Author: MarkH

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.

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.

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.

Effective April 8, 2009, the Alberta Government (through the AGLC – the Alberta liquor board) has increased the markup rates that apply to all alcohol flowing through their system. While Alberta has a privatized retail system, all product still technically flows through the government distributor which applies government markup (tax) to everything. The rate changes will increase the markup by $0.75 to $3.34 on a 750 ml bottle ($4.45 per litre). These increases are projected to add $180 million to general government revenue in the next fiscal year. The rate increases are very hefty percentage wise. Because the markup is per bottle, the impact is greatest on lower priced product and diminishes percentage wise as the bottle price increases. In addition, because the system is privatized, it remains to be seen how much of the increases will be passed on to consumers and how much will be absorbed by the retailers/distributors. See the AGLC website for details and a full markup schedule (PDF). The increases will not apply to stock currently in the system so Albertans may be wise to visit their nearest wine store quickly, particularly if they like drinking lower priced wine.

As is often the case, first the good news. For wineries, good news arrived as the federal government removed a 3% tarriff on barrels. This will reduce the cost to wineries for new barrels by about $30 each, a small amount but every little bit helps given the escalating cost of barrels. Read the story here: Canada Drops Wine Barrel Tariff.

Bad news for agents and wineries exporting wine to British Columbia. The BC LDB and the CRA have been reviewing the reporting process for GST which the LDB has been using for many years. Previously, the LDB reported the GST credits as the notional importer of all wine entering British Columbia. As a result, agents and wineries outside Canada did not have to register for GST. The CRA\’s position is that this procedure is incorrect and that from a date to be determined (perhaps October 1st) either the foreign winery will have to report the credits and register for GST or the agent will have to take possession of the wine before it arrives in Canada and do the reporting. This is obviously a huge change and will impose monumental administrative and reporting requirements on a business that runs on slim margins to begin with.

Our companion site, Free the Wine, was featured in an op/ed piece by Mark Hicken, of WineLaw.ca and the Executive Director of the Free the Wine Coalition, \”It\’s time to get B.C. wine regulations out of the dark ages\” in the Vancouver Sun today (Thursday, March 12). If you support the objectives of wine law reform and lower taxation rates on wine, please join Free the Wine. Most importantly, do not forget to contact your MLA. Thanks for your help!

Proposed new or increased taxes on wine by various states are making news south of the border, and particularly in California, home of the vast bulk of the U.S. wine industry. The state of California, which is experiencing serious financial problems, is proposing hefty tax hikes on all alcohol including wine. See these stories for details: Sonoma Valley Sun and the Wine Spectator.

In previous years, similar proposed tax hikes have been defeated but the wine industry in California is concerned that the current initiative may sneak through this time due to the deteriorating financial situation of the state government. Not to diminish the seriousness of the situation for California wineries, but if you compare the proposed taxes to B.C.\’s existing taxes on wine, the charges look like small potatoes. The proposed increase in California is from $0.20 a gallon to $1.48 a gallon. While that would no doubt have a serious effect on \”Two Buck Chuck\”, it pales in comparison to B.C. tax rates which often reach $8 to 10 per gallon on a moderately priced bottle of imported wine.

In certain channels, the tax on B.C. wine is a lot less but even there, the minimum tax is 15% plus assorted fees such as the recycling fee which would still exceed the proposed California taxes. Maybe we should consider making our wine industry more competitive by reducing this disproportionate tax burden?

It\’s also interesting to note that the same rationale for higher alcohol taxes that is being used in California is often used here: that being that taxes on wine are \”sin taxes\” and thus they are permissible at a higher rate than normal. That argument doesn\’t wash for me. The vast majority of British Columbians moderate their wine consumption to low to moderate levels. There is, in fact, a great deal of evidence that such low to moderate consumption has overall health benefits not detriments. As a result, it is not appropriate to tax wine consumption as a sin – as in the Mediterranean countries, it should be viewed as a normal part of a healthy lifestyle. Consequently, the taxation rate on wine should be a normal rate, not an oppressively high one, as is currently the case in B.C.

Wine shipping restrictions contained in Massachusetts state law have been struck down by a U.S. court as being discriminatory and unconstitutional in the case of Family Winemakers of California v. Jenkins. The restrictions at issue were complex but effectively prevented 95% of wineries from shipping direct to consumers in Massachusetts. The restrictions prevented wineries from shipping if they produced more than a set annual case volume or if they had wholesaler representation in Massachusetts. The court applied the reasoning in the earlier U.S. Supreme Court decision in Granholm v. Heald. Similar challenges are pending in other U.S. states that have enacted shipping restrictions.

The U.S. courts\’ reasoning is interesting because similar arguments could be used in Canada, particularly against the imposition of liquor board markups as between shipments of wine between wine producing provinces such as Ontario and B.C. The basis of the legal arguments in Canada would be slightly different due to the fact that the U.S. and Canadian constitutions are different but the nature of the discrimination is similar.