Classifying Your Beverage Isn’t a Matter of Taste – It’s About Money

Anyone who’s read Richard Unger’s wonderful work “Beer In the Middle Ages and the Renaissance” understands that the medieval history of beer isn’t just taste, quality, ingredients, and anecdotes about witches and overindulging monks – it’s money. Fermented beverages and laws involving them are inextricably linked with the government’s purse strings.

Alcohol production and taxes are fait accompli, which is the origin and explanation for the majority of regulatory structures and laws that control production, distribution, and consumption.

So when the Nebraska Supreme Court recently took up the question of whether a flavored malt beverage (think Mike’s Hard Lemonade or Smirnoff Ice) was a beer or a spirit, they weren’t indulging in the kind of philosophical exercise that you’d expect in the waning hours of a meeting at your local homebrewers’ association. The Nebraska Supreme Court was determining how much the state was going to make off a gallon of the stuff and noted the point in the first sentences of their opinion in Project Extra Mile v. The Nebraska Liquor Control Commission:

We are asked to decide whether a flavored malt beverage is a beer or spirit under the Nebraska Liquor Control Act. It makes a difference. Beer is taxed at 31 cents per gallon; spirits are taxed at $3.75 per gallon.

The debate about flavored malt beverages usually concerns whether they’re improperly aimed at the youth market and has been around for a while. In 2007 the New York Times wrote about them, and in 2009, the National Conference of State Legislatures posted a short article on the debate that’s a decent primer.

In Project Extra Mile, the Nebraska Supreme Court was faced with a few questions based on a lack of legislative action.

The Nebraska legislature hadn’t passed a bill on how to classify flavored malt beverages. In fact, a bill had been introduced to follow the federal regulations on the subject back in 2006 and it was never passed by the legislature. But, even though the legislature hadn’t decided, the Nebraska Liquor Control Commission still needed to determine how to tax FMBs under the Nebraska Liquor Control Act because they were served in, and imported to, Nebraska – they couldn’t hide their head in the sand. And the NLCC determined FMBs were beer by doing just what the legislature had attempted to do by statute, adopting a rule enacting the Tax and Trade Bureau’s regulations from 27 C.F.R. parts 7 and 25:

For the purpose of the classification of flavored malt beverages, the… Commission shall utilize the same classification as adopted by the [TTB] found at 27 CFR Parts 7 and 25…which went into effect January 3, 2006…

The TTB amended two parts of its regulations, parts 7 and 25, to permit beverages containing ingredients with distilled alcohol to be produced in breweries and marketed as beer products. Part 7 deals with the labeling and advertising of malt beverages. Part 25 deals with the operation of breweries. The TTB amended part 25 to allow breweries to use “flavors and other nonbeverage ingredients containing alcohol” to contribute up to 49 percent of the alcohol content of a finished beer product. It similarly amended part 7 of its regulations so that the definition of malt beverages would include beverages produced with distilled alcohol ingredients, contributing up to 49 percent of the total alcohol content in the beverages.

This classification angered some Nebraska residents (ostensibly for the reason that Nebraska taxpayers bear the burden of making up for the $3.75 – $0.31 difference that the FMB manufacturers aren’t paying – but a review of the plaintiffs’ websites shows that they’re interest groups that consider FMB’s “alcopops” targeted at children) who turned to the courts for relief and an adjudication of the Nebraska Liquor Control Commission’s regulation. So the Nebraska Supreme Court had to decide how to classify the flavored malt beverages.

You can listen to the audio of the oral argument here. In the opinion, the Nebraska Supreme Court summarized their decision pretty well, finding that the TTB regulation was at odds with the Nebraska Liquor Control Act’s definitions of beer and alcohol. The fact that only 49% of the alcohol in flavored malt beverages is derived from distilled spirits and additives for flavoring that take away the tastes that are usually associated with fermentation, didn’t impact the definition under the Nebraska statute:

The Nebraska Liquor Control Act plainly defines spirits as beverages that contain alcohol obtained by distillation. Up to 49 percent of the alcohol in flavored malt beverages is distilled alcohol…the statutory definition of beer is limited to beverages that contain alcohol obtained by fermentation. In contrast, the statutory definition of spirits includes any beverage that contains distilled alcohol. When these sections of the Act are read consistently with an exception for alcohol used in flavorings, the Act unambiguously required the Commission to define any beverage containing more than an insignificant amount of distilled alcohol used for flavoring as a “spirit” and to tax it accordingly.

Far from a philosophical point, this is a big money debate that’s worth following. It’s the difference in taxing at $9.61 a barrel versus $116.25. The classification roughly adds an extra $1 Million to 10,000 barrels of product and makes attempting a legislative correction to the Nebraska Liquor Control Act extremely worthwhile.