WineLaw.ca

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):

*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.

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 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.   

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.

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.

The BC government has announced that the new General Manager for the Liquor Distribution Branch will be Blain Lawson, who was previously with Coast Wholesale Appliances. Here is the press release: New Liquor Distribution Branch General Manager Named.

Here is an update on the charity wine auction issue in BC, following the receipt of additional information from the LCLB. The BC Government introduced legislative amendments last week which were intended to deal with this. The issue first arose last summer/fall when the LCLB made changes to its policy manual and took the position that fundraising wine auctions of privately donated wine were not legally permitted in BC despite the fact that such auctions had been regularly held and licensed without problem for close to three decades. The donation and auction of privately donated wine is extremely important to charities and non-profit groups because the most valuable wine for fundraising is usually older or rarer wine which is donated from private cellars. Following negative media attention and an expression of major concern by affected charities and non-profit organizations, the government issued a press release in the fall of 2012 indicating that fundraising wine auctions would be permitted … but which did not mention privately donated wine. A short while later in November 2012, the LCLB issued Policy Directive 12-08 which confirmed that wine auctions were permitted if they were held under a special occasion license with wine sourced only from the LDB. In addition, non-licensed auctions and auctions of privately donated wine would be permitted but only if the wine was contained in \”gift baskets\” or \”the equivalent\”, thus providing a temporary workaround although one based on an odd distinction which appears to have no basis in law. Finally, this past week, legislative amendments were introduced under the Miscellaneous Statutes Amendment Act (see part 3). Here is a review of what has been proposed and the issues related to the amendments.

Permit System Created. The amendments establish a permit system which was not previously required. Charities and some qualifying non-profit organizations would be able to apply for a permit to hold a fundraising wine auction. There would be an exemption from the permit requirement for \”small quantities\” of liquor which amount has not yet been defined. Organizations wishing to both serve wine and auction wine (which is the most common type of fundraiser) may have to obtain both a special occasion license and an auction permit depending upon whether the event was held in an unlicensed location or if the charity did not want to pay the wine prices commonly associated with serving wine in licensed premises. 

Privately Donated Wine. As noted above, it is critical for the affected organizations to be able to accept private wine donations and to auction the wine in order to fundraise effectively. The amendments themselves do not make any mention of privately donated wine (which was the issue that created this problem in the first place). However, I have confirmed with the LCLB that the intention is that regulations will eventually be issued that will allow an auction permit holder to receive private donations and to auction the donated wine. 

Non-Profit Organizations. The proposed amendments only permit fundraising wine auctions for registered charities and for those non-profit organizations that will use the funds generated for charitable purposes. Non-profit organizations that are not technically charitable are not included (and there are many of these).

As noted previously, while the government and LCLB are to be commended for acting relatively quickly on this issue, it is not clear whether the amendments will get passed before the current short legislative session ends. In addition, it is unclear to me why non-profit organizations that are not charitable are being left out. My review of similar provisions in Alberta, Washington state, Oregon and California shows that none of those jurisdictions leaves such organizations out (for an example, see the Napa Valley Premiere fundraiser which raised over $3 million last week). In addition, I am aware that BC politicians on both sides of the house regularly include wine in their political fundraising auctions (which are not charitable). It seems particularly inappropriate to include such a restriction in BC law … when none of our neighbours do so … and when our elected politicians have regularly done the same thing.

The BC Government introduced the Miscellaneous Statutes Amendment Act (see Part 3) today which purports to address the issue of charity wine auctions (previously covered here). While the government is to be commended for introducing legislative changes quickly, it is not clear whether the proposed changes resolve the problems that were previously encountered. The changes create a permit system for charity wine auctions (which was not previously required, and may in fact be a step backward). They do not appear to allow the auction of privately donated wine which is the critical problem and issue for most charities. They also appear to leave non-profit organizations out unless they also have a charitable purpose. I\’ll provide further details as they emerge. The Bill has been introduced only on first reading (which means that it may not pass at all given the short legislative session and could be amended). Update: The LCLB has confirmed to me that the intention is that private wine donations will be permitted for auctions. I have asked for clarification on how this will be implemented and will post as additional information becomes available.

