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February 1, 2013 at 6:02 AM

A battle over liquor sales to restaurants and bars

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A fight about liquor sales to restaurants and bars erupted last week at the House Government Accountability and Oversight Committee in Olympia. It’s a fight about how Washington’s new privatized liquor system works, who is allowed to do make money doing what. It is between the same sides as fought over Initiative 1183.

Opinion Northwest is a blog for writers who take sides, so I’ll put my cards on the table. I supported 1183 and the privatization of liquor, taking the side of Costco, the restaurants and grocery chains against the liquor distributors and the grocery independents. My sympathies have not changed. But the fight I describe here has reasonable arguments on both sides. It’s complicated, and explaining it takes a lot of words. This time I’m not worrying about my own opinion.

The two sides define the issue differently. The Costco and restaurants’ side says the issue is the freedom to compete, to serve the consumer and not have restaurants and bars subjected to a wholesale duopoly. The distributors’ side says the issue is Costco creating an unfair advantage for itself under the law it wrote and put up the money to pass. (Costco wrote Initiative 1183 and spent nearly $20 million on the campaign to pass it.)

The hearing at which the battle broke out was held Jan. 24. It was about House Bill 1161, offered by Rep. Ross Hunter, D-Medina. Hunter’s bill would change two of the rules, one about liquor taxes and one limiting the size of certain purchases.

First, liquor taxes. In addition to the state sales tax on liquor (20.5 percent) and the bottle tax ($3.77 per liter) , Initiative 1183 imposes a 10 percent tax (falling to 5 percent after two years) on the gross liquor revenue of wholesalers and another 17 percent tax on the gross liquor revenue of retailers. (These two are officially “fees” but really they are taxes.)

When Initiative 1183 opened up liquor wholesaling to private enterprise, it was clear that wine and beer wholesalers were going to get a big new piece of business: the right to be in a wholesale business of selling liquor to private stores. The initiative charges the wholesalers $150 million, one time, to enter this market. The proceeds of the 10 percent tax on their gross revenues go toward the $150 million until March 31, 2013. After that they owe the difference. John Guadnola, executive director of the Association of Washington Spirits and Wine Distributors, says this means that the two big distributors, Youngs Market and Southern, will together be writing a check for at least $100 million on top of all the money they invested to get into this market.

You can see why liquor is expensive in Washington.

About a quarter of the market is restaurants and bars. If restaurants and bars buy from distributors, the price they pay doesn’t include the 17 percent retail tax. If they buy from a retailer the price does include the 17 percent.

The restaurants say this drives them into the arms of the distributors, of which there are two large ones, Youngs Market and Southern. But in towns farther from Seattle—Aberdeen, for example— Bruce Beckett of the Washington Restaurant Association says it’s difficult to get timely deliveries from these distributors, and that even in Seattle, the distributors sometimes don’t have certain products on hand. Travis Rosenthal, owner of the Tango Restaurant in Seattle, testified at the hearing in Olympia that his distributor has run out of Benedictine, and won’t have any until Feb. 22. He’ll have to go to a retailer, he said, and will get hit with the 17 percent tax.

Said Monique Trudnowski, owner of the Adriatic Grill in Tacoma, “I can buy tomatoes from whomever gives me the best price and the best tomatoes.” She said she should have the same freedom to buy sprits.

Now the second issue. Initiative 1183 says a restaurant or bar buying liquor from a retailer (except a former contract liquor store) can buy only 24 liters per sale. I’m told this was put into 1183 to entice the distributors to stay neutral on 1183. In the event, they opposed it with several million dollars, they lost, and the “24 liters per sale” is now in state law.

What does it mean? Costco said it meant a cashier could ring up no more than 24 liters at a time. If a bar owner had 48 liters on his cart, the cashier had to ring up a 24-liter sale twice.

The Washington State Liquor Control Board decided it meant 24 liters per store per day. I asked the Liquor Board’s chairman, Sharon Foster, about the 24-liter issue. “We wrote these rules with strong legal advice,” she said.

Costco and the grocers have sued the Board in Thurston County Superior Court. The lawsuit, which comes up for hearing March 15, asks for some of the same things they would get in Rep. Hunter’s bill.

The bill would write Costco’s interpretation of the 24-liter rule into the law. At the hearing Hunter said, “If you’re a small restaurant, and you run out of vodka at 7:15 in the evening, you need to be able to get more vodka. And if at 9:15 you run out of rye, you ought to be able to go to the same retailer.”

The distributors have a different view. They argue that on top of all the costs of employees, warehouses and trucks, they have to pay the state $150 million to have privileges and tax rates of wholesalers. The retailers don’t pay any of that, so they should stay out of that market. To the wholesalers, this fight is about Costco (whose full name is Costco Wholesale Corporation) horning in on their wholesale business without having to pay the costs the law— the law Costco wrote — imposes on other wholesalers.

Michael Gonzales, business agent for Teamsters 174, which represents workers at the distributors, argued that point at the hearing: that Costco wants to be a distributor without paying the money.

Arguing the other side, Joel Benoliel, chief legal officer of Costco, recalls that the Legislature passed a law in 2011 to lease out the state’s wholesale liquor monopoly for 10 years to one company—and that the state rejected a bid of $300 million as too low. Under 1183, which repealed that law, the new wholesalers pay half as much to take over the state’s market for an indefinite period.

Speaking of the distributors, Benoliel said, “These guys have been in a protected business in partnership with the state for 75 years. They can’t understand the idea of free competition.”

“The benefit of this bill attaches principally to Costco and Safeway,” says Guadnola of the Association of Washington Spritis and Wine Distributors.

That’s the main fight. Another part of it involves the people who bought state liquor stores that supplied restaurants and bars. They thought they were getting that business without the burden of the 17 percent tax, but the tax has been imposed on them and they have lost much of the business to wholesalers. The buyer of the state liquor store in Leavenworth testified that the store had 18 restaurant and bar accounts that totaled 30 percent of its business, and that with the 17 percent tax only two of those accounts are left.

Still another player in this is the small groceries, which opposed 1183 because it denied liquor licenses to retailers under 10,000 square feet of floor space, and for other reasons. The organization of small grocers supports removal of the 17 percent tax on retail-to-restaurant sales but opposes any change in the 24-liter-per-day limit.

Comments | Topics: liquor privatization

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