WineLaw.ca

People ask me all the time why wine prices (and other alcohol prices) are so high in BC. The short answer is that there are two reasons: 1) extremely high tax rates (including hidden taxes like liquor board markup) and 2) inefficiency in our monopoly distribution system.

To give you a comparison on the tax side of the equation, here are the per capita (per person) annual amounts of money that the major provincial governments in Canada made from liquor tax revenue in 2009:

As you can see, BC makes a lot of money from liquor tax revenue … over $900 million per year. You can also see that BC makes a disproportionately large amount of money on the per capita revenue as compared to the other major provinces and the Canadian average. BC takes in just over $200 per person per year from liquor tax revenue … almost $60 more per person per year than Ontario (the other major wine producing province) and almost $80 more per person per year than Quebec.

It\’s also interesting to note that Alberta, the only province with full retail privatization, makes considerably more money per person per year than either Ontario or Quebec and only a bit less than B.C. where we have much higher retail prices and almost no competition. The bottom line in BC is that we are getting soaked on the tax levels compared to the other major provinces. Makes you want to have a drink … preferably in another province.

Also … if you are a glutton for tax punishment … you may want to check out my updated BC Liquor Store Wine Markup calculators which now show the HST and increased markup amounts (as of July 1st) that are hidden in the bottle prices at government stores.

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).

It appears that the Cellared in Canada controversy is continuing. Two recent articles by Jancis Robinson on her blog (From Bottom to Top – Canadian Wines and Canadian ripples – the response) have brought the subject into the spotlight once again and include a response from Vincor (one of the major producers of these wines). You can read and judge for yourselves on the consumer and business issues. I was quoted in the latter article on Canadian labeling laws (see my previous article: Cellared in Canada in the News Again) where I state my view that the current labeling of CIC wines is likely not compliant with the provisions of current Canadian federal law. On that issue, I\’ll make one further comment.

The Vincor response to Jancis Robinson\’s article states as follows:

The designation Cellared in Canada is federally regulated by the Canadian Standards Board .The words \’Cellared in Canada from Imported and Domestic Wines\’ is required to be on every product of that distinction. For 14 years we have been using this terminology with no confusion in the marketplace.

I don\’t agree with these statements. The Canadian Standards Board is a voluntary standards association. It is not a federal regulatory body and has no force of law behind it at all. Canadian federal law is contained in the statutes and regulations of Canada as passed by Canada\’s Parliament. Voluntary industry groups cannot create federal law nor create any requirements to label products in accordance with the standards that they create.  There is no legal requirement that CIC product be labeled in the manner described – the CIC wording is simply the \’standard\’ that the voluntary industry group came up with. In terms of what is legally required, current Canadian federal law requires a country of origin declaration on all wine sold in Canada as I explained in my previous article. I don\’t see how the current wording can be interpreted to comply with that law.

Some licensees have recently received information that the BC LDB will be eliminating the licensee \”discount\” which is currently provided to restaurants and bars due to the introduction of the HST on July 1st 2010. Currently, the provincial alcohol sales tax is removed from the price charged to licensees because it is added in on the customer\’s bill when they purchase the product so licensees pay a price which is approximately 10% less than the shelf price (the provincial sales tax on alcohol is currently 10%).

If the LDB eliminates the discount, the licensees would pay the full shelf price for all purchases without any discounts or exemptions. The licensee could claim an input tax credit later in order to recover the amounts paid. However, this would have a negative effect on licensees because: a) they would have to pay more up front to purchase their liquor which would affect their cash flow, and b) the input tax credit for the HST will be 12% whereas the combined current discount and GST tax credit equals 15%. Licensees would thus pay about 3% more for their liquor because the government would have moved some of the price from sales taxes (which the licensee got credits for) into the liquor board markup (for which their is no credit). As a result, the wholesale cost to licensees would increase and it seems likely that wine prices would increase on restaurant menus in order to compensate.

