California Moves Closer to Making Wine Less Tasty

The California Board of Equalization (“BOE”) proposed taxing certain wines as distilled spirits, which would increase the excise tax on the wine from 20 cents a gallon to $3.30 a gallon, an enormous  1,550 percent  increase.  Essentially, the heightened tax will hit wines where distilled alcohol has been added, such as wine specialties, flavored table wine, wine cocktails, wine coolers or blends of wine from different fruits.  Last week, the BOE approved the Alcoholic Beverage Tax Regulation 2558.1 (“ABT”) and authorized its publication, beginning the formal rule making process. The next step is a 45 day comment period which will lead to a public hearing in front of the BOE currently scheduled sometime in May.  According to the BOE’s chairman,

This new regulation clarifies the definition of wine products and the application of tax on wine-based products that contain distilled alcohol.  To allow the industry a transition period, the regulation will be effective January 1, 2012, upon approval by the Office of Administrative Law. 

The flow chart below, provided in the BOE’s report on the proposed tax hike, illustrates what will be taxed as a wine versus what will be taxed as a distilled spirit. 

Although the BOE claims that the tax increase represents an “equality issue” and as a “clarification, the timing is suspect at a time when California faces a fiscal crisis with over a $21 billion deficit.   The proposed regulation appears to follow the same approach as the Distilled Spirits Regulations that went into effect on October 1, 2008, which increased taxes on Flavored Malt Beverages (“FMB”) from 20 cents a gallon to $3.30 a gallon, the same percentage increase as the proposed regulation.  FMBs include such beverages like hard lemonade, hard ice tea, and Smirnoff Ice.  In 2008, the BOE claimed that the FMB tax would raise state revenues by approximately $41 million.  The state is still waiting for this result, and it will likely be waiting for a very long time.  Thus far, the state has raised almost nothing because the FMB producers reformulated their drinks so that the drinks are exempt from the new tax.  Hmmm…I wonder what the “reformulated wines” will taste like.  Undoubtedly, producers of these wines will also “reformulate”, and/or pass on the buck to retailers and ultimately consumers.

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