOHOLIC BEVERAGE COMMISSION 8

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Field Visits to Victoria and Houston Operations

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At Request of TDEM TABC mobilized and deployed 140 agents to support Shelter Security for the County Shelter located in the NRG complex

TEXAS ALCOHOLIC BEVERAGE COMMISSION April 13, 2018 10

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TEXAS ALCOHOLIC BEVERAGE COMMISSION 11April 13, 2018

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TABC Actions to Assist Industry

• Retail Sale of Products • Products that have come in contact with flood waters pose a health risk and are

unsuitable for consumer consumption. • Reference: Code Section 104.05 • Exception from payment of renewal late fee • Permittees have a 30-day grace period after expiration for which they can still file for

renewal without having to file an original application. The commission, as authorized under Section 6.04 of the Code and in accordance with Administrative Rule 33.6, assesses a late fee of $100 per permit upon applying for renewal of their permit after its expiration date. Permittees affected by Hurricane Harvey holding permits that expire August 23, 2017, through September 30, 2017, will be granted an exception from paying the $100 late fee to alleviate additional financial burden due to the permittees’ inability to file for renewal as a result of hurricane-related complications.

Reference: Code Section 6.04; Rule 33.6 •

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• Excise Tax Reports • Statute grants the authority to forgo penalty if failure to file or the making of a late payment is not the fault of the permittee. Permittees

affected by the hurricane will not be penalized if they are unable to file their report and or submit payment by the statutory due date of the 15th of each month. The agency will work with affected permittees to grant extensions as appropriate.

• Credit Law • Requiring reports for permittees located in the 54 counties designated in the Governor's Proclamation may prevent, hinder or delay

necessary action in coping with this disaster. Therefore, TABC will not penalize permittees in those counties for failing to file timelyreports for delivery periods beginning with August 1 – 15, August 16 – August 31, and September 1 – September 15. Upper tier members should not rely on the Delinquent List for those affected. Upper tier members must exercise their own discretion in deciding whether to extend credit or COD terms for liquor purchases during this period.

• Reference: Code Sections 11.61(b)(2), 102.32; Rule 45.121(i)

• Storage and/or Transfer of Salvaged Alcohol • On a case-by-case basis, TABC may allow an impacted retailer--whose business operations have been temporarily halted due to the

hurricane--to transfer salvaged product (which has not been submerged and/or contaminated) to another of its affiliated permits within the state to be sold through the affiliated permit number.

• Reference: Code Section 28.07

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TABC Actions to Assist Industry

• Local Distributors Servicing Accounts in Disaster Area • TABC will allow a local distributor--which has been damaged by Harvey--to service, sell, and deliver products to its

retail clients from its nearest affiliated store adjacent to the county where the damaged store is located. • Reference: Code Sections 22.08, 23.04, 28.07, and 43.01

• Beer Territorial Assignment • A beer distributor who is not operational as a result of the hurricane is allowed to enter into a temporary cross-

territorial arrangement to have beer sold and delivered to the affected beer distributor's retail clients by a beer distributor located in an adjacent territory. The affected beer distributor must notify TABC in writing of the temporary arrangement.

• Reference: Code Section 102.51 • Transfer of Products

• Package Stores and Wine Only Package Stores • The commission will use prosecutorial discretion to withhold administrative sanction against a package store

permittee that owns multiple stores to transfer product out of the county. This will allow the package store owner to temporarily store product outside of the county from which the product originated.

• Reference: Code Sections 22.08 and 24.04 • Retailers other than Package Stores and Wine Only Package Stores

• The commission will use prosecutorial discretion to withhold administrative sanction against a retail permittee in the affected counties to transfer products between locations of the same ownership. As a result, the commission will not seek administrative sanction for violations of Sections 69.10, 69.11 or 71.07 for or the appropriate chapters for each permit type authorizing their permissible activities.

• Reference: Code Sections 69.10, 69.11 and 71.07

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TABC Actions to Assist Industry

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TABC Actions to Assist Industry

Upper Tier Members Upper tier members, including the middle tier and manufacturing tier, have statutory authority to transfer products between their locations with the exception of distilleries. The commission is not aware of permit holders that hold multiple distillery permits in the affected counties. In addition to the authority to transfer products between locations, distributors and wholesalers, have statutory authority to temporarily relocate their place of business as a result of a natural disaster. Reference: Code Section 109.62

Distilled Spirits Identification Stamps To ensure local distributors operating in those areas have the stamps they need to continue operating, TABC's Excise Tax & Marketing Practices division is coordinating with TABC Field Operations to have stamps hand-delivered as necessary.

