Oregon breweries looking to cash in on the $4.1 billion hard seltzer market need to consider the ingredients they choose to produce it, as the Oregon Liquor Control Commission’s (OLCC) classification of the bubbly beverage varies by base ingredients.
“Our state definition doesn’t align fully with the federal definition, which has been challenging,” Oregon Brewers Guild executive director Christina LaRue explained.
The OLCC’s definitions for hard seltzer differ from the federal government’s classification. The Internal Revenue Code of 1986, which classifies products for tax purposes, includes sugar as a substitute for malt. The OLCC does not, meaning that Oregon brewers’ use of cane sugar as a base may cause their hard seltzers to be classified as a wine or distilled spirit, which comes with licensing and tax implications.
“There’s all this confusion because there’s nothing written into the guidance about it,” LaRue said.
The guild is working with the OLCC to tweak its definition of malt beverages. A bill with proposed changes is expected to be presented later this week.
Context: Many hard seltzers are brewed using cane sugar, which isn’t listed under the OLCC’s classifications for hard seltzer under malt beverages, wine, cider or distilled spirits.
According to the OLCC, a hard seltzer is a malt beverage if it meets one of the following criteria:
- Its ABV falls between 0.5% and 14%, and 100% of the alcohol is derived from the fermentation of grain;
- At least 98.5% of the alcohol is derived from the fermentation of grain and its ABV is between 6% and 14%;
- At least 51% of the alcohol is derived between the fermentation of grain and the ABV is between 0.5% and 6%.
The OLCC defines “grain” as “barley, canola, corn, flaxseed, mixed grain, oats, rye, sorghum, soybeans, sunflower seed, triticale and wheat.”
“If a hard seltzer cannot be qualified as a malt beverage in Oregon, it will likely be considered either a wine or a cider and then taxed accordingly,” law firm McDermott, Will & Emery wrote on its Alcohol Law Advisor blog.
In Oregon, wine is “an alcoholic beverage obtained by the fermentation of vinous or fruit juice, or other fermented beverage fit for beverage purposes, and contains more than 0.5% ABV and does not contain more than 21% ABV,” according to McDermott. A wine “may contain distilled liquor and other “non-traditional” ingredients, provided that it does not contain more than 21% ABV.”
Most hard seltzers currently available contain between 4% and 5% ABV. Outliers include Pabst Blue Ribbon Stronger Seltzer (8% ABV), Four Loko Hard Seltzer (12% ABV), Boston Beer Company’s Truly Extra (8% ABV) and Mark Anthony Brands’ White Claw Surge (8% ABV) — well under the 21% ABV threshold.
What It Means for Breweries: If an Oregon brewery’s hard seltzer is classified as a wine or spirit by the OLCC, the brewery needs to obtain proper licensing and pay different tax rates.
“Specifically, Oregon has signaled that should the state’s guidance result in the reclassification of a supplier’s hard seltzer product, there may be retroactive tax liability imposed,” McDermott wrote.
To accommodate the OLCC’s definition, LaRue said some members of the Oregon Brewers Guild have obtained winery licenses, which cost $500 and require a separate application. State excise taxes for wine are $0.67 per gallon, compared to $2.60 per 31-gallon barrel for beer. Still, breweries are becoming more interested in producing hard seltzer to expand their portfolios as the COVID-19 pandemic continues to limit on-premise sales, LaRue said.
“If you make it easier for folks to make it, more breweries are going to make it,” she said. “Right now, they’re going to do whatever they can to make money.”
Proposed Alcohol Tax Off Gov. Kate Brown’s Budget for Now
A proposed tax increase on alcoholic beverages in Oregon was not included in the budget that Gov. Kate Brown put forward in late 2020, LaRue shared in the January 28 episode of the Brewbound Podcast.
“We felt pretty good when the governor released her recommended budgets back in late November early December to Salem and she did not include it,” she said. “But we have seen a pretty substantial uptick in media outreach from the organization who’s pushing it.”
That organization, Oregon Recovers, is lobbying lawmakers to use the proposed tax on beer, wine and spirits to raise $750 million over the next two years to fund programs to treat and prevent substance addiction in the state, according to a report in Willamette Week.
The proposed increase would raise Oregon brewers’ taxes by 1,400%, LaRue said.
“We’re actually working with a beverage coalition, which includes wine, distilled spirits, cider all across the board,” she said. “We’re lucky to have some really great lobbyists on our side, so that will be our big fight going into session this year.”