Association canadienne
des restaurateurs
et des services
alimentaires
Canadian Restaurant
and Foodservices
Association
#2410 – 555 West Hastings St.
P.O Box 12125
Vancouver, BC
V6B 4N6
Tel: (604) 685-9655
or 1-866-300-7675
Fax: (604) 685-9633
www.crfa.ca
UPDATED VERSION: Modified on September 26 , 2013
September 25, 2013
Mr. John Yap
Chair, BC Liquor Review
Parliamentary Secretary to Attorney General and Minister of Justice
PO Box 9293, Stn Prov Gov
Victoria, BC
V8T 9J8
Dear Mr. Yap:
I am writing to you on behalf of the Canadian Restaurant and Foodservices Association (CRFA).
British Columbia’s restaurant industry contributes $10 billion in economic activity to the province
and employs over 166,000 people in every B.C. community (see industry info graphic Figure 1).
BC’s restaurant industry is a labour intensive highly competitive low margin industry with an
average 3.3 per cent pre tax profit margin. High liquor costs and cumbersome liquor licensing
policies are inhibiting industry and employment growth and represent a lost tax revenue
opportunity for the Government of British Columbia as every 1% increase in restaurant alcohol
sales results in an additional $1 million of liquor PST revenue.
British Columbia’s liquor mark-up structure as well as its Liquor Control and Licensing Act and
the related regulations are outdated and needlessly complex. In the submission below, CRFA
makes a number of liquor modernization recommendations that will promote industry growth
and employment, enhance social responsibility, reduce red tape for business owners, and
increase the financial return related to liquor for government.
CRFA will demonstrate that the government of British Columbia could switch from the current ad
valorem liquor mark-up model to a flat tax based model that is truly representative of the
potential social costs of alcohol and that will make government revenues more predicable with
less risk and enable the government to implement a 16% wholesale discount to licensees.
CRFA applauds the Government of British Columbia for recently taking steps to modernizing
liquor regulations such as providing caterers with a liquor license last February but more needs
to be done. For example, to date licensees continue to be the only resale purchaser of alcohol
in the province that do not receive any form of discount, despite representing 16.5 per cent of
2011-2012 sales. It is also time to implement a simpler risk based liquor sales license system.
Therefore, CRFA appreciates the government initiating a comprehensive liquor review.
Thank you for providing CRFA with the opportunity to provide comments and recommendations
on how British Columbia’s liquor laws can be improved to accelerate tourism and hospitality
industry growth and ultimately increase tax revenue to government.
Sincerely,
Mark von Schellwitz
Vice President, Western Canada
c.c.:
The Honourable Suzanne Anton, Attorney General and Minister of Justice
BC LIQUOR REVIEW
Submitted to
John Yap
Chair, BC Liquor Review
Parliamentary Secretary to Attorney General and Minister of Justice
Hon. Suzanne Anton
Attorney General and Minister of Justice
Submitted by the
UPDATED VERSION: Modified on September 26 , 2013
September 2013
TABLE OF CONTENTS
Executive Summary ................................................................................................................... 2
Summary of CRFA Recommendations ...................................................................................... 3
Private Sector Alcohol Sales ...................................................................................................... 4
Value of Flat Tax ........................................................................................................................ 5
Wholesale Discount For Liquor Licensees ................................................................................. 6
Supply Chain Dynamics ............................................................................................................. 7
Role of Municipalities ................................................................................................................. 8
Licensee Liquor Suppliers .......................................................................................................... 8
Licensing System ....................................................................................................................... 9
Appendix A Research Brief: Modernization Of British Columbia’s Liquor Legislation...............13
Appendix B Supplemental Information ......................................................................................30
TABLE OF FIGURES
Figure 1
British Columbia’s Restaurant Industry Info-Graphic ...............................................30
Figure 2
Liquor Issues ...........................................................................................................31
Figure 3
High Alcohol Price Consumer Complaints ...............................................................32
Figure 4
Beverage Alcohol Survey – Liquor Sales Ratio .......................................................33
Figure 5
Outdated View of BC Beverage Alcohol Value Chain with the BCLDB as the
only Importer and Wholesaler and Primary Retailer .................................................34
Figure 6
Benefits of Flat Tax (Beer) .......................................................................................35
Figure 7
Alberta - British Columbia Provincial Basket (2012) .................................................36
Figure 8
More Accurate View of the Current BC Beverage Alcohol Value Chain
with BCLDB as an Important Partner in a Public, Private Partnership ......................37
Figure 9
More Accurate View of BC Beverage Alcohol Value Chain Showing Proposed
Flat Tax and Mark-ups More Congruent to Value Chain ..........................................38
CRFA Submission – BC Liquor Review
Page 1
EXECUTIVE SUMMARY
British Columbia’s $10 billion foodservice industry is British Columbia’s fourth largest private
sector job creator employing 166,000 British Columbians and is a major sector of British
Columbia’s tourism industry. Liquor licensed establishments are also one of the largest liquor
industry stakeholders in terms of employment, investment, and liquor tax revenue generated
from sales, Figure 1. CRFA members identified the cost of liquor and licensing red tape as the
largest liquor related barriers to maintaining and expanding their businesses, Figure 2 Liquor
Issues. Licensed members also report that 66% of their customers have complained about high
liquor prices in the past year, Figure 3 High Alcohol Price Consumer Complaints. Tourists
visiting British Columbia in particular believe our liquor prices are too high.
Licensed establishments generate considerably more liquor sales tax revenue to government
per ounce of liquor sold than retail consumers as licensees charge the 10% sales tax on their
marked-up liquor menu price rather than the retail purchase price. In recent years liquor sales
from licensed establishments have declined significantly which has in turn resulted in a
corresponding decline in liquor sales tax revenue generated from licensed establishments.
Changes to British Columbia’s liquor mark-up system that better address social concerns,
protects future government liquor revenues, allows for a licensee wholesale price discount and
reduces the shelf price and menu price of most liquor products for consumers are overdue.
