How Illegal Is It to Collect Whiskey?

It's been just a week since the Bourbon Exchange on Facebook was announced. It has had a lively debut, with lots of people joining and posting, and already a couple of changes brought on by legal concerns.

There can be no doubt that it is against the law to sell alcohol without a license, but what people want to know is it against the law like jaywalking is against the law, or like robbing liquor stores is against the law.

To give a good, lawyerly answer: it depends.

For the most part, laws regarding the possession, sale, and transportation of alcoholic beverages are entirely up to the state's Alcoholic Beverage Control (ABC) agency to enforce. They have their own enforcement arms, their own investigators. Infractions of the ABC's rules are not crimes as far as the police are concerned. Police don't get involved unless the ABC asks for their help.

Someone operating an unlicensed bar or selling liquor out of the back of a minivan, or a licensed retailer selling to minors, that's what they care about. Nobody is looking to bust collectors, especially if their activity is entirely non-commercial.

That doesn't make trading, buying, and selling legal, it's still illegal, but if you're doing a deal now and then, the truth is that nobody is out there looking for you.

Inspector Javert doesn't care.

What constitutes non-commercial? I know people who have hundreds of bottles in their collections. In some instances, they have cases of specific products that are now considered rare and valuable. Most didn't think they were developing an inventory, they were following a personal passion, but now they have cases of something they bought for $50 a bottle that people are paying $500 for.

This happens in other kinds of collecting too, from stamps to automobiles. Someone who knows the market better than the average collector can make out by doing better deals. They might be able to make a living at it. They might get rich.

It depends.

As you can see, this isn't a simple matter.

Most collectors of most things engage in some buying and selling, sometimes in the form of trading. The object is to use pieces you don't need or care less about to obtain pieces you must have and care desperately about. This is a normal part of the collecting experience, millions of people do it, but if the thing you collect contains potable alcohol, that activity is prohibited by law.

Each state ABC is independent, answerable to its state legislature. Each state's laws are a little different. Each ABC has its own policies and priorities, and they don't exactly announce in advance what aspects of their laws they intend to enforce with vigor.

But if they post their enforcement actions online, you won't find among them, "Caught Suspect X trying to trade two 2006 Sazerac 18s and a 2009 Stagg for a 2007 Pappy Van 23."

As for the Facebook Bourbon Exchange, there probably isn't very much a state ABC can do about a page like that if it wants to and there is no reason to believe anyone wants to. It's also hard to imagine the ATF or TTB getting involved. It's not inconceivable, just unlikely.

At the most, some ABCs may be keeping an eye on the phenomenon to see if it develops into anything they need to concern themselves with.

What they care about is when they suspect (as happened in Tennessee with a Jack Daniel's collector site a couple of years ago) that the supposedly altruistic fellow running the thing is actually making money hand over fist. When a lot of money seems to be changing hands and no taxes are being collected, that's when government agencies pay attention, and call in the state police to help.

This isn't legal advice, it's legal information. Unfortunately, we have a situation where a lot of people want to do something, they don't see anything wrong (i.e., harmful) with what they want to do, but there is no way for them to do it legally. If the state alcohol regulators get interested, or if whiskey collecting grows in popularity to the point where they have to, let's hope that instead of treating it like a criminal problem, they look instead for ways to make this innocent hobby legal in all respects, so whiskey collectors finally can emerge from the shadows.

Oregon Rectifier Sentenced to Federal Prison for Tax Fraud

Among distilled spirits producers and enthusiasts, the Alcohol Tax and Trade Bureau of the United States Treasury (TTB) is best known as the Federal agency that enforces the Standards of Identity for Distilled Spirits by reviewing and approving alcoholic beverage labels, but their primary job is collecting taxes. We don't often hear about producers being busted and prosecuted for tax offenses, but with the recent explosion of new licenses and new producers, we may hear about it more often.

Yesterday, Chief U.S. District Court Judge Ann Aiken sentenced William Myers, 66, of Cottage Grove, Oregon, to serve one year and one day in prison for failing to pay $879,000 in federal excise taxes and for filing more than 70 false federal excise tax returns on behalf of his company, the Side Pocket Food Company.

