The Imperial Hotel in the inner-Sydney suburb of Erskineville has been forced to close for 72 hours for the second time in just over a month after inspectors witnessed ongoing drug dealing and use, staff serving alcohol to intoxicated patrons and lax security.

One male patron was observed licking a spilt drink off the hotel floor as a Responsible Service of Alcohol (RSA) marshal watched and laughed without taking action, according to a statement from the Deputy Premier's office.

Open drug dealing took place including a man allegedly standing next to the dance floor while he dipped a small spoon from his necklace in a container of white powder, and held it to a woman's face to snort in exchange for cash, according to the statement.

In another reported instance, an undercover inspector was approached and asked if he knew where drugs could be bought.

Inspectors witnessed numerous intoxicated patrons, including some falling asleep in chairs, slumped against walls, stumbling on the dance floor and having to be helped to stand or walk.

Security guards were seen checking IDs of only female patrons and scanning only the pockets of male patrons.

The statement said a female patron was assaulted by a security guard but it was not reported to police.

Deputy Premier and Minister for Justice and Police Troy Grant said venues breaching their licence will have the book thrown at them.

"Operating a licensed venue in NSW is a privilege, not a right, and those abusing it will face the consequences," he said.

'The music really does stop': dance party group

The Spice Cellar group has been operating a weekly dance party in the Imperial Hotel basement for the past three months and announced on social media yesterday that "today the music really does stop".

In a statement on Facebook the group said it has "taken the difficult and heartbreaking decision to cease operating as a weekly night clubbing destination" at the Imperial Hotel due to the "current climate" under the NSW lockout laws.

The Spice Cellar dance party at the Imperial Hotel in Erskineville has ceased operations. ( Facebook: Spice Cellar Ersknvl )

"The overarching agenda by conservative groups for Sydney is to remove late night culture rather than acknowledge it as a core part of the cultural fabric that enriches a city," the statement said.

"Whilst we appreciate that the NSW Government is trying to reduce alcohol related violence and anti-social behaviour, introducing the lockout laws does not solve the problem."

The Deputy Premier said serious breaches will not be tolerated by the authorities.

"I make no apologies for this Government taking strong and necessary action to protect the community, which we are doing on several fronts including lockout laws and three strikes," Mr Grant said.

"Liquor laws in NSW have never been stronger."

Mr Grant said the closure of the venue twice in a short period of time was an indicator that the operators of the licence "are not taking their responsibility seriously enough".

"These people are letting themselves down, they're letting the community down but they're also letting their industry down by shining a bad light on the entire industry," he said.

The hotel was ordered to close last night from 7:00pm by the Office of Liquor, Gaming and Racing due to serious ongoing licence breaches and will remain closed until 7:00pm on Monday.

The Imperial Hotel will continue to operate entertainment in the public bar and cabaret lounge, and the basement will be made available for venue hire once it reopens, according to the Spice Cellar group Facebook post.

Last month, Newtown police said they had issued several warnings since the pub, which was made famous in the iconic Australian 1994 film The Adventures of Priscilla, Queen of the Desert, came under new management two months prior.