PST/HST Transitions Cause Major BC Revenue Loss on Liquor

According to the latest financial figures from the BCLDB, the transitions back and forth between the PST and HST will cause major losses to the total revenue that the provincial government generates from liquor sales in the province. By my estimates, the losses are at least $185 million over the time period. The losses were caused because BC raises liquor revenue through a complicated mix of "liquor board markup" and taxes which mixture was upset by the PST/HST transitions as well as by missed LDB revenue targets and a significant increase in LDB operating costs. The losses are not immediately obvious from looking at the LDB documents because LDB financial statements do not include sales tax revenue. However, once you factor in sales tax revenue from liquor sales, the losses become apparent. Here is a summary chart (in millions of dollars):

 2009/10 (PST) 

 2010/11 (HST intro'd) 2011/12 (HST)  2012/13 (HST)  2013/14 (HST removed)  2014/15 (PST)  Change
Total LDB Sales  2854.1 2820.5 2889.9 2922.1 2891.3 2932.9 +2.7%
LDB Operating Expenses  275.9 281.5 291 305.7 307.3 312.2 +13.1%
Net LDB Revenue to Govt 877.3 890.4 911.1  906.1 850.9 860.4 - 1.9%
Approx. Sales Tax Rev. (est.*)  285.4 218.5 202 204.5 289.1 293.2
Approx. Total Liquor Rev. 1163 1109 1113 1110 1140 1154
Loss to Govt 0 (base) - 54 - 50 - 53 - 23 - 9

*Sales tax numbers would likely be greater than 10% or 7% of the total LDB sales numbers since some of the product would be sold through licensees who charge higher prices than the LDB but for ease of calculation and to be conservative, I have just used the base number.

As has been noted here earlier, when the HST was introduced, the combined federal/provincial sales tax rate on alcohol went down from 15% (10% PST + 5% GST) to 12% (5% Fed portion + 7% Prov portion). This would have created a reduction in consumer prices ... except that the government raised "liquor board markup" rates (e.g. the markup on wine went up from 117% to 123%) at the same time to eliminate any savings and with the intention of keeping provincial government revenue constant. The plan was to increase net LDB revenue to government in order to compensate for the loss in sales tax revenue. So for example, in the LDB's pre-HST service plan (page 19), one can see that LDB revenue was supposed to jump up following the introduction of the HST: for 2010/11 the projection is 973.7 (million) then 1013.5 for 2011/12 and 1039.2 for 2012/13. It is apparent from the above figures, that government revenue did not remain constant during the transition years because the LDB failed to meet its revenue targets and LDB operating costs increased substantially during the years in question, eating up some of the higher liquor board markups and preventing the intended increase in LDB revenue to government which was supposed to offset the decrease in sales tax. This can be seen from the numbers above:

  • In the fiscal year 2009/10 (pre-HST), the government received $877.3 million from LDB revenue. It would also have received the 10% PST charged on all liquor sales - $285.4 million for a total of $1.16 billion.
  • By contrast, in the fiscal year 2011/12 after the HST was introduced, LDB revenue jumped due to the liquor board markup increase, but only by $21 million, to $911.1 million (well short of the projected number noted above). The corresponding sales tax revenue would have dropped by over $60 million to about $202 million, giving government total liquor revenue of $1.13 billion, a $50 million decrease overall.
  • As of April 1 2013, the liquor board markup rates went back down and the sales tax went back up but liquor revenue in BC is still not meeting pre-HST expectations (even though liquor sales and revenues were up across Canada during this time period).
  • If we look at the LDB projection for 2013/2014 and 2014/15 with the PST returned, the revenue loss is confirmed. In these years, the LDB is forecasting LDB revenues which are significantly less than the amounts from 2009/10 even with higher overall sales numbers.
  • The numbers are contained in the latest LDB Service Plan which is available from the BC Liquor Stores web site (earlier numbers are available from earlier service plans and annual reports).  

My estimate of the overall loss to government over the period looks to be at least $185 million. If nothing else, these major losses should cause BC's next government to reconsider the current approach to raising money from liquor sales, which relies on the complicated mix of taxation and "liquor board markups" described above. By contrast, if the government simply raised its liquor revenue from straightforward taxes on liquor (such as a version of Alberta's flat liquor tax) then none of the above would have happened ... and government would have been able to rely on a consistent and stable source of liquor taxation revenue. Please let me know if you have any comments or corrections to the numbers set out above.

Privatization, Trade Issues and Fraud

Wine law remains in the news this spring with a host of interesting stories ...

Privatization. The liquor distribution privatization effort continues in Pennsylvania which is one of the few U.S. states that retains a "Canadian style" government control system for liquor. The privatization bill has now passed the state congress and is headed for the senate: see Corbett Pushes to Advance Liquor Privatization. This commentary from the Huffington Post is relevant to Canada as the issues related to "prohibition era" thinking are also relevant to most Canadian provinces: Pennsylvania's Medieval Wine and Spirits Laws

Trade Issues on Wine. The U.S. Trade Representative to Europe is complaining about the EU's geographical indication protections for wine as they relate to the use of certain terms such as "chateau" which the U.S. argues unfairly limits access of certain U.S. wines to the EU market. In addition, the Trade Rep is unhappy about restricted access to monopoly liquor markets such as Norway where listing requirements make it difficult for producers to gain a foothold in a market with restricted products and limited competition. See: US Slams EU Geographical Indication System.

Winery Land Prices. Recent data from south of the border shows that Napa land prices are the most expensive agricultural land in the U.S. with prices "topping out at $300,000 an acre". See: Napa Ag Lands Remain Most Expensive in U.S.  