Applying a new flat-tax liquor mark-up structure will achieve these objectives.
The attached Appendix A: Research Brief Modernization of British Columbia’s Liquor
Legislation provides an economic analysis of how a flat-tax mark up structure combined with
introducing a licensee wholesale price would work in British Columbia. The flat tax modal used
concludes that implementing a flat tax would enable the government to offer a 16% wholesale
licensee discount, an increased LRS wholesale discount of 20%, and generate an additional $8
million in government revenue while reducing the cost of most liquor products for consumers.
The brief also includes non-economic arguments for implementing a flat tax mark up structure
including more government policy making flexibility to address liquor related social issues.
British Columbia’s licensing system should also be modernized to reduce red tape and
encourage jobs and investment and reflect modern hospitality industry concepts. The current
licensing system which includes a municipal veto on liquor licensing is discouraging industry
growth and job creation – see Case Study in the Licensing System Section. Most hospitality
industry concepts do not fit neatly into a food primary or liquor primary license system. The vast
majority of licensed establishments whether they are liquor or food primary establishments sell
more food than liquor on average, see Figure 4 Beverage Alcohol Survey – Liquor Sales Ratio.
Limiting food primary licensees to establish lounges that are only 20% of restaurant seating to a
maximum of 40 seats simply does not make sense and is out of sync with changing consumer
demand. Liquor licensing should be risk focused rather than be based on an arbitrary division
between food and liquor sales. Moving to a risk based single liquor establishment sales license
similar to Alberta and Ontario’s licensing system will greatly simplify licensing red tape and
result in a significant increase in hospitality industry investment and job creation.
CRFA Submission – BC Liquor Review
Page 2
SUMMARY OF CRFA RECOMMENDATIONS
1) CRFA recommends that the Government of British Columbia end the use of the outdated
current ad valorem liquor mark-up tax structure and introduce a flat tax mark-up for wine and
spirits, which would bring the sale of these products in line with the existing mark up tax
structure for beer.
2) CRFA recommends that the Government of British Columbia recognize the importance of
the private sector’s contribution to liquor sales at the wholesale level by introducing a 16%
liquor wholesale price discount for all liquor licensees in British Columbia.
3) CRFA recommends that the Government of British Columbia amend the Liquor Control and
Licensing Act and rewrite Part 3 of the Regulations to move from a food/liquor primary
licensed establishment licensing system to a single liquor establishment licensing system in
conjunction with a risk based assessment framework similar to the Alberta and Ontario
licensing systems.
4) CRFA recommends that the Government of British Columbia remove the provisions of the
Liquor Control and Licensing Act and Regulations that provide municipalities with decision
making control over the issuance of liquor licenses and conditions of the license. CRFA
does not oppose the inclusion of municipalities into the consultation process, but the final
decision to grant a license and dictate the terms of the license to sell and serve alcohol in
BC should rest solely with the provincial government and its representatives as it does in
other Canadian provinces.
5) CRFA recommends that the Government of British Columbia amend liquor control and
distribution laws and regulations to allow licensees to purchase alcohol directly from private
retailers at quantities and prices negotiated solely between the two parties as well as directly
from the Liquor Distribution Branch.
6) CRFA recommends that the Government of British Columbia amend the liquor and
distribution laws and regulations to allow licensees to transfer liquor inventory from one
licensed location to another.
7) CRFA recommends that the Government of British Columbia amend Section 40 of the
Liquor Control and Licensing Regulations to specifically enable the use of liquor pre-mixing
machines for liquor menu items like slushy drinks and Sangria.
8) CRFA recommends that the Government of British Columbia amend Section 41 of the
Liquor Control and Licensing Regulations to allow licensees to adjust their liquor prices
during the day as long as prices remain above the minimum price.
CRFA Submission – BC Liquor Review
Page 3
PRIVATE SECTOR ALCOHOL SALES
The liquor industry has evolved over the past 30 years and the current structure of taxation and
mark-ups is not consistent with the new reality of the BC liquor system as a public-private
partnership. It is also not consistent with the provinces’ stated social responsibility goals.
Private business plays a major role in all levels of the value chain in the BC liquor industry.
Today private business is playing a key role in importing, wholesaling, warehousing, distribution
and retailing. Over twenty years ago the government of BC was a leader in Canada when it
privatized the importing and wholesaling of liquor products in BC. The introduction of the Agent
Stocking Program fundamentally changed the relationship between the liquor board and private
business.
Unlike the other monopoly liquor boards across Canada, the BCLDB was the only one to
privatise importing and wholesaling. Today BC and Alberta are the only two jurisdictions in
Canada where the majority of beverage alcohol consumed in the province are imported,
wholesaled, stocked and owned by the private sector.
Retail privatisation also developed significantly over the past 30 years. Today private business
is responsible for retailing over 59% of the beverage alcohol sold to consumers in the province.
The total number of choices of alcohol beverages has exploded and at last count there are over
12,000 different SKUs available in BC with more being added every day. Along with the choice
of products, the range of prices of these products has also changed dramatically. In BC you
can find wines as inexpensive as $7 a bottle and as expensive as $5,000 a bottle.
In the last 15 years there has been a shift to premium products. (See the inserted graph: “The
Opportunity: Market Shift to Premium”). Changing demographics, such as aging baby boomers
with higher disposable income, and globalisation of food, wine and culture has led to an
increase in consumer’s interest in premium products. BC’s system of liquor mark-ups and taxes
does not favour this trend to premiumization.
The Opportunity: Market Shift to Premium
$5 - $10
$10 - $15
$15 - $25
Over $25
Decline in non-premium
Historical Demand Curve
Volume
New Demand Curve
Increase in premium and
ultra premium
$11.95
Price Point
CRFA Submission – BC Liquor Review
Page 4
VALUE OF FLAT TAX
While overall BC has a level of liquor taxation comparable to other provinces, in the area of
premium products BC’s shelf prices do not look competitive to those of other jurisdictions. This
is particularly true when comparing product prices with our neighbours in Alberta where a “flat
tax” system of liquor taxes was implement in 1993. The result of BC’s unfavourable liquor markup system is that the Government of BC, the BCLDB, the producers, the importers, the
restaurants and the retailers of BC face criticism for having “high” prices.