Upon release from prison, Myers must serve three years of supervised release, including 100 hours of community service in each of the three years, and he must pay restitution in the amount of $873,186.88. Pursuant to a plea agreement, Myers admitted that he owes more than $879,000 in federal excise taxes and filed more than 70 false excise tax returns.

Myers was also operating an illegal still inside the company warehouse. He was reportedly distilling wine into brandy on behalf of local wineries. Agents discovered the still while serving a search warrent. When tested, the distilled alcohol had dangerous levels of lead and copper. The Food and Drug Administration said that drinking the tainted alcohol could cause nausea, abdominal pain, and vomiting.

Myers runs Side Pocket with his wife and five of their six children. His lawyers argued that Myers was merely trying to save the company on which his family's livelihood depends, after it experienced setbacks during the financial crises of 2007-2008. Assistant U.S. Attorney Scott Bradford, who prosecuted the case, argued for a two-year sentence, saying it was important to send a message that cheating customers and taxpayers is not the way to salvage a struggling business.

Bradford's boss, U.S. Attorney S. Amanda Marshall, noted that, “Defendant cheated his clients, the taxpayers, and the regulatory system, acting as if the rules did not apply to him or his business. Business owners need to understand that this type of conduct will not be tolerated. There are legitimate ways, like bankruptcy, to work through difficult financial times. Theft and tax fraud puts individuals and communities at risk, it is illegal, and will land you in jail.”

Licensed as a rectifier (processor), warehouseman and bottler, but not a distiller, Side Pocket bought distilled spirts, which it used to create a line of products that included whiskey, vodka, rum, tequila, gin, and pre-mixed cocktails.

Cottage Grove is a small town located about 20 miles south of Eugene.

UPDATE 1/31/13: Christopher Null at Drinkhacker alerted me to this angle. Two days before the story above broke, it was reported that Side Pocket is being sued for failure to deliver on a private label vodka named for the Ying Yang Twins, a music group. It looks like the Myers family's troubles are just beginning.

No Matter How Poor You Are, If You Drink You Pay Taxes.

One of the biggest lies right wing extremists like to tell themselves is that poor people don't pay taxes. Instead they sponge off the noble and righteous people who do. Romney's famous 47% refers to American adults whose incomes are too low to owe federal income tax. The extremist part is taking that fact to mean 47% of Americans pay no taxes and use the federal government as a free ATM.

It's one of the right's oldest tropes, around for generations. Poor people are poor because they are lazy moochers and therefore deserve no help from the rest of us.

In addition to cutting off moochers, the right wants to reduce or eliminate taxes on businesses. If we take the tax burden off job creators, they'll use that money to create more jobs, thus more people will be employed, more people will pay taxes, fewer will need government benefits, and we'll all be able to pay a little less. How great would that be?

A lot in life depends on how you look at things. That's one way to look at things. Here's another.

Businesses don't pay taxes, they build them into the cost of doing business, as they should, and pass that expense along to their customers. That's what businesses do. That's how business works. If their customers are other businesses, they pass that tax along too until it is finally paid by us, you and me, everyone who buys goods and services. It's built into the cost of everything we buy.

I'm best qualified to tell you about one particularly excellent example of this, the federal excise tax on distilled spirits such as bourbon whiskey, aka the FET. This is not intended as a defense of taxes, the FET or any other, or of tax policy, either current or proposed. It is a defense of taxpayers.

All of them.

There is virtually no adult American who pays no taxes.

Included in the 47% of adult Americans who do not pay federal income tax are the poor, but also many low income working Americans, most retirees, most college students, and most veterans. Let's say you are one of those people and you like your Jim Beam Kentucky Straight Bourbon Whiskey. Here in the Chicago area, you will pay about $26 for a 1.75 L bottle of Jim, including the taxes that are added on at the register. Of that, about $4 is paid to the United States Treasury.

Congratulations, Jim Beam customer, you are a federal taxpayer.

That $4 isn't all of the taxes you pay, just the federal ones. State, local, and indirect taxes add another $10. In all, tax is about 54% of the retail cost of a typical bottle of distilled spirits. So of that $26, $14 is tax revenue, and $12 is split among the producer, distributor, and retailer. (As calculated by DISCUS, the distilled spirits industry trade association.)

Distillers and other businesses collect the taxes and remit them to the government, but they don't pay the taxes. You do, I do, whenever we purchase our favorite libation.

