Rise in ready-to-drink cocktails fuels tax fight

Associated Press/Orlin Wagner
A customer leaves a liquor store in Lawrence, Kan., Thursday, March 26, 2015. There are proposals to allow grocery stores to sell liquor, wine and full-strength beer, amid strong lobbying efforts on both sides of the issue.

The growing popularity of canned cocktails now shouldering their way onto grocery store shelves is opening a new front in a century-old battle over the way different types of alcoholic beverages are taxed, setting off an expensive and high-stakes lobbying fight in states across the country as legislators consider their constituents’ evolving tastes in adult beverages. 

Canned cocktails — or what the industry calls ready-to-drink beverages — are the fastest growing type of alcoholic beverage on the market today. They represent only a fraction of overall alcohol sales, about 10 percent in 2020, according to the firm IWSR Drinks Market Analysis. But the market share for ready-to-drink beverages is growing by an average of 50 percent per year, said Brandy Rand, IWSR’s chief operating officer for the Americas. 

Most of that market share is taken up by hard seltzers like White Claw or Truly. A growing share, though, is coming from spirits-based cocktails, some produced by the largest whiskey, rum or gin producers in the world who offer alternatives that carry alcohol by volume percentages similar to beer.

But because those drinks are made with spirits, rather than malt like beer, consumers who pick up a pack of Jim Beam Canned Highballs, Cutwater White Russians or High Noon Vodka Seltzer will pay substantially more in both state and federal excise tax than they would for a six-pack of Miller High Life.

For small distillers, the higher taxes act as a barrier to entry to a growing and lucrative marketplace. The spirits-based cocktails sell for higher margins than beer or cider, but the taxes wipe out those gains.

“The consumers don’t understand why they’re paying so much more for a 4-pack of 4.5 percent spirits-based product compared to a much higher ABV six-pack” of beer, said Brooke Glover, the founder of Swilled Dog Hard Cider and Spirits in Upper Tract, W.Va. “Our margins are greater on the spirits side, but because of the taxes, we don’t make any more money. We actually make less money because the taxes are so high.”

Dropping the excise tax on spirits “would double our business overnight. No question. The consumers are wanting it so much, that would be really helpful,” she said.

But to the beer industry, the different excise taxes make all the sense in the world: Their products cost more to produce, and they are fundamentally different, said Jim McGreevy, president and chief executive of the Beer Institute, an industry policy group.

“The core business of the liquor industry is to sell high ABV products. The fact that some small portion of their portfolio are lower ABV products does not give them the right to have a lower excise tax rate on those products or any others. I think you have to look at the overall businesses and understand the policy priorities for taxing alcohol,” McGreevy said in an interview. “Some of these canned cocktails are really nothing more than gateways to the higher ABV products. In many instances they’re labeled very similarly, they have very similar flavor profiles to the higher ABV products that these companies sell. In our view, it’s a pretext.”

Most states that considered changing excise tax rates this year left the current rates intact. But in several states, legislators have moved to reduce excise taxes on spirits-based products, to bring them in line with beer and other similar beverages. Michigan Gov. Gretchen Whitmer (D) and Nebraska Gov. Pete Ricketts (R) signed laws in May to lower excise taxes. 

“Prior to recent changes in Michigan, spirit based ready to drink beverages were at a significant tax disadvantage compared to malt-based drinks,” said state Sen. Aric Nesbitt (R), who sponsored his state’s move to lower the excise taxes on spirits. “We heard from our smaller Michigan craft distillers that they wanted to move into this market but they needed changes to make themselves competitive.”

Legislators in New Jersey and Pennsylvania are considering their own bills this year; the measure in New Jersey is backed by state Senate President Stephen Sweeney (D), the most powerful legislator in the state. Bills introduced this year will carry over into legislative sessions next year in Hawaii, North Carolina, Vermont, Washington and West Virginia.  

Washington state provides an extreme example of just how burdensome the higher taxes have become: Taxes on spirits-based cocktails include a 5 percent fee paid by the wholesaler, a $3.77 per-liter fee, a 20.5 percent sales tax and an additional 17 percent fee paid by the retailer, which is passed on to the consumer.

