Liquor taxes continue steady climb in S. Dakota

The amount of alcohol produced in and imported into South Dakota continues to rise, with more than 24 million gallons of spirits, wine and beer reported in the state in fiscal 2008.

Retailers, however, say that doesn't mean the industry is celebrating record profits. Costs have increased across the board and changes in consumer habits could mean dire effects for some businesses that sell alcohol.

"I think you put all of that together and it's going to force a lot of these small-town bars and restaurants to close," said Mark O'Neill, the owner of a family-run bar in Henry, a small town in eastern South Dakota.

There is no statewide tax on individual alcohol drinks, thus making it difficult to specifically pinpoint whether South Dakotans are drinking more. However, taxes are collected on alcohol that is shipped into or produced in the state, and those annual rates are showing steady increases.

According to figures from the state Department of Revenue and Regulation, the gallons of distilled spirits -- any beverage with 20 percent or more alcohol by volume -- have steadily risen over the past four years, from 1.16 million gallons in fiscal 2005 to 1.34 million gallons in fiscal 2008.

Gallons of malt beverage in the state also have increased, from 21.28 million in 2005 to 21.99 million. Most wines also have shown an increase.

Correspondingly, the amount of tax money collected by the state has increased from $11.3 million to more than $12 million.

The Department of Revenue and Regulation collects $3.93 for each gallon of distilled spirits brought into the state and 27 cents for each barrel of beer. Of the alcohol tax collected, 25 percent is distributed to towns and townships based on population. The remaining 75 percent is put into the state's general fund.

The tax figures could be deceiving, said Craig Youngstrom, executive director of District 6 of the Licensed Beverage Dealers of South Dakota.

"If it's up just a little bit, it could just be the increase in price," said Youngstrom, manager of Jackpot Gamblin' in Mitchell. "Just the fact that it's up doesn't mean necessarily that there's more sales."

Youngstrom and other retailers say they're accustomed to the occasional price increase. However, the wholesale price of beer jumped twice in 2008 and the price of all alcoholic beverages increased across the board in September, forcing Youngstrom to raise the price of drinks for the first time in seven years.

It's a difficult choice for liquor retailers, and one that O'Neill, the owner of the bar in Henry, says could be fatal.

"In small towns, we're seeing it go down," O'Neill said. "It think it makes (profit) smaller for the small-town, rural areas."

"You can only absorb so much before you pass it on to the consumer and ... their budgets are getting just as tight as anybody else's," said O'Neill, LBDSD president.

O'Neill's business has been in his family for 31 years. He's seen customers shift their alcohol consumption to larger population centers in the state. To attract and keep customers in Henry, population 260, O'Neill has kept his alcohol prices the same, even after wholesale increases in pricing.

Still, customer numbers have dwindled, he said. People that haven't already moved to larger towns often purchase their on- and off-sale alcohol in those towns and it's taking a toll on business.

"I see the small business owners absorbing a lot of that increase coming on the wholesale level just because we can't get those high prices that they get in cities," O'Neill said. "Where they have a fluctuation of people coming in and out all the time, we've got a pretty well set base of people that we always have to attract."

Kyle Peschong, manager of the liquor department at County Fair Food Store in Mitchell, said tight economic conditions may be leading consumers to drink more at home instead of bars, restaurants and casinos.

Jim Stewart, store manager at County Fair, said it's always good to see increased business, but a rare price increase for every product in the department in September has resulted in lower profits.

"When our costs go up and we run things at the same margin, we are in turn losing ground because we're making the same margin on $100 in sales instead of the same margin in $90 in sales," said Stewart.

Add the chance of a public smoking ban and the situation could become a death knell for businesses like O'Neill's, he said.

As uncertainty about the economy remains, O'Neill said he'll be watching the Legislature intently this session to see how lawmakers' decisions may affect his business.

What the future holds is anyone's guess, he said.

"With the Legislature, anything's possible," O'Neill said. "If I could answer that question, I'd be up on Wall Street."