Because poor people spend all of their income, and spend most of it on taxed goods and services, they pay a higher percentage of their income in taxes than any other group. That's true whether or not they spend some of their money on alcohol, but if they do, they're paying even more tax. Alcoholic beverages are among the most heavily-taxed consumer products on the market.

The federal government first imposed the FET in 1791. It was the first federal tax on internal economic activity. All previous federal revenue came from taxes on international trade. Widely hated, it was the proximate cause of the Whiskey Rebellion, the first time the federal government used military force against American citizens.

In his 2006 book, The Whiskey Rebellion, William Hogeland argues convincingly that the FET was engineered by Alexander Hamilton, the Treasury Secretary, to favor large distillers over small ones, in order to make collecting the tax easier, and because Hamilton believed in general that a few big businesses were better for the economy than a lot of little ones. As the American polis began to form itself into two political parties, this became one of the major battle lines, and the FET became a useful symbol for Thomas Jefferson's Democratic Republicans against Hamilton's Federalists.

As president, Jefferson abolished the tax, so there was no FET between 1802 and 1814. We are currently celebrating the 200th anniversary of that tax-free period. Jefferson's successor, James Madison, reimposed it in 1814 but his successor, James Monroe, abolished it again. As a young man, Monroe had worked in a distillery and understood business better than his predecessors.

What followed was a long, 44-year period with no FET. In 1862 it was brought back to fund the Civil War, and we've had it ever since. In 1985, during the presidential administration of Ronald Reagan, it was increased to $13.50 per proof gallon, where it remains. A 'proof gallon' is one gallon of 100 proof spirits (50% alcohol by volume).

Although the FET hasn't gone up in 27 years, other taxes on alcohol have and as a 'vice,' alcohol is always a convenient target for politicians.

While producers collect and remit the FET, it only hurts their business inasmuch as higher prices affect sales. Would Jim Beam sell more 1.75 L bottles of bourbon if they cost us $12 instead of $26?

If alcohol taxes go up and so do prices, who suffers? I do, since it costs me more to get my drink on, but if I and all of my fellow moochers buy less alcohol, then it's mostly the people who make it and sell it to us who suffer, and most of them are members of the moocher class too. The bottling line at Jim Beam starts to cut hours and lay people off, so do my favorite bars and liquor stores.

When Reagan raised the FET in 1985, tax revenues declined because sales did. It took several years for tax revenues to return to pre-1985 levels.

So, in a democracy, we decide what we want to pay for as a community, then we figure out how to tax ourselves to pay for it. That's how it's supposed to work. It's hard to believe the hodge-podge of taxes and taxing authorities we have now is in any sense designed to be reasonable or fair. If it can even be said to have an overall purpose, it would be simply to maximize revenue.

How do we come up with a more rational way to run our country's finances? Not villainizing half of the tax-paying population might be a good place to start.

TTB Says Jack Daniel's Unaged Rye Isn't Neutral Spirit After All, Sort Of.

Jack Daniel's is one of the world's best known and best selling whiskeys, arguably (depending on which survey you use) THE top dog. It is also one of the world's most powerful brands, built on whiskey, but sold on everything from t-shirts to menu items at T.G.I. Fridays.

All of that makes Jack Daniel's Unaged Tennessee Rye a very important new product. Everyone wants to know what it means for both the rye whiskey and white (i.e., unaged) whiskey segments. Most people don't care that it has also created a controversy involving one of the principal regulators of the beverage alcohol industry, the U.S. Treasury Department's Alcohol Tax and Trade Bureau (TTB).

TTB's main job is collecting taxes. The tax burden on alcohol is second only to tobacco. No matter how poor you are; if you drink, you pay a boatload of tax to all levels of government, the federal government most of all.

TTB's second most important job is regulating the way beverage alcohol products are labeled and marketed. In return for all the millions we drinkers pay in taxes, TTB makes sure the products we drink are what they claim to be and are marketed responsibly. Its rule book is in the Code of Federal Regulations, where you can look it up. The part covering distilled spirits is Title 27, Chapter 1, Part 5, Subpart C, and is called the Standards of Identity for Distilled Spirits ('the Standards').