None of this information is confirmed as yet. If it is correct, it will be disappointing because, in my view, restaurants and bars should be given some form of wholesale discount just like in nearly every other jurisdiction in the world. Restaurants can buy food and other beverages at wholesale … why can\’t they also buy wine and liquor? I will provide an update once I receive concrete information. Apparently, there will be some type of official announcement next week.

In any event, the tax that the customer pays on the alcohol portion of their bill will decrease slightly from the current level of 15% to 12%.

UPDATE (2010-06-17): The LDB has now distributed their package on the affects of the HST. It confirms that there will be zero discount for licensees as of July 1st. I\’ll post further on this but it also appears from the examples contained in the package that restaurants and bars will need to re-price all liquor items on their menus if they want to maintain their profit margins.

Yesterday (June 3, 2010) was the final day of the current legislature session in British Columbia. Happily, the package of reforms to BC\’s liquor laws which I previously wrote about (\”BC Reforms Some Liquor and Wine Laws\”) received \”royal assent\” yesterday which in layperson\’s terms means that the changes were approved or passed by the legislature. This is good news for the industry because there are some substantial changes in terms of modernizing certain aspects of our archaic liquor laws: e.g. tied house laws, co-op advertising, sponsorship (see the previous article for the details). However, you should be aware that most of the major changes do not come into effect immediately – they do so at such time as they are made effective by action of the Lieutenant Governor in Council. Since many of the changes require that new accompanying regulations be drafted, it is unclear when the effective date of the changes will be. Still, this is a significant step in the right direction.

The BC Liquor Distribution Branch has announced today that the \”liquor board markup\” on all products will be increased as of July 1, 2010 as part of the implementation of the HST. The introduction of the HST means that the provincial sales tax on alcohol will actually go down from its current 10% to the 7% provincial component of the HST (the 12% HST is made up of 7% provincial sales tax + 5% federal sales tax). In order to prevent consumers from actually receiving a break on the introduction of the HST (maybe that would have been a good idea?) … the government had previously announced that they would increase liquor board markups to compensate. Today\’s announcements make changes to the markups across the board for all products. On wine, the liquor board markup will increase from 117% to 123%. On spirits, it goes from 163% to 170%. If you weren\’t aware of these staggeringly high \”tax\” rates … yes, you are reading those numbers correctly.

The stated intention has always been to keep \”shelf prices the same\”. I ran a few calculations for wine only using the new markup formula and the results were fairly consistent that the end shelf prices were almost identical to the old formula. However, these changes may be difficult to explain to a cynical public … as the markup goes up by 6%, tax down by 3%. In addition, there is a small problem regarding the legitimacy of moving government revenue generated by tax dollars to government revenue generated by liquor board markup. Revenue from taxes must be considered and passed by the legislature or it is not legal (i.e. no taxation without representation). Revenue from liquor board markup is not passed by the legislature – it is simply implemented by administrative action at the LDB. The government has now \”moved\” a large chunk of revenue from the tax side (passed by the legislature) to the non-tax side. Is this taxation without representation?

This story has now been covered by the Vancouver Sun: LDB Increases Markup on Booze as HST Lowers Tax

Update (May 25, 2010): I received a press release from Laughing Stock Vineyards today indicating that they intend to pass the HST savings on to their customers for wine ordered directly from the winery. As I explained, in an earlier article, BC wineries will actually get a small benefit from the switch to HST for wine delivered direct from the winery.

