BILL ANALYSIS Ó
Bill No: AB
1812
SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION
Senator Roderick D. Wright, Chair
2011-2012 Regular Session
Staff Analysis
AB 1812 Author: Chesbro
As Amended: March 27, 2012
Hearing Date: June 26, 2012
Consultant: Art Terzakis
SUBJECT
Alcoholic Beverages: beer
DESCRIPTION
AB 1812 adds clarity to the definition of "beer" in the
Alcoholic Beverage Control (ABC) Act by making it explicit
that beer aged in an empty wooden barrel previously used to
contain wine or distilled spirits shall be defined
exclusively as "beer" and shall not be considered a
dilution or mixture of any other alcoholic beverage.
EXISTING LAW
Existing law establishes the Department of ABC and grants
it exclusive authority to administer the provisions of the
ABC Act in accordance with laws enacted by the Legislature.
This involves licensing individuals and businesses
associated with the manufacture, importation and sale of
alcoholic beverages in this state and the collection of
license fees for this purpose.
The ABC Act defines "alcoholic beverage" to include
alcohol, spirits, liquor, wine, beer, and every liquid or
solid containing alcohol, spirits, wine, or beer, and which
contains one-half of 1% or more of alcohol by volume and
which is fit for beverage purposes either alone or when
diluted, mixed, or combined with other substances.
The ABC Act defines "beer" as any alcoholic beverage
AB 1812 (Chesbro) continued
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obtained by the fermentation of any infusion or decoction
of barley, malt, hops, or any other similar product, or any
combination thereof in water, and includes ale, porter,
brown, stout, lager beer, small beer, and strong beer, but
does not include sake, known as Japanese rice wine.
The ABC Act defines "distilled spirits" as an alcoholic
beverage obtained by the distillation of fermented
agricultural products, and includes alcohol for beverage
use, spirits of wine, whiskey, rum, brandy, and gin,
including all dilutions and mixtures thereof.
Existing law recognizes three types of alcoholic beverages
for tax purposes, namely, distilled spirits, beer, and
wine. Beer is taxed at a rate of $0.04 per gallon plus a
surcharge of $0.16 per gallon, for a total of $0.20 per
gallon (Rev & Tax Code Section 32151(a), 32220(a).
Distilled spirits are taxed at higher aggregate rates of
either $3.30 or $6.60 per gallon, depending on alcohol
content (Rev & Tax Code Section 32201, 32220, subdivisions
(e) and (f).
BACKGROUND
The enactment of the 21st Amendment to the U.S.
Constitution in 1933 repealed the 18th Amendment and ended
the era of Prohibition. Accordingly, states were granted
the authority to establish alcoholic beverage laws and
administrative structures to regulate the sale and
distribution of alcoholic beverages. In California, this
responsibility was originally entrusted to the State Board
of Equalization (BOE). In 1955, however, the State
Constitution was amended to shift this responsibility to
the newly established Department of Alcoholic Beverage
Control (ABC).
Purpose of AB 1812: According to the author's office, this
measure seeks to clarify that "beer" aged in empty wooden
barrels previously used to contain wine or distilled
spirits will continue to be defined as "beer" in order to
protect the existing regulatory and licensure structure in
California.
The California Craft Brewers Association, the sponsor of AB
1812, is concerned that current law creates ambiguity on
how wooden barrel-aged craft beers are defined and
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categorized for purposes of regulation for licensure of
manufacturing, distribution, and retail sales, as well as,
taxation. The sponsor notes that in the last 15 years,
California's craft beer industry has gained worldwide
acclaim for their use of traditional Belgian-style brewing
techniques that incorporate the use of wooden barrels to
age craft beers. These empty wooden barrels are expensive
and are recycled by craft brewers from previous use by the
wine or distilled spirits industries.
The sponsor states that "many California craft beers
receive flavor with minute amounts of distilled alcohol
from the wood in this process and because of this it is
believed these beers could be defined as 'distilled
spirits' upsetting the stability of existing regulatory and
licensure structures." AB 1812 is intended to provide
clarity that beer aged in re-purposed wooden barrels will
continue to be defined as beer under the ABC Act.
Staff Comments: In October 2006, the BOE received a
petition requesting that it begin taxing "flavored malt
beverages" (FMBs) as distilled spirits, and the BOE
thereafter initiated formal rulemaking procedures.