That adds up to an extra $1.34 in taxes on a typical 12 ounce beverage, or nearly $9 extra for a six-pack. A similar 12 ounce beer would incur just 2.4 cents per serving, plus a 6 percent sales tax.

Tax rates differ by state, but in almost every state, spirits are taxed at a higher rate than beer or wine. The difference ranges from just a few dollars per gallon in Texas, Indiana or Tennessee, to more than $20 per gallon in Washington and Oregon, and almost that much in Virginia and Alabama. 

At the federal level, malt-based beverages and sugar-based beverages — like a hard seltzer — are taxed at five cents per 12 ounce serving. A wine-based spritzer is taxed at twice that rate, while a spirits-based cocktail carries a 13-cent tax rate.

Those who oppose changing excise taxes say the two products are not alike: A typical beer carries an alcohol by volume (ABV) rate of 4 to 5 percent. A typical spirit has much more alcohol, an ABV of 40 percent or higher.

“The beer business and the liquor business are different, in a lot of different ways. One of them is that liquor’s cheap to make,” McGreevy said. “That’s one of the reasons the policy has been in place. The businesses are different, the excise taxes need to reflect that, and they do, and we hope they will continue to.”

But the newer products have ABV levels more similar to beer, and so the argument is made they deserve the same treatment under tax laws. 

“Since Prohibition, spirit-based products have always been taxed differently than beer and wine,” said David Wojnar, who heads state government relations for the Distilled Spirits Council, the industry’s trade group. “We’re trying to make the case that with these products, the ABV is all the same and they should be taxed the same and have the same access.”

Glover, whose company is one of the first in West Virginia to produce vodka-based sodas — which carry an ABV rate of 4.5 percent, lower than their line of canned ciders — is also unable to sell her products on grocery store shelves. Many states do not allow spirits-based products to sit alongside beer or wine on grocery shelves regardless of their alcohol content. 

“We’re not able to sell our ready to drink cocktails on the shelves of our grocery stores. You can have a 14 percent alcohol by volume wine on a grocery store shelf, but not a 4.5 percent ready to drink cocktail,” Glover said. “It doesn’t make a lot of sense.”

Consumer demand for ready-to-drink cocktails overall is growing so fast that volumetric sales are expected to eclipse wine sales in the United States this year, IWSR’s Rand said. The spirits-based portion of those sales are on the rise. 

“Consumer preference is clearly for spirit-based products, with vodka the leader by some way. Brands have consequently started to use their spirit base as a point of difference and to indicate quality,” Rand said in an email.

The alcohol industry has been engaged in a centurylong battle with state and federal regulators over tax rates and market access since the implementation, and subsequent repeal, of Prohibition. Many of the Prohibition-era laws changed slowly, though with moments of punctuated evolution. The coronavirus pandemic in particular led to a surge in new measures permitting to-go alcohol sales by bars and restaurants.

At times, the industry’s various factions have been arrayed against each other, as each side — those with stakes in beer brands, those in the wine business and those whose members produce spirits — battle for competitive advantage 

But increasingly, some of the largest players in the marketplace are buying up brands from across sectors, aligning their interests with other spirits manufacturers. AB InBev, the parent company of Budweiser, purchased Cutwater Spirits in 2019. Molson Coors launched a vodka seltzer brand in 2020. And Constellation Brands, owners of Corona and Pacifico and wine labels like Robert Mondavi and Clos du Bois, also owns Svedka, the vodka brand that produces its own canned vodka soda.

“You’re seeing movement across the segments from all three segments at this moment. Beer is getting into the liquor business a little bit, liquor is getting into the beer business, and wine is getting into both,” McGreevy said. 

That makes the politics of an already deeply divided industry all the more complex, at a time when their divided factions line up for another battle over tax rates that will cost someone dearly.

“I want to see everything be a little bit more of an even playing field,” Glover said.

Tags alcohol tax Gretchen Whitmer Pete Ricketts

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