One of the rules is that every distilled spirits product has to fit into one of TTB's established classes. Whiskey, for example, is a class. Each class is strictly defined in the Standards. Jack Daniel's Tennessee Whiskey is classified as whiskey. That's why people who care about such things were shocked when Jack Daniel's Unaged Tennessee Rye was classified, not as whiskey, but as neutral spirit.

As anyone who has tasted the product will attest, it's not neutral. So why is it labeled that way? Here's the explanation from Jack Daniel's spokesperson Rob Hoskins, "Jack Daniel’s packaging and legal departments argued that the Tennessee Unaged Rye should be labeled as an 'unaged whiskey' which we felt more accurately described the nature of the product to the consumer, but the TTB ruled against this proposal and would only approve the label under the category 'neutral spirit.'"

Strange, since the Standards define neutral spirit as, "distilled spirits produced ... at or above 190° proof." Mr. Hoskins says Tennessee Unaged Rye is produced below 140° proof and is destined, after aging, to become straight rye whiskey. It is, therefore, not neutral spirit.

But then what is it?

All of this was pointed out to TTB and Thomas K. Hogue, their Director of Congressional and Public Affairs, responded. "The regulations are pretty straight forward," wrote Hogue. "Whisky is defined ... as an alcoholic distillate from fermented mash of grain produced at less than 190° proof that must be stored in oak containers. Neutral spirits must be distilled at 190° or higher. A product that is made from fermented mash of grain and produced at less than 190° of proof but not stored in oak containers would be a distilled spirits specialty product, as it would not meet any of the standards of identity."

It could, according to Hogue, be further labeled as spirits distilled from grain. He noted that corn whiskey is an exception, since it need not be stored in oak containers, but must be at least 80% corn grain.

So that means Jack Daniel's Unaged Tennessee Rye is going to change its label, right? "Any time there is a concern that an approved label does not accurately reflect the contents of the bottle, that is something that we address directly with the label holder," writes Hogue.

A comment from Mr. Hoskins at Jack Daniel's has been sought.

It's Back. The Wholesaler Monoply Protection Act.

Since we're talking about laws, the Wholesaler Monopoly Protection Act (real name: Community Alcohol Regulatory Effectiveness Act -- abbreviation 'CARE') is back. It was reintroduced in Congress two weeks ago as HR 1161.

All pending bills expire at the end of each Congress and have to be re-introduced. This is the new version of HR 5034, which I wrote about it here and here.

Everyone agrees that the bill would give states more power to regulate alcohol distribution. The disagreement is about whether this is a good or bad thing.

I believe it is a bad law and can be defeated (again) but it will take some effort. The problem is that wholesalers throw around a lot of campaign cash and many legislators see it as a harmless sop to some big contributors. Not being thinking people, they don't think about how this could harm the hospitality industry in their district. It would harm producers too, off course but, state-by-state, wholesalers are much more influential than producers.

It's also bad for consumers, assuming you believe alcohol is already regulated quite enough, thank you. States don't need additional authority to lighten the regulatory burden, only to increase it.

For instance, if you think it is hard to get limited release whiskeys where you live now, passage of HR 1161 will only make it worse.

Lawmakers love their campaign money but counter-pressure will work. They usually hope with this sort of thing that no one will notice. Let them know you've noticed and they'll think twice before supporting it.

Go here if you would like to learn more about the bill, such as whether or not your representative is a co-sponsor. Check back to follow its progress . Govtrack.us is neutral regarding the bill. If you'd like to know more about why it sucks, go here and here.

Stop Booze Wholesalers Before They Sin Again.

To paraphrase Rick Blaine in Casablanca, “it doesn't take much to see that the problems of drinkers and drink-makers don't amount to a hill of beans in this crazy world.” On the other hand, preventing government mischief before it can occur is good policy under any conditions.

Hence the letter sent yesterday to members of Congress by the trade associations representing America’s 3,500 breweries, wineries, distilleries, and alcohol beverage importers.

Its well-argued plea: don’t co-sponsor the Wholesaler Monopoly Protection Act (also known as the Comprehensive Alcohol Regulatory Effectiveness Act [“CARE Act”]) when it is reintroduced into the 112th Congress as anticipated. (It never came to a vote in the 111th.) I last wrote about it here.

