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Spirits Canada Joins Open Letter to U.S.A. PA Governor Wolf from International Wine & Spirits Trade

Spirits Canada taxNEWS RELEASE

August 5, 2019

Governor Tom Wolf
Office of the Governor
508 Main Capitol Building
Harrisburg, PA 17120

Re. Pennsylvania Liquor Control Board “Flexible Pricing” Model

Dear Governor Wolf:

We are writing to you today on behalf of a broad coalition of leading wine and spirits industry trade associations with an important export interest in the Commonwealth of Pennsylvania. These include representative bodies of Australia, Canada, the European Union, New Zealand, Scotland and the United Kingdom.

We share a deep concern with the move away from transparent, posted and standardized product mark-ups by the Pennsylvania Liquor Control Board (PLCB), to a “flexible pricing” model.

To be entirely clear, we do not question the right of Pennsylvania to establish a monopoly importer, distributor and/or retailer of wine or spirits for the state. However, as a statutory monopoly1, we would suggest the PLCB does have certain obligations pursuant to its preferential market position. In addition, the PLCB fits squarely under the definition of a state trading enterprise (STE) under international trade rules.

Essentially, STEs are defined2 as governmental and non-governmental enterprises which have been granted exclusive or special rights or privileges, including statutory or constitutional powers, in the exercise of which they influence through their purchases or sales the level or direction of imports or exports.

As a state trading enterprise, the PLCB has certain mandatory requisite levels of transparency in its operations so that all can be assured that it is operating in a nondiscriminatory manner and is not pursuing trade impairment or other WTO inconsistent measures.

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1 PLCB established under Pennsylvania Liquor Code
2 Article XVII GATT 1994

Liquor board product mark-ups are imposed by state enterprises such as the PLCB in order to generate revenue for governmental purposes. In this respect, these mark-ups are no different that other government taxes or charges and are subject to similar principles and disciplines.

Under its historic transparent, standardized pricing model if the PLCB wished to raise its product mark-up rates, it would have to impose its new rate across the board on all products and notify each supplier. A full, open debate would have ensued to ensure the
democratic process was fulfilled appropriately.

Instead, with its new “flexible pricing” model an estimated $80 million increase in PLCB mark-ups were imposed in Fiscal 2018 versus Fiscal 20153, all largely hidden from view and in secret. Such stealth tax increases risk undermining public confidence in the role of state liquor monopolies moving forward.

More specifically, under international trade law, the PLCB is required to provide imported Spirits treatment no less favorable than the treatment provided the most-favored domestic product4. In practice, this means that all imported spirits must be subject to the lowest PLCB product mark-up applied on any U.S. sourced Spirit.

The proper role, structure and application of liquor board mark-ups have been reviewed extensively over the years under the WTO and its predecessor GATT.

In fact, the United States government has successfully challenged discriminatory internal tax policies on various alcoholic beverages on a number of occasions including the 1995 Japan, 1997 Chile, 1997 Korea, and most recently the 2010 Philippines Spirits and Alcoholic Beverages Taxes GATT/WTO disputes.

Germane to the PLCB flexible pricing model, the 1988 Panel on the “Import, Distribution and Sale of Alcoholic Drinks by Canadian Provincial Marketing Agencies”, for example, refuted suggestions that the application of differential mark-ups whose primary purpose was a policy of revenue maximization by liquor boards was acceptable. Similar to the PLCB’s contention, certain Canadian liquor boards had claimed that their differential markup policies were designed to exploit less-price elastic demand for certain products and thus should be considered justified by normal commercial considerations.

The Panel rightfully concluded, however, that a monopoly profit margin resulting from policies of revenue maximization could not normally be considered as a “reasonable margin of profit” in the sense of Article II:4 and that a reasonable profit of margin was a margin of profit that would be obtained under normal conditions of competition in the absence of the monopoly.

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3 Source PCLB Annual Reports (Income Before Operating Transfers $109,324,324 in F2015 to
$188,775,769 in F2018).
4 Article III GATT, United States – Measures Affecting Alcoholic and Malt Beverages

We understand the PLCB may believe it is easier to raise additional revenues for the citizens of Pennsylvania in secret, behind closed doors, but we believe such an approach is inconsistent with the operation of an open and fair market. In addition, such a pricing model is clearly inconsistent under international trade law as enumerated in the attached summary analysis (Trade Law Assessment Pennsylvania Flexible Pricing Model).

We respectfully suggest, a better solution is to reinstate the PLCB’s historic approach of transparent posted, standardized mark ups, the same approach embraced and used by Pennsylvania for its other government taxes and charges.

We would be please to discuss this important matter with yourself, relevant officials in your office and/or the Legislature at the earliest opportunity.

Thank you and sincerely,

Spirits Canada tax

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