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Lessons from HST: Tax Fairness for Wine Too!

It\’s time for BC to put the HST issue behind us. But one of the major lessons learned from this is that government needs to be honest and fair with respect to any implementation of taxes. In a culture that is demanding transparency and accountability from both governments and businesses, it is simply not acceptable when government engages in taxation schemes which are either unfair or which lack transparency. These lessons should be a wake-up call to the BC government that it needs to transform its tax policies with respect to wine. Let\’s take a look at the current tax system on wine and see how it measures up on both fairness and transparency.

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Removal of HST Will Affect Wine Industry

BC\’s vote to scrap the HST will affect the wine industry in a number of ways. Here are some of the most obvious changes based on the government\’s promise to return things to the \”way they were\”.

Taxes. The reintroduction of the PST will mean a return to the old special PST rate on alcohol of 10% (along with the 5% GST). When the HST was introduced (5% federal part, 7% provincial part), there should have been a reduction in the price of wine but the government did not pass those savings on and ordered the LDB to increase markups to compensate so the shelf price would \”remain the same\” (on wine, the markup went up from 117% to 123%). So, in order to go back, the LDB will have to reduce their markups to the old rates which means that agents and the LDB will have to reprice everything.

Retail Pricing. Retail prices on wine, for the most part, should stay the same. On imported wine, there should be no end change for consumers. However, BC wine that is sold through the direct delivery channel is exempt from liquor board markups. The tax levels on that wine actually went down with the HST from 15% to 12% (only a few wineries, such as Laughing Stock passed on those savings to consumers). With the shift back to the PST/GST, the taxes will go back up, which will likely mean that wineries will either absorb the 3% or increase prices slightly to compensate.

Restaurants, Bars and Hotels. The tax on the food portion of restaurant meals will go down from 12% to 5% as only the GST will apply. However, the tax on alcohol on a customer\’s bill will go up from 12% to 15%. Restaurants will get their \”licensee discount\” back from the LDB, which covers off the 10% PST portion when they buy wine at wholesale. Restaurants will have to re-price their alcohol if they wish to maintain constant profit margins

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Privatization Talk Driven by Govt Finances – HST Defeated

Privatization of government involvement in liquor distribution is once again attracting discussion and proposals in a number of jurisdictions. Most of the impetus for this is driven by cost concerns in a time of limited government resources and finances. Here is a run down of some of the developments.

Washington. A new initiative for the ballot in November, primarily backed by Costco, once again asks voters to approve the privatization of the remainder of Washington\’s liquor distribution system. The details are in this Seattle Times article: New Poll Shows Voters Split on Liquor Initiatives

Oregon. An editorial in Oregon also asks why that state is still involved in liquor distribution: State Should Get Out of the Liquor Business

Utah. A scandal in Utah prompts an editorial in that state to also question why government is in the liquor business at all: Why Is Utah in Liquor?

In my view, we should also be considering these issues in British Columbia. Following today\’s defeat of the HST (the retention of the HST would have generally been positive for the wine industry), our government now has serious financial constraints with increasing and important demands on spending from education and health care. How can British Columbians afford to spend almost $300 million per year on running a government liquor distribution system?

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Whistler Jazz Fest Runs into LCLB Special Occasion Restrictions

The new Whistler jazz festival, Jazz on the Mountain, which is scheduled for the Labour Day weekend has been denied a special occasion license on the terms that it requested. The festival had requested a site wide festival license from the LCLB so that patrons could consume beer or wine throughout the festival area without being separated from their families and friends: see press release from the festival. However, the LCLB has indicated that it will only issue a \”beer garden\” type special occasion license for the main event area which would require that all those wanting a drink go to a fenced off separate area. The distinction was the subject of recent reforms in Ontario where the provincial government determined that it made no sense to restrict alcohol consumption to segregated areas. Coincidentally, the founder of the festival is prominent Ontario liquor licensing lawyer, Arnold Schwisberg, who believes that the LCLB has improperly exercised its discretion in refusing the site wide license. In my view, the provisions of the statute and regulations which deal with special occasion licenses are out-dated and inadequate. They do not deal with the issue of \”beer gardens\” or segregating guests within a licensed event: these restrictions stem from LCLB \”policy\” rather than from the law. Once again, this issue proves that BC\’s archaic liquor laws need to be completely overhauled.

UPDATE (2011-08-26): The Whistler Question continues to cover this story: Jazz on the Mountain Liquor License Denied and Court Proceedings Expected Against Liquor Board. According to these stories, the festival will commence legal action against the LCLB. Whistler\’s Pique newsmagazine also covers the story, revealing that the GranFondo cycling event has also been denied a site-wide license despite having been granted one by the LCLB for the exact same event in 2010. Whistler\’s mayor and city council have now indicated that they will contact Victoria to try and get these policies changed.

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Winery Licensing

Starting or Licensing a Winery in BC

This is a short guide to the unconventional approach to licensing wineries that BC has adopted. In most jurisdictions, it is possible to read through the winery licensing requirements within the applicable laws … in other words, it is fairly easy to discover what the requirements are for obtaining a license. However, in BC, this is not the case. There are some requirements listed in the Liquor Control and Licensing Act. However, the most onerous requirements are imposed by the Liquor Distribution Branch, which may not┬áhave the statutory jurisdiction to regulate the manufacture of wine.

