Washington State Privatization Initiative Certified

The Costco led initiative in Washington state to privatize the remaining elements of Washington's liquor distribution system has been certified and will appear on voters' ballots in the fall. If the measure passes, Washington's remaining state liquor stores (which have a monopoly on spirit sales) would be privatized. The distribution system would also be deregulated and price controls repealed. As will be apparent (and despite the 'success' of the anti-HST campaign), the process for getting a voter initiative such as this on to the ballot is much easier in WA than here in BC. Still, progress and reform south of the border may have some influence on legislative policy here in BC. Is it too much to hope that our archaic distribution system and irrational wine tax structure will soon be changed? If you need reassurance that the time for change is overdue, read Jake Skakun's recent blog post: "A Layman's Attempt to Understand What It Means to be a Licensee" where he shares his frustration at our outdated system.

Provincial Per Capita Liquor Tax Amounts

People ask me all the time why wine prices (and other alcohol prices) are so high in BC. The short answer is that there are two reasons: 1) extremely high tax rates (including hidden taxes like liquor board markup) and 2) inefficiency in our monopoly distribution system.

To give you a comparison on the tax side of the equation, here are the per capita (per person) annual amounts of money that the major provincial governments in Canada made from liquor tax revenue in 2009:

Province   
Annual Liquor Tax Revenue (2009)       
Population 
Per Capita Annual Revenue from Liquor 
Quebec
973,066,000
7,870,026
123.64
Ontario
1,883,422,000
13,134,455       
143.39
Alberta              
684,468,000
3,711,845
184.40
BC
900,135,000
4,494,232                   
200.28
Canada Overall
5,426,005
33,930,830
159.91 (Canadian Average)

As you can see, BC makes a lot of money from liquor tax revenue ... over $900 million per year. You can also see that BC makes a disproportionately large amount of money on the per capita revenue as compared to the other major provinces and the Canadian average. BC takes in just over $200 per person per year from liquor tax revenue ... almost $60 more per person per year than Ontario (the other major wine producing province) and almost $80 more per person per year than Quebec.

It's also interesting to note that Alberta, the only province with full retail privatization, makes considerably more money per person per year than either Ontario or Quebec and only a bit less than B.C. where we have much higher retail prices and almost no competition. The bottom line in BC is that we are getting soaked on the tax levels compared to the other major provinces. Makes you want to have a drink ... preferably in another province.

Also ... if you are a glutton for tax punishment ... you may want to check out my updated BC Liquor Store Wine Markup calculators which now show the HST and increased markup amounts (as of July 1st) that are hidden in the bottle prices at government stores.

HST Related Changes Cause Confusion

The BC LDB has just released an information package explaining the removal of the licensee "discount" that will occur as a result of the implementation of the HST on July 1st. A number of licensees have emailed me expressing concern and confusion over the effects of the changes. Particularly, there seems to be confusion over the LDB's claim that licensees will make more money following the changeover.

Licensees should pay attention to the information contained in the package as it is important for their accounting and financial planning. While the financial impact is not major, the changes will have an impact on profitability if close attention is not paid to the changes in taxation and pricing structure. Particularly, licensees should be aware that they will need to re-calculate the pre-tax menu prices for almost all liquor products if they wish to maintain the same profit margins before and after the changeover. A detailed analysis is provided below (click the "Read More" link if necessary).

Read more: HST Related Changes Cause Confusion

Cellared in Canada Controversy Continues

It appears that the Cellared in Canada controversy is continuing. Two recent articles by Jancis Robinson on her blog (From Bottom to Top - Canadian Wines and Canadian ripples - the response) have brought the subject into the spotlight once again and include a response from Vincor (one of the major producers of these wines). You can read and judge for yourselves on the consumer and business issues. I was quoted in the latter article on Canadian labeling laws (see my previous article: Cellared in Canada in the News Again) where I state my view that the current labeling of CIC wines is likely not compliant with the provisions of current Canadian federal law. On that issue, I'll make one further comment.

The Vincor response to Jancis Robinson's article states as follows:

The designation Cellared in Canada is federally regulated by the Canadian Standards Board .The words 'Cellared in Canada from Imported and Domestic Wines' is required to be on every product of that distinction. For 14 years we have been using this terminology with no confusion in the marketplace.

I don't agree with these statements. The Canadian Standards Board is a voluntary standards association. It is not a federal regulatory body and has no force of law behind it at all. Canadian federal law is contained in the statutes and regulations of Canada as passed by Canada's Parliament. Voluntary industry groups cannot create federal law nor create any requirements to label products in accordance with the standards that they create.  There is no legal requirement that CIC product be labeled in the manner described - the CIC wording is simply the 'standard' that the voluntary industry group came up with. In terms of what is legally required, current Canadian federal law requires a country of origin declaration on all wine sold in Canada as I explained in my previous article. I don't see how the current wording can be interpreted to comply with that law.

BC LDB: What's Happening with the Licensee "Discount" (HST)?

Some licensees have recently received information that the BC LDB will be eliminating the licensee "discount" which is currently provided to restaurants and bars due to the introduction of the HST on July 1st 2010. Currently, the provincial alcohol sales tax is removed from the price charged to licensees because it is added in on the customer's bill when they purchase the product so licensees pay a price which is approximately 10% less than the shelf price (the provincial sales tax on alcohol is currently 10%).

If the LDB eliminates the discount, the licensees would pay the full shelf price for all purchases without any discounts or exemptions. The licensee could claim an input tax credit later in order to recover the amounts paid. However, this would have a negative effect on licensees because: a) they would have to pay more up front to purchase their liquor which would affect their cash flow, and b) the input tax credit for the HST will be 12% whereas the combined current discount and GST tax credit equals 15%. Licensees would thus pay about 3% more for their liquor because the government would have moved some of the price from sales taxes (which the licensee got credits for) into the liquor board markup (for which their is no credit). As a result, the wholesale cost to licensees would increase and it seems likely that wine prices would increase on restaurant menus in order to compensate.

None of this information is confirmed as yet. If it is correct, it will be disappointing because, in my view, restaurants and bars should be given some form of wholesale discount just like in nearly every other jurisdiction in the world. Restaurants can buy food and other beverages at wholesale ... why can't they also buy wine and liquor? I will provide an update once I receive concrete information. Apparently, there will be some type of official announcement next week.

In any event, the tax that the customer pays on the alcohol portion of their bill will decrease slightly from the current level of 15% to 12%.

UPDATE (2010-06-17): The LDB has now distributed their package on the affects of the HST. It confirms that there will be zero discount for licensees as of July 1st. I'll post further on this but it also appears from the examples contained in the package that restaurants and bars will need to re-price all liquor items on their menus if they want to maintain their profit margins.

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