IDOR’s Proposed Liquor Tax Overhaul: A Return to the Same Unconstitutional Scheme the Illinois Supreme Court Already Struck Down
Illinois liquor distributors, importing distributors, manufacturers, RTD cocktail producers, and alcohol brand owners should be paying close attention to the Illinois Department of Revenue’s proposed amendments to 86 Ill. Adm. Code 420.
The proposal is being presented as an update to Illinois’ Liquor Control Act rules and liquor gallonage tax administration. But for many Illinois alcohol businesses, especially those dealing in ready-to-drink cocktails, spirit-based seltzers, canned cocktails, alcohol-infused products, and other innovative low-ABV products, the proposed rule is not just a technical cleanup. It may revive the same constitutional problem the Illinois Supreme Court rejected nearly forty years ago in Federated Distributors, Inc. v. Johnson, 125 Ill. 2d 1, 530 N.E.2d 501 (1988).
On April 24, 2026, IDOR published proposed amendments to Part 420 in the Illinois Register. The Department says the rulemaking is intended to update outdated rules, align the administrative code with the Liquor Control Act, and accurately reflect current statutory gallonage tax rates. That sounds mundane.
It is not.
The proposed rule would move Illinois toward a rigid “added spirit” tax rule that classifies a beverage or product as a spirit whenever it includes added spirits, with limited exceptions for fortified wine. That means a low-ABV ready-to-drink cocktail, spirit-based hard seltzer, canned cocktail, or even bourbon-infused ice cream could face Illinois’ $8.55-per-gallon spirits tax, while a similar wine-, cider-, beer-, or malt-based product could receive a much lower rate.
That is where the Illinois Constitution enters the picture.
What IDOR’s Proposed Illinois Liquor Gallonage Tax Rule Would Do
Under proposed Section 420.10, IDOR would tax alcoholic beverages at the following gallonage rates: $0.231 per gallon on beer regardless of alcohol by volume; $0.231 per gallon on cider from 0.5% through 7% ABV; $1.39 per gallon on wine regardless of ABV and cider over 7% ABV; and $8.55 per gallon on alcohol and spirits.
The constitutional problem comes from the next move.
Proposed Section 420.10(a)(5) says that, generally, “when a beverage includes the addition of a spirit,” the beverage “will be classified as a ‘spirit’ and taxed accordingly,” except for fortified wines. IDOR gives the example of a pre-mixed canned cocktail containing gin, sparkling wine, lemon juice, and simple syrup, and says that product would count as a spirit for tax purposes. Proposed Section 420.10(a)(6) then says that when alcohol or spirits are added to any other alcoholic liquor, the resulting beverage or product will be taxable as alcohol or spirits. IDOR’s example: “ice cream infused with bourbon, or any other spirit, will be taxed as a spirit.”
So the proposed rule does not simply tax products by alcohol content, serving size, drink-equivalent, public-health risk, or consumer use. It uses added spirits as the tax trigger.
That looks a lot like the move Illinois already lost in Federated Distributors, Inc. v. Johnson, 125 Ill. 2d 1, 530 N.E.2d 501 (1988).
Why Federated Distributors v. Johnson Matters for Illinois Liquor Distributors
Federated involved low-alcohol fruit-flavored products fortified with spirits. The products contained between 0.5% and 14% alcohol by volume. They competed with wine coolers. The key difference: one used spirits; the other used wine.
IDOR initially told the taxpayer those “New Products” would be taxed like wine coolers at the lower rate. Then IDOR reversed itself and said the products “technically” fell within the statutory definition of spirits and should receive the higher spirits rate. The Supreme Court described the case as a challenge to IDOR’s ruling that a distributor of a low-alcohol beverage “must pay taxes on that beverage based solely on the method of production of the alcohol it contained.”
The Supreme Court rejected IDOR’s position.
The court held that, although most of the Liquor Control Act regulates alcohol under the police power, Article VIII — the gallonage-tax article — “is a tax for revenue purposes” and therefore subject to Article IX, section 2 of the Illinois Constitution. The court then held that there was no “real and substantial difference” between New Products and wine coolers, and that manufacturers and importing distributors of those products had to be taxed at the same rate.
That holding matters because Article IX, section 2 requires that classifications of non-property taxes and fees be reasonable and that the subjects and objects within each class be taxed uniformly. The court emphasized that Illinois’ uniformity clause gives taxpayers added protection beyond the federal minimum.
