Artisan Spirit: Summer 2021

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he ready-to-drink or “RTD” cocktail category has exploded in recent years, and it’s occupied not just by craft distillers familiar with a carefully made cocktail. Brewers, distillers and even vintners alike have joined in, capitalizing on consumers’ desire for a premade, no-fuss beverage. The most unexpected thing to have emerged with the rise of RTDs is the complex legal issues surrounding these products, some of which the industry is just beginning to grapple with. Most of the legal landmines stem from the fact that the legal regulatory landscape in the vast majority of states has not caught up with the rapidly evolving alcohol industry. That leaves ready-to-drink cocktails, much like hard seltzers, as not having a specific “class” or “type” in most states. Manufacturers looking to enter the space have lots of options when it comes to creating a new product, subject to what licenses the manufacturer holds and what those licenses allow them to produce. Generally speaking, ready-to-drink cocktails can be spirits-, malt-, sugar-, cider-, or even wine-based. In this regard, the base of the RTD product is arguably the key factor in determining how the product will be treated from a legal perspective. This categorization is important as it impacts licensing needed to manufacture, distribute and sell the product, applicable franchise law, available channels of distribution, and excise tax rate charged to the manufacturer. For a distiller, the obvious path into the RTD space is likely through a spirits-based ready-to-drink cocktail. While distillers are likely aware of the nuances in the regulations applicable to a distilled spirits product, entering a category with manufacturers from all across the industry with a much lower alcohol-by-volume provides an opportunity to think critically about how distilled spirits products are treated under the law compared with other alcoholic beverages, particularly when competing with them in the same market and category. As distillers know, spirits-based products enjoy the luxury of not being tied down by restrictive franchise laws, as fewer than 12 states have some franchise protection for spirits, as opposed to roughly 17 states with wine-specif-


ic franchise laws and 48 beer franchise states. This allows distillers in most states to almost continuously evaluate their wholesalers and, in the event a wholesaler is not performing, move the brands. Their beer and wine counterparts are much more restricted in their ability to terminate a wholesaler’s right to distribute their brand of RTDs after entering into an agreement with a wholesaler. Similarly, to produce spirits-based RTDs from a licensing perspective requires the same permits as their full-proof counterpart products. So distillers have to do very little to no work, from a licensing perspective, to produce these lower ABV products. While there are some advantages in distillers choosing to make an RTD product, there are also some challenges. Outside of a few states, lower-proof RTD spirit products are treated the same as a full proof product in terms of channel distribution and excise tax rates. Many states restrict where products can be sold, or what “channel” they may be distributed through, based on the category of the product. Generally speaking, beer and wine can be sold in many more places than spirits, such as grocery or convenience stores. While some states like Florida have modified their regulations to allow for low proof spirits to be sold at grocery and convenience stores, many have not. This has left spirits-based RTD growth somewhat stunted in states. Similarly, excise tax, or “privilege tax,” is typically calculated based on the category of product, as opposed to ABV. At the federal level, excise tax for a 12-oz. can of six percent ABV RTD product is $0.05 for a malt-based product, $0.10 for a wine-based product, and $0.15 for a spirits-based product. State discrepancies are even worse. In Washington State, a spirits-based product is taxed at $32.52 per gallon, as compared to a malt-based product, which is taxed at $0.26/gallon, regardless of the ABV. While there has recently been pressure for states to reevaluate this tax burden on low-proof spirits, that advocacy has been met with resistance from industry members working to keep the excise tax rates as they are today. All of this begs the question: Is it really fair for similarly based ABV products to have such a huge discrepancy in their treatment under the law? Many THE LEGAL distillers are pushing for updates to REGULATORY the federal and state regulatory landscape to create a new categoLANDSCAPE HAS ry for low proof “other” prodNOT CAUGHT UP WITH ucts, such as low-proof spirits THE RAPIDLY EVOLVING and sugar-based seltzers. ALCOHOL INDUSTRY. LIKE On a federal level, container size restrictions also come HARD SELTZER, READYinto play. While malt beverTO-DRINK COCKTAILS DO ages can be in any container NOT HAVE A SPECIFIC size, spirits and wine-based products must be sold in certain, “CLASS” OR “TYPE” pre-determined container sizes. IN MOST STATES. All of these complexities are the result of a disjointed attempt to fit inno31