ALCOPOPS : A QUESTION OF CLASSIFICATION September 25, 2008 ©2008 The National Alliance for Model State Drug Laws, 1 414 Prince Street, Suit e 312, Alexandria, Virginia 22304. This information is presented to acquaint readers with issues related to the regulation of “alcopops,” or flavored malt beverages. It is not intended to serve as legal opinion or advice. Consult an attorney licensed in your jurisdiction before taking any action of legal consequence. The research in this report is current as of September 25, 2008. Please contact Christopher Zealand at [email protected] with any corrections, suggestions, or comments. 2 I. Background The “designer drug phenomenon” is relatively well known among state legislatures. Designer drugs are compounds designed to mimic the effects of controlled substances, while possessing a slightly different chemical structure from the substance they attempt to imitate. Since controlled substances are identified by their precise chemical composition, the idea behind designer drugs is to alter that composition just enough to evade existing legal controls. Producers of “alcopops,” or “flavored malt beverages” (FMBs) have taken a similar tact by engineering ostensibly malt-based alcoholic drinks that begin as fermented products, like beer, but are then processed to remove the aroma, color, flavor, and foam characteristic of traditional malt beverages. 1 Colorings and flavorings derived from distilled spirits are then added to the malt base to give the FMB its aesthetic and taste profile, which typically masks the flavor of alcohol and instead mimics punch, lemonade, or other soft drinks. 2 These products are often marketed under brand names and trademarks associated with premium liquors, although they contain no such ingredients. 3 Despite this marketing approach and even though most of the original FMBs derived their alcohol content primarily from spirits in the added ingredients,4 producers have generally succeeded in persuading regulators that these products are the legal equivalent of beer, rather than distilled spirits (i.e., “hard liquor”). 5 This is due at least in part to the fact that the finished drink is the product of a brewery and not a distillery. 6 Whether an alcoholic drink is legally categorized as a malt beverage or a distilled spirit is significant for several reasons. Under federal law and in most states, it determines the rate of excise tax which the producer has to pay on the product. Spirits are generally taxed at a significantly higher rate than beer. Higher taxation, in turn, raises the retail price, which has been shown to reduce youth consumption of the product. 7 Second, the categorization affects where and how products may be advertised. Hard liquor, for example, is generally not advertised on television, whereas beer and malt beverages are heavily promoted in this medium. 8 Availability of the product is also affected by its categorization, as spirits are more tightly controlled and sold in fewer outlets. Beer and malt beverages, on the other hand, are 1 See Flavored Malt Beverages and Related Proposals, 68 Fed. Reg. 14292, 14293, 14294 (March 24, 2003) (to be codified at 27 C.F.R. pts. 7, 25) (explaining how FMBs are produced). 2 Id . 3 See id. at 14298-99. See also Press Release, Center for Science in the Public Interest, Beware the “Side Effects” of Alcopops, March 18, 2004, available at http://cspinet.org/new/200403181.html [hereinafter CSPI Press Release]. 4 68 Fed. Reg. at 14294-95 (noting that of 114 FMBs studied by the TTB, 105 derived at least 76% of their alcohol content from distilled spirits in added flavorings). 5 See James F. Mosher, Flavored Alcoholic Beverages: An International Marketing Campaign that Targets Youth , 26 J. OF PUB . HEALTH POL ’Y 326, 335-336 (2005). 6 See id . at 335 (noting that differing production processes and “base” materials are used in different countries to suit the local regulatory climates); 68 Fed. Reg. at 14294, 96. 7 Mosher, supra note 5, at 336. 8 See Laura Bradford, Soft Ads for Hard Liquor , TIME , Sept. 2, 2002, at 40; Malt-based Drinks Bypass TV’s Hard Liquor Ad Ban , HOUS . CHRON ., March 29, 2002, at 3; Stuart Elliott, Facing Outcry, NBC Ends Plan to Run Liquor Commercials , N.Y. TIMES , March 21, 2002, at C1. 3 widely available in grocery and convenience stores that cater both to children and adults. 9 A fourth important difference is the manner in which the product must be labeled and what information the label must contain. 10 The primary concern surrounding FMBs is the impression that they are designed for and marketed to underage consumers who have yet to develop a taste for alcohol. 11 While the industry admits that FMBs can bridge the gap between soft drinks and more well-established liquor brands, they reject the charge that FMBs are deliberately meant to entice underage drinkers.12 Surveys indicate, however, that FMBs are particularly popular with teenage girls. 