California Flavored Malt Beverage Regulation
The California State Board of Equalization has adopted new regulations regarding Flavored Malt Beverages. The new CA regulations regarding “Flavored Malt Beverages” classify these beverages as distilled spirits, rather than beer, where 0.5% or more of the alcohol by volume is derived from flavors or ingredients containing alcohol obtained from distillation. Under the new regulation (Cal. Code of Reg., tit. 18 § 2559), every alcoholic beverage other than wine is presumed to be a distilled spirit unless that presumption is rebutted. If the producer/importer believes that its flavored malt beverage products are an exception to the regulation then it may rebut the presumption by filing a report under penalty of perjury stating that the beverage contains less than 0.5% alcohol by volume derived from flavors or ingredients containing alcohol obtained from distillation.
Current Case Law: Diageo Guinness USA, Inc. v. California State Board of Equalization
On July 17, 2008, plaintiff, Diageo Guinness USA, Inc. and defendant, California State Board of Equalization appeared in Sacramento Superior Court for oral argument regarding Diageo’s Motion for Preliminary Injunction. Diageo sought the injunction to prohibit implementation on October 1, 2008, of the newly-enacted tax classification of “flavored malt beverages.”
The regulations at issue will tax flavored malt beverages as distilled spirits rather than beer beginning in October 2008, which will result in a taxation increase of 1,650 percent. Diageo’s complaint, filed June 12, 2008, contends that the Board does not have the power to classify alcoholic beverages, and therefore the regulations are unconstitutional.
The court denied Diageo’s motion for injunction based on the “prepayment litigation bar” found in the California Constitution and the Alcoholic Beverage Tax Law. The prepayment litigation bar prohibits any injunction that prevents the collection of any tax upon which essential public services depend so that the funds are not interrupted. An exception to the prepayment litigation bar exists when an injunction is necessary to prevent irreparable injury from an unconstitutional tax. The court rejected Diageo’s argument that the exception applies in this case.
Diageo Guinness USA, Inc. has 60 days to appeal the court's order.
The court's order is not a final disposition of the case. In the ordinary course of time, the matter will be heard as a motion for a permanent injunction.
Other states have addressed the issue of classification and taxation of flavored malt beverages. The Maryland Attorney General recently ruled that flavored malt beverages fall within the category of distilled spirits in the state laws governing taxation and licensing of alcoholic beverages. Additionally, Utah recently enacted the “Malt Beverage Act” that classifies flavored malt beverages as distilled spirits.