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Virginia: ABC to Use Liquor Markup to Modernize the System

The impending markup of liquor sold in Virginia ABC stores will pay for far more than $2.5 million to help close a $2.4 billion revenue gap in the state budget.


The total markup – and its effect on the price of distilled spirits in state stores – has not been determined, but the Department of Alcoholic Beverage Control is looking to raise money to invest in new financial management and other information technology to modernize a system that still relies on cash and paper transactions in a digital world.


“ABC is now in the process of considering various approaches to implementing a markup that will assist in addressing not only the commonwealth’s needs, but also the pressing infrastructure needs of ABC,” said S. Chris Curtis, secretary to the ABC board, in a letter to alcohol industry stakeholders on Oct. 16.


The letter was sent one day after Gov. Terry McAuliffe announced that the state would mark up liquor prices to contribute $2.5 million toward $92.4 million in spending cuts and revenue shifts in executive agencies as part of a strategy for closing a projected revenue gap that has grown by $882 million on top of the $1.55 billion in reductions made in the biennial budget in June.


The markup, already an average of 69 percent on every bottle of spirits that passes through ABC’s cavernous central warehouse in Richmond, has drawn fire from the liquor industry, which quickly branded it as a “stealth alcohol tax.”


The industry supports initiatives to modernize the ABC system and expand sales but wants the General Assembly to pay for it through profits of $140 million last year and revenue from taxes on liquor, wine and beer that flowed nearly $250 million more into the state treasury – not a price markup.


“It becomes a diminishing return,” said David Wojnar, vice president of the Distilled Spirits Council of the United States, or DISCUS, in an interview Friday. “It jacks up the price, and you’re hurting the consumer.”


ABC profits and tax revenues were the main reason state legislators rejected then-Gov. Bob McDonnell’s proposal to privatize Virginia’s liquor monopoly in 2011, Wojnar said. “We’re hoping the legislature will now invest in the system that they decided they wanted to keep.”


Travis G. Hill, the new chief operating officer at ABC, said the agency is still determining its highest priorities for improving the system, as well as the costs and methods of paying for them, which the board of commissioners will consider next month.


“The system is at a point where it’s got to be improved. … It’s about modernization,” Hill said.


McAuliffe already has received a report that recommends extensive changes in the ABC system after a 4½-month review led by Richard D. Holcomb, commissioner of the Department of Motor Vehicles, a customer service-based state agency that has made a priority of moving as many transactions online as possible.


“It’s a sweeping report,” said Brian Coy, the governor’s press secretary.


The contents of the report are confidential and still being assessed by the McAuliffe administration, but Coy said, “The fact that (the governor) sent Holcomb over there was an indication he thinks there can be improvement at ABC.”


Holcomb said his assignment was to help the 80-year-old agency boost its sales, about $801 million in gross revenue in the fiscal year that ended June 30. “The goal is to make it a billion-dollar-a-year enterprise,” he said in an interview Friday.


Holcomb said his review focused on three areas: aging information technology, consisting of 17 systems; personnel needs for 350 retail ABC stores that rely heavily on part-time employees, especially in rural areas; and structural improvements to the 50-year-old warehouse on Hermitage Road through which every bottle of distilled spirits sold legally in the state passes.


“We went over there talking about how much we depend on e-commerce,” said Holcomb, referring to DMV’s efforts to move transactions online. “That is clearly something that ABC knows it needs to move toward.”


“ABC is committed to e-commerce – they just need the infrastructure to be there,” he said.


The agency already is working to expand use of debit and credit cards for people to make purchases at ABC stores, but licensees such as restaurants, bars and hotels cannot apply for or renew their licenses online, Holcomb said. Renewal notices are sent by mail, although that process is beginning to change. Consumers cannot pre-pay for bottles on special order.


Business customers, who must buy their wholesale supplies from state stores at retail prices (minus the sales tax), have to use cash or checks to buy from state stores, he said. “You’ve got to allow ABC’s business customers to be able to pay by credit card.”


ABC has asked the alcohol industry and other interested parties to make suggestions on how to improve the system, which Wojnar commended. He said the state should allow ABC to keep more of its revenue to invest in infrastructure, greatly expand the number of retail outlets and open stores earlier on Sundays.


“If the marketplace was as robust as it could be, the state would be maximizing its assets and wouldn’t have to do markup increases,” he said.


Currently, ABC charges $1 for every case of spirits that comes into the warehouse. It applies a markup that averages 69 percent of the price and then a 20 percent excise tax, which goes directly to the state general fund. The agency is considering an increase in the case handling fee, a markup on 50 milliliter “mini-bottles” and an increase in the general markup.


The last markup, 4 percent, occurred in 2008, but the industry says Virginia has raised prices 13 times since 1980. “Markups are essentially a tax increase,” Wojnar said.


Among changes that would require legislation, DISCUS advocates giving ABC bonding authority to raise revenue for its needs. “If the ABC board were given the tools they need … they would bringing a lot more revenue,” he said.


Efforts to modernize the system “are legitimate recommendations,” Wojnar said. “Where we differ is how it gets paid for.”

Source: Richmond Times-Dispatch