The Toronto Distillery Co., a local maker of organic spirits, is in a fight with the LCBO about unpaid fees that could threaten the company’s existence.

The company is taking legal action against the LCBO because they say the LCBO is unfairly requiring them to pay taxes on booze they sell directly from their distillery; a tax that they say is “inconsistent with Canada’s constitution.”

Their argument stems from the Constitution Act of 1867 which states that all taxes in this country need to be legislated. That is, they need to be presented in the house (federal or provincial) and then voted on. As such, the Toronto Distillery Co. claims that current fees for onsite stores that are imposed on distilleries and created by the Ministry of Finance (and not voted on), are not consistent with this law.

The current fees related to booze sold onsite, The Toronto Distillery Co. alleges, are based on the same mark-up the LCBO uses on the booze they sell in their actual stores. That is to say, if a distillery opts to sell liquor from their own premises, they are forced to mark up their prices 140% and pay the LCBO a hefty fee.

You could argue that the LCBO’s in-store mark-up–while steep–at least covers all that the LCBO does for booze-makers: They warehouse the stuff, shelve it, pay for staff to sell it, market it, etc. But when it’s sold directly from the place that it’s made, as when Toronto Distillery Co. sells bottles at their place on Cawthra Ave, the LCBO still collects that markup.

The Toronto Distillery Co. doesn’t think that’s fair and co-founder Charles Benoit gave me an overview of why they think they have a legal case to not pay them.

The current arrangement is outlined in a 26-page contract that all distilleries must enter into with the LCBO. According to Benoit, this contract is not negotiable and is not flexible and along with the details of how to transfer bottles from the distillery part of your site to the store part (often a few feet apart) it states that the liquor being sold at an onsite sore is technically being sold on consignment for the LCBO. In other words, it makes the onsite liquor stores of distillers technically part of the LCBO and they insist on their cut. For the Toronto Distillery Company, for example, this means that they are forced to sell their new organic distilled beet liquor for $39.50 in their own store and the LCBO gets $18.44.

If that sounds strange to you, you’re not alone. “We actually feel like our case is really good,” Benoit tells me. “We’ve talked to a dozen lawyers who agree.”

And this won’t be the first time Benoit and his partner Jesse Razaqpur have raised their objections. Benoit tells me that back in 2014 they simply stopped paying the LCBO their cut, and they made it clear why. “We told them we didn’t think it was fair,” he said “and for a long time it was just radio silence.”

That changed in May of 2015 when the LCBO issued a letter letting Toronto Distillery Co. know that they had “missed the last few months”of fees.

Benoit says at that time he again reiterated in a letter why they weren’t paying the fees, at this point totalling around $13,000 by his count, and invited the LCBO to have a conversation about the issue.

Again they heard nothing in return, and so they sent yet another letter last month saying that if the LCBO wasn’t willing to discuss the issue, the Toronto Distillery Company would be considering litigation. This time they received a response – one that said, flatly, pay the money you owe or the distillery will be shut down.

So now the distillery is facing the prospect of having their business shut down. In fact, the LCBO’s date for them to comply is today (Friday, July 24). In response, they’ve asked a judge for an injunction so they can keep their business running while the case is considered.

I contacted Christine Bujold, Media Relations Coordinator for the LCBO, for comment and she replied via email that “Part of the LCBO’s purpose as defined in the Liquor Control Act is to control the sale, transportation and delivery of liquor in Ontario.”

But as for the specifics of this case, she would only say that “The Toronto Distillery Company is currently in the midst of a contract dispute with LCBO. As this is an ongoing matter, it would be inappropriate for the LCBO to comment further on the specifics of the dispute.”

“We’re not asking for anything crazy,” Benoit says. “Breweries and wineries are taxed on a scale. Just institute a spirit tax that’s consistent.” The current fees, he argues, have nothing to do with the way services are administered.

Time will tell if the case solves anything for the province’s small but growing number of craft spirit makers, but Benoit seems optimistic that logic will prevail.

“It would cost less money to simply change legislation,” he says, “than to proceed with a legal procedure.”