After outlining the contribution the alcohol beverage industry makes to the U.S. economy, yesterday’s letter continues: “Fundamental to our long-term success is a stable regulatory system in which Congress regulates interstate and foreign commerce, and states regulate the distribution and retail sales of alcohol beverages within their borders. This system has evolved and served the public well since the repeal of Prohibition.”

“We do not believe that Congress should spend valuable time wading into an intra-industry squabble and unraveling a successful regulatory structure to the detriment of consumers, the industry, and the federal interest in a fair, competitive, and orderly marketplace for alcohol beverages.”

What the letter doesn’t mention is that in cahoots with the wholesalers are state alcohol regulatory boards, who can’t wait to create larger and more burdensome bureaucracies, not because they care so passionately about alcohol regulation but because they like their jobs and want to make themselves more important.

The wholesalers are only too happy to carry water for the alcohol control bureaucrats because the bureaucrats have no interest in fostering competition at the wholesaler level. When you have the power to grant people very lucrative, low risk business monopolies, they tend to be very cooperative. State legislators are in on it too because booze wholesalers are such generous campaign contributors.

This is only possible because alcohol is already so heavily regulated at the state level, unlike almost any other consumer product. More than 4,000 state alcohol beverage laws are on the books. Every state mandates a so-called 3-tier system, in which consumers may buy alcohol only from state-licensed retailers (bars and stores), and those retailers may buy only from state-licensed wholesalers. Producers (i.e., manufacturers and importers) may not sell directly to consumers nor retailers, only to state-approved wholesalers.

The current system has many flaws, most stemming from the fact that it hasn’t been seriously examined since it was put in place almost 80 years ago. The problem isn’t at the Federal level, it’s out-of-date state laws and regulations.

Nobody disagrees with the public policy goals of state regulation – preventing underage drinking and limiting alcohol abuse – or even with the very high taxes we all pay for the privilege of drinking alcohol. It’s out-of-date rules that accomplish little except maintain the status quo, including inefficient monopolies. Empowering state regulators to cause new mischief will only make the problems worse.

Recovery of Distilled Spirits Industry Still Fragile, Says DISCUS.

This morning in New York, the Distilled Spirits Council (DISCUS) presented its annual report on the state of the industry.

The report is based on sales data and other research about the year just ended. DISCUS President Peter Cressy led with an appeal to lawmakers not to stifle the recovery by piling on new tax burdens.

In 2010, supplier volumes rose 2% to 190 million cases and revenue rose 2.3% to $19.1 billion, but Cressy pointed out that growth rates remain below the robust pre-recession growth rates, and the important on-premise (restaurants and bars) sector is still experiencing a fragile recovery.

Cressy also noted that in 2010 consumers began to return to their preference for high-end and super premium spirits products, with revenue in the super premium category growing 10.9% from a very soft 2009. Revenue-based market share for spirits versus beer and wine gained four-tenths of a point, rising to 33.3% of the beverage alcohol market. Beer lost seven-tenths of a point of market share falling below 50%, as consumers continued their decade-long migration from beer to cocktails.

Reinforcing the cocktails theme, vodka, which accounts for 31% of industry volume, was up 6.1% to 59 million 9-liter cases (the standard measure of industry volume). Among super premium vodkas, volume was up nearly 18% and revenue was up approximately 14%.

Whiskey showed strong revenue growth, particularly in the super premium segment, which increased by 8.1% overall to over $1.1 billion. Within the super premium segment, bourbon and Tennessee whiskey revenue increased by over 17% to $161 million; single malt scotch grew nearly 18% to $140 million; and Irish grew 30% to $23 million. Super premium Brandy and Cognac were also up almost 10% to $315 million.

2010 preliminary U.S. distilled spirits export data showed a fourth consecutive year exceeding $1 billion, and a rebound from the slight downturn in 2009. The Council predicted final results could break the $1.1 billion record set in 2008. American whiskey represents 71% of all U.S. spirits exports.

DISCUS also reported that progress is being made in the prevention of underage drinking and drunk driving. The latest government data shows underage drinking by 8th, 10th and 12th graders, as well as the total number of drunk driving fatalities in the United States, are at historic low levels.

Much Ado About Nothing: Cane Neutral Spirits.

