Some winners, some losers in liquor sales privatization

By Kristi Pihl, Tri-City HeraldSeptember 23, 2012 

Customers at the West Richland Liquor Store don't have any uncertainty about what their bottle of liquor is going to cost at the register.

Owner Kuo-Ying Frenzel and her employees have changed all the prices to reflect the total cost of each bottle -- taxes and new fees included.

That's something customers requested, she said. It may be shocking in comparison to prices advertised by other retailers, but those prices don't include all the taxes.

The increasing cost of liquor has been one of the more obvious changes after June 1, when the state handed the reins of liquor sales to private companies as required by Initiative 1183.

The average price paid for spirits was up 12.4 percent in July compared to the same month last year, said Mike Gowrylow, spokesman for the state Department of Revenue. What the state doesn't know is if people decided to buy more expensive liquor.

I-1183 added a 10 percent fee on distributors and a 17 percent fee on retailers in the place of the markup the state used to have on liquor sales. That is in addition to the existing 20.5 percent sales tax and liter tax.

The initiative created winners and losers, said Brian Smith, communications director for the state Liquor Control Board. The state Liquor Control Board has implemented the law as it is written, and while the agency makes rules using a public process, there are some things in the initiative that the agency doesn't have the power to change, Smith said.

Several lawsuits have been filed surrounding I-1183, including one by initiative writers Costco, Northwest Grocery Association and the Washington Restaurant Association challenging the state's rules for implementing it.

Frenzel and other Mid-Columbia business owners hope to see the state Legislature address some of the changes that would help smaller businesses compete with the big boys.

"This whole initiative is really not positive for small businesses," Frenzel said.

Smith said his office is hearing that the legislature may make changes to the initiative.

One of the main issues Frenzel said she wants to see changed is how the 17 percent retail fee is applied. At this point, it is applied to all sales, including when a retailer sells to a restaurant or bar.

That makes it difficult to compete with distributors who aren't required to charge restaurants and bars that 17 percent fee, said Michael Shemali, co-owner of Mid-Columbia Wine and Spirits.

Shemali said his business is going out of its way to sell to restaurants. His Kennewick and Richland stores can't offer as low of a price as a distributors, so it comes down to reliability and convenience, he said. About 5 percent of his business comes from restaurants and bars.

Frenzel said she's been able to keep some of her restaurant and bar customers. Before I-1183, they represented 30 percent of her business.

Business has slowed as expected, Frenzel said. But they've continued to see good support from their customers.

"We are just trying to stay steady here," Frenzel said.

Initially, Rajiv Malhan, co-owner of Mid-Columbia Wine and Spirits, said his stores did not see as many customers as hoped. Business has increased gradually, with the Richland store remaining the busiest. The Kennewick store, which opened July 26, is creeping up in sales, Shemali said.

Shemali said the taxes dragging down sales prompted his business to lay off 10 of his 35 employees. Mid-Columbia Wine and Spirits also is closing an hour earlier each night, and it is considering closing on Sundays.

The reality is that two distributors in Washington state -- Columbia Distributing and Southern Wine & Spirits -- have a monopoly on liquor, Shemali said. Each company carries products the other does not, so there isn't competition between the two for pricing, he said.

"We don't have anybody else to buy from, and we can't buy out of state," Shemali said.

Those two distributors are slowly increasing their prices, Shemali said. Every time he orders something, at least one items costs more.

Shemali also said he is receiving complaints from customers about the price of liquor. And those prices seem to be driving some customers to Idaho and Oregon, Malhan said.

At Pasco's Fiesta Foods, store director Juan Torres said the challenge with liquor has been the higher cost because of taxes and fees. Most people who want liquor are going to buy it, but some would rather drive to Oregon to avoid paying higher prices.

For the most part, customers are enjoying the convenience of buying liquor in the grocery store, Torres said.

Since June 1, liquor has been available at nearly 50 stores in Benton and Franklin counties, instead of the eight state and contract stores who sold liquor prior to June 1.

The state Liquor Control Board ramped up and was able to issue 1,700 new licenses that didn't even exist nine months ago, Smith said. They auctioned off the right to operate all of the state stores successfully, raising about $31 million in new revenue for the state.

"I think we did everything that we said we would do," he said.

The state Department of Revenue recently reported that the volume of liquor sold in July increased by 15.4 percent compared to the same time last year.

Sales from May through July increased to $164.8 million compared to $138.9 million during 2011, according to the department.

The state collected $68 million in tax revenue, up 15 percent from the same period last year. That revenue does not include the fees charged to retailers and distributors, Gowrylow said.

The state Office of Financial Management estimates that ultimately the fees created by I-1183 will generate additional revenue, Smith said.

For Mid-Columbia Wine and Spirits, Shemali said he sends more money to the state than he is able to keep as profit.

"We've become glorified tax collectors," he said.

In the end, taxes amount to about 92 percent of the price of a bottle of liquor, Frenzel said.

Frenzel said because the 17 percent fee is applies on the gross cost of the liquor, the cost is actually more than 17 percent.

"This taxation is incredible," said Joel Tefft, co-owner of Black Heron Spirits Distillery in West Richland.

Tefft said he believes prices will settle once everyone has a better idea of what they are paying, but he modified his prices after determining how much would go to the state.

Fees depend on the distillery's customer, Tefft said. In the tasting room, he must charge the 10 percent distributor fee in addition to the sales tax and liter tax. The cost changes when selling off-premises to a grocery store or liquor store.

Tefft said he relies on spreadsheets to determine the fees, and his paperwork has increased since the transition.

It's difficult to change an industry midstream, especially in such a short time, Tefft said.

"Everything will turn out better eventually," he said.

Shemali said he and Malhan anticipated there would be hiccups during the transition to private liquor sales, but there were portions of the initiative that surprised them.

"We are hoping it's going to get better," he said.

Then came the passage of Initiative 1183 last November. Tefft said he didn't sell anything for the first month and a half.

Now, he is making inroads with stores which can buy individual bottles, rather than by the case.

"We've just got to get people asking for us," Tefft said.

While the Black Heron Spirits website is updated as more places agree to carry his products, Tefft said he's been disappointed by the lack of local stores willing to offer his product. A few restaurants and Yoke's Fresh Market in Kennewick and West Richland offer his spirits.

But Tefft said he's had success in getting his liquor offered along the Interstate 5 corridor. And he's created a second label of vodka that is doing well, called Smooth Vodka, he said.

Tefft said he has the opportunity now to reach more people than he did when liquor sales were state-run.

In 2008, the state passed legislation allowing for craft distilleries to create tasting rooms and sell directly to the public. That prompted him to sell his winery in Outlook.

Now, Tefft hopes the latest change in the laws will help people become more aware of small distilleries in Washington, which offer different flavor profiles than mass distilleries, he said.

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