Illinois Liquor Tax Saga - Over for Now

Since I wrote about the increase in the Illinois liquor tax a couple of years back, the challenge leveled by Wirtz Beverage was successful at the appellate court level. This week, the Illinois Supreme Court ruled against Wirtz and reinstated the liquor taxes, along with a host of other taxes and fees to pay for the rest of Governor Quinn's package of projects. Alas, no tax refunds for anyone, and video poker coming your way soon.

Ilinois Liquor Tax Saga Revisited

Back in 2009, I wrote a post about the quickly proposed and passed increase to the liquor tax rates in Illinois, which was rather dramatic. In my second post, on August 25th, I wrote that Wirtz Beverage had challenged the constitutionality of the law.

Recently, the Illinois Appellate Court actually agreed with Wirtz and ruled the "Illinois Jobs Now!" act was unconstitutional. The Illinois Constitution requires that any new legislation address a single subject, and the court found that a bill covering as wide an array of topics as was included in this law did not satisfy the requirement. (Full text of opinion here - loads as a .pdf)

If the opinion stands, Wirtz stands to receive a significant tax refund. Of course, the State of Illinois is appealing, and the Supreme Court has granted a stay, pending the appeal. Which means the liquor tax, as well as the other taxes included in the package, are still being collected for now.

The tax is/was assessed on the wholesaler, who in turn collected it from the retailer (who passed it on to the consumer, in most cases). If they get a big fat refund, do you suppose Wirtz Beverage will pass that back to the retailers?

Illinois Liquor Tax Saga Continues

This could get really interesting - today the Chicago Tribune is reporting that Rocky Wirtz and his family-owned Wirtz Beverage (2nd largest liquor wholesaler in Illinois, and operating in several other states) have filed a lawsuit challenging the constitutionality of the Illinois law that included the huge liquor tax increases I've written about recently. Stay tuned, we'll see if there's even a hearing before the law takes effect next week.

Illinois Liquor Taxes - Highest in the Nation

Recently I wrote about the liquor tax increase taking effect on September 1, 2009 in Illinois (link to .pdf from IL Dept of Revenue).

BIG PICTURE
The increase was included in the "Illinois Jobs Now!" act, which is a $31 billion capital improvement bill - lots of road, bridge and transit expenditures, as well as some money for schools and community development. To pay for it, there are lots of new taxes and fees, including an increased sales tax on candy (which has it's own headaches), sweetened tea & coffee drinks, increase title, registration and drivers license fees, taxes on grooming & hygiene products, and the controversial introduction of video gambling.

The increased beer, wine and spirits taxes are only expected to raise $119 million, so they're really a small part of this massive spending bill. However, the increases leave Illinois with the highest liquor taxes in the nation. That's right, the HIGHEST in the nation among non-control states, by a factor of 31% over the next highest state.

COMPARISON TO OTHER STATES
One of our customers (thanks Adam!) gave me a handy-dandy chart today that shows all the tax rates in all the states in the US that are not control states (meaning the state governments do not run the liquor stores and/or act as the distributor - they are traditional three-tier states, so we're comparing apples to apples).

Top Ten States
Although the Marin Institute says this is good news, this is really unfortunate for our industry and the consumer who imbibes. Here's the ranking by state liquor tax rates.

1. Illinois, as of 9/1/09 - $8.55 per gallon
2. Florida - $6.50
3. New York - $6.43
4. Hawaii - $5.98
5. New Mexico - $5.68
6. Alaska - $5.60
7. Minnesota - $5.03
8. Oklahoma - $4.56
9. Connecticut - $4.50 (Illinois would have been tied for 8th before)
10. New Jersey - $4.40

WHO GETS HURT

• Consumers who Drink. In most cases, a 750 ml bottle of spirits is going to cost at least $2 more, perhaps $3, regardless of the bottle's pricepoint, and before sales taxes. In Chicago, for example, once you factor in the federal, state, county and city manufacturing taxes, as well as sales taxes, more than 25% of the cost of a $30 bottle of spirits is tax - not money to the manufacturer, distributor, or retailer - taxes.
  

