Financial Report
FY06 Financial Highlights
Total revenue is up about 14 million dollars for the year according
to Jim Kuhlman. An additional 3.5 million dollars was transferred
to the General Fund in June and another $2 million will be transferred
this fiscal year.
In response to Commissioner Collins query, Ms. Gehl stated she
thought there was an additional 2 million dollars appropriated for
substance abuse treatment; however, she would check again and e-mail
Ms. Collins. Mr. Kuhlman added that although the amount transferred
to the General Fund for substance abuse treatment will increase
again this year, the legislature will decide how much is actually
appropriated for that purpose.
In response to Commissioner Doll’s query, John Lundquist
said that Iowa law does not require someone direct shipping wine
into Iowa to pay wine tax. Mr. Walding added that Iowa retailers
have to pay the tax which creates reverse discrimination. Some discussions
were held last session with legislative leadership about requiring
out-of-state registration and taxation to create a level playing
field with in-state operations.
Liquor Sales – Wine and Beer Taxes
Jim Kuhlman reported the trend continues with both dollars and gallons
sales being up significantly. Dollar sales are up approximately
10% with volume up about 7.5%.
The division currently has quarterly price changes requiring suppliers
to submit permanent price changes 45 – 60 days prior to the
price increase. The division is exploring the possibility of having
an electronic system where suppliers can access their accounts through
a security system and change prices at will. The system would notify
the division electronically that a price change had occurred and
ABD would notify customers. Mr. Kuhlman stated that traditionally
prices increase about 2.5% each year.
Commissioner Doll commented on the number of incentives that are
appearing in the monthly newsletter. Assistant Attorney John Lundquist
stated that the law requires that Iowa Alcoholic Beverages Division
price each case at the same price to everybody; however, it is lawful
for a liquor distributor or someone else to offer some sort of incentive
(rebate) for large case purchases.
Jim Kuhlman stated that companies have not instituted a fuel surcharge
at this time; however, some companies are starting to ship more
by rail. Since the Division does not receive by rail, the supplier
ships a full rail car to the Des Moines Rail Yard in a container
and hires a local trucking firm to deliver the product.
Wine tax is approximately 4.5% - 5% ahead of last year which seems
to be mirroring national averages according to Kuhlman. Iowa and
Idaho continue to battle as the state having the largest percentage
increase in spirit sales.
Sales Report
Sales Comparison
Sales through May are up 10% in dollars. Mr. Kuhlman reported that
June 26 was a $1.5 million day which is the biggest day the division
has had in the past two years – including Christmas. The national
perspective is that distilled spirits sales will continue at a strong
pace. Mr. Walding cautioned that although sales have been up almost
double digits the past 3 years, it will be hard to sustain that
indefinitely.
Product Buyouts
Product Buyouts remain on target for the year. The Division’s
goal to make an additional $758,000 profit throughout the course
of the year was achieved with the buyouts through May.
FY06 General Fund Transfers
It is projected that the division will transfer funds in excess
of $82,000,000 this fiscal year. Of that amount it is projected
that $53,500,000 will be from liquor sales. Excise tax on beer appears
to be up slightly less than 1%; wine tax up 6%; and civil penalties
down almost 9%.
When asked if ABD was the biggest revenue producer in the state,
Mr. Walding replied that the Department of Revenue is the largest.
The Iowa Lottery produces about $50 – 60 million yearly while
ABD has exceeded $80 million producing about 1.8% of the state’s
revenue.
Awards
Lynn Walding congratulated employees who were recently recognized
at the Governor’s Golden Dome Awards ceremony. Those honored
were Annie Adamovicz as Department of Commerce Employee of the Year;
Russ Eagen as Department of Commerce Leader of the Year; the Transportation
Division as Department of Commerce Team of the Year; and Gary Marker
as the Department of Commerce Volunteer of the Year.
Instant Rebate Coupons
Instant rebate coupons are a legal form of marketing products in
the state of Iowa; however, the question has arisen whether suppliers
are using the instant rebate coupons to circumvent the three tier
system. Subpoenas have been sent to all beer wholesalers asking
for their books and records relating to who was given instant rebate
coupons, how they were distributed and how many were redeemed and
by whom.
Anheuser-Busch has suggested the division initiate a rule-making
process and supplied the division with a draft copy for consideration.
