State to Tax Flavored Malt Beverages at Higher Distilled-Spirits Rate

By Andrew McIntosh, The Sacramento Bee, Calif.

Jun. 12–Sales of flavored malt beverages like Smirnoff Ice and Barcardi Silver will be taxed as if they were distilled spirits rather than beer under new rules that take effect this fall, a state tax agency said Wednesday.

London-based Diageo PLC, one of the world’s biggest players in the sector, vowed in a statement that it will sue to have the rules overturned.

The decision by the Board of Equalization comes after a two-year policy review, divisive public hearings and state agency infighting. It is expected to generate about $41.4 million in taxes for state coffers every year, Board of Equalization spokeswoman Anita Gore said.

For consumers, it could mean hefty price increases for the popular alcoholic drinks, sometimes called “alcopops.”

The board approved the new regulations April 8 to clarify the definition of “distilled spirits” under California’s Alcoholic Beverage Tax law.

This week, the state’s Office of Administrative Law reviewed and approved proposed new rules, paving the way for them to be implemented in October.

The change means flavored malt beverages will be taxed at the distilled spirits rate of $3.30 per gallon, rather than the rate of 20 cents per gallon for beer.

A spokeswoman for Diageo, owner of Smirnoff Ice, said the company believes the board should not be making decisions about taxes.

“Decisions about raising taxes on flavored beer are the responsibility of the Legislature, not three politicians on the Board of Equalization,” said Amy Elliott, a Sacramento-based state government affairs director for Diageo.

In 2007-08, Diageo spent $537,330 on lobbying state officials about the tax rate, filings with the secretary of state show.

Students and other groups like the Girl Scouts had expressed concern that the sweeter, juice-flavored drinks were fueling underage binge drinking among girls and had little or no beer content, while enjoying lower tax rates compared to hard liquor.

The beverage industry has angrily opposed the reclassification of what it calls “flavored beer” and denied its drinks target underage female drinkers.

Elliott said higher taxes will hurt not only consumers and more than 35,000 small businesses in California, but wrongly persuade the public that higher taxes deter underage drinking.

In November, the state’s own Department of Alcoholic Beverage Control said the board should not reclassify the beverages, saying state law is ambiguous and that legislators ought to approve any new tax changes.

The new regulations presume that all non-wine alcoholic beverages, including flavored malt beverages, will carry the higher rate. Manufacturers must prove their product does not meet the new definition of “a distilled spirit” to avoid the higher tax rates.

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