• Liquor stores near the border with another state that has lower taxes. Wisconsin is $3.25 per gallon, Indiana is $2.68 per gallon. Illinois is $8.55. The difference translates to a few dollars per bottle - in each case, it's over $1 per 750 ml bottle in tax, before markups. People near borders will cross them and stock up, even if doing so is technically illegal. So we're sending business to our neighboring states.
  

• The Little Stores. The single, independently owned liquor stores will probably suffer. They often don't have the resources and clout to buy huge quantities and stock up before the increase, or negotiate with the powerful distributors, so they'll be hit with the increase (and price increases) sooner. And little producers, like us, don't have a lot of wiggle room on pricing to absorb the tax, so our prices will go up, despite the tough economy.
  

• Bars and Restaurants. Bars and restaurants are already suffering in this economy, and now they'll be forced to either raise drink prices or work on a slimmer margin, neither of which is particularly appealing. Once you break the tax increase down to a per-ounce count, in theory it would be about 5¢ per ounce. In reality, after distributor markups, it will be more like 8¢ an ounce in additional tax per ounce, or around 25¢ per cocktail (assuming about 3 oz of taxed liquid total). It may not sound like a lot, but that 25¢ per drink will add up quickly. And it doesn't matter what caliber of spirits you're using, if it's over 20% alcohol, it's the same tax regardless of price.

Alcohol Taxes Going Up in Illinois

Despite statements that he wasn't sure he supported an alcohol tax increase, and despite the fact that we already had the highest liquor taxes in the Midwest among non-control states, Governor Pat Quinn signed a bill (now Public Act 096-0038, starts p. 117) yesterday that will increase the taxes on alcoholic beverages effective September 1, 2009. It's part of a big public works package intended to stimulate our local economy, with some significant tax increases thrown in to fund it ($109 million from alcohol taxes).

Before the Increases
Here's where we stood before the increase on Illinois taxes (these are just for the state, not the feds):
Beer and Cider up to 7% Alcohol - $0.185 per gallon
Wine and others under 20% Alcohol - $0.73 per gallon
Spirits and anything else 20% Alcohol or more - $4.50 per gallon

Just for comparison, the state tax rate on spirits in neighboring states are:
Indiana: $2.68 per gallon
Missouri: $2.00 per gallon
Wisconsin: $3.25 per gallon

So we were already significantly higher than the three states near us with similar alcohol regulatory schemes.

After the Increases, Effective September 1, 2009
Here's where we stand after the increase:
Beer & Cider up to 7% Alcohol - $0.231 per gallon ($0.046, or 25% increase)
Wine & Others under 20% Alcohol - $1.39 per gallon ($0.66, or 90% increase)
Spirits & anything 20% Alcohol or more - $8.55 per gallon ($4.05, or 90% increase)

The power of the beer lobby is apparent - they typically spend significantly more in lobbying efforts in Illinois than the wine or spirits lobby.

How it Plays Out - Who Gets Hurt
It remains to be seen how this will play out exactly - it was difficult to even find the legislation through the major media outlets covering the news. It's safe to say that many prices will rise in response.

A $4.05 per gallon increase translates to $.80 per 750 ml bottle in additional tax. However, the tax is assessed at the distributor level of the three-tier system, which means both the distributor and retailer markups will be applied before it gets to the consumer. So that $.80 may be $1.60 or more in increases at the liquor store.

Here are some of the likely outcomes from where I'm sitting:

• Costs will be higher to restaurants and bars, who are already hurting and preferring not to raise drink prices. They'll either have to raise prices or shift to lower-priced spirits.
  

• Value-priced spirits will be hit the hardest, because they have the same increase as higher-priced items - it's not tied to price but to alcohol level and volume.
  

• As usual, the little guys will suffer the most across all three tiers (manufacturer, distributor, retailer). Small companies like ours don't have the leverage with our partners to insist that they share in the increase. Either we have to eat it and reduce our prices, or we have to live with a price increase. Neither sounds particularly appealing in these tough economic times.

Once it shakes out a bit more, I'll try to post a further update on how the industry responds to the increase.