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POINT of BREW ----- Michael J. Lewis

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Taxes, Hard Seltzers and Other Alcoholic Oddities.

I recently ran across an article by Josh Barro entitled “How Tax Law Gave Us White Claw.” 

White Claw is one of these relatively new pre-mixed cocktails sometimes presented as hard seltzers or alcopops, or RTDs (ready to drink) or FMBs (flavored malt beverages) or coolers or some implication of alcoholic beverage other than those we already know. According to Josh the product tastes very much like a vodka tonic; if so, perhaps one could buy a bottle of vodka and a bottle of tonic and do the mixing oneself and save a few bucks. But that is not what his article is about.

The article is a fairly straightforward explanation of why taxes on alcohol affect producers’ decisions. Furthermore, the piece meshes accurately with my understanding of how that works compared to many on-line explanations of these beverages that leave me mystified.

My experience with this relationship between taxation and product design goes back a long way to the early 1980s. I was contacted a major tea company (guess who) who sought my help to make a product in the alcohol beverage field that leveraged their expertise with tea. Their product concept was essentially the same concept that is behind these modern hard seltzers.

They had done their initial research for the product and had discovered that they could not use pure alcohol or any beverage alcohol that was the result of distillation such as vodka. This was by far the preferred source of alcohol, of course, because it is pure and free of flavors other than the alcohol itself (that is, a “neutral” spirit). However, such alcohol carries a heavy tax burden and would have made the final product expensive. Josh discovered that a sixer of White Claw would be about $2 more expensive made with distilled alcohol compared to undistilled alcohol. The tea company also discovered that in terms of taxation, brewers produced the cheapest alcohol available: that is beer.

What to do? Answer: I agreed to help.

The challenge they gave me was to produce a neutral spirit as a base for the new product. That would have been relatively easy, but the company wished to avoid regulatory problems and so wanted a genuinely iron-clad brewing process as the basic technology. That made the challenge of neutral flavor much harder. They also wanted the alcohol to be colorless and perfectly clear (both fairly do-able) and at least 20% ABV (very difficult).

I made several trips to their product development department to amend the spirit specifications because I knew I could deliver 15% ABV. I also visited ATF regulators in D.C. to see if there was any wiggle room in how I might approach this task from their point of view. I have never met people more interested in making sure that the distinction between beer, wine, champagne (with its “bubble tax” that brewers and beer also avoid) and distilled beverages remained clear, uncompromised, incontrovertible and absolute. As a result, back in those days, I was blocked by regulation from using fermentation techniques that producers now use to produce a neutral spirit.

I ended up missing most of the original specified targets for the neutral spirit produced by a brewery fermentation. I did reach 16% ABV. Unfortunately, when mixed with tea and flavorings the product went hazy and threw a deposit. That turned out to be a tea problem. Nevertheless, my client brought a product to market that was really quite excellent. Unfortunately, the name chosen for the product violated a trademark of Coca-Cola (not a good start!), another company brought out wine coolers (oops!) and Snapple (lemon tea) appeared (disaster!).

These days the neutral spirit can be made by fermentation of sugar solutions (not malt as required for a brewery fermentation) and so issues of flavor from the raw materials goes away. Producing really high alcohol content is still a problem but that is not strictly required if the final product is only 5% alcohol by volume as many hard seltzers are.

I mentioned above that many of the web sites I perused about seltzers and like products mystified me. The reason is mainly because the explanations given would run afoul of the tax provisions. For example a site tells me that the process of making the neutral spirit also removed much of the alcohol (which make me wonder why go through that process of making a neutral spirit in the first place) and that alcohol must be replaced by vodka in the final product. That would immediately run afoul of tax provisions. Similarly, producers cannot make wine coolers from wine plus carbonated water without paying tax at the champagne rate. So many such coolers are similarly made from neutral spirit from fermentation of sugar (not grapes).

A producer could indeed make life simple by using vodka as the base neutral spirit of a new product. He might willingly pay the augmented tax for the privilege of advertising “made with real vodka.” But another regulatory provision then may arise (in some places) as to whether the product may be sold in bars with only a beer and wine license.

Many years ago when the brewpub concept was first permitted (incidentally, that happened as a regulatory slip-up that could not be reversed) I organized and taught university extension courses that addressed the issues that might arise for such entrepreneurs. I was much concerned that they be well aware of the regulatory minefield into which they were wading. I employed a government regulator, an officer with ATF with enforcement credentials, to teach the regulatory aspects of this new industry. He always began by writing two words on the backboard: “Law” and “Logic”.

He then said:

“The only connection between these two words is the letter L.”

 

Michael J Lewis MUG Picmonkey

Michael J. Lewis, Ph.D., is professor emeritus of brewing science at the University of California, Davis, and the academic director and lead instructor of UC Davis Extension’s Professional Brewing Programs. Lewis has been honored with the Master Brewers Association of the Americas’ Award of Merit and the Brewers Association’s Recognition Award. He is an elected fellow of the Institute of Brewing & Distilling. He is also a recipient of the UC Davis Distinguished Teaching Award. 

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