The most important part of Federated for today’s proposed rule is not that Illinois can never use beer, wine, cider, and spirits categories. It can. The important part is narrower and more dangerous for IDOR: Illinois cannot impose dramatically different tax rates on materially similar products when the meaningful tax-driving difference is the source or method of production of the alcohol.
The Federated court quoted the record showing New Products and wine coolers were “virtually identical in every aspect except one, the method in which the alcohol in each product is obtained.” The court then warned that “taxation on manufacturers limited to a rigid application of these definitions to products which have only recently entered the market cannot meet the constitutional mandate of uniform taxation.”
That is the sentence IDOR needs to confront before it finalizes this proposal.
The Uniformity Clause Problem with IDOR’s Added-Spirit Rule
IDOR will likely respond that Illinois can tax beer, wine, cider, and spirits differently.
True.
The Illinois Supreme Court confirmed that point in Wirtz v. Quinn, 2011 IL 111903. There, the court upheld statutory tax increases on distributors of beer, wine, and spirits and noted that “higher taxes may be constitutionally imposed on alcoholic beverages that have a higher alcohol content,” because higher-alcohol beverages contribute to societal harms and higher taxes may promote temperance. The court also rejected the idea that the uniformity clause requires strict proportionality between tax rates and alcohol content.
But Wirtz does not give IDOR a free pass here.
Wirtz addressed broad statutory rate increases across traditional categories. It did not bless an administrative rule that treats added spirits as a classification trump card for new, mixed, low-ABV, or alcohol-infused products that may look, drink, compete, and function like lower-taxed products.
That distinction matters.
Federated did not say every 5% ABV product must receive the same tax treatment. The court expressly recognized that a real-and-substantial-differences analysis does not turn on alcohol percentage alone. But Federated did say Illinois cannot ignore virtual identity between competing products and tax them differently merely because one product’s alcohol comes from spirits while the other’s comes from wine or fermentation.
That is the constitutional problem with IDOR’s proposed “added spirit” rule.
IDOR cannot solve a constitutional problem by copying statutory language
IDOR frames the proposal as an effort to align the administrative rules with the Liquor Control Act. The Department says the purpose of the rulemaking is to make the rules “accurately reflect the statute” and “accurately reflect the gallonage rates as provided in the statute.” It also says the Liquor Control Act rules have “seldom been updated,” and that many terms, forms, and procedures are outdated.
That may all be true.
But none of it answers Federated.
An agency cannot cure a constitutional problem by codifying it more clearly. If the statutory language, as applied to materially similar products, produces non-uniform taxation without a real and substantial difference, the problem does not disappear because IDOR moved the language into the Administrative Code.
The Supreme Court in Federated did not order Illinois courts or IDOR to rewrite the whole liquor-tax statute. It did something narrower: it held that Section 8-1 violated Article IX, section 2 “to the extent” it failed to establish a basis to tax virtually identical products equally.
That “to the extent” language should matter here. IDOR may update definitions. IDOR may clean up forms. IDOR may reorganize exemptions. But IDOR cannot adopt an administrative shortcut that recreates the same unconstitutional application the Supreme Court already rejected.
The proposed rule taxes taxonomy, not temperance
The Liquor Control Act says it should be construed to protect health, safety, and welfare and to foster temperance through sound control and regulation of alcoholic liquors. Federated treated that statutory purpose as central to the analysis.
IDOR’s proposed rule does not advance temperance in a coherent way.
A low-ABV canned cocktail containing gin could face the $8.55-per-gallon spirits rate. A much stronger beer could remain at the $0.231 beer rate. Wine would receive the $1.39 wine rate regardless of ABV. A bourbon-infused ice cream over the alcohol threshold could receive spirits treatment even though its alcohol content and consumer use may have little in common with a bottle of bourbon.
That is not temperance. That is taxonomy.
And taxonomy alone does not satisfy Article IX, section 2 when it creates materially unequal treatment among functionally similar products.
IDOR’s own history shows why this rigid rule creates trouble
The Department has struggled with these classifications before.
In Federated, IDOR first placed the New Products in the same category as wine coolers, then reversed itself and applied the spirits rate. Decades later, IDOR’s 2018 flavored-malt-beverage rulings showed the same difficulty in another form.
In ST 18-0007-PLR, IDOR discussed Federated and stated that the case made clear “the process used to derive the alcohol contained in a beverage is not controlling.” Relying on Federated, IDOR concluded that a 14% ABV flavored malt beverage should be taxed as wine rather than beer because the Department found no real and significant difference between that product, wine coolers, and the New Products at issue in Federated.