This criticism may be deflected but what cannot be deflected is the growing issue of illegal liquor
smuggling. It is difficult to measure the total value of liquor smuggled into BC but
estimates of over $50 million dollars have been suggested. The Government of BC is not
only losing revenue from liquor taxes but is also losing 10% liquor sales tax revenue for all liquor
products illegally entering the province.
The challenge facing the BC Government today is that the current system of liquor taxes is
better suited to the way the liquor business used to be done in BC rather than the way it is done
today. Figure 5 Outdated View of BC Beverage Alcohol Value Chain with the BCLDB as the
only Importer and Wholesaler and Primary Retailer depicts the value chain of the liquor industry
the way our current taxes and regulations portray it. In this diagram the BCLDB is the central
player in most of the commercial business. It is the main importer, wholesaler and retailer.
Private industry is represented as a sideline playing the role of marketing agent, or niche retailer
but not involved in the main volume of business.
This type of model still exists in Canada, most notably in Ontario. However, it is not an accurate
representation of the model that BC has operated under for most of the last two decades. In
this model, the BCLDB is expected, and feels entitled, to sell all products at full retail price to
licensees and return the maximum revenue back to the government.
All private business in this relationship find themselves in “win-lose” relationship with the
BCLDB. Any concessions the BCLDB makes are viewed as “losses” to the BCLDB and are
recorded as such, under the heading “discounts”, on the financial statements. Rather than see
private business as revenue generating partners, this model depicts private enterprise as a
threat to government revenues which is not case.
The ad valorem model of taxation also does not accurately reflect the stated reason why the
BCLDB needs high mark-up’s for alcohol; social responsibility. Under the current mark-up
formula a $25 dollar bottle of whiskey with 40 per cent alcohol pays less tax to the government
than a $75 dollar bottle of whiskey with the same alcohol content. Rationally, the quality of an
alcoholic beverage does not have any meaningful impact on the social cost of alcohol; the
percentage of alcohol in the beverage is responsible. Therefore, because a flat tax model is
applied to the per cent of alcohol in a beverage, it is equal to all consumers and their choice of
beverage.
In 2003 the BC Government implemented a flat tax mark-up for beer which has been
successful. In the decade before switching to a flat tax beer sales grew by 2.4% compared to a
healthy beer sales growth of .8.4% in the five years following the move to a flat tax mark up, see
Figure 6 Benefits of Flat Tax (Beer).
CRFA Submission – BC Liquor Review
Page 5
The attached Appendix A: Research Brief: Modernization of British Columbia’s Liquor
Legislation provides an economic analysis of how a flat tax mark up structure combined with
introducing a licensee wholesale price would work in British Columbia. The flat tax modal used
concludes that implementing a flat tax would enable the government to offer a 16% wholesale
licensee discount, an increased LRS wholesale discount of 20%, and generate an additional $8
million in government revenue while reducing the cost of most liquor products for consumers.
The brief also includes non-economic arguments for implementing a flat tax mark up structure
including more government policy making flexibility to address liquor related social issues.
RECOMMENDATION:
End the use of the current ad valorem tax structure and introduce a flat tax for wine
and spirits, which would bring the sale of these products in line with the existing flat
tax structure for beer.
WHOLESALE DISCOUNT FOR LIQUOR LICENSEES
The most important priority for CRFA member licensees with respect to liquor retail and
distribution is getting access to wholesale liquor prices. The BC Liquor Distribution Branch
(LDB) is both a liquor wholesaler and retailer competing with other private liquor retailers. The
LDB is currently the only wholesale customer receiving a true wholesale price. In theory all
wholesale customers who are reselling liquor products should receive the same liquor
wholesale price as is the case in neighbouring Alberta. The LDB is in a competitive conflict of
interest as it forces other private sector wholesale customers to purchase liquor from it at full
retail prices minus varying discounts on the retail price to select wholesale customers.
Currently licensed establishments are the only major wholesale customers not receiving
any wholesale discount off the retail price. Over the past decade CRFA has consistently
pointed out the purchasing discrepancy between Alberta members and BC members in the cost
of liquor. Depending on the product mix licensees in Alberta have consistently been able to
purchase wine and spirits between 15-20% cheaper than in BC. The more premium the product
mix the more the discrepancy. Even a non-premium product mix shows a 15% price
discrepancy between BC and Alberta; see Figure 7 Alberta - British Columbia Provincial Basket
(2012).
As a part of introducing a flat tax model in BC, CRFA strongly believes that in the absence of a
true wholesale price it is time liquor licensees are treated the same way as other private
resellers of liquor products and at least receive a discounted rate from the public retail shelf
price of liquor.
While CRFA believes that ultimately a single, negotiable wholesale rate for all liquor
retailers and licensees will create the most competitive and fair market environment, the
government of BC should immediately implement both a liquor flat tax system and 16%
discount for licensees.
As demonstrated in the document Research Brief: Modernising British Columbia’s Liquor
Legislation (Appendix A), introducing the licensee discount, in conjunction with a flat tax,
could generate an increase in government revenues of $7.56 million dollars.
CRFA Submission – BC Liquor Review
Page 6
The introduction of a flat tax would have the impact of slightly raising the price of the lower end
imported wine and spirit products, while significantly reducing the shelf price for all other
products. Furthermore, introducing this discount will make restaurant pricing more competitive
with liquor retail purchases, which restaurants have been losing sales to in recent years.
Beverage alcohol purchases provide substantially higher PST and GST returns to government
when compared to a retail sale. As demonstrated in the research brief, on a $24.75 bottle of
vodka, government only receives $3.23 in PST and GST ($2.15 and $1.08) at retail.
Comparatively, if each ounce is sold for $4 in a restaurant, the return on the bottle for
government is $15 dollars.
