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.

BC Liquor Law Reforms Succeed

Yesterday (June 3, 2010) was the final day of the current legislature session in British Columbia. Happily, the package of reforms to BC's liquor laws which I previously wrote about ("BC Reforms Some Liquor and Wine Laws") received "royal assent" yesterday which in layperson's terms means that the changes were approved or passed by the legislature. This is good news for the industry because there are some substantial changes in terms of modernizing certain aspects of our archaic liquor laws: e.g. tied house laws, co-op advertising, sponsorship (see the previous article for the details). However, you should be aware that most of the major changes do not come into effect immediately - they do so at such time as they are made effective by action of the Lieutenant Governor in Council. Since many of the changes require that new accompanying regulations be drafted, it is unclear when the effective date of the changes will be. Still, this is a significant step in the right direction.

BC Increases Wine Markup From 117% to 123%

The BC Liquor Distribution Branch has announced today that the "liquor board markup" on all products will be increased as of July 1, 2010 as part of the implementation of the HST. The introduction of the HST means that the provincial sales tax on alcohol will actually go down from its current 10% to the 7% provincial component of the HST (the 12% HST is made up of 7% provincial sales tax + 5% federal sales tax). In order to prevent consumers from actually receiving a break on the introduction of the HST (maybe that would have been a good idea?) ... the government had previously announced that they would increase liquor board markups to compensate. Today's announcements make changes to the markups across the board for all products. On wine, the liquor board markup will increase from 117% to 123%. On spirits, it goes from 163% to 170%. If you weren't aware of these staggeringly high "tax" rates ... yes, you are reading those numbers correctly.

The stated intention has always been to keep "shelf prices the same". I ran a few calculations for wine only using the new markup formula and the results were fairly consistent that the end shelf prices were almost identical to the old formula. However, these changes may be difficult to explain to a cynical public ... as the markup goes up by 6%, tax down by 3%. In addition, there is a small problem regarding the legitimacy of moving government revenue generated by tax dollars to government revenue generated by liquor board markup. Revenue from taxes must be considered and passed by the legislature or it is not legal (i.e. no taxation without representation). Revenue from liquor board markup is not passed by the legislature - it is simply implemented by administrative action at the LDB. The government has now "moved" a large chunk of revenue from the tax side (passed by the legislature) to the non-tax side. Is this taxation without representation?

This story has now been covered by the Vancouver Sun: LDB Increases Markup on Booze as HST Lowers Tax

Update (May 25, 2010): I received a press release from Laughing Stock Vineyards today indicating that they intend to pass the HST savings on to their customers for wine ordered directly from the winery. As I explained, in an earlier article, BC wineries will actually get a small benefit from the switch to HST for wine delivered direct from the winery.