Flavored Malt Drinks Are Overtaxed

(via Utah AG)

The Flavored Malt Beverage industry can hoist a mug of beer to its victory over the California Board of Equalization.  A state appeals court said the board lacks authority to change the definition of malt drinks from beer to “distilled spirits,” in its effort to impose a higher tax rate.

It is the Department of Alcoholic Beverage Control that classifies the brews as either beer or “distilled spirits,” according to Sacramento’s Third District Court of Appeals.

The drinks should be taxed as beer, not alcohol, according to the court.  California taxes beer at 20 cents per gallon, while distilled alcohol gets hit with $3.30 or $6.60 per gallon in tax, based on alcohol content.

The coalition, six manufacturers and marketers of alcoholic beverages including malt liquor, sued the board for redefining “distilled spirits” to include Flavored Malt Beverages (FMB), a move the coalition says was not reasonably necessary to the board’s taxing function.  FMB characterization falls to the ABC, and the ABC has consistently categorized FMB as beer, the plaintiffs argued.  

The ABC Act of 1954 defines both “beer” and “distilled spirits.”  FMBs are a hybrid, containing elements of both.

The board argued that FMBs “are produced from a base of fermented malt beverage that is treated to remove the basic characteristics of a malt beverage, including color, bitterness, and taste.  The base is then mixed 6 with flavorings or other ingredients containing distilled alcohol.”

But the industry contends FMBs “begin with a base of brewed and fermented beer, to which a variety of ingredients are added.  Those ingredients include one or more flavors, which ordinarily contain alcohol obtained by distillation, but which are unfit for beverage purposes.”

The term “unfit for beverage purposes” is a vestige from the Prohibition Era, a reference to liquids containing alcohol, but used for cooking and other purposes unrelated drinking that Prohibition sought to address.

Trial Judge Shelleyanne W.L. Chang sided with the board, stating that the board can reclassify FMBs for tax purposes, in the absence of a specific FMB definition.  That’s separate from the ABC’s licensing and regulation classification.

But Justice Harry E. Hull, Jr. overturned Chang’s grant of summary judgment for the board.  Hull pointed out that the board lacked specific statutory authority to regulate.  He said the regulations must also have been reasonably necessary for tax purposes.

Case: Diageo-Guinness USA v. Board of Equalization, No. C061227


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