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April 13, 2018

POETCS Ports of Entry Tax Collection System

Fully automated on: December 1, 2008

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Port of Entry Tax Collection System (Hardware) upgraded in 2013. Legacy software and hardware at end of life cycle. Advances in technology presents opportunity to utilize new modes and methods of collections. May 2017, ITD personnel created a contract for a POE Tax Collection Managed Application Services and issued a Request for Proposal on May 15, 2017.  The request for proposal closed June 30, 2017 No vendor responded to the Request for Proposal. August 2017,  POE/ITD met with the current vendor that supports POE Tax Collection System and requested a proposal for an upgrade to the current  system.  Currently waiting for a response from the vendor.

POETCS SYSTEM UPDATE

Key Personnel Moves

Jo Ann Joseph – Promoted – Director II

Ramiro Gonzalez – Port Supervisor

Heather Nevill – Fiscal Services Manager

Charlotte Roper - Revenue Manager

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Questions?

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Attachment 2

Tax and Marketing PracticesDivision Update

9/26/2017

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Excise Tax and Marketing Practices Division

Excise Tax and Marketing Practices Division Update

Thomas GrahamExcise Tax and Marketing Practices Director

Excise Tax and Marketing PracticesOrganizational Chart

9/26/2017

2

Excise Tax TeamLauren KeyAccounts Examiner

Years with TABC: 2.5 yearsKey Responsibilities: 

Wineries, distilleries, brewpubs, in state brewers and manufacturers, direct shippers

Sean Nayebi‐OskouiAccount Examiner

Years with TABC: 1.5 yearsKey Responsibilities: 

Distributors, out of state brewers and manufacturers, direct shippers

VacantAccount Examiner

Years with TABC:Key Responsibilities: 

Wholesalers, nonresident seller, carrier, direct shippers

Rickie EddinsAdministrative Assistant

Years with TABC: 11 years Key Responsibilities: 

ID stamps, private club temporary membership cards

Excise Tax

• Division is responsible for collecting, processing andreviewing excise tax payments and reports as well asother reports

• Excise tax is paid by the wholesaler/distributor uponsale to the retailer and/or by the manufacturer uponsale to the retailer or direct to consumer

• 57,809 reports were received and reviewed for FY 2017• Account examiners reconcile reports• Auditors conduct 120 comprehensive tax audits annually

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3

Excise TaxCY 2016 Compliance Numbers

In‐State Manufacturers

Permit Type Total Number Total Gallons Average GallonsWinery (G) 417 3,836,433 9,200Distillery (D) 105 21,218,398 202,080

License/Permit Type Total Number Total Barrels Average Barrels

Brewery (B)* 117 413,000 3,591Manufacturer (BA)* 58 82,846 1,479

Brewpub (BP) 160 78,389 490*B/BA combined produce less than 225,000 barrels

Excise TaxOnline Submission

• License/Permit holder submits payment andattaches report using existing online systemutilized by label approval and licensing• Versa:Online/Versa:Regulation – Customerinterface

• Neubus – Digital storage• Payments online – Texas.gov

• Increase productivity and eliminate processesand procedures across multiple divisions

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4

Excise TaxGross Excise Tax Revenues

$160

$170

$180

$190

$200

$210

$220

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017

$192.4$195.9

$193.1

$199.9

$205.6$208.8

$212.9$217.2

$225.5 $231.7

Mill

ion

Dol

lars

FY 2008 – FY 2017

Excise TaxGross Excise Tax Collections

1,630,498(4.5%)

4,692,247(7.2%)

6,903,954(1.3%)

166,395(.02%

13,393,094(1.83%)

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

Distilled Spirits Wine Beer Malt Liquor All Classes

Gal

lons

Changes in Quantities SoldFrom FY 2016 to FY 2017

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Excise TaxGross Excise Tax Revenue by Beverage Class

Distilled Spirits$91,624,530

39%

Wine$16,661,846

7%

Beer$108,074,489

47%Malt Liquor$15,382,917

7%

FY 2017: September - August

Total = $231,743,782

Excise TaxWholesale Sales in Gallons by Beverage Class

Distilled Spirits38,176,887

5%

Wine70,042,360

9%

Beer558,380,203

75%

Malt Liquor77,691,503

11%

FY 2017: September - August

Total = 744,290,953

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6

Tax ID Stamps & Temporary Memberships

• 2615 active package stores permits• 744 authority to sell alcohol to mixed 

beverage and private club permittees Local Distributor’s Permit (LP)

• ID stamps placed on distilled spiritsbottle by the LP upon sale to theMB (Mixed Beverage) or N/NE(Private Club)

• Online ID Stamp implemented inFY 2015

• Temporary membership cards• Required for guests to consume 

alcoholic beverages at a private club• 50 membership cards in a booklet• $3/piece total $150/booklet