The BC government has announced some major changes to liquor laws and regulations that include the reform of tied house relationships (govt news release: BC Liquor Laws Get Overhauled). The tied house laws previously restricted the ability of a manufacturer such as a winery to sell its own products in another business with the same ownership. Other changes include: the expanded operation of tasting rooms for breweries and distilleries, changes to promotional restrictions, a markup exemption for distillers using 100% BC product, the appointment of a BC wine \”envoy\”, the conversion of independent wine stores into licensees, and the inclusion of distance separation requirements for LRS stores in regulation rather than policy. Here is a summary of the changes:

• Tied House. A tied house exemption will now be available such that a small or medium sized manufacturer (licensed under s.57 of the Act – and in respect of wineries producing less than 750,000 litres per year) may have a financial relationship with up to 3 retail level licensees who are licensed under s.12 of the Act (e.g. bar, restaurant, private liquor store, caterer). Exempted retail level licensees would have to offer a \”range of products\” from other manufacturers along with the \”tied house product\”. This change will be greeted with relief by some manufacturers within BC who are currently prohibited from selling their products in financially connected businesses (an infamous example is Carbrea winery on Hornby Island who have been prevented from selling their product in the family\’s lodge, a few miles away, for many years). However, the restriction to 3 licensees will likely not be viewed as a solution to larger business operations, particularly chains of restaurants and retail stores. By contrast, Washington state scrapped its tied house restrictions almost entirely last year.
• Expanded Operation of Tasting Rooms for Breweries and Distilleries. Breweries and distilleries will now be placed on a more even footing to wineries in respect of the operation of their tasting rooms. They will now be able to obtain lounge, special event area, tour area and picnic area endorsements for their licenses. Previously, brewery and distillery tasting rooms included arcane restrictions about pricing and serving quantities that seriously limited their utility. This change brings B.C. more into line with other jurisdictions, such as Oregon which has seen huge growth in its artisan breweries and distilleries.
• Markup Exemption for Direct Delivery Spirits. The press release indicates that direct delivered spirits (i.e. product delivered direct to consumers or licensees from a distillery, not through the LDB) will be eligible for an exemption on LDB markup (which is currently 170% on spirits) if they are made from 100% BC product. Such an exemption would place direct delivery spirits on an equal footing to direct delivery wine and would provide a huge financial incentive for distillers who are able to meet the 100% BC requirement (apparently not easy for some products). In addition, as I have noted in the past, the difference on markup treatment between 100% BC product and imported product is likely a violation of Canada\’s relevant trade obligations and any expansion of this could spark a trade challenge. Indeed, this very issue is currently one of the subjects of a law suit in Washington state.
• BC Wine Envoy. Effective March 1, 2013, Herb Leroy has been appointed BC wine envoy by the province with specific responsibility to try to open up interprovincial wine shipping across the country.
• Independent Wine Stores. Some categories of private retail wine store in the province are being converted to licensees under the Act. This will make all private retailers subject to the same regulator (LCLB) and, for the most part, the same set of rules. The affected stores include independent wine stores (Liberty, Marquis, Everything Wine etc …), VQA wine stores and tourist wine stores. The new regulation continues an existing policy which prohibits the issuance of any new private wine store licenses. The discount rates (wholesale prices) that licensees get are unaffected by the change.
• LRS Distance Separation Rules. The BC government currently restricts competition in the retail liquor business by preventing licensee retail stores from relocating within 1 km of an existing store. Previously, this rule could be waived at the \”discretion\” of the general manager – which caused interpretive problems ending with a recent BC Supreme Court judgment. This discretion is being eliminated and replaced with set criteria in the regulations. 
• Trade Practices. Some minor changes have been introduced with respect to liquor industry trade practices, including the elimination of the requirement for \’buy-sell agreements\” in certain circumstances and the allowance of the promotion of events by licensees. However, the most significant issue in this area is the fact that the rules on \”inducement\” activity have not been reformed. Many in the industry were expecting a liberalization of these rules to allow co-op advertising and other financial arrangements which are typical in other industry sectors (the LCLB had previously noted that \”inducements between suppliers and licensees are quite common\” and that deregulation would not result in any \”significant change in actual business practices\”). 

Good news: the BC government has announced today that it will start issuing caterers\’ licenses for liquor service. This will be a great help for event organizers who can now enlist a caterer to handle all aspects of an event\’s liquor purchase and service. Previously, people hosting an event serving liquor in B.C. needed to get a special occasion licence, take the Serving It Right course, purchase and transport the liquor and accept liability for liquor service at the event. Catering companies can now handle these responsibilities on behalf of their clients. See the press release for more details and the LCLB policy directive. The regulatory changes are contained in 2013 Orders in Council number 69 and number 70.