Spirits-Based RTDS Recent Legislative Updates Written by Beth Hatef
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f you follow the alcohol industry at all — as a producer, distributor, retailer, or even as a consumer of alcohol beverages — surely you are aware of the recent ready-to-drink (RTD) alcohol beverage craze. Although the explosion in popularity of RTD beverages is certainly not limited to the alcohol industry, one particular area of recent growth has been in the spirits-based RTD space. With this growth has come many changes in the legislative landscape. As a refresher, RTD alcohol beverages fall into several different categories, including hard seltzers, hard kombuchas, flavored malt beverages (FMBs), and wine- and spirits-based cocktails. All of these categories have seen phenomenal growth in the last couple of years, fueled by a consumer desire for convenient, often lower calorie and lower alcohol content alcoholic beverages. On the spirits side in particular, according to the Distilled Spirits Council of the United States (DISCUS), the RTD and premixed cocktail category grew more than 125 percent in 2020. The spirits-based RTD industry is an approximately $300 - $400 million industry at the moment. Bank of America has estimated that in the next five years, it could reach $3 to $5 billion. Indeed, a wide range of players in the spirits industry — from the largest producers and importers to startup craft distillers and everyone in between — want to get in on the action. A recent DISCUS survey found that 45 percent of craft distillers who responded were already producing RTDs, and an additional 20 percent planned to do so in the near future. Of the distillers not already producing RTDs, more than 60 percent noted that they would be interested if excise tax rates on these products were lower.
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Key Legal Issues Facing Spirits-Based RTDs Producers of spirits-based RTDs currently face two major obstacles with respect to the production and distribution of these products: (1) high excise taxes; and (2) limits on distribution. These hurdles are based on the fact that states generally classify spirits-based RTDs, notwithstanding their lower alcohol content, in the same category as other types of distilled spirits. Federally, spirits-based RTDs are currently taxed at the distilled spirits tax rate (as opposed to malt-based RTDs, which are taxed at the much lower beer tax rate). Because state alcohol laws typically do not distinguish between full-strength distilled spirits and lower-alcohol spirits-based RTDs, most states currently impose the same alcohol excise tax rate that applies to distilled spirits to spirits-based RTDs. Spirits industry groups, most notably DISCUS, are working to change that by lobbying — at the federal and state level — for lower excise tax rates for spirits-based RTDs (also known as equalization). Unsurprisingly, DISCUS’ efforts have been met with pushback, particularly from the beer industry. Moreover, in a number of states, current laws restrict how spirits (and, by extension, spirits-based RTDs) are sold. In the 17 states with control systems for spirits, spirits-based RTDs generally must be sold in the same manner as other, higher-ABV distilled spirits (i.e., through the control system). This substantially limits the retail outlets that can carry these products. In some states, the fact that spirits-based RTDs must be sold through the control system affects self-distribution rights as well. In addition to lobbying for equalization of excise tax rates, DISCUS and spirits industry members have been pushing to expand the availability of spirits-based RTDs in retail channels and through direct-to-consumer shipments.
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