New tax under McDonnell plan to privatize liquor sales

Restaurants and bars that buy liquor from state stores now would have to pay for the privilege of buying directly from private wholesalers under a privatization plan being prepared for unveiling by Gov. Bob McDonnell next week.

McDonnell is counting on restaurants and bars for as much as $38 million a year as part of a complex package of taxes and fees designed to make up the revenue now generated by Virginia's state liquor monopoly.

The money would come from a new 4 percent tax that would be imposed on drinks sold in restaurants or bars, according to sources familiar with the plan. The tax would be imposed on a business's gross receipts for alcohol sales rather than the customer's bill.

The restaurant and hospitality industry is willing to support the idea if it is assured of being able to buy directly from wholesalers with the opportunity for discounted prices based on volume, sources said.

The money from the proposed fee is essential to ensure that a private liquor industry would be able to produce the same amount of revenue as the wholesale and retail monopoly operated for 76 years by the Virginia Department of Alcoholic Beverage Control. The state operation produced about $231 million in profit and excise-tax revenue in the fiscal year that ended June 30, according to ABC.

McDonnell, who made ABC privatization a centerpiece of his 2009 campaign, has pledged that the new system will not cost Virginia revenue that it currently receives from ABC sales.

Sources said that while the components of the plan are set, the numbers are being analyzed because of ongoing discussions involving ABC and the Department of Planning and Budget on how to replace the revenue from state liquor sales. Firmer numbers are to be announced at Wednesday's meeting of a subcommittee studying ABC privatization for the governor's commission on government reform.

The governor's staff will make recommendations to the subcommittee, which will in turn make recommendations to the full commission. Using those recommendations, the governor will work with members of the General Assembly to develop legislation. "This is really the start of the discussion," said Eric Finkbeiner, the governor's senior policy adviser and point man on ABC privatization.

Coming up with a plan that replaces the state revenue is a challenge.

The state would have to impose an excise tax of more than $21 a gallon sold to wholesalers to replace that revenue, making the new system uneconomical for the private wholesalers and retailers that would have to pay for the privilege of being licensed to distribute distilled spirits in Virginia. Initially, the plan proposed two sources of revenue — an excise tax of $12.50 and a "buyout fee" of $2.25 a gallon — to produce most of the annual revenue, about $160 million. However, that number could increase if other components of the plan generate less money than expected.

McDonnell's plan also counts on money from the "on-premises fee" for restaurants and bars to help make up the difference. Currently, restaurants and bars buy liquor from ABC's 332 retail stores and pay the same price as other consumers, so the industry is counting on savings from a private system that would more than offset the cost of the proposed new fee.

To make up for the lost ABC revenue, the proposed plan also relies on "repatriated sales" of spirits that consumers have been purchasing outside of Virginia — in Washington, for example — and military base stores, sources said. Those revenues, including additional sales taxes from the recaptured markets, were projected to generate more than $30 million, but sources said doubts remain within the administration about the estimates.

McDonnell's goal is to raise $300 million to $500 million in one-time revenues from the sale of licenses and other assets to pay for state transportation needs without raising taxes.

In addition to auctioning licenses for up to 1,000 retail outlets, the administration is looking to raise $160 million from wholesale licenses. The plan would provide unlimited licenses to wholesalers, which would have to negotiate their own agreements with distillers, manufacturers and importers to sell particular brands, such as Jack Daniel's bourbon whiskey, the sources said. The wholesalers then would have to pay the state a fee of two times the gross annual sales of that product as compensation for the state's right to distribute it.

Finally, the administration hopes to make an additional $34 million from sale of the state's sophisticated ABC central warehouse in Richmond and other state-owned retail sites, particularly properties in Alexandria's Old Town area that have high real estate values.

McDonnell already has outlined the parameters of his retail privatization model, including three tiers of retailers — big-box stores, stand-alone independent spirit sellers and small convenience stores.

Martz is a staff writer at the Richmond Times-Dispatch.