WineLaw.ca

I recently watched Ken Burns’ excellent PBS documentary on Prohibition in the U.S., which included more than a few references to Canada and BC (which is where much of the American illegal booze flowed from). There are some obvious lessons from history, some of which are highly relevant for efforts to modernize BC’s current wine regulatory system which to a large extent is still reflective of post-prohibition thinking.

Lesson 1: Don’t Penalize Everyone if a Small Group Has a Problem. This was really the heart of the problem with prohibition. In order to solve the drinking problems of a minority of society, they punished everyone by banning alcohol entirely. This was obviously a terrible policy because the majority refused to abide by a law which they rightly viewed as unfair. Unfortunately, some of BC’s current liquor policies still have this attitude. One example: in order to supposedly discourage alcoholism and overconsumption, we tax everyone at excessive levels, including those who are drinking responsibly and moderately. As a result, big spenders ignore the law and buy their wine in Alberta.

Lesson 2: All Alcohol Consumption is NOT the Same. Much to the dismay of wineries and wine drinkers, the prohibition laws treated all alcohol exactly the same: as inherently evil. The laws completely ignored that wine is an agricultural product that has been part of civilized meals for thousands of years. They made no distinction between a jug of bargain basement vodka and a nice bottle of wine drunk with dinner. Most of BC’s regulatory system still inherits this thinking making almost no distinction between types of alcohol or manner of use. For example, a fine bottle of wine served with a meal in an upscale restaurant is basically subject to exactly the same tax and regulatory rules as a tequila shooter served in a college bar.

Lesson 3: If the Law is Not Being Respected Then Fix the Law Rather Than Stepping Up Enforcement. The ultimate failure of the prohibition advocates was that they steadfastly refused to compromise. Even in the face of massive disregard for the prohibition laws, they called for greater enforcement rather than compromising and creating more sensible policy that had a greater chance of being respected. We still have this problem. For example, some of Canada’s liquor boards are still opposed to the modernization of Canada’s foolish and unenforceable interprovincial wine shipping restrictions – they actually threatened BC wineries with criminal sanctions rather than working to create a more sensible law.

Here is a link to Bill C-311, the Bill that, if passed, will amend the Importation of Intoxicating Liquors Act so as to create a national personal use exemption which would permit the shipment of wine between provinces direct to consumers. The amendment to IILA would add an additional exemption in s.3(2) of the Act so that the prohibition on inter-provincial shipment would not apply in the following circumstances:

the importation of wine from a province by an individual, if the individual brings the wine or causes it to be brought into another province, in quantities and as permitted by the laws of the latter province, for his or her personal consumption, and not for resale or other commercial use.

Here’s a short analysis of the effect of Bill C-311, if it is passed. What does Bill C-311 do?

• Creates an exemption from the interprovincial ban on shipping alcohol across provincial borders in limited circumstances, as described below.
• The exemption would apply to wine only, both domestic and imported (this is necessary in order to comply with Canada’s trade agreement obligations and desirable for consumers) and only in amounts for personal consumption.
• The exemption would apply to BOTH wine that is personally transported across a provincial border with an individual AND wine that is shipped at the request of an individual across a provincial border.
• The destination province is given the ability to further define reasonable amounts for personal consumption and potentially set other requirements so long as they do so through law.

It’s my strong belief that this is a reasonable compromise measure that should be supported by all aspects of the wine industry (see Dan Albas\’ sensible explanation here). Some have called for the complete abolition of the IILA and, personally, I would not be sad to see it gone but such a step would create dramatic changes that most provinces would oppose. The approach taken by this Bill is much less disruptive but it is significant enough that it will provide immediate benefit for Canadian wineries and consumers in a small segment of the retail wine market, specifically, those consumers who are looking for hard to find products that are unavailable locally.

The benefits of this Bill, if it is passed, are:

• Consumers will be able to order wine from wineries in other provinces and have it direct shipped so long as the amounts are for personal consumption.
• Consumers will be able to order hard to find wines from retailers (including liquor boards) in other provinces so long as the amounts are for personal consumption.
• Consumers will be able to return from vacations in other provinces with wine without breaking the law.

The above changes are sensible because they re-establish Canada as a free trade zone for wine (which is supposed to be guaranteed by the Constitution anyway) and they provide consumers with a greater selection of wines to purchase within the country. This Bill will not appreciably affect the revenue that the provinces generate from liquor sales. The vast majority (well over 90%) of retail wine is consumed within a few hours of purchase. This Bill will not affect those sales at all because those consumers will not wait for the delivery of their wine or pay for shipping (usually at least $2-3 a bottle). In the U.S., which has had a similar system for many years, the experience has been that interstate (or interprovincial) shipment will only comprise about 1% of the total retail wine market. This Bill deserves our support and I encourage readers to go to FreeMyGrapes.ca where they can ask their MP to vote for it and ask their MLA/MPP to also provide support.

Dan Albas, MP for Okanagan-Coquihalla, will introduce a private member\’s bill today which will, if passed, have the effect of creating a national personal use exemption so that wine can be shipped between provinces. More coverage and analysis will follow as soon as the Bill is introduced.

