South Carolina Tax Revenue Impacts of Shifting by arnold1

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									South Carolina Tax
Revenue Impacts of
Shifting On-Premise
Liquor Distribution from
Mini-Bottles to National
Restaurant Standards


An Analysis of State Tax Revenue
Impacts to the Year 2020




Report by:

Steve Morse, Ph.D.
Economist


School of Hotel, Restaurant and Tourism Management
College of Hospitality, Retail and Sport Management

University of South Carolina
Columbia, SC


January 2003
               South Carolina Tax Revenue Impacts of Shifting
              On-Premise Liquor Distribution from Mini-Bottles
                      to National Restaurant Standards


                                Table of Contents


Executive Summary                                                                                3

I.     Purpose of the Study                                                                      4

II.    Methodology                                                                               4

       A.   Current Mini-bottle Tax Structure                                                    4
       B.   Converting Current Mini-bottle Taxes to per
              Liter Bottle Taxes                                                                 5
       C.   Convert Current Off-Premise Retail per Case Taxes
              Per Liter Taxes                                                                    6
       D.   Tax Revenue Impacts of 1998 Mini-Bottle Demand                                       8
       E.   Tax Revenue Impacts of 1998 Mini-Bottle Demand
            Taxed at Retail Bottle Tax Rates                                                     8

III.   Comparison of Tax Revenues Generated by Mini-Bottle
       Taxes vs. Retail Per Liter Taxes                                                          9

IV.    Replacing the $14 Million Liquor Tax
       Revenue Shortfall                                                                         9

V.     Tax Revenues Automatically Increase With Inflation                                        10

VI.    Conclusions                                                                               13

VII. References                                                                                  13

VIII. About the Author                                                                           15




                                                                                                             2
                         Steve Morse, Ph.D., Economist; School of Hotel, Restaurant and Tourism Management
                         University of South Carolina, Columbia, SC.
                South Carolina Tax Revenue Impacts of Shifting
                     On-Premise Liquor Distribution from
                 Mini-Bottles to National Restaurant Standards


                              Executive Summary



 The purpose of this study is to examine the tax revenue impacts of
  shifting the current on-premise liquor distribution system from mini-
  bottles to a system consistent to national restaurant standards.

 Under the current tax system for liquor, on-premise mini-bottle sales
  are taxed at a rate equal to $5.94 per liter, while off-premise retail
  bottles are taxed at a rate equal to $1.42 per liter.

 The analysis shows that if mini-bottles were replaced with national
  restaurant standards of liquor distribution, a 5% liquor sales tax and
  current per liter sales tax would generate higher tax revenue than the
  current system of mini-bottle taxation.

 Twenty-year projections to the year 2021 show that South Carolina
  liquor tax revenues generated over the 20-year period will more than
  double under the new 5% liquor sales tax and current $1.42 per liter
  taxes.

 Thus, the new tax system will automatically increase liquor tax
  revenues generated as inflation increases over time with no required
  increase in liquor consumption.




                                                                                                             3
                         Steve Morse, Ph.D., Economist; School of Hotel, Restaurant and Tourism Management
                         University of South Carolina, Columbia, SC.
                                     South Carolina Tax Revenue Impacts of Shifting
                                     On-Premise Liquor Distribution From
                                       Mini-Bottles to National Restaurant Standards



                                     I.        Purpose of the Study

                                     The purpose of this study is to examine the tax revenue
Analysis by:                         impacts of changing the current on-premise mini-bottle
Steve Morse, Ph.D.                   liquor distribution system in South Carolina to a
Economist                            system equal to national restaurant standards of liquor
                                     distribution. The specific objectives of the study are to:
School of Hotel,                     1) review the current tax structure associated with
Restaurant and Tourism
Management                           mini-bottle sales distribution, 2) examine the tax
                                     structure of shifting existing mini-bottle taxes to per
College of Hospitality,              liter and per drink taxes, 3) estimate the level of tax
Retail and Sport
Management
                                     structures on bottles that would equal current mini-
                                     bottle taxes with the criteria of being tax revenue
University of South                  neutral, and 4) estimate liquor tax revenues generated
Carolina, Columbia, SC               as a result of inflation.


