
Yesterday (March 5th), the federal government issued a first ministers’ statement indicating that significant changes will be made shortly to eliminate or reduce internal trade barriers in Canada: see First Ministers’ Statement on Eliminating Trade Barriers in Canada. Specifically, the announcement states the following regarding barriers that restrict the alcohol trade:
“Launching pan-Canadian direct-to-consumer alcohol sales for Canadian products: The Governments of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, Nova Scotia, and Canada have committed to improving the trade of alcohol products between participating jurisdictions by advancing direct-to-consumer sales for Canadian products. Currently, British Columbia allows for direct-to-consumer sales for wine, while Manitoba is already open to direct-to-consumer sales on all alcoholic beverages. The Yukon is exploring options for direct-to-consumer alcohol sales within the territory.”
Media organizations have subsequently reported on this positively. See Ottawa, Provinces Agree to Open the Tab on Booze.
I am encouraged to see that progress may be happening on this issue. However, I have been working on this issue for a decade and a half. During that time, there have been many grand statements of intention with only a few practical and workable results. On this issue, like many areas of liquor policy, the “devil is in the details”. Particularly, I wait to see for those details and to see whether the announced changes address the following two major issues.
Will There Be Realistic and Workable Tax Expectations?
The major stumbling block over the years has been provincial concerns that if they loosen their control over their respective provincial liquor monopolies by removing interprovincial restrictions, they will lose sales tax and liquor markup revenue from liquor sales. The latter amounts are the ‘hidden taxes’ that are applied by the government liquor monopolies at the wholesale level as part of their statutory monopolies over liquor distribution. Generally, the provinces have asserted that they need to collect all of the tax and liquor markup from out of province sales in order to ‘remain whole’. In my view, this concern is exaggerated.
The liquor markup fulfills two functions. Partly, it covers the costs of operating the wholesale liquor distribution system (i.e. importing, warehousing, shipping … and sometimes also retail costs). And partly, it is ‘pure tax’ that goes to general revenue. There are very different approaches to the application of these fees in each province. Sales taxes vary considerably with Alberta having none. There is similar variation for liquor markup with varying amounts charged. Some provinces exempt their own producers from markup entirely (BC) or apply reduced charges (Ontario).
In respect of an interprovincial sale where the wine is shipped directly from a producer to a customer, there are zero liquor distribution system costs to be covered. The destination province incurs no costs at all because the producer or customer pays for the shipping and costs of sale. As such, the provinces should only be worried about the ‘pure tax’ component.
And even on that part, would interprovincial sales make any appreciable difference? Manitoba has had open borders for alcohol sales since 2012 … and has not experienced any meaningful drop in provincial liquor revenue. BC has permitted DTC sales of Canadian wine from other provinces for years (without collecting any fees) … and has not seen any significant adverse effects. Same for Nova Scotia. The reality is that if a province has reasonable tax and markup levels, it will not see any substantial change … because it is much easier for a customer to buy wine locally than to order it from another province, pay for shipping, and wait for delivery. DTC generally only happens in respect of product that is difficult to find and for that small segment of the wine consumer marketplace that is willing to seek out those wines.
For any system that permits the interprovincial sale of alcohol, there needs to be realistic and workable expectations about how much sales tax and liquor markup are being collected, if any. If the system is too expensive or administratively cumbersome, it simply will not work … and may price Canadian wines out of reach of normal consumers.
The recently introduced Alberta DTC system provides an instructive example. When introduced, this system required producers to pay a simply flat fee amount (about $3) on each bottle. This was easy for producers to charge and reasonable enough that consumers would likely pay it. However, Alberta has recently indicated that it is changing its markup structure … and it is not yet clear how much fees will increase or whether the fee calculation will become overly complicated (see Alberta Hikes Liquor Markups).
Consequently, I await the details associated with our new ‘open borders’ for alcohol. It may be too much to hope for truly ‘free’ sales and shipment but I am hopeful that the provinces may at least introduce a sensible system that will work for both producers and customers.
Will Consumers Have Both Producer and Retail Choice?
A secondary concern is whether the new system will apply so that customers can buy wine from both producers and retailers in other provinces. To date, the only province that openly permits both is Manitoba. The reforms in BC and Nova Scotia only apply to Canadian wine purchased directly from a winery. If Canada wants to join the rest of the world, it should let wine lovers shop for wine in other provinces without such limitations … and simply let consumers find, buy and love any wine that they can find within their own country.