Wisconsin Court of Appeals rejects equal protection argument for premixed cocktails to be taxed on alcohol volume not on full volume. Arty’s Part 2.
Yesterday we detailed the facts and the holding by the Wisconsin Court of Appeals in rejecting a premixed cocktail maker’s statutory contentions that its cocktails should be taxed based on the alcohol contents and not on the full blended contents including the additives. You can read that post on Arty’s v. Wisconsin DOR here. The Court in that case also considered a rather engrossing and compelling argument regarding an equal protection challenge to the same taxation regime. One that, perhaps if it had been proffered with expert evidence and a full trial on the matter, might have fared better and given its potency deserves mention.
The second argument Arty’s made in looking to be taxed only on the 1.2 ounces of its beverage comprised of distilled spirits rather than the full 7 ounces which includes the soda, flavoring, and water that go into the premixed cocktails was based on two facts. The first is that Wisconsin taxed sales of intoxicating liquors at higher rates than similar volumes of wine which are in turn taxed at rates higher than similar volumes of beer. The second fact, and salient point, is that Arty’s beverages – the premixed cocktails – have alcohol contents that are lower or “roughly equivalent to some wines and beers” – 6.9% ABV according to the opinion. Based on these facts, Arty’s argued that the application of the taxation regimes based on the source of the beverages manufacture violate constitutional guarantee of equal protection “because sellers of intoxicating liquor pay higher occupational tax rates than sellers of wines or beers containing the same or higher alcohol contents, without a rational basis to justify this distinction.”
That last rational basis part is important because the standard that the state must meet in such a challenge where a protected class isn’t impacted by the law in a discriminatory fashion or where a fundamental interest like free speech is implicated, is that the state’s law has a rational basis.
The Court described Arty’s argument as one that “argues that the current taxation scheme… always operates unconstitutionally, because it is irrationally based on methods of production of the sales of alcoholic beverage, as opposed to being based on the alcoholic content of the beverages. That is, Arty’s argues that the only rational alcoholic beverage taxation system would be one based on the alcoholic content of the alcoholic beverage, and that it is irrational to tax beverages more heavily merely because their ingredients include distilled spirits. Thus, the remedy that Arty’s seeks is invalidation of the entire current system.” This is what’s called a facial challenge, which is that the law itself is improper as opposed to an as-applied challenge in which a party says that the law is unconstitutional because of the way it is enforced. Arty’s wanted to claim an as-applied challenge, but the Court rejected that contention and considered the challenge one to the entire alcoholic beverage taxation regime.
So the law only needs to have a rational basis for treating different types of people differently. – [T]hat the distinction made in treatment have some relevance to the purpose for which classification of the classes is made.” Courts will uphold such statutes “unless it is patently arbitrary and bears no rational relationship to a legitimate government interest.”
Under Wisconsin law, A legislative classification satisfies the rational basis standard if it meets the five criteria, one of which is that the classification adopted must be germane to the purpose of the law.
Arty’s argument was that it was unconstitutional not to tie taxes to the alcohol content of a beverage and that the regime that taxed wine and beer with higher alcohol content than its premixed cocktails at a lower rate was irrational as it created two classifications of citizens:
(1) “producers of low [alcohol] potency … beverages made using products derived from the distillation process,” who pay a higher occupational tax on sales, and (2) “producers of low [alcohol] potency … beverages made using products derived from the fermentation process,” but not distillation, such as wine and beer, who pay a lower occupational tax on sales of the same volume. Arty’s argued that these classifications denied it equal protection, because low-alcohol-by-volume products that contain distilled spirits are “essentially identical” to low-alcohol-by-volume wine and beer products, but nevertheless the former are taxed more heavily merely because of a difference in the method of production, and that distinction was not based on any rational legislative decision. Following this Arty’s argued that the only purpose in imposing taxes on the sales of alcoholic beverages was to “encourage temperance” and that such a purpose was directly undermined by lower tax rate for higher alcohol content beverages like wine above 12% alcohol or beers that exceed 10%.
The Wisconsin Department of Revenue responded that it had a rational basis for the distinction because it “‘provides for easy administration in taxing all intoxicating liquor sales the same without needing to analyze the ingredients in each individual product sold in the state’ in particular the alcohol content in each product, and that part of what makes administration easy is that it minimizes opportunities for tax cheating compared with an alcohol-content-based taxation system.”
The Court rejected Arty’s contention as to the sole purpose for the law finding that there was no evidence of a legislative history or purpose statement in the statute that provided the foundation for their contention regarding temperance. Finding further that the Wisconsin statutes actually make it clear that temperance was not the primary purpose in establishing and collecting the taxes at issue. Pointing to the facts that the legislature had decided not to tax based on alcohol content and statements in the statutes about the states economic stability and the efficient and effective collection of taxes as proof that temperance was not the basis for the system of taxation’s adoption of classes based on method of manufacture.
The Court found that the Department of Revenue’s arguments that a tax on alcohol content would make it hard to detect tax cheating as it would require self-reporting and then additional testing of each product for confirmation. Stating that under the current method of manufacture system, the Department could easily audit the data regarding production inputs in order to determine what the method of manufacture is.
Perhaps if Arty’s had had the chance to develop a factual record as to the methods and ease for implementing such a system of reporting or confirming alcohol content, or shown that confirmation was not an issue, the matter might have been determined differently on a factual record that supported a contention that one method was no less difficult than the other or that tax cheating was unlikely – but Arty’s didn’t get that chance.
But it potentially leaves the argument open for someone willing to develop a factual record in asserting that a rational system would target the alcohol for taxation and not the method of manufacture as it is still the case that these products, distilled spirits, wine, and beer, are only taxed on account of the fact that they’re alcoholic beverages and not on some fundamental difference between their inert or non-alcoholic contents.