                                     II.       Methodology

                                     To achieve the objectives of this study, the current
                                     mini-bottle tax structure will be examined and a per
                                     liter equivalent tax structure will be analyzed. In
                                     particular, the study seeks to examine the tax structure
                                     on liter bottles and unit sales that could replace the
                                     current mini-bottle tax structure and remain tax
                                     revenue neutral.


                                     A.        Current Mini-bottle Tax Structure

This analysis is the sole view of    The current tax structure on mini-bottles in South
the author and does not
necessarily represent the views of   Carolina is a mix of five different taxes at various
the University of South Carolina.
This analysis is for informational   levels of the distribution system. Table 1 shows the
purposes and not intended to aid
or hinder any bill before any
                                     current mix of five taxes on the mini-bottle sales
state, county, or municipal          distribution system.
legislative bodies.



                                                                                                                         4
                                     Steve Morse, Ph.D., Economist; School of Hotel, Restaurant and Tourism Management
                                     University of South Carolina, Columbia, SC.
   Table 1. Current South Carolina Tax Rates on Mini-bottles

Tax
             Tax Type and Rate                                      Tax Sales Units
No.
        Wholesalers Tax = $1.81                                   a
 1                                       Per case of mini-bottles
        Retailers Tax = $2.99                                     a
 2                                       Per case of mini-bottles
        Mini-bottle Tax = $0.25                          b
 3                                       Per mini-bottle
 4      Additional Case Tax = $0.56 Per case of mini-bottles a
 5      Surtax = 9%                      [Sum of Tax No.1+2+3+4] X .09
       Total Mini-bottle Taxes           Sum of Tax No.1+2+3+4+5
Notes:
a
b
  1 case of mini-bottles = 240 mini-bottles;
  1 mini-bottle = 50 ml.
Source: S.C. Department of Revenue, Liquor Wholesalers Monthly Report,
Form L-101, Schedule A-1, p. 3, (copy enclosed).



       B.        Converting Current Mini-bottle Taxes to Per
                 Liter Bottle Taxes

       Step 1. Calculate total taxes per case of mini-bottles

       a) Convert $0.25 tax per mini-bottle tax to per case
          equivalent tax.

            Since one case of mini-bottles equal 240 mini-
            bottles, the existing tax of $0.25 per mini-bottle
            would be equivalent to $60 tax per case. [Derived
            by $0.25 (X) 240 = $60]

       b) Sum other per case taxes from Table 1.

            Per Case Tax No.1 ($1.81) + Per Case Tax No. 2
            ($2.99) + Per Case Tax No. 4 ($0.56) = $5.36.

       c) Find case tax equivalent of Tax No. 1 + Tax No. 2
          + Tax No. 3 + Tax No. 4.

            Sum per case taxes from Step 1a ($60) + per case
            tax from Step 1b ($5.36) = $65.36. Thus, total
            mini-bottle per case tax = $65.36.

                                                                                           5
       Steve Morse, Ph.D., Economist; School of Hotel, Restaurant and Tourism Management
       University of South Carolina, Columbia, SC.
                       d) Add 9% sur-tax to tax in part (c) above.

 Convert current            The 9% sur-tax = $65.36 (X) .09 = $5.89.
mini-bottle taxes to
  per liter taxes      e) Find total taxes per case of mini-bottles.

                            Sum taxes from parts (c) + part (d) = total taxes per
                            case of mini-bottles. $65.36 + $5.89 = $71.25 total
                            tax per case of mini-bottles.


                       Step 2. Convert $71.25 tax per case of mini-bottles to
                       equivalent tax per liter

                       f) First, convert one case of mini-bottles to liters.
                          Since one case = 240 mini-bottles, and one mini-
                          bottle = 50 ml, and 1 liter = 1000 ml, the
                          conversion from mini-bottles to liters is [240 (X)
                          50] / 1000 = 12 liters. Thus, one case of mini-
                          bottles = 12 liters.

                       g) Second, convert $71.25 tax per case of mini-bottles
                          to equivalent tax per liter. Since 1 case of mini-
                          bottles = 12 liters, the equivalent tax per liter is
                          $71.25/12 = $5.9375 or $5.94 tax per liter.

                       h) Conclusion is that current mini-bottle tax rate, when
                          converted to a tax rate per liter, is equivalent to a
                          tax rate of $5.94 per liter.


