A new election season seems to be upon us, bringing to this writer’s mind thoughts of laws and legislatures and just how they effect the growing cider industry. Alcohol has been a part of the American story from the very beginning, and an excise tax on it’s domestic production was the first ever imposed by the brand new American government in an effort to pay down debts from the Revolutionary War. Confined to distilled spirits and short lived, this whisky tax was spectacularly unpopular, though from the point of view of the Treasury it still got the job done. By the early 20th century, excise taxes had been put in place for all alcoholic beverages and had become a significant source of the monies needed to keep government running. For example, alcohol-related taxes accounted for almost 75% of New York State’s revenue in the early part of the century. Then came the grand failed experiment that was Prohibition resulting in a huge budgetary hole that, contrary to the hopes of it’s proponents, went unfilled by increased tax income from what was supposed to be a big bump in the sales of other goods. Historian Michael Lerner estimates that the Federal government forewent some 11 billion dollars in liquor taxes and licensing fees during Prohibition, surely one of the driving forces behind its demise.
After Prohibition the Feds seem to have forgotten about the once ubiquitous cider, or maybe there just weren’t many companies interested in producing it, so when they went to write new tax laws cider was just lumped in with wine, not getting a tax category of its own until 1997. You see, cider is a little like a platypus. You remember the platypus, right? An Australian mammal that looks like it was assembled from spare parts with bits of a duck (funny bill, lays eggs) and bits of a beaver (furry coat, nurses it’s young)? Cider has a some of the same problem. Like wine it is fermented from the natural sugars found in the juice of a fruit and can be either still or carbonated, but it’s typical alcohol content is more along the lines of beer, and much of it is sold as a direct competitor to beer. This seems to have confused law makers, to the extent they thought about it at all.
Cider and Taxes
Why should this make a difference? It’s all in the money. The Federal excise tax rate for cider is currently about 23 cents/gal. as long as the ABV stays below 7%. Any higher and the tax rate jumps up to that of wine, which is $1.07/gal. Beer, on the other hand, is taxed at 58 cents/gal. regardless of ABV. Small producers do get discounts on some of their production, although for wine makers/cider makers it’s on their first 100,000 gals, and brewers on their first 1.86 million gals. And then there’s carbonation. If the CO2 in cider exceeds 3.92 grams/liter (don’t worry about what the units mean), about half the amount of your average beer, the tax rate jumps to $3.40/gal. ($2.40 for a small producer), the same rate as champagne.
Carbonation can be easily controlled, unless the cider is meant to finish its fermentation in the bottle and be naturally sparkling, but alcohol content is another matter. The amount of sugar in any fruit, including apples, will vary from year to year, based on how hot the summer was, for example, and sometimes by a lot. And, of course, the sugar in the resulting juice is what ends up as alcohol. The only way to control the finished alcohol content in a high sugar year is to either start with concentrate instead of fresh apples or dilute your fresh juice, which also dilutes the flavor. If a cider maker is committed to using whole fruit instead of concentrate he/she is at the mercy of nature as to whether or not their cider gets taxed at one level or another, particularly if they are orchard-based (as some of the finest ciders in the country are). And this can have a profound effect on the bottom line, not to mention the ramifications regarding labels, which are absurdly convoluted and beyond what you’ll want to read about here.
One of the other notable features of the end of Prohibition is that in a nod to the federalists (and more likely the die hard teetotalers) states were allowed to define their own laws regarding alcoholic beverages any way they saw fit. When crafting their liquor laws most states included cider under the definition of wine as a fermented fruit juice, but a handful of others treated cider as some sort of beer, at least under certain circumstances. The wine/beer duality can lead to some vexing situations if you are a cider maker trying to get your fledgling business off the ground.
Take Pennsylvania, 4th largest producer of apples in the U.S. Pennsylvania law defines cider as a “malted beverage” as long as it has 5.5% ABV or less. Ciders with more alcohol are defined as wines. Malted beverages can be sold in all manner of ways including self distribution and through wholesale distributors to various retail outlets, like bars and restaurants. Wines, however, can only be sold directly from the winery or through a state-controlled liquor store. (It’s interesting to note that in Pennsylvania beer can have any amount of alcohol in it and still just be beer.) This regulatory approach forces cider makers to make some hard choices: jump through hoops to keep the sugar content of their juice low enough, resign themselves to highly restrictive sales channels, or to create two companies operating under two different licenses for essentially the same drink so that they can sell some cider as “beer” and some as “wine”.