The \”cellared in Canada\” issue is in the news again this week with a story in Business in Vancouver\’s current issue: \”Gripes Growing Over BC Wine Grape Rules\” (subscription required for online access). As readers will recall, \”cellared in Canada\” (CIC) wines are blended wines made from primarily (or all) imported bulk juice that is then bottled in Canada. The issue that is now in the news is that CIC wines get preferential distribution treatment within BC over other imported wines. Specifcally, CIC wines can be distributed through \”direct delivery\” which means that the producer can ship them (along with 100% BC wines) directly to consumers and licensees without going through the BCLDB distribution system. All other import wines have to go through the BCLDB distribution system which creates numerous problems in terms of providing timely and efficient delivery to customers. The story quotes CIC producers as arguing that CIC wines provide economic benefits to Canada over other imported products. In addition, there is an argument that CIC wines are competing against other blended global products which by Canadian law are able to identify a country of origin (such as \”Product of France\”) so long as 75% of the wine comes from that country (in other words, up to 25% of the wine can be blended in from elsewhere).

In my view, while there are likely good arguments about the fairness of the distribution system, the sale of CIC wines should not be problematic if the wines are labelled correctly and in a manner which is not misleading to consumers. The recent signage changes at BCLDB stores are a step in the right direction on this issue. However, one issue that still lingers is the legality of the wording on the labels used on most CIC products. This issue was first raised by Arnold Schwisberg at the wine law conference held here in Vancouver this past November. Canadian federal labelling law requires that all wine sold in Canada must contain a declaration of the \”country of origin\” on the label (see Food and Drug Act, Regulation B.02.108). The Canadian Food Inspection Agency has a guide to their enforcement of the labelling laws on their website. It acknowledges the blending issue and then explains that if a wine does not contain at least 75% content from a single country, so that it can claim that country as its \”country of origin\”, then it must be labelled as follows:

The labels of products which do not meet the conditions mentioned
above must describe the various origins on the label.  For example: \”Made in Canada from (naming the country or countries) grapes
(or juices)\” or \”Blended in Canada from (naming the country or countries)
wines\”

(emphasis added)

It seems to me that there is still a problem with the labelling of many CIC wines because most, but not all of them, simply state \”Cellared in Canada from a blend of international and domestic wine\”. This wording does not identify the countries of origin of the wine, as federal law requires. As a result, it is not possible for the consumer to tell where the wine is sourced from. In BC, this wording is particularly problematic because there is, in fact, no requirement that any domestic wine be included in the blend. I have discussed this issue with producers who have told me that CIC blends change quite frequently and, as a result, it would be difficult to continually change the labels to identify the various countries of origin. While that may be true from a practical business perspective, it is not a sufficient answer to the legal problem – the law currently requires the country of origin declaration. In my view, any labels that do not include it are likely in violation of federal labelling laws.

The BC Government has announced changes to some of BC\’s liquor laws. The statutory amendments are fairly extensive. The LCLB has a summary in PDF form here. Many of the amendments are housekeeping matters to reflect the reality of various changes to the liquor and wine business that had been informally adopted previously. However, there are also some relatively substantial changes which are for, the most part, good news. For example:

