Wine & Liquor Tax Issues Heating Up Across America

Governments are facing challenging fiscal situations world-wide. As a result of mounting economic pressures, governments across North America appear to be looking to liquor and wine taxation as a source of increased revenue. In April, Alberta raised its provincial markups (hidden taxes) on all forms of liquor. The U.S. federal government is exploring the idea of taxes on wine, liquor and sugary soft drinks. California has debated this issue prior to almost every state budget recently. And the latest salvo comes from New Jersey where that state is proposing to increase liquor taxes by about 25%.

Which of course brings us to BC and the newly re-elected Liberal government. Unfortunately for the Liberals, there is basically no room for increasing revenue within the current system. BC already has the highest wine taxes and prices in North America and the highest in the world in any significant wine producing region. Liquor sales in BC were down significantly by both volume and price in the last quarter. That trend is excessive compared to other neighbouring jurisdictions and could be a harbinger of growing problems of evasion for an uncompetitive system.

In my view, the government should be taking a serious look at overhauling the current system so that we can have a liquor distribution and revenue structure worthy of the 21st century. Here's some food for thought: the Alberta and BC governments generated almost exactly the same amount of per capita revenue from liquor even though the Alberta system is privatized and has lower prices. And that was BEFORE the recent increase in Alberta markups. Maybe BC should consider systemic reform if it wants to maintain or increase its liquor revenue.

US Feds Propose Increased Taxes on Wine

Interesting article this morning out of Washington, D.C. indicating that the U.S. federal government is proposing to dramatically increase federal taxes on all forms of liquor (as well as on soft drinks made with sugar) in order to pay for health care for about 50 million uninsured Americans. The proposed taxes would add 49 cents to a bottle of wine and 48 cents to a six pack of beer.

WA State Reforms Wine Laws

One of British Columbia's neighbours, Washington State, is reforming many aspects of its winery and wine distribution laws in Bill 2040 which resulted from hearings of a Joint Select Committee from both the state senate and house. The Bill has now been signed into law by the Governor. The bill is multi-faceted: it removes "tied house" restrictions so that the owners of a retail establishment serving liquor such as a hotel or restaurant could also invest in a winery (previously prohibited). It also reforms many, but not all, aspects of state distribution laws which were the subject of a long running legal battle between Costco and the state. These include elimination of both the required 10% markup by distributors and the "post and hold" requirement which restricted changes to the prices of beer and wine. Costco, however, has indicated that it will seek further changes "to bring the beer and wine regulations into the 21st century".

Maybe it's time for similar reform here in B.C.? After all, our laws are even more archaic than Washington state's. If you agree, please contact your MLA and express your support for wine law reform.

Washington state originally had a state control liquor system similar to BC. Washington stands as an interesting contrast to BC because at one point, Washington's state control system was similar to BC's current one in that all imported product was marked up substantially and had to be sold through government stores. Washington wineries, however, escaped the markups and could sell through other channels. Consumers were supposed to only purchase through the government system and were required to pay markup on any imported wine brought back into the state (much like BC's current laws). Of course, in the U.S., it was not that difficult to circumvent the system by ordering or purchasing wine in another state at a lower cost and then bringing it back to Washington.

Eventually, after some prosecutorial blunders by the liquor board, public pressure forced the Washington state government to reform the system. Reform has resulted in nearly all wine and beer now being sold through private retailers. A network of state liquor stores has been maintained with a continued monopoly over the sale of spirits and a small portion of annual wine sales. Taxes are, of course, much lower in Washington than in BC so prices are also lower.

Globe Followup on Shipping Laws

Following up on an item in my most recent newsletter, there is an excellent article on the current state of Canadian wine shipping laws in today's Globe and Mail. Beppi Crosariol provides an update on efforts to reform our archaic prohibition era laws. At the present time, the Canadian Vintners Association is attempting to convince CALJ (the Canadian Association of Liquor Jurisdictions - i.e. the provincial liquor boards) that reform is in everyone's best interest. In my view, reform is imperative at this time. The current Canadian laws are susceptible to challenge on numerous legal grounds and it is in both the industry's best interest and consumers' best interests for the system to be reformed.

Shipping Law (IILA) is Unconstitutional?

A new legal analysis by a prominent Toronto lawyer, Ian Blue Q.C. (of Cassels Brock Blackwell LLP) has concluded that the Importation of Intoxicating Liquors Act (IILA) is likely unconstitutional. The IILA is the federal law that was passed immediately after prohibition and which effectively gives each of the provincial liquor boards their monopoly over the distribution of wine (and other alcohol) and which also prevents both consumers and wineries from shipping or bringing wine across provincial borders (see this article for the history of BC liquor laws).

Mr. Blue's article, On the Rocks? Section 121 of the Constitution Act, 1867, and the Constitutionality of the Importation of Intoxicating Liquors Act, has just been published in the April 2009 issue of the Advocates Quarterly at p. 306. The article traces the history of the IILA and provides a thorough analysis of the limited case law that has considered it over the years. Mr. Blue concludes that the previous case law (most of it very old) is not in line with a contemporary interpretation of constitutional provisions and probably would not be followed: "[w]hen the IILA is tested against a purposive [contemporary] interpretation of s.121, it obviously violates it, leading to the conclusion that the IILA is probably unconstitutional".

This article provides ample food for thought. If the IILA was found to be unconstitutional (which could only happen if the matter was brought before a court), the provincial liquor boards would lose their ability to prevent inter-provincial trade in wine (and other alcohol). In other words, they would be forced to compete against one another. In B.C., that result would probably be good for consumers since we have some of the highest wine and liquor markups in the country. In addition, it seems likely that such a determination would be a catalyst for a general change in liquor regulation across the country.

Please contact me if you would like further information on this issue.