WineLaw.ca

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.

A couple of prominent California wineries have been in the news recently regarding ownership disputes between \”winemaker owners\” and their partners. The first dispute relates to Pax Wine Cellars in Sonoma where the namesake winemaker, Pax Mahle, has been fired and is locked in a dispute with the majority owner . The second dispute relates to Napa flagship winery, Joseph Phelps, where a former employee (the winemaker) and the estate of the late Tom Shelton who was the CEO (and widely known throughout the industry) are also fighting over the value of minority ownership shares with the majority owners .

While these disputes are no doubt unique and while some disagreements are inevitable, these types of lawsuits do show the value of ownership and succession planning. Wineries are not unique to these issues – many, many businesses (particularly family owned ones) do not pay sufficient attention to succession planning until either a dispute arises or one of the key people leaves or passes away. Does your winery have a succession plan for key personnel? If not, you should contact your legal and financial advisors for assistance in implementing one.

Yesterday\’s Globe and Mail contained an excellent article by Beppi Crosariol on Canada\’s arcane inter-provincial barriers for shipping wine . This site was referred to in the article and WineLaw\’s principal, Mark Hicken, was quoted and two photos were included.

The national coverage on this issue is appreciated. Hopefully and since we are in the middle of a federal election campaign, this will bring the issue to the forefront and there will be some action from the relevant governments and liquor boards to fix this problem.

We are currently working on an updated article on shipping law which has now been posted . Of course, if you have any questions, please do not hesitate to contact us directly .

The LCBO and the Manitoba liquor control board have recently threatened two BC wineries for direct shipping to out of province customers (see Vancouver Sun story ). In addition, they contacted the BC LCLB who is now warning wineries that it is illegal to make such shipments under the Importation of Intoxicating Liquors Act. The legal background to these issues is covered in my earlier article on shipping for the industry .

The impetus for all of this is, of course, lost revenue. Direct shipments to wineries in other provinces bypass the relevant liquor boards and their regime of markups/fees/taxes. However, Manitoba and Ontario do not have a monopoly on this type of behaviour. BC\’s rules with respect to wine coming into this province are exactly the same (see s.65 of the BC Liquor Control and Licensing Act).

With 2010 on the horizon, isn\’t it time for Canada\’s liquor boards to reform this system? A prohibition era system of liquor distribution is simply not appropriate for Canada in the 21st century … particularly, as we try to encourage and expand an increasingly successful wine industry.

Update (Sept  19/08): Please see my updated article on shipping for more information on this issue . A thorough legal analysis will also be posted shortly. Please contact me directly for additional information.