Opponents argued that the classification of alcoholic
beverages is within the exclusive jurisdiction of the
Department of ABC, and that the department has consistently
classified FMBs as beer, which is taxed at a much lower
rate. On April 8, 2008, the BOE adopted regulations
redefining beer and distilled spirits for purposes of
taxation and declaring a rebuttable presumption that all
alcoholic beverages, except for wine, are to be considered
distilled spirits. Those regulations were approved by the
Office of Administrative Law (OAL) on June 10, 2008. The
BOE established a threshold of 0.5% distilled alcohol by
volume as the boundary for manufacturers to rebut the
presumption and declare under penalty of perjury that their
products have less than 0.5% distilled alcohol and are
therefore legally considered "beer" for purposes of
taxation.
On June 12, 2008, Diageo-Guinness filed a complaint against
the BOE containing two causes of action, one seeking a
declaration that the FMB regulations are void as beyond the
BOE's authority and not reasonably necessary to effectuate
the BOE's taxing function and the other claiming a
violation of the Commerce Clause of the U.S. Constitution -
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Diageo later dropped their Commerce Clause claim. The
court concluded the BOE has the authority to adopt
classifications of alcoholic beverages for taxation
purposes that are different from the classifications
adopted by the department of ABC for purposes of licensing
and regulation.
As noted above, the department of ABC has for years
informally classified FMBs as beer for purposes of
licensing and regulation. The federal government, through
its Tobacco, Tax, and Trade Bureau (TTB) classifies FMBs as
beer if (1) they contain no more than 49% of that alcohol
content from "flavors and other nonbeverage ingredients
containing alcohol" or (2) they contain more than 6%
alcohol by volume but no more than 1.5% of the overall
volume of the beverage consists of "alcohol derived from
added flavors and other nonbeverage ingredients containing
alcohol."
Diageo appealed the trial court's decision and in late
April of this year the Court of Appeal reversed the trial
court ruling. The Court of Appeal concluded that "the
Legislature did not delegate authority to the BOE to adopt
its own classification of alcoholic beverages for purposes
of excise taxation. The Legislature directed that the
definitions in the ABC Act apply to the Tax Law, and it is
the department, not the BOE, that is authorized to
interpret as necessary the provisions of the ABC Act,
including the relevant alcoholic beverage definitions. The
BOE instead adopted regulations that utilize different
classifications than those adopted by the department. The
BOE's regulations therefore cannot stand."
Recently the BOE announced that it would not appeal the
court's ruling and stated that the regulations adopted in
April 2008 defining distilled spirits and beer for taxation
purposes have been invalidated and that "manufacturers,
wine growers and importers should return to the prior
practice of reporting beer, wine and distilled spirits
transactions for alcoholic beverage tax purposes consistent
with the classification established by the department of
ABC. Manufacturers, wine growers and importers of these
beer and wine products are hereby advised to stop reporting
these products at the higher distilled spirits tax rate
effective immediately."
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PRIOR/RELATED LEGISLATION
SB 39 (Padilla) Chapter 140, Statutes of 2011. Prohibited
the import, production, manufacture, distribution, or sale
of beer to which caffeine has been directly added as a
separate ingredient at retail locations within the state.
AB 346 (Beall) Chapter 624, Statutes of 2008. Provided
that any container of beer or alcoholic beverage, other
than sake, that is approved for labeling as a malt beverage
under the Federal Alcohol Administration Act, that derives
0.5% or more of its alcoholic content by volume from
flavors or other ingredients containing distilled alcohol
and that is sold within this state on or after July 1,
2009, shall bear a distinctive, conspicuous, and
prominently displayed label, or firmly affixed sticker, as
defined.
AB 345 (Saldana) 2007-08 Session. Would have required the
BOE, beginning on or after January 1, 2008, to calculate
the total amount of all surtaxes, interest, and penalties
that would be collected as a result of a reclassification
of any alcoholic beverage from beer to a distilled spirit,
as specified. (Died in Assembly G.O. Committee)
AB 417 (Aghazarian) 2005-06 Session. Would have modified
California's existing definition of "beer" to include "any
alcoholic beverage that qualifies as a malt beverage under
the Federal Alcohol Administration Act." (Vetoed by
Governor)
SUPPORT: As of June 22, 2012:
California Craft Brewers Association
OPPOSE: None on file as of June 22, 2012.
FISCAL COMMITTEE: No
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