TalkTax

Over recent weeks two announcements have been made with regard to excise arrangements for wine. The excise rate for all alcoholic beverages will increase from 1 July by 4.5%, in line with the annual increase in the CPI to March 2011. The second announcement was a change in the thresholds affecting the timing of excise payments. This meant that the threshold at which wineries would be able to pay their excise liability annually (instead of monthly) would increase from $10,000 per annum to $50,000 per annum. From a practical perspective this was meant to reduce compliance costs and change the cash flow position whereby smaller wineries are often paying excise before they actually receive payment for wine sales. Or at least that was the intention.
Of course the increase in the CPI over this period included approximately a 2.2% impact related to the October 2010 increase in the rate of GST. Accordingly the excise increase (which also carries GST) arguably has the cumulative effect of adding a tax on a tax on a tax. From a social as well as a pure revenue perspective perhaps the Government might consider increasing GST more often!
In principle the change to the payment thresholds is a step in the right direction (regardless of what one thinks of the fairness or efficacy of the whole excise regime). However, in practice this will have little effect. The simple reality is that a large number of New Zealand wineries, mostly, but not all, small in size, don’t have their own wineries or cellar doors. Accordingly they store almost all of their wine in bonded warehouses, the owners of which are licensed directly by Customs. Since these bonded warehouses (known as Customs Controlled Areas) are therefore aggregating the excise liabilities of many wineries they do not usually qualify for the exemptions. They will still charge their winery customers and pay their excise monthly.
For these wineries to all go out and hire their own warehouses to obtain the better payment terms would clearly be ridiculous (as well as decimating the business of the storage industry – surely an unintended consequence were it to occur).
How many wineries are we talking about? I did a quick count of the wineries on the list of Customs Controlled Areas and arrived at 434 – well short of the 700 or so members of NZ Winegrowers (and then some on the CCA list are not NZW winery members either). I also know of several wineries that are on the CCA list but which also use bonded warehouses for what they can’t handle themselves. So how many wineries that were meant to benefit will these changes mean nothing for? My guess is close to 300 – the vast majority of the wineries intended to benefit!
Ultimately this highlights the fact that excise, often viewed as a tool for pricing the social costs of alcohol abuse and therefore as a potential tool for increasing prices as a means for reducing consumption, is a flawed tool. The April 2010 Law Commission Report on Regulatory reform for the sale of liquor, which recommended significant increases in the level of excise that the Government declined to implement, referred to research describing the varied price elasticity of demand for different alcoholic beverages. Unfortunately the report did not reflect on the meaning or impact of these differences. The history of excise changes shows that breweries, for example, are routinely able to re-price for the excise impost each year. Wine prices are rarely changed on account of excise – even in more buoyant market conditions – because the nature of competition in the industry , and the plethora of labels on shop or supermarket shelves. Increasing excise solely as a means of raising prices to douse consumption, will more likely further reduce profitability than reduce demand.
New Zealand Winegrowers has long pushed for the point of excise liability to be shift from the winery to the retail end of the chain so that it would more closely reflect actual consumption. The argument goes that these outlets are already all subject to licensing and already returning GST so that attaching the collection of excise to the collection of GST would be more efficient. At this point it would be more likely to have a direct impact on prices and therefore on the efficacy of excise as a social pricing tool. Such an approach, it has to be admitted, has pros and cons. It might not actually be a clean shift, given the issues of whether some wines in the transition might effectively be subject to excise twice while others could miss depending on timing; and given that what the wine industry would save in compliance costs might well be magnified by greater compliance costs in some sectors of the licensed community such as restaurants that are not necessarily as well set up for security of storage.
And another thought: if the Government were to shift the excise impost to the point of sale and at the same time double the level of excise, it might produce a perverse outcome. The Government coffers might benefit to the tune of an extra $145 million (less lost GST); while at the same time wine prices would actually fall slightly, to the likely chagrin of the health sector, since the increased excise would be less than the total added margins presently charged through the supply chain to the consumer. Would this benefit wine industry profitability? Probably, to the extent that there is one less unavoidable cost that wineries can factor when negotiating with supermarkets or retailers. Of course there would be the perverse affects, such as the reduced profitability of the agency distribution sector that presently charges a margin on the excise-inclusive prices it receives from wineries.
When the Government can’t even implement a viable reform intended to help affected businesses, what is the bet that a bigger reform will be a candidate for the “too hard basket”?
(Disclosure of interest: the writer operates a small winery and currently utilises off site bonded storage, so will derive no benefit from the threshold changes).