RECOMMENDATION:
Introduce a 16% wholesale discount rate, in conjunction with the flat tax, for
licensees in British Columbia.
SUPPLY CHAIN DYNAMICS
The Liquor Industry in BC is a great model of private-public partnership. Until Alberta privatised
its liquor system in 1993 BC was the nation’s leader with private industry playing a significant
role in many aspects of BC’s provincial liquor industry. Today it continues to be the second
most privatized, and perhaps the most progressive, liquor system in the country. The challenge
facing the Government of BC is to embrace our public-private partnership with a tax and
distribution structure that supports collaboration between the private and the public sector.
Figure 8 More Accurate View of the Current BC Beverage Alcohol Value Chain with BCLDB as
an Important Partner in a Public, Private Partnership depicts the true value chain and
acknowledges the very significant role the private sector plays in this industry. There are some
key points to note in this diagram. First, unlike any other provincial liquor jurisdiction, besides
Alberta, private industry plays a key role as the importer/agent/wholesaler.
In BC the BCLDB purchases goods from the importers/agents bonded warehouse locations in
the province. The importers/agents and suppliers have millions of dollars of inventory invested
in stock held in BC. Locally stocked product allows the BCLDB to minimize its inventory,
eliminates the need for complicated freight and logistics, and eliminates risk and costs
associated with currency management. Second, BC already has a robust and diversified
private distribution system. Private companies such as Commercial Logistics move hundreds of
thousands of cases of product such as imported beer, domestic beer and domestic wines to all
points in the province.
The Brewers Distributors Ltd. (BDL) is also responsible for the wholesale and distribution of
hundreds of thousands of cases of beer each year. These private distribution systems operate
alongside the BCLDB’s “Store 100” and Kamloops distribution centres and account for 1/3rd of
the wholesale revenue in the province.
CRFA Submission – BC Liquor Review
Page 7
Third, BC has an extensive network of private retail businesses, numbering in the thousands;
these private retail stores, agency stores, restaurants, bars and pubs are responsible for selling
59% of the beverage alcohol sales revenue in the province. Figure 9 More Accurate View of BC
Beverage Alcohol Value Chain Showing Proposed Flat Tax and Mark-ups More Congruent to
Value Chain depicts the most accurate example of how the value chain for beverage alcohol
works in British Columbia.
ROLE OF MUNICIPALITIES
Currently provisions of both the BC Liquor Control Act and the associated regulations provide
municipalities with considerable influence and decision making control over licensee operations.
Significantly, municipalities currently hold what amounts to veto powers over whether or not a
company is granted a license to sell and serve beverage alcohol. CRFA understands that the
Government of British Columbia wants to ensure that the municipalities are consulted regarding
the decision to issue a liquor license but the final decision should ultimately rest solely with the
provincial licensing body.
Furthermore, provisions of the current Act provide municipalities with the right to dictate what
type of entertainment that restaurant owners may offer their guests. Section 50(1) of the Act
currently states that “a municipality or regional district may restrict or prohibit any or all of the
types of entertainment permitted.” This provision is overly broad and has the potential to be
punitively applied to licensees for issues not related to their entertainment. Municipalities
already have the power to issue by-laws related to noise levels and CRFA believes that Section
50(1) of the Act is unnecessary.
RECOMMENDATION:
Remove the provisions of the Act that provide municipalities with decision making
control over the issuance and terms of liquor licenses. CRFA does not oppose the
inclusion of municipalities into the consultation process, but the final decision to
grant a license to sell and serve alcohol in BC should rest solely with the provincial
government and its representatives.
LICENSEE LIQUOR SUPPLIERS
Section 38 of the Liquor Control and Licensing Act establishes the requirements for how a
licensee may purchase alcohol and limits them to only purchasing directly from BCLDB. The
mix of public and privately operated liquor stores in BC has created a system where private
stores will often retail products that are not available in public stores.
CRFA Submission – BC Liquor Review
Page 8
While licensees may go through the private ordering system at BCLDB, the process is arduous,
overly regulated, and prohibitively expensive due to the requirement to order a full case of
product. Private retail stores have allowed British Columbians to have access to many unique
products, however the same opportunities are not being provided to licensees.
CRFA believes that it is time that licensees were allowed to purchase wholesale products
directly from private retailers. In conjunction with the initiation of a flat tax, liquor distribution
laws in BC should be adjusted to allow licensees and private retailers to negotiate their own
quantities and prices for wholesale products.
Flat taxes are applied on beverage alcohol at the point of entry into the province or at the point
of production. Because of this, government tax revenues are already guaranteed and any rate
negotiated between retailers and licensees would not affect government revenue projections.
RECOMMENDATION:
CRFA recommends that the BC government adjust the liquor control and distribution
laws and regulations to allow licensees to purchase alcohol directly from private
retailers at quantities and prices negotiated solely between the two parties.
LICENSING SYSTEM
The current system of liquor establishment licensing in British Columbia is based around
applying for either a liquor primary or food primary license. CRFA believes that this is an
outdated regulatory system and that the liquor application process should be streamlined by
developing a single license system in conjunction with a risk based assessment, as is used in
Ontario and Alberta.
CRFA Submission – BC Liquor Review
Page 9
Case Study
A successful $45 million Alberta based company, which currently owns 10 pubs and
employs more than 700 employees was interested in expanding and planned to open six
locations in British Columbia. The CEO invested over 200 hours of his own time, plus paid
consultants and lawyers $450,000 in fees over a two year period in an attempt to obtain a
liquor primary license for the first planned location in Vancouver. After two years of
frustration trying to obtain a primary liquor license the company abandoned their B.C.
expansion plans and is now expanded into Saskatchewan and Manitoba instead.
British Columbia’s complex liquor primary licensing system including its additional
municipal liquor licensing red tape resulted in the province missing out on an investment
in BC’s economy of $17 million (roughly $2.8 million per location), 420 jobs (roughly 70 per
location), not including the significant spin offs benefits in indirect jobs supported and
significant tax revenue that would have been generated by that investment.