Great news for those following the wine shipping law saga. Dan Albas, the MP for Okanagan-Coquihalla, will introduce a private members\’ bill which is intended to amend the Importation of Intoxicating Liquors Act (IILA) next week. The IILA is the 1928 post-prohibition federal law that prevents wineries from shipping directly to their customers in other provinces. The private members\’ bill is entitled \”An Act to amend the Importation of Intoxicating Liquors Act (interprovincial importation of wine for personal use)\”. More details on the exact wording and effect of the Bill (if it gets passed) will be posted as soon as they are available.

Two items of wine business news from Australia this week have possible implications in BC:

The End of Wine Tax Rebates? Two of Australia\’s major wine producing companies have called for sweeping reform of Australia\’s current wine tax system which is similar to BC\’s system. The Australian approach includes a 29% \”wine equalization tax\” on all wine consumed in Australia. However, Australian producers have been eligible for a \”rebate\” of the tax in most situations. The unequal treatment of imported and domestic wine prompted trade complaints from both New Zealand (which complaint was settled by making its producers eligible for the rebate) and from the EU. Now, Treasury Wine Estates (Penfolds, Wolf Blass, etc) and Pernod Ricard (Jacob\’s Creek) have both called for an immediate overhaul of the system. Treasury\’s CEO stated:

Tax has a fundamental influence on both the structure and sustainability of the Australian wine industry. In the context of our industry’s current challenges, ambitious reforms are urgently required if we are to achieve our vision of an Australian wine industry that is economically, socially and environmentally sustainable. In particular, the WET rebate must be abolished or fundamentally reformed. It is untenable to have a tax mechanism that inhibits restructuring and works against the long term best interests of our industry, whilst also costing Australian taxpayers more than $200 million a year. Significant wine tax reform won’t be easy to implement and we understand the considerable impact it will have on some sections of the industry, and therefore advocate the need for appropriate support and transition arrangements. It will, however, be critical if we are to fundamentally address our industry’s challenges and protect the sustainability of Australia’s wine sector over the long term.

See here for more commentary and analysis on this story: Treasury Calls for WET Tax Abolition or Shake-up and WET Rebate Doomed to Dry Right Out. As noted above, BC\’s current wine tax system is similar to Australia\’s in that we impose hefty liquor board markups (123%) at the wholesale level and then in most circumstances, provide exemptions or rebates back to local producers. Most wine producing countries provide some form of subsidy to their producers. However, these subsidies are normally provided in the form of agricultural or technical assistance. Few countries provide wholesale or retail price subsidies which have both the immediate effect of driving prices up for consumers and the long term effect of distorting the economics of the industry (as was noted in Andy Hira\’s recent report on the BC wine industry).

Wine Health Claims. A recent report by the \”Alcohol Policy Coalition\” in Australia generated media coverage because it claimed that the health benefits of drinking red wine are a \”myth\”. Judging from academic reaction to the claims in the report, it now appears that this report was based on temperance-type ideology and flawed science. Wine Spectator reports that there is little scientific foundation for the claims in the report and, even more significantly, the Boston University School of Medicine calls the report \”biased and unscientific\”, states that it is \”shocking\” that government agencies would align themselves with it and notes that \”the paper disregards the vast majority of well controlled studies which show significant and concrete public health benefits of moderate alcohol consumption\”: see \”A misguided statement on alcohol and health from a coalition in Australia\”.

The FreeMyGrapes campaign, which is pressing for reform of Canada\’s archaic interprovincial wine shipping restrictions, recently requested that the various provincial liquor boards clarify their interpretations of whether it is legal for individuals to have wine shipped to them from wineries in other provinces (i.e. direct to consumer wine shipments). You can read the responses here. I have now updated my recent Shipping Law Update August 2011 to include an analysis of those responses. From a legal perspective, the responses are problematic because some of them appear to ignore the plain meaning of the liquor laws that the boards are supposed to operate under. Please read the Update for the full details but here is a summary:

Alberta. Alberta law states that the \”importation\” of wine for personal consumption is legal but the AGLC says that you can only import wine if it \”accompanies the individual\”. The law makes no such distinction and the plain meaning of \”importation\” includes direct to consumer shipments.

Ontario. Ontario law does not deal with the importation of wine from other provinces but the LCBO has created a new \”policy\” permitting importation of specified amounts \”on their person\”. Since the LCBO has no powers outside Ontario or over interprovincial trade, it is difficult to see how the LCBO can use its \”internal policy\” to modify a federal law that prohibits the behaviour in question.

PEI. PEI law permits individuals to \”import\” and keep up to 2 litres of wine from other provinces but the PEILCC says you can only do that if you bring the wine \”on your person\”. Once again, the law makes no such distinction and the plain meaning of \”import\” includes direct to consumer shipments.

While change is welcome, even in small steps, the troubling aspect of the above is that the liquor boards appear to be interpreting their own laws in a manner which is inconsistent with the plain meaning of the law. In my view, the liquor boards are obliged to apply and interpret the laws as they are written. If they don\’t like the laws, they can ask their respective governments to change them. You and I are not free to interpret liquor laws (or any laws) in ways which we would prefer but which are contrary to their plain meaning. Liquor boards are also required to follow the rule of law.

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.

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

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?

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.