Friday, October 10, 2008

Since The Subject Seems To Keep Coming Up Lately

All right, it's time for the boring tax issues. What a great intro, eh? Hey, I know a great way to ensure that no one reads the article! Really? How!? Tell them it's going to be boring and that it's about taxes. But it probably will be boring. Then why are you publishing it, dimwit? Two reasons: first, it's an important issue that affects producers, distributors, and consumers of beer; second, I find it interesting and I get to publish whatever I want. Besides, we haven't done something like this in a long time, so, hey, if you like it great, comment and contribute to the discussion; otherwise, stop bitchin' and find a different website. Sheesh.

OK.

There are currently no less than 3 beer-related tax issues to discuss, two of the issues involve the dastardly and beguiling Sparks and Smirnoff Ice and their brethren. The other involves a pending beer-tax related issue here in Wisconsin that might be able to use these other examples to maybe avert the disaster before it hits.

What are you talking about?

On Monday, in a summary post linking to some interesting articles, one of the articles that I linked to was a letter to the Salt Lake City Tribune complaining of the State of Utah's decision to pull flavored malt beverages. While it seems like this lady is referencing Smirnoff's Green Apple Ice drink, her point is somewhat valid. So, what is she complaining about? The state of Utah is concerned that alcohol producers are trying to target kids with super-sweet flavored beverages – sometimes called "alcopop" or "malternatives". The producers, for their part, have decided to use the "cheaper" excise tax alternatives by producing these beverages as fermented malt beverages. Why does that matter? Well, malt beverages (e.g., beer) are taxed at a much lower rate than spirits (aka "distilled liquor"). But, there is some slight-of-hand at work, because these pseudo-"beers" aren't really beer – they use a malt-based beverage (unhopped, highly sugared, super light beer), and add distilled spirits to it.

Although flavored malt beverages are produced at breweries, their method of production differs significantly from the production of other malt beverages and beer. In producing flavored malt beverages, brewers brew a fermented base of beer from malt and other brewing materials. Brewers then treat this base using a variety of processes in order to remove malt beverage character from the base. For example, they remove the color, bitterness, and taste generally associated with beer, ale, porter, stout, and other malt beverages. This leaves a base product to which brewers add various flavors, which typically contain distilled spirits, to achieve the desired taste profile and alcohol level.
While the alcohol content of flavored malt beverages is similar to that of most traditional malt beverages, the alcohol in many of them is derived primarily from the distilled spirits component of the added flavors rather than from fermentation. [cites: CA Board of Equalization via Wikipedia]
Therefore, by being classified as a malt beverage they are taxed at the lower rate. In Wisconsin, producers pay $2.00 per barrel (31 gallons) of beer; on the other hand, distilled spirits are taxed at $.88766 per liter (including administrative fees) or $3.36 per gallon, or $104 per barrel. As you can see, the difference is huge.

The State of Utah has taken a moral absolutist position and banished all flavored malt beverages to liquor stores instead of in the beer-section at the grocery or other beer purchasing locations. [cite: Salt Lake Tribune] "Distributors must file documents with the Utah Department of Alcoholic Beverage Control, attesting that all alcohol in the flavoring comes exclusively from hops extracts or these products also will be restricted to state liquor stores." The argument being that the flavorings used by alcopop producers contain a tiny amount of alcohol: 22/100 of 1 ounce. [ed note: this number is cited in the article linked above, but on review, it's not entirely clear how much this really is. First of all "22/100" is 22%. Second, while it is 22/100ths of an ounce, in how much flavoring? If you have flavoring that is 22% of one ounce in one ounce of flavoring then that flavoring is 44 proof in-and-of itself!]
Therefore, all of the the alcohol contained in the malt-beverage is not derived from the malt fermentation process, but is actually supplemented by distilled spirits. These flavor extracts are relatively common, not only in these "alcopops" but also in "beers" like Miller Chill and Bud Light Lime; though beer such as New Glarus' Belgian Red use fruit bases instead of these flavorings. Beer that uses "real" fruit, or rather uses flavorings that do not contain alcohol themselves, are still presumably OK under the new law. It is this discrepancy that the letter to the editor linked above referenced (i.e., why can I drink this brewery's pumpkin beer, but not this green apple beer? answer: one is brewed with real pumpkins, the other is flavored with an alcoholic flavoring syrup). But, the law is written fairly broadly leaving producers to wonder exactly what is and is not allowed under the law. And, in any event, complying with the regulations of one state, for example, filing the necessary certifications means that out-of-state producers will simply not distribute there.

The State of California has taken a similar approach, but stopped short of an exile. California has instituted a presumption that all malt beverages (note: this even includes regular ol' beer!) are distilled spirits and will be taxed at the spirits rates. As a producer you must prove to the State that you do not use distilled spirits in your beverage before it will be classified as beer. "The state [of California] already has over 100 pages of a single-spaced list of brewers who've 'proven' that their product...is beer." Again, given the difficulty of complying with state-by-state differences many breweries are simply choosing not to distribute in California. Maryland was considering a similar initiative.

With all of the producers pulling their product, what is the net effect? Yep. You guessed it: $0 of tax revenue instead of the malt-based tax rate.

For now, WI State Rep. Theresa Berceau's plan is simply to raise the excise tax on beer. Her plan would raise the excise tax from $2.00 per barrel to about $2.46 per barrel – it would add about $.15 to the cost of a six-pack. But it is important to keep an eye on these other developments, since, as we can see there might be a temptation to follow in their footsteps.
I'm not necessarily opposed to the non-existence of Smirnoff Ice and Sparks and Miller Chill, but should we legislate it? No. Just don't buy the crap. But, I'm also not thrilled with the latent dishonesty of calling these "malt beverages" either. It gives beer a bad name. It would be like calling Woodchuck Apple Cider "wine." Is it technically? Yes. It is fruit-based (as opposed to grain-based) fermented beverage. But, come on, we all know what the real deal is.
The harder question is how do your write a law that makes the distinction between "beer" and "alcopop"? Well, one answer is drop any distinction between beer, wine, alcopop, etc. and just tax everything by alcohol content irregardless of how the alcohol is derived. The more total amount of alcohol in the package, the higher the payment of tax. So, say the tax is $.10 per ounce of alcohol. Your beer contains .72 ounces of alcohol (6% ABV)? Fine. You pay tax times .72 or $.072 per bottle of beer. Your wine contains 3.6 ounces of alcohol (17% of a 750ml bottle)? You pay tax times 3.6 or $.36 per bottle of wine. Your can of alcopop contains .9 ounces of alcohol? You pay $.09 per can. Of course, this type of taxation ignores the public policy reasons behind, for example, Utah's ban. But, is the tax code really an appropriate place to express public policy? Unfortunately, the commerce clause of the Constitution prevents states from explicitly banning one producer over another for no reason other than that we don't like the product. But, if there is something else, such as targeted advertising, targeted distribution, or flat-out fraud, then it seems maybe that consumer or child protection laws might be the better place to enact this public policy.

3 comments:

  1. No need to be defensive when you post good content. I actually started following your blog because of your posts on the Great Dane legislation.

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  2. Thanks, Steve. I appreciate the kind words. I like posting the business stuff, but it's hard to know if others like it. So, thanks for the input! More on Monday, actually. Not on taxes - but business.

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  3. I agree with Steve. I've been curious about tax/pricing issues, such as why Dogfish Head is cheaper at Steve's (the store(s) in Madison, not the aforementioned commenter) than at the actual brewery in Delaware.

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