                       C.        Convert Current Off-Premise Retail per Case
                                 Taxes to per Liter Taxes

                       a) Convert the current off-premise license excise tax
                          and per case tax rate on retail liquor shown in Table
                          2, to a per liter tax rate. The current taxes on retail
                          liquor are based on per case tax rates and as shown
                          in Table 2, where there is not one standard case
                          size. Four per case tax rates are constant across
                          different case volume sizes, thus when converted to
                                                                                                           6
                       Steve Morse, Ph.D., Economist; School of Hotel, Restaurant and Tourism Management
                       University of South Carolina, Columbia, SC.
Off-premise retail              tax per liter, the tax rate is different on each case.
 liquor taxes are               As shown in Table 2, when tax rates are converted
  equal to $1.42                to tax per liter, tax rates range from $1.44 per liter
     per liter                  to $1.28 per liter. Since a large majority of cases in
                                the distribution system are in the 12 liter case size,
                                the weighted average tax per liter of all cases sold is
                                $1.42 tax per liter. (South Carolina Department of
                                Revenue, Liquor Tax Revenue Study, Fall 1998)


                      Table 2. Current South Carolina Tax Rates For
                                Off-Premise Retail Liquor

                                                     Case Size & Volume
                         48/200 ml.              24/500 ml. or              24/375 ml. or               6/1.75 liter
                           bottles                 12/1 liter                12/750 ml.                   bottles
        Tax Type                                    bottles                    bottles
                       (total case volume       (total case volume         (total case volume         (total case volume
                                                    = 12 liters)                = 9 liters)              = 10.5 liters)
                         = 9.6 liters)
         License       $6.895 per case          $8.619 per case            $6.465 per case           $7.542 per case
          Excise
                       ($0.72 per liter)        ($0.72 per liter)          ($0.72 per liter)         ($0.72 per liter)
           Tax
         Retailers     $2.99 per case            $2.99 per case             $2.99 per case            $2.99 per case
          Case
                       ($0.31 per liter)        ($0.25 per liter)          ($0.33 per liter)         ($0.28 per liter)
           Tax
                       $1.81 per case            $1.81 per case             $1.81 per case            $1.81 per case
        Wholesalers
          Tax          ($0.19 per liter)        ($0.15 per liter)          ($0.21 per liter)         ($0.17 per liter)
                       $0.56 per case            $0.56 per case             $.56 per case             $0.56 per case
        Additional
        Case Tax       ($0.06 per liter)        ($0.05 per liter)          ($0.06 per liter)         ($0.05 per liter)
        9% Sur-tax
        on Excise &    $0.12 per liter           $0.11 per liter            $0.12 per liter           $0.11 per liter
         Case Tax
        Total Tax     $1.40 tax     $1.28 tax        $1.44 tax        $1.33 tax
         per liter     per liter     per liter        per liter       per liter
                 Weighted Average Total Tax per liter = $1.42 per liter a
        Note:
        a
          Weighted average tax per liter weighted by percent of each type cases sold
        Source: S.C. Department of Revenue, Liquor Wholesalers Monthly Report, Form L-101,
        Schedule A, p. 2, (copy enclosed.)




                                                                                                               7
                           Steve Morse, Ph.D., Economist; School of Hotel, Restaurant and Tourism Management
                           University of South Carolina, Columbia, SC.
                    D.        Tax Revenue Impacts of 1998 Mini-Bottle
                              Demand


Mini-bottle taxes   a) Using 1998 mini-bottle demand as an example,
  are equal to         convert 1998 mini-bottle demand to equivalent
 $5.94 per liter       liters. One mini-bottle equals 50 ml., and 1998
                       demand was 62,113,904 mini-bottles. To find the
                       equivalent liters the 1998 mini-bottle demand
                       represents, use the following conversion:
                       [62,113,904 mini-bottles (X) 50 ml.] / 1000 ml. =
                       3,105,695 liters. This conversion means that in
                       terms of liters, 1998 mini-bottle demand equaled
                       3,105,695 liters.

                    b) Calculate liquor tax revenues from 1998 mini-bottle
                       demand. From Table 1, it was found that mini-
                       bottle taxes were the equivalent of $5.94 per liter.
                       Given the 1998 mini-bottle demand was the
                       equivalent of 3,105,695 liters, the liquor taxes
                       generated equal: 3,105,695 liters (X) $5.94 per liter
1998 Mini-bottle       = $18,447,828.
taxes generated
$18.4 million in    c) Conclusion: 1998 mini-bottle demand generated
  tax revenues         $18,447,828 in liquor taxes.