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Restaurant Wine Lists: Mission Impossible in BC

There is an interesting article in a recent edition of the trade newsletter, Shanken News Daily, which describes the approach to creating restaurant wine lists in the Michael Mina group of U.S. restaurants: Mina Group Wine Director Parr Thinks Nationally, Acts Locally. The article describes the philosophy of Rajat Parr, who is Mina\’s wine director, in creating unique wine lists for each restaurant ranging from 300 to 2500 selections including vintages of some famous wines going back decades or even hundreds of years as well as extensive by-the-glass programs offering 15 to 50 wines. The striking thing from reading this article is how difficult it is to replicate such a philosophy in BC. Why? Because BC has such outdated law and regulations that restaurant wine directors are faced with ridiculous hurdles in any quest to offer selection and value. Consider the following …

Restaurants Must Buy ONLY from the LDB. With the sole exception of purchasing from BC wineries, restaurants in BC are legally required to buy all their wine from the LDB, usually from a single designated government liquor store. They can\’t buy from private stores or direct from importers and they can\’t buy from individuals, all of which would be able to offer better selection, particularly for older vintages or rarer wines. If a restaurant buys any wine from a non-LDB source, it is considered to be \”illicit liquor\”.

Restaurants Have to Buy in Full Cases for Special Orders. If a restaurant selects only from the extremely limited selection at its designated government liquor store, its wine list will be sad indeed. Restaurants do have the option of special ordering products that are listed in the system (usually referred to as \”SPEC\” items). However, they can only order those products in FULL cases which for the most part is unworkable as it would tie up too much cash, particularly for rarer wines. They also have to get those products delivered by the LDB\’s slow distribution system which usually means waits of weeks, or often months, when re-ordering.

No Off-Site Storage. Restaurants are required to keep ALL of their wine stock within the licensed area of the restaurant. In most restaurants, space is at a premium, particularly in the Lower Mainland. This rule means that restaurants can\’t create better selection and manage their cellars and stock by keeping some wine nearby at a different site.

Can\’t Transfer Product Between Locations. Restaurants also can\’t transfer wine between locations so if they are out of stock of a particular wine in one restaurant, they can\’t move stock from another location. It doesn\’t matter that the taxes have been paid – it\’s illegal.

Zero Wholesale Discount. The worst problem is, of course, that unlike everywhere else in the civilized world, restaurants in BC get ZERO wholesale discount from the LDB (despite being some of their best customers). The LDB also forces BC wineries to give zero discounts. As a result, restaurants have to pay full RETAIL price just like you and me. This means that restaurant wine prices are much higher in BC than nearly everywhere else. A recent advisory from one government liquor store even told restaurants that they should not expect that their orders would be filled during peak hours … imagine if any other business treated its best customers this way!

In light of the above, kudos go out to all of the restaurant wine directors in BC who operate gallantly within a system which tries to make things as difficult as possible for them. It wouldn\’t be hard to fix these problems. Indeed, if the government did so, the entire hospitality community would be better off … and the government would make more tax revenue!

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Wine Shipping Law Update

Following recent actions by Canada\’s liquor boards (likely prompted by Terry David Mulligan\’s cross-border wine action), I have just posted this Shipping Law Update August 2011 which explains recent moves by the LCBO and other liquor boards to okay the personal transport of wine (and other liquor) across provincial borders but to continue to prevent direct to consumer shipments. The update explains why I think it is difficult to make this distinction from a legal perspective.

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Wine Economists Release Report on BC Wine Industry

The American Association of Wine Economists has released Andy Hira\’s study of the BC wine industry this morning which should make for interesting reading regardless of whether you agree with the conclusions: BC Wine Industry Study. There are a couple of references to this site in the study. I am particularly interested in Prof. Hira\’s conclusions regarding regulatory protectionism as I have previously advocated for systemic change in this area because, in my opinion, BC\’s current wine distribution system does not comply with BC\’s and Canada\’s obligations under our international trade agreements including GATT and NAFTA.

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LCBO \”Policy\” Permits Personal Interprovincial Wine Transport

The LCBO has announced a \”policy\” that will permit consumers to personally transport alcohol into Ontario in limited quantities. The liquor board says that they will allow consumers to bring up to 3 L of spirits, 9 L of wine and 24.6 L of beer into the province so long as the alcohol is carried in \”on their person\” and is for personal consumption. The \”in person\” requirement will still prevent Canadian wineries from shipping direct to their customers in other provinces. I expect other provinces will follow along on this initiative as the liquor boards are trying to quell the public\’s distaste for Canada\’s 90 year old post-prohibition laws which prevent all inter-provincial movement of alcohol except to liquor boards. I\’ll provide further analysis and comment on this development shortly.

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Winery Gives Up VQA Status for Bag in Box

Prompted by environmental concerns, Summerhill Winery in Kelowna has decided to package some of its wine in bag-in-box packaging. However, the current regulations regarding eligibility for VQA status prevent VQA wine from being packaged in anything other than bottles. As a result, Summerhill\’s bag in box wine will not be eligible for VQA labeling. The story has received significant media attention: BC Vintner Loses VQA Designation and Vintner Can Teach Bureaucrats A Thing or Two About Wine. The loss of VQA status also means that this wine would not be eligible for the VQA rebates paid to wineries for sales in government liquor stores. As a result, Summerhill will likely only sell this wine to restaurants/hotels and private stores.