That is just one example of the many lost investment and job creation opportunities British
Columbia has missed due to its overly complex and complicated liquor licensing system.
In conjunction with a single licensing system, the Alcohol and Gaming Commission of Ontario
(AGCO) has seven endorsements available to potential licensees. An applicant can receive a
Liquor Sales License to sell and serve alcohol provided that they have an approved license and
optionally one or more endorsements. 1
The single license system is less complicated to regulate than a multiple license system
because compliance is focused on ensuring that alcohol is sold safely and not on forcing
licensees to clearly demonstrate whether they are food primary or liquor primary licensed
establishments. Many modern hospitality industry concepts do not neatly fit into one category or
another. CRFA believes that the appropriate regulatory role for government is to ensure that
liquor is sold and served to the public in a safe and responsible manner, not on demonstrating
an arbitrary division of food and alcohol sales.
Switching to a risk based regulatory framework for evaluating compliance with license
requirements has also allowed the AGCO to more effectively track and monitor licensees that
are considered higher risk. According to the AGCO a three step process is used to access risk.
See below for the AGCO assessment process: 2
1) After an application is received, an assessment process takes place. During the initial
application review, the Registrar of Alcohol and Gaming ("the Registrar") uses AGCO
Board-approved criteria to assess the risk(s) posed to public safety and public
interest, and of non-compliance with the law.
1
2
http://www.agco.on.ca/en/whatwedo/licence_liquor_sales.aspx
http://www.agco.on.ca/en/whatwedo/licence_riskbased.aspx
CRFA Submission – BC Liquor Review
Page 10
Licensees/applicants are evaluated under the criteria of past conduct, liquor-related
infractions, honesty and integrity, financial responsibility, and training and experience.
The premises themselves are evaluated under the criteria of type, location,
occupancy, activities and hours of operation.
2) After reviewing all the available information on both the licensee/applicant and the
establishment, the Registrar assesses the risks and determines if the licence should
have a Level I, Level II or Level III risk designation, or no designation.
a. If the Registrar believes that no conditions need to be placed on a licence,
or if a licensee has taken steps on his/her own to recognize and manage
any risks, then the Registrar will most likely assess the licence as having
no designation. These establishments will see no change in the way that
their licences are administered.
b. If the Registrar believes that a licensee may need more assistance and
support to remain compliant with the Liquor Licence Act (for example, by
placing conditions on the licence, or by focusing more of the AGCO´s
resources on the licensee and the establishment), then the establishment
will be designated at Level I, Level II or Level III.
3) If the Registrar designates an establishment at Level I, Level II or Level III, s/he may
attach certain conditions (from among those approved by the AGCO Board for this
purpose) to the liquor licence to help address the identified risks.
RECOMMENDATION:
CRFA recommends that the Government of British Columbia transition from a
food/liquor primary license model to a single license system in conjunction with a risk
based assessment framework.
CRFA members have also raised other operational constraint issues which should be
addressed.
Multi-unit licensees have requested that they be able to transfer liquor inventory from one
license location to another to help maximize inventory efficiency.
Some licensees want to ensure that they are able to use pre-mixing machines to serve cocktails
such as slushy drinks and cocktails.
Some also want to be able to to adjust their liquor prices during the day allowing them the
ability to offer Happy Hours which is a standard industry practice in other jurisdictions. Instead
of Happy Hours some licensees are offering “Appy Hours” as a poor substitute. They argue
that they should be able to offer Happy Hours provided that all liquor menu prices are above the
minimum price.
CRFA Submission – BC Liquor Review
Page 11
RECOMMENDATIONS:
CRFA recommends that the Government of British Columbia amend the liquor and
distribution laws and regulations to allow licensees to transfer liquor inventory from
one licensed location to another.
CRFA recommends that the Government of British Columbia amend Section 40 of
the Liquor Control and Licensing Regulations to specifically enable the use of liquor
pre-mixing machines for liquor menu items like slushy drinks and Sangria.
CRFA recommends that the Government of British Columbia amend Section 41 of
the Liquor Control and Licensing Regulations to allow licensees to adjust their
liquor prices during the day as long as prices remain above the minimum price.
CRFA Submission – BC Liquor Review
Page 12
APPENDIX A
Research Brief:
Modernization of British Columbia’s Liquor Legislation
Research Brief prepared by:
Tor N. Tolhurst
Research Associate
University of Guelph
Department of Food, Agricultural and Resource Economics
E-mail: [email protected]
September 19, 2013
CRFA Submission – BC Liquor Review
Page 13
Executive Summary
The purpose of this research brief is to demonstrate how the Government of British
Columbia (BC) could increase discounts to its wholesale consumers without
compromising government revenues or the public interest in responsible alcohol
consumption. To offset reduced government revenues from higher wholesale discounts,
we introduce a flat tax mark-up model, which can generate sufficient revenues to cover
the cost of higher wholesale discounts without dramatically impacting shelf prices. We
also discuss a number of non-economic advantages of the flat tax mark-up model
including: better promotion of social interests, flexibility in adjusting the policy over
time, and lower uncertainty in government revenues generated from alcohol distribution.
Overall, the proposed policies offer the opportunity for a prosperous outcome for both
government and industry.
The adjusted mark-up scheme presented in this research brief covers the cost of
introducing a 16% discount for licensed establishments and increasing the licensee retail
discount to 20%, while increasing gross sales by over 4.1% and gross profit contributions
to government revenue by $7.92 million to $1.22 billion. Critically, retail shelf prices at
low price-points decrease or do not dramatically increase, while for the vast majority of
products, prices fall. Here only one adjusted mark-up scheme is presented, but a key
strategic advantage of the adjusted mark-up is its flexibility: alternative flat tax scenarios
could be calculated to target specific policy concerns or to achieve specific objectives.