Fraud Law Suit. Ongoing law suits in the U.S. related to the allegedly fraudulent sale of counterfeit wine provide interesting reading, particularly if you were a fan of the book "The Billionaire's Vinegar". See: Servant Disses Ex-Boss in Billionaire Wine Fraud Trial and this commentary at the On Reserve Wine Law Blog: William Koch Back in Court for Another Counterfeit Wine Lawsuit.

March Wine Madness: Taxes, Control, Lawsuits & Happy Hours

March Madness appears to be infecting the wine business this week as a number of interesting stories hit the news:

Taxes. The British government introduced measures this week, as part of its Budget, which would reduce taxes on beer but increase them on wine and spirits. The Wine & Spirit Trade Association is questioning the legality of this discrimination, particularly in the light of applicable EU laws. Here in Canada, Wines & Vines ran an article today pointing out that British Columbia is one of the most heavily taxed jurisdictions in the world as it relates to the wine business. A hefty 11% of the total economic impact of BC's wine industry relates to taxation (the numbers are 6.3% in WA and 2.4% in OR). As noted earlier, the sales tax rate on BC wine will go up from 12% to 15% as a result of the return to the PST on April 1st. In addition, the non-BC part of the wine business faces much higher rates of taxation ... so the overall impact would be significantly greater than the numbers quoted.

Control Crumbling? Pennsylvania is one of the few U.S. states that retains "Canadian style" government control over its liquor distribution system. However, it appears the control era may be close to an end in this state as the Governor's privatization initiative passed critical votes this week. If the measures pass, Pennsylvania would join the rest of the free world in having a normal private system for the retail of wine and other alcohol

Parker Sues Galloni. The world of wine reviewing meshed with the legal world this week as it was reported that Robert Parker's Wine Advocate is suing his former reviewer, Antonio Galloni. See the NY Times, Robert Parker vs. Antonio Galloni, and Dr. Vino's blog, Parker sues Galloni, for all the details. In one interesting but odd twist, the Wine Advocate is asserting as part of the law suit that Galloni is not entitled to use its "proprietary" 100 point rating system on his new wine review site.

Happy Hours. A fun read in the Vancouver Sun this morning as columnist Pete McMartin takes down BC's outdated "nanny state" approach to liquor regulation: Absurd Ban on Happy Hours Sends This Drinker to Seattle.   

Some Taxes on Wine Increase with PST Return

British Columbia's PST will return as of April 1, 2013. The return of the PST also means the increase of certain taxes on wine. This is due to the fact that the PST has (and previously had) a higher tax rate on alcohol (10%) than on other products (7%). When the HST was introduced, the combined federal/provincial sales tax rate on alcohol went down from 15% to 12%. This would have created a small reduction in consumer prices ... except that the government raised "liquor board markup" rates at the same time to eliminate any savings (for example, the rate on wine was increased from 117% to 123%). As of April 1, the liquor board markup rates will go back down and the sales tax will go back up. For the most part, consumer level retail prices should remain the same. However, there are a number of exceptions ...

  • Wine brought back by travellers from outside the country into BC will become slightly more expensive since the sales tax rate applied at the border will go up from 12% to 15% and the method of calculating it will become slightly disadvantageous. 
  • Wine purchased direct from BC wineries will also be subject to a higher tax rate because liquor board markup is not applied to those sales. However, it has been typical in BC for wineries to advertise "tax included" prices in the past rather than levying the sales tax separately. As a result, wineries may choose to absorb the sales tax increase and keep the prices the same ... or they may choose to increase prices.
  • Wine purchased in restaurants/hotels/bars will also be subject to a higher tax rate for consumers because the combined sales tax rate on those purchases will go up from 12% to 15%. The price charged to the restaurant may go down slightly due to the reduction in liquor board markups and the return of a provincial sales tax discount (hopefully). However, if restaurants do not re-price their wine lists then the end price for consumers will rise.
For more information, see these earlier articles: Removal of HST Will Affect Wine Industry and BC's Budget: Effect on Wine Industry (which discussed the changes when the HST was originally introduced).

Industry Economics, Wine Tasting Rules, Privacy

A few interesting news items for today ...

Economic Impact Study. A number of industry groups, including the Canadian Vintners Association and the BC Wine Institute, have released a study on the economic impact of the Canadian wine industry which includes some very interesting and salient economic statistics relevant to the economic benefits of the wine industry nationally and here in B.C. See the press release and download the full report here

LCBO Shut Down on Privacy Issue. The LCBO has been forced to change its "personal information" collection policies by an Ontario privacy ruling which determined that the LCBO was not entitled to collect personal information on orders processed by a wine club. See the LCBO Loses Privacy Decision. In response, and in what seems to be a rather outrageous reaction, CBC is reporting that the LCBO has now shut down wine club orders!

WA State Bill Aims to Permit Educational Tastings for 18-21 Year Old Students. Washington state's progressive approach to alcohol regulation is apparent in respect of a state bill that aims to permit underage (18 to 21 year old) students to taste wine as part of legitimate wine education courses. Contrast this to the arcane approach to wine education and culture in B.C. where current licensing policies do not even permit adults to taste wine at educational wine tastings unless the event is held in a licensed venue or is hosted by a charity.

Quebec Introduces Bill C-311 Amendments - Intent Unclear. The Quebec government has introduced legislative amendments (PDF) that are intended to deal with the issue of interprovincial wine shipments. However, it is unclear at the present time whether the intention is to allow interprovincial wine shipments or to restrict them. More information as it becomes available.