June 18, 2008

Diageo Lines Up Legal Battle With Californian Taxman

By Martin Flanagan

SPIRITS giant Diageo, Scotland's biggest whisky producer, has launched an American legal action against a regulatory ruling that has raised the taxes on its flavoured beer products by 1,600 per cent.

Diageo-Guinness USA has taken the case to the California Superior Court in Sacramento County in a joint action with the Flavored Malt Beverage Coalition, a Diageo spokesman confirmed yesterday.

Gary Galanis, Diageo-Guinness USA's vice-president for corporate communications, said the legal move followed a recent decision by California's board of equalisation (BoE) to reclassify flavoured beer like Diageo's Smirnoff Ice - which is malt based in the US, with no vodka in it - as a distilled spirit attracting vastly higher taxes.

"There is no spirit in these products. And this could be financially significant for the company," Galanis said.

The complaint seeks to invalidate the BoE regulations as illegal on a number of grounds, including that the BoE does not have the authority to classify alcohol beverages for taxation purposes and that flavoured beer is beer, not distilled spirits.

Diageo-Guinness USA will also contend that the flavoured beers have also been taxed as beer for decades.

Kellye Walker, general counsel for Diageo North America, said: "The board of equalisation has the authority to tax within existing classifications, but it does not have the authority to reclassify alcohol beverages for the purpose of taxation.

"The power to reclassify lies solely with the department of alcohol beverage control. The BoE has completely overstepped its jurisdiction."

Some observers say the BoE has partly acted to cut the problem of under-age drinking in the States.

But Galanis said: "Under-age drinking has been falling steadily and flavoured beverages account for just 2 per cent of the US beer market."

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