There is much weeping and gnashing of teeth in some quarters about something Beam Global recently did. You see, all labels for alcoholic beverages have to be approved by the U.S. Treasury Department's Alcohol and Tobacco Tax and Trade Bureau (TTB). Companies typically get labels approved way in advance and sometimes on the if-come.

That's what Beam did with labels for three of its blended whiskeys. The United States has this crazy rule, rejected by the rest of the world, that says a mixture of 80 percent vodka and 20 percent whiskey may be sold as blended whiskey. It's crazy but it's the rule, a political compromise made more than 100 years ago.

By vodka I mean neutral spirits. Another equally silly part of the compromise says that if neutral spirits are used, the label must say what kind of neutral spirits they are, i.e., from what raw material they were made. If made from grain it has to say grain neutral spirits. If made from fruit it has to say fruit neutral spirits. If made from potatoes it has to say potato neutral spirits. And if made from sugar cane it has to say cane neutral spirits.

This is true for any beverage that contains neutral spirits, not just blended whiskey. The same rule applies to vodka, gin and most liqueurs. That's all Beam was doing, getting labels approved that say 'cane neutral spirits' instead of 'grain neutral spirits.'

Why might they want to use cane spirits instead of grain spirits? Beam, like most beverage companies, doesn't make its own neutral spirits. Neutral spirits are a commodity, sold strictly on price. Becauses of this, neutral spirits distilleries tend to be where the raw materials are, so the companies that make grain neutral spirits tend to be in Indiana, Illinois, and Iowa; and the companies that make cane neutral spirits tend to be in tropical areas where sugar cane is grown.

Years ago the U.S. government came up with an idea to help fund development in Puerto Rico. Instead of distilleries there paying federal excise tax like all U.S. distilleries do, they pay a special federal tax that goes directly into the budget of the island's government. Eventually the U.S. Virgin Islands (USVI) got the same deal for its distilleries. Everyone was getting along fine until USVI decided to lure Diageo, the world's largest drinks company, to USVI by rebating half of the tax back to the company.

Since neutral spirits are a commodity this tax advantage gives neutral spirits produced in the islands a significant price advantage over neutral spirits produced in the Midwest, probably more than enough to offset the shipping cost. Since blended whiskeys are themselves extremely price-sensitive, blended whiskey producers such as Beam Global may have no choice but to switch to cane neutral spirits. Vodka, gin and liqueur makers will too.

To those doing the weeping and gnashing, this is a bad thing because "whiskey is supposed to be made from grain." I would argue that whiskey is not supposed to be made by flavoring neutral spirits, but that horse is not just out of the barn, it has died of old age as have all its offspring to seven generations. Since whiskey-flavored vodka can be called blended whiskey, how much can it really matter what kind of neutral spirit it is?

Some weepers and gnashers have compared this to India, which would like the rest of the world to recognize its cane-based imitation scotch as whiskey. Europe and much of the rest of the world is holding fast to the rule that not only must whiskey be made entirely from grain, and not be neutral, it must be aged in wood for at least three years. Morally, the U.S. has less of a leg to stand on but it too refuses India's appeals. Although if the Indians want to sell us very cheap cane neutral spirits we'll be glad to use it in our blended whiskeys, because there is nothing in the rules about U.S. origin either.

I'm all for calling out any producer, big or small, who does something bad for whiskey and whiskey lovers, but this just isn't worthy of our outrage.

This Independence Day Think About The Limits Of Liberty.

Liberty takes many forms. The ability to easily obtain legal products of our own choosing without government interference is not a trivial freedom. Today, many people shop over the internet and have their purchases shipped to them. You can easily buy guns that way, but not alcoholic beverages.

In the USA, alcohol is more heavily regulated and restricted than guns. In part, that is because guns have a very powerful lobby and their own Constitutional Amendment.

But alcohol has a Constitutional Amendment too, it just cuts the wrong way.

The 21st Amendment, ratified in 1933, ended National Prohibition. It is very short and simple. The first section repeals the 18th Amendment. The third gives states seven years to ratify it (they took less than one).

The second section, necessary to obtain ratification, is where the trouble lies. It says "the transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited."

That means the states may regulate alcohol as they see fit, including banning it altogether, regardless of any burden on interstate commerce that would normally run afoul of the Constitution's Commerce Clause. Furthermore, if you take alcohol into any state in violation of that state's laws, you commit a federal offense too.