                    E.        Tax Revenue Impacts of 1998 Mini-Bottle
                              Demand Taxed at Retail Bottle Tax Rates

                    a) What would be the impact on liquor tax revenues if
                       1998 mini-bottle demand were taxed at the retail
                       bottle tax rate of $1.42 per liter? 1998 mini-bottle
                       demand was the equivalent of 3,105,695 liters. At
                       the current retail tax rate of $1.42 per liter, tax
                       revenue generated would be: 3,105,695 (X) $1.42 =
                       $4,410,086.

                    b) Thus, if 1998 mini-bottles were taxed at the retail
                       tax rate per liter, this tax rate would generate
                       $4,410,086.

                                                                                                        8
                    Steve Morse, Ph.D., Economist; School of Hotel, Restaurant and Tourism Management
                    University of South Carolina, Columbia, SC.
                      III.      Comparison of Tax Revenues Generated by
                                Mini-Bottle vs. Retail Per Liter Tax Rates


If mini-bottles are   a) From above, it was found that 1998 mini-bottle
    taxed at off-        demand taxed at the mini-bottle, per liter equivalent
   premise retail        rate of $5.94 per liter, would generate $18,447,828.
rates of $1.42 per       Also, it was found that if 1998 mini-bottle demand
liter, would result      were taxed at the retail per liter rate of $1.42 per
in $14 million tax       liter, this would generate $4,410,086. Thus the
                         difference in tax plans is: (mini-bottle taxes
 revenue shortfall
                         $18,447,828 – mini-bottles taxed at retail bottle
                         taxes $4,410,086) = $14,037,742 in revenue
                         shortfall.

                      b) Thus, taxing 1998 mini-bottle demand at retail
                         bottle tax rates would generate a $14,037,742 (or
                         $14 million) liquor tax revenue shortfall.


                      IV.       Replacing the $14 Million Liquor Tax
                                Revenue Shortfall

                      a) Convert mini-bottle unit sales to new unit sales with
                         equivalent liquor per ounce. One mini-bottle unit at
                         1.7 ounce per unit is the same as 1.36 mini-bottle
                         sales units at 1.25 ounces. It is assumed that new
                         ounces per unit with using liter bottles will be 1.25
                         ounces. Thus, converting 1998 mini-bottle units to
                         new units using liter bottles would be the equivalent
                         of 62,113,904 mini-bottle units (X) 1.36 =
                         84,474,909 sales units. Industry standards on
                         amount of liquor per unit sales are varied. Although
                         national corporations like Marriott and others use
                         1.0 ounce per unit in automated dispensing
                         machines, others in the industry use an amount as
                         high as 1.5 ounces per unit as the industry standard.
                         Thus, the average of both these two industry values
                         is 1.25 ounces per unit, and is used in this analysis.


                                                                                                          9
                      Steve Morse, Ph.D., Economist; School of Hotel, Restaurant and Tourism Management
                      University of South Carolina, Columbia, SC.
A 5% liquor sales   b) What percent liquor sales tax would generate the
 tax would more        $14,037,742 tax revenue shortfall? At an average
than replace $14       price of $3.91 per unit and a per unit tax of 5%,
   million tax         total liquor tax revenue generated would be
revenue shortfall      $16,514,844 and would more than cover the
                       revenue shortfall. Although there are no published
                       national, regional or state averages for on-premise
                       liquor unit prices, according to industry experts in
                       South Carolina, an average price per unit of $3.91
                       is a conservative estimate of average prices
                       statewide and does not overstate average prices.