• Reform of Tied-House Laws. The current Liquor Control and Licensing Act (\”LCLA\”) contains a \”blanket prohibition\” in section 18(1) of \”tied-houses\”. The original intention of these provisions was to prevent vertical control of the liquor market (i.e. to stop manufacturers from owning pubs/restaurants/retailers so that they could favour their own products). The reality of our modern liquor industry is that such control is not a major concern. The tied-house laws ended up causing significant grief for some businesses. For example, a winery could not sell its wine at a hotel/restaurant that was owned by the same family because of the \”tied-house\” restrictions. The amendments remove the blanket prohibition and permit regulations to be issued which will govern any restrictions on \”tied-houses\”. As such, we will have to wait to see the regulations to see exactly how this issue is being fixed … but the statutory amendments are a step in the right direction.
• Inducements and Co-op Advertising. Similarly, the current LCLA contains prohibitions that prevent licensees from receiving \”money, gifts, reward or remuneration\” for the promotion or sale of liquor. These blanket prohibitions made it difficult to permit retailers and agents/manufacturers from working together to promote the sale of a product. These practices are commonplace in other industries such as the supermarket and grocery business.  The amendments eliminate the blanket prohibitions and make them subject to regulation. Once again, we will have to wait to see the regulations. However, it appears that the intention is to permit some form of co-op advertising.
• Licensee Resale. The amendments change the law so that \”a prescribed class or category\” of licensee can sell to other licensees. The explanatory PDF indicates that this is to enable rural agency stores to sell to other licensees (e.g. pubs/restaurants) in remote areas.
• Inter-provincial Border Issues. The PDF states that there will be a new \”process for bringing in small amounts of alcohol into BC from elsewhere in Canada for personal use\”. At the present time, it is generally illegal and/or so expensive to do this that consumers ignore the reporting requirements (if they are even aware of them). I have long advocated that BC take the lead on this issue and establish a workable process for inter-provincial shipping of wine. However, I understand from the LCLB that this initiative is more limited and the new process will only apply to \”small amounts\” of wine brought back personally with a traveller into BC from another province – so it will not address the inter-provincial shipping issue. Rather, it will permit BC residents to bring wine back with them from other provinces if they have been on a trip without breaking the law. It appears that the intent is to exempt such wine from provincial markups. While this is a step in the right direction, it will not solve the problem for BC wineries\’ shipping to other provinces.
• Independent Wine Stores. The \”old-style\” private wine store license (e.g. Liberty, Marquis, Everything Wine etc …) was based on an agency agreement with the Crown. This category of store is being removed from the legislation … presumably to be moved into a category of license under the regulations (where other retailers such as LRS stores are located).
• Special Occasion Licenses. There are a number of changes which clarify the process and regulation of special occasion licenses. The new statutory provisions permit \”prescribed\” classes or categories of licensees to also issue special occasion licenses. It is not clear what the extent of this is.

While we will have to see what the new regulations contain, these
reforms generally appear to be good ones and a welcome step in the right
direction for wine law reform.

UPDATE (June 3, 2010): the legislative bill which makes the above changes has now been passed by the BC Legislature and will receive Royal Assent on June 3, 2010. However, many of the more significant changes do not take effect immediately. Rather, they will be introduced by regulation.

Please contact me directly if you have any questions or comments on the above.

In U.S. news, it appears that wine and spirits wholesalers are attempting to mitigate the impact of recent court decisions permitting direct shipping of wine to consumers by strengthening the power of the states to regulate alcohol (including wine). A bill has been introduced in the U.S. Congress which is designed to make it difficult to challenge the power of the states in respect of their use of legal barriers which support the three tier distribution system. The wine and spirits wholesalers have historically supported the three tier distribution system which has until recently required that all alcohol going into a state be distributed by a wholesaler for that state. Recent court decisions (the most prominent of which is Granholm v. Heald) have permitted wineries to direct ship to consumers in other states without going through the three tier system. The bill changes the evidentiary standards for such challenges, making it more difficult for them to succeed. Wine Spectator has reported on this and is properly concerned that this could be an end to direct shipping.

My apologies for the following rant which is really a summary of recent frustrations …

News from the BC Government, LCLB and LDB is showing that the lack of accountability and transparency in our retail wine distribution system is reaching unprecedented levels. Generally, it is assumed by the law that when government regulates in an area it is doing so in the public interest. However, the BC government\’s wine and liquor distribution system throws some serious doubt on this assumption. In fact, some recent actions of the BC government seem to show that there is inadequate consideration of the public interest in this area. Consider the following recent issues.

Minimum Shelf Prices. Most people aren\’t aware that the government imposes minimum prices for beer, wine and spirits in BC. The LDB recently increased the minimum shelf price for spirits in BC from $23 to $23.75. A couple of recent articles have showed how off base this policy is. Because the LDB uses a \”fixed markup formula\” for all of its products, any increase in the shelf price will simply result in the supplier increasing the wholesale price charged to the LDB. So all that happens is that the consumer overpays, the government loses out on tax revenue and the supplier gets a windfall profit. Zero benefit to consumers … nice profit for suppliers, minor benefit to the government/taxpayers (but with lost revenue).