CRFA Submission - BC Liquor Review
2
Page 14
Background
On August 7, 2013, British Columbia's Attorney General and Department of Justice
officially declared its intention to review BC’s liquor laws and consider recommendations
for modernizing the province's alcohol control policy. The guiding principles of this
review were stated as follows:
•
Government revenue is maintained or increased;
•
Minimize health and social harms caused by liquor;
•
Balance economic and social interests by ensuring public safety and the public
interest of British Columbians and their communities is protected;
•
Be evidence-based and transparent; and,
•
Respect obligations under collective agreements and international and
interprovincial trade agreements.
Purpose of this Research Brief
In light of the Attorney General and Department of Justice’s objectives, we consider the
following potential policy updates:
1. Increase discounts for wholesale prices for licensees
2. Adjust the BC Liquor Distribution Branch (LDB) mark-up structure to
promote social and economic goals
We use an economic model to evaluate how these policy changes together would affect
government revenue, consumer prices, and wholesale prices to licensees. Throughout our
analysis we comment on the effectiveness of these policies in fulfilling the Attorney
General and Department of Justice’s non-economic objectives; particularly ensuring
public safety, and minimizing the health and social harms caused by liquor consumption.
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Increase Discounts for Wholesale Prices for Licensees
Introduce Discounts for Licensed Establishments
Tourism is an extremely important driver of British Columbia’s Economy and the
accommodation and foodservice is the most important contributor to tourism revenue,
accounting for 32% of tourism revenues.1 However, the importance of these contributions
is not recognized by the BC LDB, which does not offer discounts to licensed
establishments such as restaurants, hotels, and pubs. Introducing discounts for licensed
establishments would lower their input costs, increase their margins, and provide an
economic boost to the province’s hospitality, tourism and agri-food sectors. This is
particularly important considering the recent challenges faced by the industry. Although
total provincial sales have increased steadily over the past five years, sales from licensed
establishments have experienced a marked decline in both share of total sales and
absolute sales dollars, which is clearly illustrated by the downward trend in Figure-1:
Figure-1: The downward trend in sales from licensed establishments.
Sales Index (2009 = 100.0) Sales from Licensed Establishments 100.0 99.9 94.8 93.3 92.7 2009 2010 2011 2012 2013 Year (at Fiscal Year End) Source: BC LDB Annual Report (2013).
As an industry driven by human capital and small businesses, decreasing sales from
licensed establishments have negative consequences for jobs and local businesses in
1
To illustrate the importance of licensed establishments to jobs and small businesses, consider data from BC Tourism’s
latest report. For example, 77% of all tourism and hospitality operators in BC are small businesses with less than 20
employees and tourism activities represent 10.8% of BC’s total labour employment. Food and beverage services are the
largest sector, responsible for approximately 43% of labour demand in the tourism sector.
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hospitality, tourism and agri-food sectors. Furthermore, government revenues from sales
taxes have been negatively effected by the downward trend in sales from licensed
establishments: the government earns more sales tax revenue on alcohol sold in licensed
establishments than it does on retail counter sales. The downward trend in sales means a
downward trend in government revenues from sales taxes.
As an example, consider the sales taxes earned from a standard 750mL bottle of
vodka sold with a shelf price of $24.75 at the BC Liquor Store, which is sold with $1.08
in federal GST and $2.15 in provincial PST included in the shelf price. A licensed
establishment purchases the bottle before sales tax at $21.50 and then sells the bottle to
retail customers in roughly 25 one ounce portions. Say the licensed establishment sells
the 25 one ounce portions as part of mixed drinks or on its own for roughly $4 per ounce.
On this single 750mL bottle, the federal government earns $0.20 per ounce for a total of
$5.00 and the provincial government earns $0.40 per ounce, for a total of $10.00 paid by
the end consumer. The government earns a total of $15.00 sales tax from the sale to the
end consumer at the licensed establishment compared to $3.23 for the retail counter sale,
an increase of nearly 465%. Even in this simple example, it is clear the government (both
provincial and federal) loses a substantial amount of revenue from declining sales to
licensed establishments.
The introduction of discounted wholesale prices for licensed establishments
would provide relief on currently tight profit margins, which in turn would boost an
important sector of BC’s economy. Importantly, this policy change would not conflict
with current obligations (under either collective or trade agreements), nor would it have
any negative consequences for protections in place to ensure the public safety of
communities. 2 Based on current sales, introducing wholesale discounts for licensed
establishments would increase discount costs between $46.9 million to $75.1 million:
2
Minimum pricing rules are already in place to ensure licensees do not charge less than the BC Liquor Store shelf
price.
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Table-1: Cost of introducing wholesale discounts for licensed establishments.
$2,950,417 15.9% $469,116 Total LDB Sales (000s of $) Share of total sales, licensed establishments Licensed establishment sales (000s of $) Discount 10% 12% 14% Cost of Discount $46,911 $56,294 $65,676 Source: Author calculations, BCLDB Annual Report 2013. 16% $75,059 Increase Discounts for Licensee Retail Stores
With 670 retail licensee retail stores across the province, which accounts 41.4% of all
retail sales, for the private sector plays an important role in its partnership with the BC
Liquor Distribution Board. However, the current 16% discount presents a significant
challenge for licensee retail stores as it squeezes retailers to operate on a very thin
margin. It also results in higher prices for consumers, since retailers must make up for
the low margins one way or another. Therefore, by providing relief on squeezed profit
margins, an increased discount for licensee retail establishments would boost the sector
and could lower prices for consumers. Based on current sales, each 1% increase in the
licensee retail store discount increases discount costs by $10.27 million:
Table-2: Cost of increasing discounts for licensee retail stores.
$2,950,417 34.8% $1,026,745 Total LDB Sales (000s of $) Share of total sales, licensed establishments Licensed establishment sales (000s of $) Discount 10% 12% 14% Cost of Discount $10,267 $20,535 $30,802 Source: Author calculations, BCLDB Annual Report 2013. 16% $41,070 The updated mark-up system considered in this research brief would allow for both the
introduction of wholesale discounts for licensed establishments and an increase in
wholesale discounts for licensee retail stores, without reducing government revenues
from their current level or creating substantial shelf price increases.
