Independent Tri-Cities liquor store faces closure because of state fees

By Kristi Pihl, Tri-City HeraldDecember 29, 2012 

Independent liquor stores that opened after the state handed the reins of liquor sales to private companies seven months ago already are facing the threat of closure.

New state fees on spirits have cut into the bottom line of small-business owners and increased prices. Many potential Tri-Cities customers are driving to Oregon for cheaper booze.

At the same time, big box stores such as Costco are eligible for quantity discounts under Initiative 1183 that smaller stores don't qualify for, making it harder to compete with chain grocery stores and pharmacies.

Like other independent liquor store owners, Michael Shemali and Rajiv Malhan, co-owners of Mid-Columbia Wine and Spirits in Kennewick and Richland, said they may have to consider closing their doors if changes aren't made.

I-1183, which went into effect June 1, 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. Those fees cut into the gross profit margin, Shemali said.

For example, a bottle of Black Velvet whiskey costs a customer $19.64 out the door with taxes, Malhan said. About 61 percent of that is taxes and fees.

And if someone pays with a credit card, the credit card company then charges the business an almost 3 percent fee that applies to the total cost, including taxes, Shemali said.

About 60 small stores in the state either have shut down or never opened, Shemali said. He estimates another 20 to 30 might close in the next several months.

There is no official count of the number of liquor stores that have closed and opened since June 1. In October, the state Department of Revenue estimated 11 stores had closed, but that department and the state Liquor Control Board have not tracked closures.

Some have pinned their hopes on holiday sales. But State Rep. Larry Haler, R-Richland, said he's heard from store owners that sales have been flat since August, with only a blip leading up to the holidays.

Haler, who recently met with about 40 owners of small liquor stores, said the struggles he is hearing about from small businesses concern him.

"We need to create a level playing field, and right now we are losing a lot of our market share," Haler said.

The number of liters of liquor sold in Washington during September essentially was unchanged from the previous year despite being available in more locations, according to data from the state. Sales were up almost 20 percent during July and 13 percent in August compared to the same time in 2011.

The state collected about 13 percent more taxes on spirits between July 11 and Nov. 10 than the same period last year, according to state data. Total tax collections for those months were almost $90 million.

The average price of a liter of liquor was up almost 12 percent in September, according to the Department of Revenue. Haler, Shemali and Malhan said the higher taxes are causing Washington residents to go outside of the state to buy their alcohol.

Just across the Oregon border at Hermiston Liquor Store, Trudi Seadorf, owner/agent, said her store's sales have risen 20 percent to 25 percent since Washington privatized.

Customers are coming from the Tri-Cities, Seattle and even the state's northern border in search of cheaper liquor, Seadorf said.

Brian Smith, communications director for the state Liquor Control Board, said enforcement officers are keeping an eye out for Washington residents who may be buying large amounts of liquor in Oregon to resell in Washington.

But Shemali and Malhan at Mid-Columbia Wine and Spirits want to see the state enforce the 2-liter quantity limit that Washington residents are allowed to buy in another state without paying Washington taxes.

Haler plans to suggest three bills to the state Legislature this session addressing portions of I-1183 that small-business owners have criticized.

While he would like to see the taxes reduced to help boost sales, that is not a bill Haler is suggesting yet. That would require more work with other legislators, he said.

What Haler will ask other legislators to support is getting rid of the 17 percent retail fee when retailers sell to restaurants and bars.

That fee hampers any ability independent stores might have to compete with distributors for the business that represented about 38 percent of sales for most former state and contract liquor stores, Shemali said. About 5 percent of Mid-Columbia Wine and Spirits' sales are to restaurants and bars.

A second bill would allow cumulative buying for independent stores, Haler said.

Independent stores want to be able to pool orders together to receive the quantity discounts that chain retailers receive, which is one of the major advantages chains have under the new law, Shemali said.

They want to be able to form a co-op of independent stores that can put an order in together and then have it delivered to each of the stores, he said.

Right now, a chain with single ownership can buy in bulk, have it delivered to a central warehouse and then distribute it to their own stores, according to Smith at the liquor board. The law doesn't allow places that are independently owned to buy liquor in a single transaction from a distributor and get a volume discount.

A third bill, which already has been filed, would take away the sale percentage requirement for retailers to offer beer and wine sampling, Haler said.

The liquor board can't change the law; it just wrote the rules, Smith said. Changing the law requires a two-thirds majority for the first two years.

The liquor board has heard that some former state and contract stores are struggling, Smith said, but others have said they are doing well.

At Steele's Got Liquor in Connell, owner Tim Steele said the transition hasn't gone too badly for him. While business has dropped off in the face of new competition -- the local grocery store now sells spirits -- he still is seeing some of the same customers from when he was a contract store for the state.

He did lose one of his two restaurant and bar customers because of the 17 percent retail fee. Changing that would help, he said.

"I'm glad that some of my customers stuck through it with me," he said.

w Kristi Pihl: 582-1512; kpihl@tricityherald.com

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