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).
Here is the LDB\’s example which purports to show that licensees will make more money after July 1st on a 750ml bottle of wine that has a display price of $12.99.
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Assumption: Licensee Selling at 2X Display Price of $12.99
| Before |
After |
|
| Retail Price Before Taxes |
11.30 |
11.60 |
| Add GST |
0.57 |
|
| Add HST |
1.39 |
|
| Net Payment |
11.87 |
12.99 |
| Selling Price |
25.98 |
25.98 |
| less: Taxes Collected |
3.39 |
2.78 |
| Net Sale |
22.59 |
23.20 |
| Net Profit to Licensee |
11.29 |
11.60 |
| Taxes to be remitted – collected less paid |
2.82 |
1.39 |
As a result, the LDB says that the licensee will make 0.49 more profit on this sale after the switch-over.
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Many licensees have told me that the above example is confusing. I have reviewed the calculations and in my opinion, they are correct. However, they are based on some assumptions which may not be true for most licensees.
Firstly, the LDB is assuming that the licensee will take the display price ($12.99) and double it to a selling price of $25.98 INCLUDING TAXES. Most restaurants do not do this. Rather, they create a selling/menu price and then add the taxes on afterwards on the customer\’s bill.
Secondly, the LDB is assuming that the licensee will not pass on the HST tax savings to the customer. Under the HST, the taxes on alcohol will actually go down by 3% from the current combined level of 15% to the HST rate of 12%. It has already been widely reported that the LDB is increasing liquor board markups to eliminate the tax savings for the customer. However, in the example above, the LDB is assuming that the licensee will act in a similar way and increase its menu prices to keep the after-tax price the same. In other words, the LDB is assuming that the licensee will act like the LDB by moving the tax savings into its profit margin so as to keep the after-tax consumer price the same.
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The following table is a more detailed version of the LDB example which should be easier to understand because it includes calculations which are missing from the LDB example:
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Detailed Example of Wine Sold (Display Price of $12.99) – LDB Example
| Before |
After |
|
| Retail Price Before Taxes |
11.30 |
11.60 |
| Add GST |
0.57 |
|
| Add HST |
1.39 |
|
| Net Payment by Licensee to buy product |
11.87 |
12.99 |
| Menu Price |
22.59 |
23.20 |
| Taxes Collected on Customer\’s Bill |
3.39 |
2.78 |
| Total Collected by Licensee Including Taxes |
25.98 |
25.98 |
| Less Taxes Remitted (taxes collected minus input tax credits) |
2.82 |
1.39 |
| Net Proceeds to Licensee |
23.16 |
24.59 |
| Minus Amount Paid for Bottle (from above) |
11.87 |
12.99 |
| Net Profit to Licensee |
11.29 |
11.60 |
In the above example (now with more detail), you can see that the LDB has assumed that the licensee will increase the pre-tax menu price from 22.59 to 23.20 in order to keep the after-tax price the same and to move tax savings into the licensee\’s profit.
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To show how important these changes are, here is another example based on different assumptions which may be more common for restaurants. This example assumes both: 1) that the restaurant will NOT change its menu prices during the switchover, and 2) that the restaurant doubles the display price and then adds the taxes on the customer\’s bill.
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Detailed Example of Wine Sold ($12.99 Display Price) – Restaurant Doubles Display Price Then Adds Taxes
| Before |
After |
|
| Retail Price Before Taxes |
11.30 |
11.60 |
| Add GST |
0.57 |
|
| Add HST |
1.39 |
|
| Net Payment by Licensee to buy product |
11.87 |
12.99 |
| Menu Price |
25.98 |
25.98 |
| Taxes Collected on Customer\’s Bill |
3.90 |
3.48 |
| Total Collected by Licensee Including Taxes |
29.88 | 29.46 |
| Less Taxes Remitted (taxes collected minus input tax credits) |
3.33 | 2.09 |
| Net Proceeds to Licensee |
26.55 |
27.37 |
| Minus Amount Paid for Bottle (from above) |
11.87 |
12.99 |
| Net Profit to Licensee |
14.68 | 14.38 |
This example shows that the licensee will actually make LESS money if they do not alter their menu prices. Licensees can, of course, adjust the menu prices as they see fit. It would also be possible to adjust pricing such that the licensee makes the same amount of money on a particular bottle but the customer gets a small break on the after-tax price.
Unfortunately, the LDB\’s example does not make this clear. Licensees should carefully look at their wine list pricing on this issue. The changeover will likely affect your profitability unless licensees adjust pre-tax pricing to compensate.
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