Marketing Practices Team

Mary AielloMarketing Practices Coordinator

Years with TABC: 2.5 yearsKey Responsibilities: Answers industry questions, conducts reviews of programs and industry promotions to determine compliance with requirements, laws, regulations, policies and procedures

• Sweepstakes and Games of Chance, Market Research andCivic, Religious and Charitable Temporary Events

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Marketing Practices

• Point of contact to assist industry with proposals ofmarketing practices programs, activities and questions

• Encourage voluntary compliance through training forindustry members to maintain balance of competitionand fair trade practices throughout the State

• Provide training to agency personnel• Provides assistance to Audit and Investigations, Licensing

and Enforcement divisions with inter‐industryrelationships

• Advisories

Marketing Practices

• Review for compliance, promotions and marketingstrategies:

• Sweepstakes promotions• Product advertising• Equipment• Use of coupons and related material• On and off premise promotions/samplings with retail accounts• Sponsorship and Charity Events/Temporary events• Product market research compliance• Consignment, recalls and damaged product• Third‐party service providers• Mobile Apps• Delivery services• Use of social media

• Receive 40 phone calls and emails on daily basis• Industry, license/permit holders and general public

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Label ApprovalAmanda BrothersLabel Approval Coordinator(Team Lead)

Years with TABC:  1.5 yearsKey Responsibilities: 

Label approval team lead, malt beverage and low wine label approval

Sherri DiazAdministrative Assistant 

Years with TABC: 20 yearsKey Responsibilities: 

Label approval processor for wine anddistilled spirits

Janeen MetcalfAccounts Examiner

Years with TABC: 1 yearKey Responsibilities: 

Label approval support for wine and distilled spirits applications and support for excise tax reports (wholesaler, nonresident sellers and carrier)

Joe SchorpChemist

Years with TABC: 9 monthsKey Responsibilities: 

Test malt beverage and low wine samplesfor label approval, test seized evidence from the field

Label Approval

• By statute, no person may ship or cause to beshipped into the State of Texas any alcoholicbeverage unless the product has receivedlabel approval from the commission.

• The division reviews label applications toensure compliance with state law.

• Certificates of label approval available onwebsite’s Public Inquiry

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Label ApprovalVolume & Growth

1,457 1,9382,482

4,017 4,1325,086

2,999 2,841 2,785

2,918 3,235 3,298

15,808

12,531 12,87013,873 13,887 13,275

20,264

17,310 18,137

20,808 21,254 21,659

0

5,000

10,000

15,000

20,000

25,000

FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017

Label Application GrowthFY 2012 - FY 2017

Malt Beverage (+249% Growth) Spirits (10% Growth)Wine (16% Decline) All Labels (7% Growth)

Label ApprovalApplications Processed by Beverage Class

Malt Beverage5,086 - 23%

Spirits3,298 - 15%

Wine13,275 - 61%

FY 2017Total = 21,659

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Label ApprovalAverage Days to Process

21,254 21,659

20

15

0

5

10

15

20

25

16,500

17,000

17,500

18,000

18,500

19,000

19,500

20,000

20,500

21,000

21,500

22,000

FY 2016 FY 2017

Aver

age

Day

s to

Pro

cess

Appl

icat

ions

Pro

cess

ed

FY 2016 - FY 2017All Beverage Classes

Apps Processed Average Days

Label ApprovalAverage Days to Process

8

11 11 10

412 351

1,105

1,868

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

0

2

4

6

8

10

12

Malt Beverage Distilled Spirits Wine All Labels

Labe

l App

licat

ions

Pro

cess

ed

Aver

age

Num

ber o

f Day

s R

equi

red

for

Proc

essi

ng

Label Applications ProcessedAugust 2017

Avg Days Lable Apps Processed

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Label Approval

• FY 2017 user participation rate online:• Malt Beverage – 88.59%• Distilled Spirits – 68%• Wine – 61.52%• Overall – 68.48%

• Strategic Plan• Promote the online process for label approval applicationsresulting in 75% participation rates by August 2018

• Internal Audit Label/Product Approval Process• Conducted April 2016• No deficiencies detected in the audit• Effective procedures and controls in place

Questions ?

Attachment 3

Audit and Investigations Division Update

 

 

9/26/2017

AUDIT UNIT Mission

• Primary responsibility is to ensure – compliance with regulatory and tax/financial requirements under authority of the Commission by

– Initiating a variety of audits, conducting inspections,  and administering education initiatives all aimed at seeking voluntary compliance from taxpayers. 

1

9/26/2017

Audit Unit ‐ Purview Over the years, the Audit Unit has evolved from primarily conducting taxaudits to performing additional administrative and regulatory duties associated with the following activities:

• Cash and Credit Law • Confiscated Property • Licensing • Marketing Practices • Educational Initiatives • Administrative Case Settlements • Complaint Investigations • Regulatory & Tax Audits • Compliance Inspections • Assist Special Investigations Unit, Financial

Crimes Unit, Marketing Investigations Unit and Enforcement with various I investigations.