                    V.        Tax Revenues Automatically Increase With
                              Inflation

                    a) As Table 3 shows, projections of liquor tax
                       revenues generated are made to year 2021. The
                       projections are made using the following
                       assumptions: (1) price per unit increases 3.5% each
                       year, (2) demand is constant over the period (at
                       84,474,909 units), (3) per liter tax is constant at
                       $1.42 per liter over the period. Below is an
                       explanation of why these assumptions are
                       considered very conservative assumptions.

                    b) Assumption (1): The price per unit (inflation)
                       increases by 3.5% each year. This assumption
                       concerns the increasing price level of sales units or
                       liquor unit inflation each year. In South Carolina,
                       the service economy now (2000) employs more
                       workers than the state’s manufacturing economy.
                       Projections over the period 1996-2006 by the South
                       Carolina Employment Security Commission and
                       the U.S. Department of Labor’s Bureau of Labor
                       Statistics estimate a 28% increase in the demand for
                       employees in the state’s food and beverage sector
                       of the economy, compared to a smaller 16%
                       increase in the demand for all South Carolina
                       workers. Increased demand for food and beverage
                       workers in the state will put upward pressure on
                       labor rates, especially in labor-intensive food and

                                                                                                    10
                    Steve Morse, Ph.D., Economist; School of Hotel, Restaurant and Tourism Management
                    University of South Carolina, Columbia, SC.
                              beverage sectors of the economy. Higher labor rates
   With 5% liquor
                              put upward pressure on consumer prices and are
 sales tax, liquor tax
                              partially passed on to the consumer as the National
  revenues increase
                              Restaurant Association projects wage rates of
 automatically with
                              employees in the food and beverage industry to
       inflation              increase 4.5% in 2000. Thus, over a twenty-year
                              period to 2021, an average inflation rate each year
                              of 3.5% is considered a conservative estimate.

                         c) Assumption (2): Demand is constant over the 20-
                            year period. Population and cultural factors effect
                            demand, and as the population of South Carolina
                            increased by 1.1% from 1998 – 1999, projections
                            are for South Carolina’s population to continue to
                            grow over the 20-year period.          Thus, the
                            assumption that demand will be constant over the
                            20-year period as the population increases is a
                            conservative assumption.

                         d) Assumption (3): In Table 3, it is assumed the
                            current per liter tax rate of $1.42 is constant over
                            the 20-year period. Thus, if tax rates are increased,
                            this assumption is considered a conservative
                            assumption.

                         e) As shown over the 20-year period in Table 3, total
                            liquor taxes are projected to increase to $40.3
                            million, nearly double the 1998 liquor tax revenues
                            of $20.9 million. (with the assumptions of unit
 Liquor tax revenues        prices increasing 3.5% each year, demand not
 projected to double        increasing and held constant at 1998 levels, and per
over the next 20 years      liter tax rates held constant at $1.42 per liter.)




                                                                                                         11
                         Steve Morse, Ph.D., Economist; School of Hotel, Restaurant and Tourism Management
                         University of South Carolina, Columbia, SC.
 Table 3. Projected South Carolina Liquor Tax
Revenue Generated With 5% per unit Sales Tax
         and per Case Tax, 1998 – 2021

                                       Partial Tax
                                                                    Total Liquor Tax
                Sales                   Revenue
 Year                 a                                                 Revenue
              Revenue                Generated at 5%                             c
                                                 b                    Generated
                                        of Sales
  1998      $330,296,894                   $16,514,844      $20,924,930
  1999      $342,123,381                   $17,106,169      $21,516,255
  2000      $353,949,868                   $17,697,493      $22,107,579
  2001      $366,211,105                   $18,310,555      $22,270,641
  2002      $379,292,341                   $18,964,617      $23,374,703
  2003      $392,808,326                   $19,640,416      $24,050,502
  2004      $406,324,312                   $20,316,215      $24,726,301
  2005      $420,685,046                   $21,034,252      $25,444,338
  2006      $435,045,781                   $21,752,289      $26,162,375
  2007      $450,251,265                   $22,512,563      $26,922,649
  2008      $466,301,497                   $23,315,074      $27,725,160
  2009      $482,351,730                   $24,117,586      $28,527,672
  2010      $499,246,712                   $24,962,335      $29,372,421
  2011      $516,986,443                   $25,849,322      $30,259,408
  2012      $534,726,174                   $26,736,308      $31,146,394
  2013      $553,310,654                   $27,665,532      $32,075,618
  2014      $572,739,883                   $28,636,994      $33,047,080
  2015      $593,013,861                   $29,650,693      $34,060,779
  2016      $614,132,588                   $30,706,629      $35,116,715
  2017      $635,251,315                   $31,762,565      $36,172,651
  2018      $657,214,792                   $32,860,739      $37,270,825
  2019      $680,023,017                   $34,001,150      $38,411,236
  2020      $703,675,992                   $35,183,799      $39,539,885
  2021      $718,036,726                    $35,901836      $40,311,922
Notes:
a
  sales revenue = price (X) unit sales of 84,474,909 (constant demand)
b
  represents sales tax of 5% of sales revenue
c
  represents total liquor sales of 5% of sales revenue + per case tax of
  $4,410,086.