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Adjusting the LDB Mark-Up Structure with a Flat Tax
Overview
We consider the following scenario:
•
Mark-ups are determined by a flat tax
•
Flat tax rates are determined by alcohol-by-volume
•
Do not alter current flat tax mark-up rates on beer
•
The LDB earns a 10% wholesale margin on all sales and a 35% retail margin on
its retail operations
Under this scenario, gross LDB revenues increases over 4.1% from their current level of
$2,950 million to $3,079 million. More importantly, gross profit increases from $1,213
million to $1,221 million, a gross profit increase of $7.915 million.
We proceed as follows:
•
Impact of adjusted mark-up structure with flat taxes on gross profit contribution to
government revenue is included on page 8
•
Effect on retail and wholesale prices is illustrated on page 9
•
Calculations are provided on page 10 to 13
•
The qualitative advantages of flat taxes are discussed beginning on page 14
•
Concluding statements are provided on page 16
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Adjusting the LDB Mark-Up Structure
Estimating Gross Profit Contribution to Government Revenue
Note: for Mark-­‐Up Contribution Calculations see pages 10 through 13. CRFA Submission - BC Liquor Review
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Adjusting the LDB Mark-Up Structure
Effect of Mark-Up Adjustment on Shelf Prices
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Adjusting the LDB Mark-Up Structure
Calculation A:
Beer (No changes to Mark-Up Structure)
• Calculations are based on sales (in liters) from the LDB Quarterly Market Review
June 2013.
• Assumes 95% of imported beer comes from breweries with annual production
over 160,000HL and 5% from breweries with annual production over 15,000HL
and up to 160,000HL.
• Mark-Up and Cost of Service differential rates are based on LDB Mark-Up
Schedule as of April 1, 2013.
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Adjusting the LDB Mark-Up Structure
Calculation B:
Wine (Flat Tax Mark-Up Structure)
• Calculations are based on sales (in liters) from the LDB Quarterly Market Review
June 2013.
• No change to cost of service differential rates, which are based on LDB Mark-Up
Schedule as of April 1, 2013.
• Mark-up based on a Alberta Flat Tax rates for wines
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Adjusting the LDB Mark-Up Structure
Calculation C:
Spirits (Flat Tax Mark-Up Structure)
• Calculations are based on sales (in liters) from the LDB Quarterly Market Review
June 2013.
• No change to cost of service differential rates, which are based on LDB Mark-Up
Schedule as of April 1, 2013.
• Volumes are reported as either domestic or imported, while cost of service
differential rates are divided into three categories—domestic ($0.00/L), US
imports ($0.31/L), and Rest-of-World Imported ($0.39/L). We assume the US
share of imports is 55%.
• Mark-up generally based on Alberta Flat Tax rates for spirits with some
modifications:
Category Over 55% ABV Over 40% up to 55% ABV Over 22% up to 40% ABV Up to 22% ABV Note: ABV is alcohol-­‐by-­‐volume CRFA Submission - BC Liquor Review
Mark-­‐Up Rate $18.00 $15.80 $ 8.00 $ 6.50 Estimated Share of Sales 5.0% 35.0% 45.0% 10.0% 12
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Adjusting the LDB Mark-Up Structure
Calculation D.
Refreshment beverages (Flat Tax Mark-Up Structure)
• Calculations are based on sales (in liters) from the LDB Quarterly Market Review
June 2013.
• No change to cost of service differential rates, which are based on LDB Mark-Up
Schedule as of April 1, 2013.
• Mark-up based on Alberta Flat Tax rates for refreshment beverages.
• Assume 25% of spirit coolers exceed 7.1% ABV.
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Strategic Advantages of the Adjusted Mark-Up Structure
The Adjusted Mark-Up Structure uses flat taxes, which have a number of strategic
qualitative advantages compared to the current ad valorem (mark-up proportional to
dollar value) mark-up system:
1. Flat tax mark-ups are a more effective means of encouraging responsible
alcohol consumption. Mark-ups are effectively taxes to discourage excessive
consumption: it makes sense to tax alcohol because irresponsible alcohol
consumption imposes costs on society (public health, policing, etc.). However, for
the tax to be an effective means to discourage harmful consumption of alcohol the
tax should increase in proportion—at least primarily—to the cause of the harm,
i.e. alcohol by volume. In the current ad valorem mark-up system, the level of
mark-up is at best tenuously associated with alcohol concentration; therefore, the
current mark-up system is not an economically sound policy tool for reducing
socially harmful alcohol consumption. On the other hand, because flat tax rates
increase at higher alcohol concentration levels, flat taxes are a more effective
policy tool to promote the public interest of responsible consumption.
2. Flat tax mark-ups are easier to understand. Timely and up-to-date information
on the current ad valorem mark-up structure is not readily available to the public,
and only publically available to the keen and savvy researcher, which could
reflect the concern that ad valorem mark-up rates are relatively high and
potentially politically sensitive. As a result, it is very difficult to measure and
understand the consequences of the mark-up on consumption patterns. The
adjusted mark-up system based on flat taxes—which increase at different alcohol
levels—are easier to understand and potentially more transparent than the current
ad valorem mark-ups.
3. Flat tax mark-ups offer greater policy flexibility. Unlike the current mark-up
system, which has only one ad valorem rate to vary, a flat tax allows
policymakers to tweak a variety of “policy switches” independently. The lack of
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policy flexibility inherent in the current system was evident with the repeal of
HST and the resultant transitory costs for the BC LDB, which were rather
significant. A flat tax mark-up would allow a policymaker to adjust the rate on
one specific beverage category at a time to meet a specific policy objective with
reasonable expectations of the consequences. Under the current mark-up system,
this is effectively impossible. In addition, since the flat tax is more transparent,
the effects of these changes can be readily measured.