Privatization Derailed. The recent deal between the BC government and the BCGEU has the government promising to keep operating nearly all government liquor stores as well as the wholesale distribution system. This comes at a cost to taxpayers of about $300 million per year. The government could have privatized some or all of the retail stores, saving itself tens or hundreds of millions of dollars in operating costs while maintaining all of its existing liquor tax revenue (which is applied at the wholesale level … so it doesn\’t matter whether the product gets sold in a government store, private store or bar/restaurant). In addition, the government could have sold the government stores to the private sector, likely netting itself a one-time windfall of hundreds of millions of dollars at a time when those funds are badly needed. Instead, the government decides to keep the status quo. Zero benefit to consumers & taxpayers, no help for smaller BC wineries trying to get better distribution … but a nice benefit to the BCGEU and some of the other players who like the system the way it is.

For an interesting insight into the inner workings of the liquor system and how your taxpayer dollars are being spent, you might wish to read either this summary or the full labour arbritration decision both of which relate to a 2005 LDB awards dinner where one employee got severely intoxicated, fell over as he was receiving his award and apparently heckled the Premier, the Minister and the Lieutenant-Governor (who were all present) using some rather inadvisable and colourful language. While this is obviously a case of \”one bad apple\”, it casts some light on the use of your taxpayer dollars. The LDB fired the employee afterwards … apparently at least partly because he had caused embarassment to the LDB at a time when they were trying to avoid privatization. The LDB lost an appeal by the union of the dismissal … and the \”over-refreshed\” employee was reinstated.

Increased Distance Separation for Private Liquor Stores. Most
people also aren\’t aware that the government has a legal prohibition
which prevents a new private liquor store from opening if there is
another private store close by. It\’s almost impossible to obtain a
retail liquor license in BC … so there\’s not a great deal of
competition anyway. But, the government has just increased the \”distance
separation\” so that the law prohibits any new stores within 1 km of an
existing store. So for example, if you are lucky enough to have an
existing private liquor store license, you are effectively
shielded from any new competitors within a 2 km radius. No allowance is
made for population density so if your license happens to be in a
densely populated area – lucky you, you get an exclusive right to that
area. As readers will know, I am an advocate of more privatization in
the wine business and many existing operators do an excellent job … but this
government policy is misguided. Since when is it a legitimate function
of government to prevent competition in any retail sector? Just imagine
if this logic was extended to other businesses – e.g. we\’ll make it
illegal for anyone to open another coffee shop within 1 km of yours
regardless of how many people live nearby. Nice perk if you could get
it! Zero benefit to consumers & taxpayers … preferential treatment
for existing store owners who are in densely populated areas.

Implementation of the HST Means Increases in Liquor Board Markup. Theoretically, the introduction of the HST at a combined rate of 12% would have meant a small reduction on the taxes on wine (which are currently 10% PST + 5% GST = 15% total). However, the government has decided that this can\’t be allowed so they have directed the LDB to INCREASE the already outrageous liquor board markups. So, for example, the markup on wine, which is currently 117% will go up to an even more absurd level. Once you add the liquor board markup, the sales taxes and various liquor board fees, you have combined tax and markup rates which approach 150%! And this is on wine, a product which is actually good for you when consumed as intended, in moderate amounts. By contrast, if I chug soda pop which is not good for me in any amount, I am currently not taxed by the BC government at all and will only be taxed at 12% after the HST is added. For complicated reasons (which you can read about here if you are interested), there may actually be a small benefit to BC wineries but there will be zero benefit to consumers and taxpayers.

The sum of all of this is obvious … in my view, the government is not paying sufficient attention to the public interest on important policy decisions which affect the wine industry and wine consumers. Most monopolies in Canada have historically had a corresponding regulator whose purpose it is to protect the public interest. However, Canada\’s liquor monopolies have never had this oversight … it\’s time for consumers and taxpayers to demand change.