                                                                                  12
  Steve Morse, Ph.D., Economist; School of Hotel, Restaurant and Tourism Management
  University of South Carolina, Columbia, SC.
                    VI.       Conclusions


                    a) Replacing the current mini-bottle system of on-
A 5% liquor sales      premise sales with a system consistent with national
 tax + $1.42 per       restaurant standards and implementing a new liquor
    liter tax is       tax with a tax of $1.42 per liter and a liquor per
   projected to        drink sales tax of 5% is projected to generate liquor
   increase tax        tax revenues greater than the current mini-bottle tax
 revenues to the       rates. Thus, the new tax system is projected to
       State           generate additional tax revenues for South Carolina.
                    b) Under a new liquor tax equivalent to national
                       restaurant standard sales, a $1.42 per liter tax and
                       5% liquor sales tax are projected to increase
   Liquor tax          automatically with inflation each year, thus liquor
    revenues           tax revenues are projected to nearly double over the
 automatically         20-year period to the year 2021 and generate
 increase with         additional tax revenues for South Carolina.
  inflation and
   projected to
 double in next
     20 years




                    VII. References
                    1) Morse, Steve C. Economic Impact of College of
                       Applied Professions Graduates in the 21st Century.
                       University of South Carolina, March 1999.

                    2) National    Restaurant    Association.    “2000
                       Restaurant Industry Forecast.” Restaurants USA.
                       Vol. 19. No. 11. December 1999.

                    3) South Carolina Department of Revenue. 1998
                       Year End Alcoholic Liquor Summary. Contains
                       tax revenue generated by on-premise mini-bottle
                       sales and off-premise retail bottle sales for 1998.
                       Columbia, SC. July 1999.

                                                                                                    13
                    Steve Morse, Ph.D., Economist; School of Hotel, Restaurant and Tourism Management
                    University of South Carolina, Columbia, SC.
4) South Carolina Department of Revenue. Liquor
   Wholesalers Monthly Report.          Form L-101,
   revised 4/1998. Contains wholesale and retail
   license excise tax, case tax, and sur-tax reporting
   schedules including: a) Schedule A (for ½ pint or
   larger liter category), and b) Schedule A-1 (for
   2oz. or less mini-bottle category), pp. 1-4.
   Columbia, SC. April 1998.

5) South Carolina Department of Revenue. Liquor
   Tax Revenue Impact Report, Mr. Gordon
   Shufford. Columbia, SC., 1998.

6) South     Carolina    Employment    Security
   Commission, Labor Market Division.     South
   Carolina Industry and Occupation Projections,
   1994-2005. Columbia, SC., 1996.

7) U.S. Department of Labor, Bureau of Labor
   Statistics.    U.S. Occupational Employment
   Projections, 1994-2005.       U.S. Government
   Printing Office, Washington, DC, 1996.




                                                                                14
Steve Morse, Ph.D., Economist; School of Hotel, Restaurant and Tourism Management
University of South Carolina, Columbia, SC.
VIII. About the Author


Dr. Steve Morse is an economist and professor in the
School of Hotel, Restaurant and Tourism Management
in the College of Hospitality, Retail and Sport
Management at the University of South Carolina in
Columbia. He teaches economics and finance courses
in both the Bachelors and Masters degree programs in
the hotel, restaurant and tourism curriculum. His
research areas are in economic and finance issues in
hotel, restaurant and tourism issues in the hospitality
industry. Dr. Morse received the Ph.D. in Applied
Economics from the University of Tennessee, and the
B.S. in Agricultural Economics from the University of
Georgia. Dr. Morse can be contacted at the University
of South Carolina in Columbia at Ph. (803) 777-3458,
or e-mail at smorse@sc.edu.




                                                                                15
Steve Morse, Ph.D., Economist; School of Hotel, Restaurant and Tourism Management
University of South Carolina, Columbia, SC.

								
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