[Title]

MCC: LIFT MAXIMUM DISTRIBUTION AGENT FEE

House Bill 5578 (reported from committee as Substitute H-1)

First Analysis (10-31-14)

BRIEF SUMMARY: House Bill 5578 would amend Section 205 of the Michigan Liquor Control Code to eliminate the upper limit on the per-case fee paid to a vendor of spirits as an offset to the costs incurred by that vendor in contracting with an authorized distribution agent for the warehousing and delivery of spirits to retailers. (The fee is understood to be a pass-through to the authorized distribution agents.)

FISCAL IMPACT: House Bill 5578 would have an indirect fiscal impact on the state’s General Fund (GF/GP) to the extent that any increases in the per case warehouse and delivery fee would be supported with revenue generated from the Liquor Control Commission’s (LCC) wholesale mark-up of spirits sold to licensed retailers and deposited into the Liquor Purchase Revolving Fund (LPRF), the unexpended amounts of which lapse into the General Fund.

In FY 2012-13, the per case fee was $7.50, the total amount expended from the LPRF for warehouse and delivery fees to vendors of spirits contracting with authorized distribution agents (ADAs) was $55.4 million, and the unexpended revenue within the LPRF lapsing to the General Fund was $169.6 million. If the Legislature enacts HB 5578 and the LCC follows the recommendation of the Office of Regulatory Reinvention (ORR) to increase the per case fee to $8.12 (published on 06/29/12)—a 8.3% increase— the total amount that would be expended for warehouse and distribution fees to ADAs would be approximately $60.0 million; this would be an increase of approximately $4.6 million over the FY 2012-13 amount, resulting in an equivalent decrease in the amount lapsing to the General Fund.

THE APPARENT PROBLEM:

The current cap of $7.50 per case paid to vendors of spirits (and passed through to distributors) as part of the state's liquor distribution system was reached last year, according to testimony given by National Wine and Spirits (NWS). Vendors of spirits approach the MLCC periodically seeking an increase in the fee, which currently is set at a statutory maximum of $7.50 per case. While NWS stated in testimony that they are still profitable, they also claim that if fee increases do not correspond to increases in business costs, it will hinder their ability to perform their role in Michigan’s liquor control system.

THE CONTENT OF THE BILL:

House Bill 5578 would amend Section 205 of the Michigan Liquor Control Code to eliminate the upper limit on the per-case fee paid to a vendor of spirits as an offset to the costs incurred by that vendor in contracting with an authorized distribution agent for the warehousing and delivery of spirits to retailers. Currently, the law authorizes the Liquor Control Commission to establish a fee of not less than $4.50 but not more than $7.50 per case. The bill would remove the maximum amount. The fee is understood to be a pass-through to the authorized distribution agents. The adjustment of the per-case fee was proposed in the 2012 Office of Regulatory Reinvention report regarding liquor control in the state, as recommendation #65.

The bill would also strike language put in the code when the liquor distribution system was privatized in 1996 that required distributors to make a good faith effort to provide employment to the state employees who were losing their jobs in the privatization. Also being eliminated is a nine liters per-month limit on the amount of spirits a specially designated distributer (SDD) can sell to an on-premises licensee, and a related record- keeping requirement.

BACKGROUND INFORMATION:

The following information is from the Michigan Liquor Control Commission website:

Michigan operates as a "control" state for the sale of spirits. That is, the Michigan Liquor Control Commission (MLCC) acts as the wholesaler for all spirit products. A "Vendor of Spirits" sells spirits to the MLCC. The MLCC then resells the spirits to both on and off premises retail licensees. Spirit products are warehoused and delivered to retail licensees by Authorized Distribution Agents (ADA). An ADA is required to be certified by the MLCC and is also required to have a contract with each Vendor of Spirits they represent to deliver their particular spirit products. Spirit products that are sold to consumers for off-premises consumption by licensed Specially Designated Distributors (SDD).

ARGUMENTS:

For:

By giving the MLCC flexibility in setting the fee, say supporters of the bill, the ADAs will no longer have to come before the legislature every time a cap is reached in order to obtain a fee increase.

Against:

Opponents of the bill are not so much opposed to this particular bill as they are the control system Michigan uses. They argue that it is not necessary for Michigan to purchase the liquor, and they say that by going to a traditional market-based system, there would be no need for either authorized distributors or for a fee to be paid.

POSITIONS:

Support:

Distilled Spirits Council (9-30-14)

Michigan Licensed Beverage Association (9-30-14)

National Wine and Spirits (9-30-14)

Michigan Grocers Association (9-30-14)

Michigan Spirits Association (9-30-14)

Neutral:

Michigan Liquor Control Commission (9-30-14)

Legislative Analyst: Josh Roesner

Fiscal Analyst: Paul Holland

■ This analysis was prepared by nonpartisan House staff for use by House members in their deliberations, and does not constitute an official statement of legislative intent.