The draft rule has also been proposed in Florida and other states
where coupons are legal. The issue could have broad implications
and the Iowa Grocers Association and Miller Brewing have expressed
an interest in providing their input.
Ted Powers, representing Anheuser-Busch, stated that the proposed
language basically has the following three components:
1) Require all coupon programs be pre-registered with Iowa
ABD. The wholesaler would register the coupon program with Iowa
ABD 15 days in advance of the promotion stating when the program
begins, ends and how unredeemed coupons will be handled.
2) Implement a dollar maximum on the coupon value.
3) Place coupons directly on the package.
Mr. Powers emphasized that the proposal would not preclude a coupon
where a non-alcohol entity would pay the redemption value. An example
of this type would be a co-promotional program between Coors and
Kingsford Charcoal where the coupon would be in the beer section
next to Coors products offering $2.00 off Kingsford Charcoal. It
is not illegal for a non-alcohol entity to pay slotting fees so
the proposed rule would not affect that type of coupon.
The rule, according to Lynn Walding, would require no action by
the division unless there was a complaint registered by a competitor
stating there was a violation of the program. At that point the
division would check the pre-registered promotional program to see
if the wholesaler was implementing it properly. Jenny Tyler from
Carney Law Firm added the proposed rule has more parameters built
allowing the division to see if the wholesaler is in compliance
rather than basing action on hearsay that the wholesaler was using
the coupons inappropriately.
Commissioner Doll liked the idea of having the programs registered
because it keeps the wholesaler in line knowing that they have to
have enough coupons for each retailer. He pointed out it is against
the law to give coupons to high volume accounts while excluding
low volume accounts. Although wholesalers give the same top line
price to all their customers, in effect they are not offering the
same price to each retailer when they give coupons to some and not
others. That has become a huge problem in the industry.
Mr. Powers stated the system is tailor-made for abuse. He emphasized
that he was not implying that Anheuser-Busch’s competitors
were the only ones abusing the system. Discussion ensued regarding
the types of abuse that occur with instant rebate coupons.
Commissioner Clayton asked if the real purpose for the regulation
was to level the playing field for the beer distributors so they
all handled coupons in the same way. Commissioner Doll responded
the regulation would do that for both wholesalers and retailers.
Although he had not seen the draft prior to the meeting, Mr. Fleagle
from the Iowa Grocers Association agreed with pre-registration of
coupons. He suggested that the rule be amended to take out “not
to exceed $1.00 per item.” He pointed out that costs go up
or down depending on the market and in 10 - 20 years $1.00 per item
may seem very low.
Mr. Powers agreed that he would have no problem with changing or
deleting the dollar limit. His main concern was to limit abuse by
pre-registration, ensure all retailers are aware of coupons offered,
and that coupons are placed directly on the package.
Judy Seib stated the coupons under discussion are furnished by
manufacturers through the distributor to the retailer. Coupons offered
by retailers are not affected and the draft rule would apply only
to off-premises accounts.
When asked if the beer wholesalers had taken a position regarding
coupons, Commissioner Doll stated that he personally was in favor
of the draft proposal; however, the organization had not yet seen
the draft. During the legislative session the beer wholesalers were
neutral on the idea of eliminating coupons.
Jim Kuhlman asked if beer wholesaler territories are clearly defined.
His concern was that retailers in the western part of the state
might be upset if they were not eligible for a coupon that was being
offered to retailers in the eastern part of the state. Commissioner
Doll assured him boundaries are clearly defined, retailers know
the territories and know their suppliers.
Mr. Walding summarized stating that he and Ms. Seib will work with
interested parties to present an official draft to the Commission
at the next meeting. Mr. Powers and Ms. Tyler will research other
states that allow coupons looking for a precedent. As part of the
rule making process a hearing will be held to get public comment,
the rules will be published and then submitted to the Administrative
Rules Review before the rule can take effect.
Warehouse Update
Lynn Walding reported that Crystal has given up the right to enter
into the contract and the Iowa ABD has resumed warehouse operations.
Mr. Walding plans to hire an individual to take care of several
major initiatives in the warehouse. Changes will include the addition
of security cameras, racking and more product.
In response to Commissioner Doll, Jim Kuhlman relayed the biggest
problem the division has encountered in assuming the warehouse operations
is getting the correct workforce. The decision was made to initially
hire people through a contract agency called Merit Resources thus
giving supervisors more time to evaluate employees before hiring
them as state employees. Workers are expected to pick 170 units
or cases per hour with an error rate of less than .05%. The scanning
system and program designed by Bruce Ireland is simple and effective.
