Privatizing the Sale of Wine & Spirits in Pennsylvania

   

Pennsylvania is one of only two states (the other being Utah) that maintains complete control of both wholesale and retail sales of alcohol.

>> An overview of Pennsylvania's archaic liquor sales system

>> What Pennsylvania newspapers are saying about the need for liquor privatization

>> Privatizing liquor sales would improve safety


Details on Rep. Turzai's Amendment to House Bill 11


RETAIL

TOTAL OF 1,600 WINE & SPIRITS LICENSES 

• Allocated to counties based on sales, population and median  household income. (Limit of 130 in Philadelphia.)

• Initial Sale of Licenses to existing Beer Distributors for “fair value.”  
       - Formula to determine value is the same to determine what   the “reserve price” is for 
            licenses subject to auction. (Approximately 1,100 distributor licenses available.)

• Auction remainder of licenses (1,600 minus distributor “buy-in”) on a county-by-county basis.  
        - Method of valuation of the licenses is similar to the method in the VA proposal, which has 
            been reviewed in the valuation done by PFM. 

        - Formula:  50% of Sales net of taxes and COGS for a county, divided by the number of 
            licenses allocated in the county and multiplied by a factor of 3.5. 

        - Auction process would be transparent and ensure bidders compete on a fair playing field. 
            Licenses would be awarded to highest bidders.

• No retail licensee could own more than 40 licenses statewide.

• Additionally, no retail licensee could own:
        - more than 10% of the licenses in any county.
        - more than 1 license in counties with fewer than 10 licenses.

• Distributor licensees would be subject to a similar license limitation and would be permitted more flexibility on placement of the license (i.e. allowances for interior connections to unlicensed areas).

• Combined use of licenses (ability to put beer in the same business model as these new retail licenses) would be limited to distributors for the first 10 years, then open to R’s and E’s. 
        - For the first ten years after privatization, a new retail licensee could own and operate the 
            premises in combination with a distributor (D) license.
        - Ten years after privatization, a new retail licensee could own and operate the premises in 
            combination with another license which permits the sale of beer for off premises 
            consumption (R, E, D).
 
WHOLESALE LICENSES

Would be sold based on a contractual relationship between manufacturers/importers and a wholesaler to be the exclusive wholesaler for their products within the state.

• The wholesaler would purchase the rights to distribute the products in their portfolio based on an objective valuation, similar to the formula used in the Virginia privatization model.  
        - Formula for existing brands:  20% of COGS in most recent 12-month period x 2.5.
        - Establishes a protocol to bring new brands (those not sold in PA for at least 10 yrs. ) into 
            the Commonwealth for a base fee of $1,000. 
            + Once in the state, new brands would be treated like other brands for 
                regulatory purposes.

• Wholesaler must be an in-state business entity; have a physical presence in the state; and, service all retail licensees.

• Product lines may be moved between wholesalers in instances when the parties wish to end their relationship and the manufacturer/importer wishes to be represented in the state by another wholesaler.

• Provisions are in place to ensure that no one wholesaler controls more than 50% of the wholesale market.

• Plan ensures against wholesalers engaging in "variable pricing" schemes. (A single price is required except in instances of volume purchase only).

REVENUE NEUTRALITY

• Turzai Amendment abolishes the 18 percent Johnstown Flood Tax.
Replaces it with a “gallonage” tax in combination with sales tax and other fees to assure revenue neutrality.

Currently, to determine a bottle’s shelf price, the PLCB takes the wholesale price every bottle of liquor and adds to it:

• A prompt payment markup of 1.0%.
• A standard markup of 30.0%
• A Logistics Transportation & Marketing Fee (LTMF) of between $0.50 and $2.00 (average impact 
    on each bottle 15.5%)
• The Johnstown Flood Tax of 18.0%
• A rounding up fee of $0.05

For a bottle of wine that sells for $8.45 at wholesale, the shelf price would be about $14.69 (or approximately 74% in cost added to the bottle by the state).  When the consumer purchases the bottle, they also pay the additional 6% sales tax and the final price to consumers for that $8.45 bottle at wholesale becomes $15.57. 

What about the workers?

Not a single job is “lost” if the state’s liquor system were sold off, or privatized – not a single job.

On the retail side, moving from a current 600 outlets to 1,600 means more there will be career opportunities in new businesses looking to hire good, knowledgeable employees.

Many of the chain wine and liquor stores pay good, family-sustaining salaries with benefits.

The bottom line, if current state store workers are good, private industry will scoop them up.

For those state workers looking for a different direction

Displaced PLCB employees who intend to remain in the workforce will receive the following opportunities under the Privatization plan: 
• Tax credits for employers – something no one else in job market would have;
• Tuition assistance for employees ($1,000 per year for two years); and
• A preference for other civil service positions.

Early retirement benefits would be available to employees:
• with 30 years of state service OR
• who are at least 55 years old with 10 or more years of state service.

What about beer?

As more grocery stores sell beer, customers line up to buy their beer with the convenience of their food shopping. The state’s 1,050 or so beer distributors are losing customers to grocery stores, and it will continue as more stores gain licenses.

The Turzai Amendment would give all the beer distributors opportunities to expand their businesses beyond beer and into wine and spirits distribution. 

The amendment will allow active Beer Distributors six months to buy a license at fair value (i.e. reserve price) – the license will allow them to sell beer, wine and liquor at one location.

Exclusivity for the first 10 years, with the exception of the approximately 120 grocery store currently selling beer, only distributors could sell beer, wine and liquor in one store.

Package Reform

Beer Distributors permitted to sell 6-packs or greater; there would be no limitations on how many packages could be sold in a single transaction.

To help the Commonwealth’s thriving craft beer market, distributors would be allowed to sell a “mixed six” which lets consumers sample a variety of beers before committing to a larger-sized purchase of a twelve pack or case.

Restaurants would be permitted to sell packages of 30-packs or less.

Importing Distributors

Wine and liquor privatization could be a big boon for members of the Pennsylvania Beer Alliance and other importing distributors.

These businesses could become an in-state wholesaler for any of the thousands of independent brands of wine and spirits waiting for privatization to be sold at stores throughout the state.

Larger (national) wholesalers will have a short timeframe to establish the infrastructure (trucks and warehouses) necessary to bring their products to the marketplace.  Given that importing distributors already deliver beer to 12,000(+) licensed businesses, they are the natural selection for such a task. 

In any event, the legislation does not disturb the “three-tiered” beer distribution system.  Certainly, there will be some long-overdue changes in retail.  But, brewers will continue to manufacture the product; importing distributors will continue to move product to retailers; and retailers will continue to sell beer to consumers.