13 Alcopops are also higher in calories than most soft drinks and beers and may therefore be even more likely to contribute to obesity. 14 More recently, caffeine and active herbal compounds have been added to the formulae of some FMBs,15 and some believe these ingredients are yet another enticement to the youth market and may dangerously distort users’ perceptions of how the alcohol in these drinks affects them. 16 II. Federal Regulation Federal oversight of FMBs is provided by the Alcohol and Tobacco Trade and Tax Bureau (TTB), the successor agency to the Bureau of Alcohol, Tobacco and Firearms. Its jurisdiction arises, in part, from Chapter 51 of the Internal Revenue Code of 1986 (the IRC), 17 which imposes excise taxes on alcohol, and the Federal Alcohol Administration Act (the FAA), 18 which requires those who engage in the production, importation, or wholesale distribution of alcoholic beverages to obtain a federal permit and which regulates the labeling and marketing of alcoholic products. The FAA defines “distilled spirits” as “ethyl alcohol, hydrated oxide of ethyl, spirits of wine, whiskey, rum, brandy, gin, and other distilled spirits, including all dilutions and mixtures thereof, for non-industrial use.”19 “Malt beverages,” which include beer, are those 9 See Mosher, supra note 5, at 33; Stuart Elliott, Slightly Sweet Malt Beverages Get Some Heavy Marketing, With Young Drinkers the Targets , N.Y. TIMES , March 6, 2002, at C10 (quoting the president and chief executive of a leading alcopop marketer, who notes that “’beer products are in eight times more outlets than spirits products’ and are consumed ‘exponentially more’ often than liquor”). 10 See 68 Fed. Reg. at 14294. 11 See , e.g. , Carolyn Marshall, Drinks With Youth Appeal Draw Growing Opposition , N.Y. TIMES , April 13, 2007, at A12; Richard Willing, Lawsuits Target Alcohol Industry , USA TODAY , May 14, 2004, at 3A; Elliott, supra note 9; Skip Wollenberg, Critics Say Spiked Lemonade Aimed at Kids , HOUS . CHRON ., Oct. 8, 2000, at 4. 12 See Mosher, supra note 5, at 332. 13 Id . at 335-36. See also Gayle Worland, Teen Girls Drinking More, AMA Warns , CHI . TRIB ., Dec. 17, 2004, at 1. 14 See CSPI Press Release, supra note 3. 15 See , e.g. , John Cloud, This Ain’t No Wine Cooler , TIME , July 28, 2008, at 51. 16 Id . 17 26 U.S.C. §§ 5001 – 5692. 18 27 U.S.C. §§ 201 – 219a. 19 27 U.S.C. § 211(a)(5). 4 made by the alcoholic fermentation of an infusion or decoction, or combination of both, in potable brewing water, or malted barley with hops, or their parts, or their products, and with or without other malted cereals, and with or without the addition of unmalted or prepared cereals, other carbohydrates or products prepared therefrom, and with or without the addition of carbon dioxide, and with or without other wholesome products suitable for human food consumption. 20 Federal statutory law does not contain a separate statutory definition for alcopops or FMBs, leaving this determination to be made by the TTB. Even though the FAA’s definition of “distilled spirits” includes, on its face, “ all dilutions and mixtures” thereof,21 TTB regulations still allow FMBs to contain a significant amount of distilled spirits before they are categorized and regulated as such. The TTB divides malt beverages into two categories for the purpose of determining when the addition of spirits in flavorings and other ingredients changes the regulatory status of the finished product: those containing up to 6% alcohol by volume and those that exceed 6%. “Beer” in the first category may derive up to 49% of its alcohol content from “[f]lavors and other nonbeverage ingredients containing alcohol.” 22 If a beer or malt beverage contains more than 6% alcohol by volume, not more than 1.5% of the volume of the finished product may consist of alcohol derived from flavorings and other nonbeverage ingredients. 23 Products that exceed the preceding limitations will be treated by the TTB as distilled spirits and must comply with all laws that apply to that category. In a recent public notice, the TTB warned industry members that it has determined that some brewers continue to exceed the limits established by its new rule, that “[t]here are no tolerances that allow a producer to exceed those limitations,” and that “serious consequences” may befall brewers who are found to be producing non-compliant products. 24 Because production of distilled spirits is only allowed at licensed, permitted distilleries, 25 brewers who produce FMBs that qualify as distilled spirits may be found in violation of the IRC and subject to penalties or “other appropriate enforcement actions.” 26 Alcopops that qualify as distilled spirits will also be subject to a significantly higher rate of federal taxation, which will be become due and payable on the date the non-compliant 20 27 U.S.C.