Wisconsin Appeals Court rules premixed cocktails are taxed on the full amount of liquid in the bottle and not solely on the amount of alcohol in the bottle. Arty’s Part 1.
Arty’s Legendary Cocktails makes premixed cocktails like Old Fashioneds and Bloody Marys. They don’t distill their own liquor and instead, like many rectifiers, purchase spirits for use in their premixed cocktails in bulk from a distillery and then dilute the distilled spirits “in a mixture of soda, water, and flavoring.” Each 7 ounce bottle produced by Arty’s contains 1.2 ounces of distilled spirits and 5.8 ounces of soda, water, and flavoring.
The distilled spirits Arty’s purchases are 40% ABV and after dilution, each bottle produced by Arty’s is 6.9% ABV. Like many states, Wisconsin charges a tax on liquor, not by the proof gallon like the federal government (26 U.S.C. 5001) but on a per liter of the basis of the “liquor produced or bottled in” the state which is “incurred at the time of the first sale in” the state. Wis. Stat. §139.06(1)(b). But no tax “tas is levied … in respect to… [s]ale or shipment of … intoxicating liquor in bulk between manufacturers and rectifiers and wineries.” Wis. Stat. §139.04(4).
For its premixed beverages, Arty’s remitted tax to the Wisconsin Department of revenue at the statutory rate of $0.8686 per liter but counted only the distilled spirits portions of its products and not the other ingredients (i.e., the 1.2 ounces of alcohol, but not the other 5.8 ounces of soda, water, and flavoring). Wisconsin’s Department of Revenue assessed an additional tax based on the entire volume of each bottle and Arty’s petitioned and then appealed the DOR’s decision having lost in the circuit court. On appeal, Arty’s raised two interesting arguments for why it shouldn’t have to pay the tax on the non-alcoholic portions of its ingredients. The first, which we discuss today is a question of statutory interpretation about Arty’s activities, the second which we’ll address tomorrow was a constitutional challenge to Wisconsin’s system of assessment.
In its statutory challenge, Arty’s argued both that the tax should apply under the relevant statutes at the time it purchased the bulk alcohol from a distillery and that the statute should only apply taxes on the distilled spirits portion of the contents of each bottle.
The appellate court rejected these arguments finding that as the statutory definition of a rectifier in Wisconsin is that of:
A person who after rectifying and purifying distilled spirits, by mixing such spirits with any materials, manufactures any spurious, imitation or compound liquors for sale. Wis. Stat. §125.02(16)(c) and Wis. Stat. §139.01(6).
That Arty’s met the definition of a rectifier as it includes a person who mixes distilled spirits with other materials and who uses that mixture to manufacture, for sale, a beverage that contains distilled spirits mixed with other ingredients. The court of appeals explained this decision at length in the opinion citing to both other statutory provisions and dictionary definitions and rejecting an argument by Arty’s that the legislature intended a rectifier to be the kind of entity or person that makes compound liquors by blending distilled spirits – such as blending scotches – but not the kind of person who creates premixed cocktails.
The appellate court also rejected an argument that the tax against Arty’s applied at the time of the purchase of bulk liquor from the distillery and not at the time of sale of the mixed compounded drinks which flowed naturally under the statute from the determination that Arty’s was a rectifier as no taxes are levied in respect to the sale or shipment between a manufacturer and a rectifier. Wis. Stat. §139.04(4).
The appellate court’s ultimate decision was that Arty’s owed the taxes rejecting the statutory interpretation arguments Arty’s proffered. It’s a big deal as it basically more than quadruples the amount of taxes Arty’s has to pay for its premixed cocktails.
Arty’s had a second, more interesting argument revolving around a constitutional equal protection challenge to the DOR’s interpretation and enforcement of the taxation on these premixed drinks that we will address tomorrow.