Auditor Duties

2

 

 

 

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AUDIT UNIT ACTIVITIES Fiscal Year 2017

Audit Unit

Inspections 12 Types 22%

Cash & Credit Law 5%

Educational Initiatives

15%

Tax  & Regulatory Audits/Investigations

8 Types 33%

Administrative Duties 25%

Licensing Related 5%

Time Allocation

FY‐2017 Accomplishments • Audit Unit exceeded its goals for FY-2017:

Inspections: Goal - 23, 200 Actual - 24,252 Audits: Goal - 1,585 Actual - 1,600 Education: Goal - 55,000 Actual - 56,410

• Investigations: Opened - 2,587 Closed - 2,573 Closed within 60 days - 86.01%

• Administrative Cases: Filed - 624 Sustained - 93.45%

Audit Unit

3

 

    

     

    

 

 

 

    

 

 

 

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Special Investigations Unit Mission

• Identify and Investigate habitual patterns of at‐risk behavior of permittees. – through covert operations – may act in a routine open capacity as applicable in the performance of their day to day

task. – conducts both pro‐active and re‐active administrative and criminal investigations.

• The primary focus is to exercise administrative and criminal powers – to suppress or dismantle organized criminal activity that has a NEXUS to the Alcoholic

Beverage Industry.

• Investigations are long term and complex. – Investigations conducted by SIU include narcotics trafficking, human trafficking, alcohol

beverage counterfeiting, tax stamp fraud, cargo theft, carrier related crimes, alcohol beverage theft, organized crime, and other violations.

Law Enforcement Sensitive

Special Investigations Unit 

1 Captain 1 Lieutenant 3 Sergeants 13 SIU Agents/Investigators 1 Civilian Analyst TOTAL: 19

SIU Sgt. X 1 SIU X 3

SIU Sgt. X 1 SIU X 2

SIU Sgt. X 1 SIU X 3

SIU X 1

SIU X 1

SIU X 2 Analyst X 1

CPT. X 1 SIU LT. X 1 SIU X 1

Law Enforcement Sensitive

Area’s of Responsibility

4

 

 

9/26/2017

209 on‐going investigations:

0

20

40

60

80

100

120

Investigation Type

112

66

43 42 41 32

26 25

9

Narcotic Violations Money Laundering Place or Manner OCA Human Trafficking Drink Solicitation Prostitution AB Code Violations Misc.

Law Enforcement Sensitive

Permits Cancelled

This does not include cases closed with a Civil Penalty, pending in Legal, or a closed Protest investigation that resulted in proactively keeping bad‐actors out of business.

0

20

40

60

80

100

FY2014FY2015 FY2016 FY2017 TOTAL

10 24

36 27

97

7 12 18 19

56 Total Cancelled

Cancelled in the Border Region

Law Enforcement Sensitive

5

      

 

    

   

  

 

 

 

 

 

9/26/2017

Special Investigations Unit (SIU)

• Long term investigation of Narcotics Sales at Six El Paso bars located within a Drug Free Zone:

• Player’s Billiard Parlor (MB568927) 4024 Dyer Street • Rumors Sports Club and Lounge  (MB876073) 3317 Dyer Street • Horizon Nite Club (MB659460) 3808 Pershing Drive • Brass Asp Bar  (MB214587) 6201 Airport Road • Twinz Lounge  (MB142285) 6203 Airport Road • Mobius Bar 915  (MB935763) 6269 Airport Road

– Investigation at two locations began in Jan. 2015 – Those investigations expanded into the other locations – Over 200 operations conducted – Frequent street level narcotics buys

• 81 total administrative violations

“Operation TNT”

LOCATIONS ARE NOW “FOR LEASE”

– All six permits Cancelled for Cause from 3/13/17 to 5/3/17 – Arrests are continuing with assistance of EPPD, DPS and HSI – Criminal Charges are enhanced due to Drug Free Zone

• 49 Felony Warrants on 17 individuals

HUGHEY ELEM. SCH.

BRASS ASP TWINZ

MOBIUS

Law Enforcement Sensitive

SIU/FCU Performance Measures

Measure FY14 FY15 FY16 FY17

Average Cost Per  N/A $1,558.73 $2,427.30 $2,320.32 OCA/Joint Op

OCA Investigations 130 98 130 122 Closed

OCA Investigations  369 535 457 520 (Border Region)

OCA Investigations 440 734 614 641 (Statewide)

0 500

1000 1500 2000 2500

Closed Investigations

OCA Joint Ops (Border)

OCA Joint Ops

(Statewide)

Av