4. Flat tax mark-ups are well suited to a phase-in transition plan. As it is easier
to tweak rates under the flat tax system, it would also be easier to design a smooth
transition from one policy to another. For example, rates could start higher and go
down over time, or vice versa, on a predetermined schedule and give the
government the option of slowing or ending rate changes as it saw fit.
In general, the adjusted mark-up system with flat taxes offers a clear strategic advantage
over the mark-up system for a policymaker because of its transparency and flexibility. In
the long run, the adjusted mark-up system would give the government flexibility and
transparency to achieve a tax rate that best balances both economic and public interests.
In addition, consumers should find the results of the flat tax broadly appealing.
First and foremost, retail shelf prices at BC Liquor Stores go down for the vast majority
of products. Additionally, consumers would likely see lower prices at licensee retail
stores and licensed establishments, as these agents would pass down the some of the costsavings resulting from higher discounts.
The greatest challenge with the flat tax is its regressive nature: it tends to increase
prices are on lower price-point items; however, the actual resultant price increase is
determined by the flat tax rate. In the adjusted mark-up system proposed here, the
adjusted mark-up system results in very small increases, the highest of which is only
$1.84 on a 750mL bottle imported table wine (which would be even less on a domestic
table wine due to cost of service differential), and only $1.14 on a 750mL bottle of an
imported spirit. Under other flat tax systems, price increases on low price-point items
would be higher; however, LDB operating margins from retail (35%) and wholesale
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(10%) activities shift margins onto higher price-point products and allow the flat tax rates
to be set lower. This results in only small price increases on the lowest price-point items.
Aside from price increases at this point, prices across the spectrum fall. Furthermore, the
most important point to understand is that this scenario is one of many, and a key
strategic advantage of the adjusted mark-up structure with flat taxes is its flexibility. Only
one scenario is presented here and alternative flat tax rates could easily be calculated to
consider alternative scenarios or achieve specific outcomes. For example, the shelf price
increases on low price-point items could be reduced further, or we could consider
introducing a wholesale pricing scheme that gave all wholesale purchasers the same
wholesale price (for example, all licensees receive a 20% discount) without a reduction in
government revenues. The adjusted mark-up structure with flat taxes offers a range of
possibilities and strategic advantages for policymakers.
Conclusions
The adjusted mark-up scheme presented in this research brief replaced the current
percentage mark-up schedule with a flat tax schedule, which incorporates healthy
margins for the LDB’s retail (35%) and wholesale operations (10%). A flat tax schedule
has a number of important strategic qualitative advantages over the current mark-up
system and is a particularly effective policy tool for encouraging responsible alcohol
consumption. In addition, a 16% discount for licensed establishments is introduced and
licensee retail stores discounts are increased to 20%, in order to relieve squeezed profit
margins for an important sector of the province’s economy. While offering an economic
boost to the hospitality sector and better tools for managing the social harms of
irresponsible alcohol consumption, the adjusted mark-up system with flat taxes increases
LDB gross sales by over 4.1% and, most importantly, increases or maintains government
revenue: gross profit contributions to government revenue increase $7.92 million to over
$1.22 billion. Overall, the proposed policies considered in this Research Briefing offer
the provincial government with an opportunity to create a prosperous outcome for both
government and industry stakeholders.
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External References
1. Tourism BC. 2012. The value of tourism in British Columbia, Trends from 2001
to 2011. Published November 2012 available at:
http://www.destinationbc.ca/cmspages/getfile.aspx?guid=b3e25947-b337-4381b29d-936df7db03b1
2. Tourism BC. Undated. Labour Market Strategy. Available at:
http://www.bcjobsplan.ca/wp-content/uploads/TLMS.Summary.pdf
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Supplemental Information
Figure 1
APPENDIX B
British Columbia’s Restaurant Industry Info-Graphic
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Figure 2
CRFA Submission – BC Liquor Review
Liquor Issues
Page 31
Figure 3
CRFA Submission – BC Liquor Review
High Alcohol Price Consumer Complaints
Page 32
Figure 4
Beverage Alcohol Survey – Liquor Sales Ratio
CRFA Submission – BC Liquor Review
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Figure 5
Outdated View of BC Beverage Alcohol Value Chain with the BCLDB as the only Importer
and Wholesaler and Primary Retailer
CRFA Submission – BC Liquor Review
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Figure 6
CRFA Submission – BC Liquor Review
Benefits of Flat Tax (Beer)
Page 35
Figure 7
Alberta - British Columbia Provincial Basket (2012)
WINE (750 ml) *
PROVINCE
British Columbia
Licensee Price
SPIRITS (750 ml) *
Concha y Toro
Stoneleigh
Casillero
Sauvignon Blanc
Carmenere Tinto Marlborough (UPC
(UPC
9414505957010)
7804320087016)
Price
$12.49
Price
$15.17
Bacardi Superior
White Rum (UPC
620213015402)
Price
$21.21
Canadian Club
Classic 12 Year
Whiskey (UPC
080686817055)
Price
$22.10
Glenlivet 12 yo
(UPC
080432400630)
Price
$43.74
Absolut Vodka
(UPC
0835229000308)
Price
$23.65
Bobbay Sapphire
Gin (UPC
620213190000)
Price
$24.54
Jack Daniels
Tennessee Sour
TOTAL PRICE OF
Mash (UPC
BASKET
082184046357) OR
Jack Daniels Old No. 7
Brand (UPC
082184080924)
Price
$28.56
$191.46
Alberta
Wholesale Licensee Price
Price
$10.48
Price
$10.35
Price
$19.56
Price
$23.34
Price
$33.37
Price
$20.03
Price
$21.56
Price
$24.80
$163.49
* 2012 Prices
Alberta Basket
Cheaper By:
CRFA Submission – BC Liquor Review
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15%
Figure 8
More Accurate View of the Current BC Beverage Alcohol Value Chain with BCLDB as an
Important Partner in a Public, Private Partnership
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Figure 9
More Accurate View of BC Beverage Alcohol Value Chain Showing Proposed Flat Tax and
Mark-ups More Congruent to Value Chain
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