In 1620, on the shores of the James River, early Virginia colonists distilled America’s first whiskey. Over a hundred years later, Virginia native George Washington built the largest distillery in the country at Mount Vernon en route to becoming America’s “original craft distiller.”
But for a state with such a rich distilling history, it may come as a surprise that modern craft distillers in the commonwealth are currently operating in one of the worst regulatory environments in the country.
Virginia is one of 13 “control states” at the retail level, meaning that a government entity — in Virginia, the Department of Alcoholic Beverage Control (ABC) — is in charge of all sales of hard spirits in the state.
The Virginia ABC has become notorious for its outdated regulatory model, and any honest survey of the legal obstacles Virginia distillers face shows why.
Despite this oppressive legal regime, prior reform efforts have mostly failed to make it through the state legislature. Now, lawmakers in Richmond have their best opportunity in years to pass meaningful reform — if only they can find the courage to follow through.
Under state law, Virginia distillers are permitted to serve a paltry three ounces of hard spirits to customers who visit their distilleries. After that point, distillers are forced to cut off patrons even if they are not intoxicated.
Breweries and wineries in Virginia face no such restrictions when customers visit their tasting rooms — a disparity that makes little sense in an era when a mug of strong beer can contain nearly as much alcohol as a shot of vodka.
Beyond sampling, distillers also face restrictions on how they sell bottles of their spirits to on-premise visitors. Because the Virginia government is in charge of all liquor sales, distilleries must technically operate as ABC agent stores if they wish to sell bottles directly from their tasting rooms. This means distillers are conscripted into operating ABC retail stores that must adhere to the government’s strict rules and guidelines.
ABC imposes a jaw-dropping 69 percent markup on every bottle of hard spirits sold in the state, in addition to the state’s 20 percent excise tax on liquor. When taxes and the state-imposed markup are added together, distilleries receive only 46 percent of the purchase price of every bottle of booze they sell. This gives Virginia the third-highest effective tax rate on hard spirits in the nation.
Being forced to operate a government retail store and being permitted to keep less than half of your profits might sound bad, but the reality is even more dispiriting.
The 69 percent markup applies even to the on-premise ABC stores that distillers operate — despite the fact that the distillers themselves bear all the costs associated with running these stores. Distilleries also are required to send all the proceeds from their on-premise sales to ABC and then wait up to a month to receive their share.
Unsurprisingly, this creates significant cash-flow problems for small businesses like craft distilleries, which have expensive overhead and need to make periodic investments in things like new bottle orders.
This session, the Virginia legislature has considered numerous reform bills that would overhaul the state’s backward booze system. While most failed to gain traction, at least one bill now has a shot at passage. SB 803, which would allow distilleries to keep the markup money from on-premise liquor sales, recently cleared the state Senate. The ball is now in the House of Delagates’ court to decide whether to take up the Senate legislation.
A companion bill to SB 803 previously stalled out in the House Appropriations Committee over concerns about the projected fiscal impact of allowing distillers to keep the markup money. ABC officials cited a report from the Department of Budget and Planning, which warned that it could cost the state $1.7 million in foregone revenue for fiscal year 2019 (and more in the future). The Joint Legislative Audit and Review Commission subsequently released its own report, predicting slightly lower revenue losses. Both reports may be underestimating the potential for increased on-premise sales from distilleries — which will still be subject to the state’s 20 percent excise tax for spirits — to make up at least part of the revenue loss.
Regardless, these figures underscore the lucrative nature of the control-state model, even if government control of alcohol sales no longer makes sense in a 21st-century economy.
Virginia ideally would remove itself from the business of booze entirely, following the practices of most states. Even if privatization is deemed a bridge too far for state politicians, Virginia has options available for offsetting at least some of this projected revenue loss. For example, the hours of operation of ABC retail stores — including agent stores located at distilleries — could be expanded to bring in more revenue. Presently, ABC stores are open only from 10 a.m. to 9 p.m. on Monday through Saturday, and noon to 6 p.m. on Sunday.
Increasing the hours to bring them more in line with the hours of private retailers could generate additional revenue for state coffers. This may not make up the projected revenue loss entirely, but it’s far past time for Virginia to reconsider a system that balances the state budget on the backs of entrepreneurial spirit-makers — a burden no other industry in the state has to bear.
The state’s outdated alcohol laws are hurting craft distillers and handicapping the jobs and innovation that these small businesses provide. After many years of failure, state lawmakers have a golden chance to pass meaningful, commonsense reform. It’s time they finally follow through.
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