Individual states, like the feds, also impose their own excise taxes on alcohol production. In almost all states the tax rate per gallon of beer is lower than the tax rate for wine, often dramatically so, again under the theory that beer has a lower alcohol content. That being said, in the state of Washington, for example, a state that is very much pro-cider, beer that’s less than 10% ABV is taxed at $0.26/gallon whereas cider of any strength, since it is defined as wine, is taxed at $0.87/gallon.
States of Change
As the cider market has grown in the last 5 or so years and the number of new cider companies with it, many states have finally realized that by adjusting their laws a bit they can support and encourage these new businesses, creating jobs, and in apple growing states, new markets for local apple growers, Virginia, one of the top 10 apple producing states, changed its definition of cider in 2011 to included a more favorable tax rate up to 10% ABV as long as cider is made solely from non-chaptalized juice (no pre-ferementation sugar added). Washington, while still not adjusting it’s tax rates, as of as of 2014 allows cider makers to fill growlers for customers the way breweries have done for years, and as of July 2015 no longer requires cider producers to pay dues to the state’s wine commission, which historically has promoted the state’s wines and ignored cider completely.
One of the most ambitious new state laws affecting cider was passed in New York in October 2013. This forward thinking legislation created a separate definition for cider (fermented un-chaptalized juice from pome fruit (i.e. apples, pears, etc.) between 3.2 and 8.5% ABV) and created a new Farm Cidery producer license for smaller producers (less than 250,000 gals/year) and requires using only fruit grown in the state. The new license category not only has a lower licensing fee but brings with it all sorts of tools to help grow a business including exemption from sales tax, the ability to have a tap room for retail sales for on and off premise consumption, and to sell at sanctioned farmer’s markets and fairs, as well as a certain amount of latitude in participating in many other direct sales opportunities. And in a radical departure from any other state in the nation, New York set excise taxes for cider at a mere 3.79 cents/gal, the only state where a tax on cider is less than tax on beer (14 cents/gal. + 12 cents/gal. in NYC.) As of August 2015, New York has issued 16 Farm Cidery licenses, including the first to hot urban cidery Nine Pine Cider in Albany, NY.
Getting the Feds Into the Act
New York has also been at the forefront of proposed changes to Federal Law that would support the emerging cider industry. In legislation first introduced by Sen. Charles Schumer (D-NY) and Sen. Patrick Leahy (D-VT) in 2013 the Cider Investment and Development through Excise Tax Reduction Act (aka the CIDER Act) would redefine cider as a beverage fermented from the juice of apples or pears between 0.5% and 8.5% ABV and up to double the amount of carbonation currently allowed before the big tax bump-up. The House has it’s own version, HR 600, sponsored by Rep. Earl Blumenauer (D-OR) and Rep. Chris Collins (R-NY).
The bills appear to enjoy bipartisan support in both houses, but the wheels of government turn slowly, so even a bill with little or no opposition can move at what seems like a glacial pace, in part because of what appears to be the curious way that bills can be endlessly tweaked. There are, at the end of the 2015 summer recess, no fewer that 3 bills pending before the U.S. Senate that contain the original language of Sen. Schumer’s bill essentially unchanged. One is S1459, reintroduced by Sen. Schumer in May 2015. A second is S906, passed out of the Senate Finance Committee in February 2015 and sponsored by Sen. Orin Hatch (R-UT), which is Schumer’s original bill but with a section added that would make a small change related to Medicare providers. The third is S1562, the Craft Beverage Modernization and Tax Reform Act, introduced in June 2015 by Sen. Ron Wyden (D-Or), a sort of omnibus act that would make changes to laws relating to alcoholic beverages across the board, including legalizing home distilling. We can only hope that at least one of these bills, or something with the cider provisions intact, will make it to the President’s desk before too long, making it just a little easier to bring cider back to it’s historic place on American tables. You can follow the CIDER Act’s progress by checking in with the U.S. Association of Cider Makers website.