Legislators make the state’s liquor distribution system more palatable to small distillers.
Written by Zack Harold
West Virginia’s secret government warehouse isn’t quite what I thought it would be. It was easily visible from the interstate, although I suppose that could be part of a hiding-in-plainsight strategy.
Driving past on a two-lane road, I could see two sides of the warehouse are lined with large bay doors. Some had white unmarked tractor trailers parked in front.
There is a tall chain link fence, but it is not a threatening-looking fence. The gate stood wide open, without security guards or anything. I still didn’t go in.
A government spokesman declined my multiple requests to tour this 153,000-square-foot facility, citing security concerns. The government can’t have reporters crawling around a building filled with such highly valued assets.
The secret warehouse isn’t filled with gold bars, or weapons, or former Guantanamo Bay detainees. Instead, the brightly lit corridors are stacked to the ceiling with hundreds of thousands of dollars of booze.
The facility’s low profile wasn’t enough to avoid the attention of the state legislature earlier this year, however. But lawmakers were not concerned with what the warehouse contained—they were more worried about what wasn’t inside.
Although Gary Robinson, spokesman for the West Virginia Alcohol Beverage Control Administration, did not arrange a tour of the warehouse, he was more than happy to explain what goes on there. West Virginia is one of 17 alcohol “control” states in the country. While we do not have state-run liquor stores like Pennsylvania, Alabama, or Mississippi—West Virginia got out of the retail business in 1990—the state still controls alcohol distribution at a wholesale level. “Alcohol is a unique product. It’s not soap. There are things that need to be done to protect the public,” Robinson says.
That means every drop of whiskey, vodka, bourbon, scotch, gin, tequila, and rum sold in West Virginia passes through this big, brown, unmarked building in the Kanawha Valley. This is known as a “bailment” system. I’m not going to divulge the location, but if you’re any good with Google searches, you can find the exact address in just a few clicks. Manufacturers deliver their products to the warehouse’s bay doors, where a staff of 19 employees meticulously organizes the hooch in long rows. Robinson showed me a picture—it reminded me of the warehouse at the end of Raiders of the Lost Ark.
“Your top products are in the first aisle,” Robinson says. That’s where the Crown Royal, Smirnoff, and other popular brands live. “Those are stacked to the ceiling.” But that’s only a fraction of what the warehouse holds. There are currently around 2,000 different products in stock at the WVABCA facility, and each has its own numbered spot. The agency has another 1,000 products available for special order.
When West Virginia’s 178 liquor stores need to restock their shelves, they log onto a special password-protected WVABCA website and place their orders. Warehouse workers “pick” the order the next day, gathering up all the different cases, stacking them on pallets, and shrink-wrapping everything for shipment. The booze leaves the warehouse the day after, in the back of an unmarked tractor trailer.
Just under 700,000 cases of liquor worth $91.6 million passed through the bailment system in fiscal year 2014. “It’s a pretty big operation,” Robinson says. Each case that passes through the facility is subject to a 28-percent markup fee, plus an 80 cent per case “bailment” fee, and a $2.30 per case delivery fee. Those fees generated about $15.6 million for West Virginia’s general revenue fund in fiscal year 2014. Retailers also pay West Virginia’s 6 percent sales tax and a 5 percent excise tax, and are required by law to further mark up the liquor by at least 10 percent.
But the state also collected thousands of dollars for distributing alcohol it never touched. That’s because state law requires West Virginia-based distilleries that sell their products on-site to pay the same fees as major manufacturers and retailers, even if their products never pass through the bailment process.
“These are service fees for services we’re not receiving,” says Rob Losey, co-owner of Bloomery Plantation Distillery. While the company distributes its flavored liqueur “SweetShine” to stores around the state through the WVABCA warehouse, Losey says many of his company’s sales happen in the distillery’s Charles Town tasting room. And because of the way state law is written, Bloomery still had to pay all those taxes and fees on products sold in the tasting room, even though the bottles never left the door before being sold.
Be warned, this gets a little confusing. If Bloomery Plantation wants to sell a case of its product in the tasting room, it first has to “sell” the liquor to the state—which doesn’t actually own the booze, but just holds it in consignment. Once the state “receives” the liquor—which has not physically left the factory—it cuts a check to the distillery. Bloomery then buys back its own liquor by writing a check to the state for the cost of the product, plus a 28 percent markup, 80 cent per case bailment fee, $2.30 per case shipping and handling fee, and a 10 percent “market zone fee,” which is distributed to other liquor stores in the county. The distillery must go through this process for every case of liquor sold in its tasting room, and must wait until this paper trail is complete before consumers can purchase the bottles in question.
Losey says the taxes and fees were not a major concern when the company opened in 2011, but sales in the tasting room have dramatically increased in recent years as more and more tourists visit Bloomery Plantation. “We had no idea how successful an agritourism destination we’d become, and how painful these costs would be,” he says.
Last year, Losey says the WVABCA taxes and fees cost his company about $200,000. “As we started to analyze our business a little more, the thing we do really well is what’s costing the most.” When he and his business partners crunched the numbers, it became clear they could not afford to keep the tasting room open with those fees in place. On February 10, 2015, Losey and his partners closed Bloomery Plantation’s tasting room, laying off most of its 17 employees— the distillery’s manufacturing side remained open with only a few workers. News of Bloomery’s closure spread quickly across the state. Outraged fans sent more than 1,000 letters to state lawmakers and collected more than 1,000 signatures with an online petition.
A bipartisan team of legislators soon began crafting a bill that would lower fees for on-site sales at West Virginia distilleries. The resulting legislation dropped the required markup from 28 percent to 5 percent for on-site sales, eliminated the handling fee, and reduced market zone payments from 10 percent to 2 percent, which were capped at $15,000 per year. The bill passed unanimously in the state Senate, and the House of Delegates approved it with a 91-8 vote. Governor Earl Ray Tomblin signed the legislation into law on March 31. “I celebrated with an unsweet tea,” Losey says.
Although the bill does not go into effect until June 12, Bloomery Plantation reopened its tasting room the first weekend in April, bringing back all 17 employees. The new law will not change the confusing check-writing process between distilleries and the state, but Losey said it would boost his company’s bottom line. “That will bring our tasting room to a profitable position,” he says.
Robinson at the WVABCA says the change in the law probably will not affect state liquor revenues much—since only about 60 of the 3,000 products in the agency’s ordering system are made by in-state distilleries. Losey predicts the bill will eventually bring even more revenue into the state, however, since it will encourage other distilleries to set up shop in the Mountain State and draw more tourists from across state lines. “That collateral revenue is way bigger than what the state’s giving up,” he says. “It’s way cheaper for the state to agree with me than it is to lose me.”