Liquor Tax Hits Barrel-Aged Beers

by Alastair Bland, April 15, 2010

When Bison Brewing Company’s bourbon barrel-aged brown ale goes to tap late this spring, the brewery’s owner, Dan Del Grande, may be required by a new law to pay a hefty liquor tax to state collectors.

That’s because the Berkeley-based Bison, like scores of other craft breweries in the United States, has been hit by a poorly written California initiative approved in late 2008 by the state Board of Equalization that called for an extra tax on in-state sales of flavored malt beverages like Mike’s Hard Lemonade and Smirnoff Ice — low-priced drinks appealing to teenagers for their soda-like qualities but fortified with distilled spirits. Often called “cheerleader beer” or “alcopops,” these drinks were the target of the initiative’s authors, who brought down the hammer by requiring that they be labeled “distilled spirits” and be subject to associated liquor taxes. This, so believed the Board, would help keep alcopops out of the price range of children and alcohol abusers.

But the law’s fine print has unintentionally subjected a style of beer aged in bourbon, brandy, rye and rum barrels to the same tax. Such beers, now gaining popularity, are favored for their potent flavors of coconut, vanilla and butter, but they may also absorb a stiff shot of alcohol from the booze-saturated wood. Some barrel-aged beers can gain as much as two percentage points of alcohol by volume during this time period, far exceeding the half-percent ABV increase that the Board of Equalization agreed upon as the fortification limit before a beverage must be classified — and taxed — as a distilled spirit.

Del Grande believes the tax initiative was authored poorly, if not maliciously.

“The people writing these regulations just don’t understand anything technically about what we’re doing in our breweries,” says Del Grande. “We’re still going to say on the bottle how much alcohol is in the beer. We’re not trying to sneak anything by. It’s not even about the alcohol. It’s about the flavor we get from the wood.”

Breweries like Drake’s, Anchor, Magnolia, Deschutes, Rogue, Lagunitas and El Toro have all worked with spirits barrels. Black Diamond Brewing Company in Concord has a particularly active program, with 22 brandy and bourbon barrels currently filled with beer. Brewmaster Derek Smith says he understands the state’s concerns over alcohol abuse and cheap beverages like alcopops. Barrel-aged beers, however, are about more than alcohol, says Smith.

“Gaining flavors from barrels is a true art form, whereas alcopops are just a way to put alcohol into a sweet drink, and they’re aimed at a young crowd. Barrel-aged beers are for specialty high-end retailers.”

The craft beer industry saw the problem coming two years ago, says Tom McCormick, executive director of the California Craft Brewers Association. McCormick attended a public hearing in 2008 at which he unsuccessfully urged the Board of Equalization’s members to amend the wording of the proposed tax law and avoid an inadvertent hit to the beer industry. The Board listened but made no such amendment, according to a spokesperson.

“Now we’re just getting caught in the net,” says McCormick. “(The law’s proponents) were going after cheap high alcohol drinks that people drink out of a paper bag, not craft beer.”

Brewers point out that the law’s fine print works in ironic ways; while many non-barreled beers are yeast fermented to levels of 15 percent alcohol and more without raising authorities’ eyebrows, even relatively low-strength beers lightly affected by distilled spirits are now subject to a state tax.

“I can make a 13- or 14-percent (ABV) beer with no problem, but if I put a 10-percent beer in a barrel and it gains a half-percent alcohol then it’s a distilled spirit and I have to pay a tax,” says brewmaster Steve Altimari at Valley Brewing Company in Stockton. Altimari purchased a half-dozen used Heaven Hill bourbon barrels from Kentucky several years ago. He has released several barrel-aged stouts since, and now, to avoid paying the alcopop tax, Altimari slightly dilutes his barrel-aged beers with weaker ales — a common method among brewers leery of paying the tax. Altimari has also rinsed out new barrels with water to remove any lingering pools of whiskey, though he says, “I’d love to soak up my beer with bourbon if I could.”

Other beer-makers have submitted and paid the tax. North Coast Brewing Company’s Old Rasputin Russian Imperial Stout measures 9% ABV in conventional form, but a special bourbon barrel-aged version first produced several years ago has measured up to 11%. When the alcopop tax took effect almost 18 months ago, the Fort Bragg brewery made no objections.

“We just went ahead and paid the distilled spirit tax because we’re good citizens,” says Mark Ruedrich, North Coast’s president and brewmaster. “These beers aren’t a big enough part of our business to make it worth our time to complain.”

The standard beer tax in California runs 20 cents per gallon sold within the state, but distilled spirits are taxed at a rate of $3.30 per gallon. Barrel-aged beers are expensive to begin with, and the tax further boosts the cost; a 16.9-ounce bottle of North Coast’s bourbon barrel stout, for example, retails at approximately $20.

The Marin Institute, an anti-alcohol abuse organization in San Rafael, is one of several groups that initially petitioned the state to tax alcopops as distilled spirits. The organization’s research and policy director Michele Simon stresses that the target of her organization’s efforts were alcoholic “soft” drinks aimed at children. Yet brewers that object to the alcopop tax aren’t getting any sympathy.

“It’s typical of people to whine about new regulations causing them problems,” says Simon. “We’re busy trying to keep alcohol out of the hands of minors, and it’s up to them to figure out how to reformulate their recipes.”

But that’s exactly what the alcopop producers themselves have done, according to the Board of Equalization’s spokesperson Anita Gore. She says that, after the tax was approved, major alcopop producers crafted new product formulas, dodged the tax and are still releasing sweet, soda-like drinks with as much alcohol as the average pale ale. Mike’s Hard Lemonade Company, one of the nation’s biggest alcopop producers — has reported to the state that 27 flavors of its leading product line no longer meet the definition of a “distilled spirit.” Diageo-Guinness USA Inc. has reported that 14 flavors of Smirnoff Ice drinks do not fit the bill. Anheuser-Busch has reported that seven Bacardi brand beverages formerly fortified with liquor no longer are.

The change of recipe for alcopop makers was a simple switch, according to Del Grande, who says he learned details through conversations with an alcopop producer. He says that, prior to 2008, alcopop manufacturers often began with a flavorless beer-derived base of roughly 2% ABV and subsequently fortified it to about 5% using neutral grain alcohol. After the Board of Equalization defined such drinks as distilled spirits, producers simply reversed the process; Del Grande says they now start with a clear malt beverage base — by definition a beer — of about 8% ABV and blend down the strength with syrups, flavorings and water. They add no distilled spirits, and the final product is a traditional alcopop, still as sweet as ever, still readily available today and free of the new liquor tax.

“They just skirted the law and these alcopops are still out there,” says Del Grande.

In the coming year, Black Diamond’s Derek Smith has plans to release multiple batches of bourbon and brandy barrel beers. He doesn’t, however, plan to pay the state a dime in alcopop taxes. Like Altimari and others, he will simply blend down his barrel-aged beers to keep them out of the distilled spirit tax bracket. It’s probably the easiest legal fix there is. The required paperwork, Smith says, is a different story.

“Since the law passed it’s now up to us to submit these reports proving that every single new beer we make isn’t fortified with other alcohols. I’m not a big fan of alcopops myself, and I understand what they’re trying to achieve, but it’s become a pain in the ass.”

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