If employees are trained correctly and follow directions, there
are literally no errors.
Russ Eagen is working on a second reroute which will cut more miles.
The first reroute done two years ago resulted in approximately $100,000
savings. Loads average about 800 cases per truck with some loads
as high as 1100 cases. The trucks use a 5% blend of bio-diesel fuel
which is considerably cheaper than regular diesel fuel. Next year
the state will require state vehicles to use a 10% blend which will
create a problem for ABD. Most of the engine manufacturers will
only warrant to 7.5%.
NCSLA Annual Conference Report
Mr. Walding thanked Derek Lippincott, Brent Saron and Linda Cox
for their assistance in helping to make the NCSLA Annual Conference
recently held in Boston a great success. Mr. Walding served as president
of the organization this past year and relinquishes his presidency
July 1st. He distributed copies of the NCSLA Annual Conference program
which was published in-house by Mr. Lippincott.
Prominent speakers at the conference were August Busch IV, Maine
Attorney General Rowe who is a significant figure in the alcohol
industry, Andrew Thomas, president of Heineken USA and MADD president
Glenn Birch. “Toward Liquor Control” was the conference
theme. The quote by John D. Rockefeller, Jr. was taken from a study
done shortly after Prohibition. The study recognized the important
of state control of alcohol with the theory that the best way to
distribute alcohol is to take the profit motive out of it.
Native Wineries
Mr. Walding and Ms. Seib recently met with Roger Halvorson, head
of the Iowa Wine Growers Association, to discuss the issues causing
a rift in the association between the two factions. Business model
1 is the true native winery that grows, ferments and bottles juice
from Iowa grapes. Business model 2 grows some Iowa grapes but imports
mostly California juice which they may or may not blend with Iowa
grapes. Both models market and sell their product as Iowa native
wines. The native wineries are allowed to sell directly to consumers
thus avoiding the 3-tier system. They can also sell directly to
themselves, have kiosks at malls and are not taxed on any direct
sales. In addition the group receives 5% of the money from all wine
tax collected.
The problem, according to Walding, is: 1) if business model 2 is
allowed to exit, it will kill business model 1; and 2) it is cheaper
to buy California grapes than it is to produce them in Iowa. The
division needs to make a policy decision on whether to allow one
or both business models.
Mr. Walding views business model 2 as a mini-tax avoidance where
the wineries are not paying the taxes that they are required to
pay. He expects the Association to pursue a legislative change this
session. Current Iowa law only stipulates that the juice has to
be fermented in Iowa. ABD will not oppose or support any legislation;
however, if the Association is not successful in passing legislative
changes Mr. Walding proposes that the division start enforcing the
law.
Another component of this issue is whether the division should
support direct shipping into Iowa. At the present time, Iowa is
a reciprocity state; however, the division is in favor of making
direct shippers register, pay a license fee and pay the $1.75 gallon
tax.
John Lundquist added that at some point the playing field will
have to be leveled whether Iowa does it voluntarily through legislation
or a judge tells the division to do it. He pointed out that Iowa
has had the advantage of the last year to see how other states have
dealt with the effects of the Granholm decision. Mr. Walding relayed
that Professor Tanford, one of the speakers at the NCSLA Annual
Conference, sued Michigan in the Granholm case making $2 million
in legal fees. Professor Tanford told the audience that he was going
to sue every state that has preferential laws for their wineries.
Iowa is a target because Iowa does have preferential laws.
Commissioner Doll stated that grape growing is an agricultural
product and the native wineries should be getting their tax breaks
through the Department of Agriculture rather than from the Iowa
Alcoholic Beverages Division.
When Commissioner Doll asked if there is mislabeling of product
information, Ms. Seib responded that the law states that the juice
has to be manufactured or processed (fermented) in Iowa. Commissioner
Clayton suggested there needs to be a better definition of the process.
Some states allow blending with a wine from another state and Mr.
Walding suggested that Iowa might consider up to 30% blending as
a compromise.
Lynn Walding suggested the Commission study the issue and make
a recommendation to the legislature who will ultimately make the
decision. Mr. Walding and Ms. Seib will meet with the Wine Growers
Association in August and invite the two groups to speak to the
Commission.
Election of Officers
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