But IDOR then reversed course again. ST 18-0007 was later superseded by ST 18-0012-PLR, where IDOR concluded that the same category of malt-based products should instead be taxed as beer. In that later ruling, IDOR emphasized that the products were brewed from malted barley, combined with hops, fermented, federally treated as beer or malt beverages, and fell within the statutory definition of beer. IDOR also relied on Federated for the narrower proposition that the uniformity clause does not require classification based on alcohol content alone, and that the proper inquiry looks to the overall similarity of the products.
That history matters for the current rulemaking. The point is not that ST 18-0007 was right and ST 18-0012 was wrong, or vice versa. The point is that even IDOR’s own rulings show the difficulty of administering rigid alcohol categories when modern products blur traditional lines. The Department has moved from “similar alcohol content and market comparability” to “statutory beer definition and federal malt-beverage treatment” depending on the record before it. That is precisely why a blanket added-spirit rule is dangerous.
Federated requires a real product-comparison analysis. ST 18-0012 confirms the same thing in a different way: IDOR must look at the product’s nature, statutory fit, ingredients, manufacturing process, federal treatment, market context, and overall similarity to other products. What IDOR should not do is adopt a categorical shortcut under which the addition of a spirit automatically pushes a product into the highest-taxed category regardless of whether that product is materially similar to lower-taxed beverages.
The proposed 2026 rule moves toward that shortcut. That is the problem.
Who gets hurt?
The proposal hits the most innovative parts of the alcohol industry first.
Spirit-based RTDs, canned cocktails, spirit-based hard seltzers, and other low-ABV products increasingly compete with beer, wine, cider, and malt-based alternatives. If IDOR taxes a 5% ABV spirit-based canned cocktail at $8.55 per gallon while a similar malt-, beer-, wine-, or cider-based product receives the $0.231 or $1.39 rate, the tax difference does not reflect consumer risk. It reflects formulation.
That creates a government-backed competitive advantage for one production method over another.
Small distillers, craft producers, co-packers, brand owners, importers, and distributors would have to account for a classification scheme that may make low-ABV products with added spirits dramatically more expensive to sell in Illinois than competing products with comparable alcohol content. Food producers making alcohol-infused products could also find themselves swept into a spirits-tax category they never expected.
IDOR’s own rulemaking materials estimate 5,135 active license accounts file Liquor Gallonage Tax Returns, while also stating that the Department lacks data to determine how many affected licensees qualify as small businesses. IDOR nevertheless projects no additional compliance costs because it views the rulemaking as an update that makes the rules easier to read.
A classification that moves products into a higher gallonage-tax category does more than clarify paperwork.
It changes economics.
The better fix belongs to the legislature
Illinois does need a better liquor-tax system.
The General Assembly could adopt an alcohol-content-based tax. It could create a carefully drafted RTD category. It could modernize beer, wine, cider, spirits, and alcohol-infused-product taxation in a way that treats like products alike and ties tax burdens to actual alcohol content, serving size, consumer use, or another constitutionally defensible public-policy measure.
What Illinois should not do is let IDOR adopt a rule that says: add gin, become spirits; add bourbon, become spirits; compete with a materially similar lower-taxed product, too bad.
That is the Federated problem in modern packaging.
An alcohol-by-volume or standard-drink approach would not magically immunize every tax choice from challenge, but it would avoid the central error Federated identified: using production method or alcohol source as the decisive tax fact when the relevant products otherwise share the same real-world attributes.
Why Illinois Distributors, Importing Distributors, and RTD Producers Should Comment Now
IDOR’s first-notice period for the Liquor Control Act proposal ends June 8, 2026. IDOR’s proposed-rule notice says comments may be submitted in writing within 45 days after publication to Kimberly Rossini, Associate Counsel, Illinois Department of Revenue, Legal Services Office, 101 W. Jefferson, Springfield, Illinois 62702, or by email to REV.GCO@illinois.gov.
Manufacturers, importing distributors, distillers, RTD brand owners, wineries, breweries, cideries, wholesalers, retailers, and trade associations should not treat this as a technical cleanup.
The issue is bigger than the formatting of Part 420.
Illinois’ liquor-tax rules need modernization. But modernization should not mean reviving a rigid classification theory that already ran into Article IX, section 2. Federated remains binding Illinois Supreme Court precedent. IDOR should withdraw or revise the added-spirit classification before the rule reaches second notice.
If Illinois wants a modern alcohol tax structure, the legislature should enact one. IDOR should not try to relitigate Federated through the Administrative Code.