Most of the states have used this authority to create a mandatory three-tier system for the distribution of alcoholic beverages. The three tiers are producers, distributors and retailers. The mandatory part means no tier may be bypassed by anyone, including consumers who may only legally buy from state-licensed retailers. In most cases, the laws prevent cross-ownership too. Producers may not own interests in distributors or retailers, and so on.

Everything said about these state laws will be "in most cases" because the 50 states each regulate alcohol differently, which all by itself is a significant burden on interstate commerce.

Imagine that instead of buying L. L. Bean clothes directly from L. L. Bean in Maine and having them delivered to your home you were required by law to buy them from a brick-and-mortar store with no connection to L. L. Bean, who bought them from a distributor who also has no connection to L. L. Bean but has an exclusive franchise from your state government to be the state's only legal source for L. L. Bean clothing.

Retailers who want to carry L. L. Bean clothing must buy their L. L. Bean merchandise from the sole distributor in the state who carries it, whose monopoly is enforced by state law.

The state government, as well as the independent distributor and independent retailer, all have something to say about which L. L. Bean clothes are available to you and how much they cost. Will they offer every garment in every color and size that L. L. Bean makes? Maybe, but probably not. While you probably will have a choice of several retailers who may offer different selections, the monopolist distributor will control absolutely which L. L. Bean products are available to those retailers and thus to you. Unless a state border is nearby, you're out of luck.

And even if it is you may still be out of luck because that same distributor may have obtained the monopoly in the adjacent state too.

Now imagine that on an out-of-state trip you have discovered a clothing manufacturer that is similar to L. L. Bean but a bit more suited to your taste. You return home only to discover that none of the state-franchised wholesalers choose to carry that line. Remember, you are only allowed to buy clothes at state-licensed clothing stores. You cannot legally buy clothing online or over the phone. Once again you are stuck.

Although you may travel to where that other clothing brand is sold to buy it, even that may at least technically violate state and federal law.

Let's assume for purposes of our example that clothing is not burdened with excessive taxes the way alcohol is. Even so, the lack of competition inherent in this state-run system makes its products more expensive than they otherwise would be. Maybe instead of a L. L. Bean polo costing $30 it costs $50. You'll get used to it.

Okay, so not being able to buy clothing (or alcohol) except in a narrowly government circumscribed way is inconvenient but it's not the same as being enslaved by Communist (or Capitalist) overlords.

Yet it still sucks.

What I have described above is the state of the law now. H.R. 5034 would give the states an even greater presumption of authority in alcoholic beverage matters. It is arguable whether or not that is even possible. If you are a drinker, it is almost certainly not desirable.

On the one hand, H.R. 5034 hasn't even gone to committee yet, which is where most legislative proposals die. On the other hand, H.R. 5034 has 122 cosponsors, mostly Democrats but with a fair sprinkling of Republicans too. Will this Congress's first bi-partisan legislation be a further burden on alcohol consumers? Are we the sole whipping boy on which everyone can agree?

Everybody Likes Alcohol Taxes, Except Us Drinkers.

Taxes on alcohol, especially spirits, are outrageous. About 60 percent of the money you spend for a bottle of bourbon goes to some government entity. It is further broken down for you here.

Public policymakers justify these outrageous taxes because it is considered socially beneficial to make alcohol much more expensive than it needs to be, considering how much it actually costs to make and deliver the stuff, to discourage abuse. They also might argue that it is justified to defray the social cost of alcohol abuse, in terms of law enforcement, health care, social services, etc.

However you rationalize it, this is manipulation of the tax code for social engineering purposes and it is supported equally by liberals and conservatives.

Prohibition itself made strange bedfellows of liberals and conservatives, liberals who believed the abolition of alcohol would improve the human condition, uplifting the poor in particular; and conservatives who believed alcohol consumption was a sin and usually occasioned additional sinning, plus drunk workers were bad for industrial productivity.

One could argue that high taxes help keep alcohol legal, since however much politicians might like to earn points by attacking Big Alcohol, they are loath to give up all those tax dollars.

Most taxes on things we buy are a percentage of the price, but most alcohol taxes are not. Most though not all of them are on the alcohol content, meaning that the tax bite for the cheapest vodka is about the same, in absolute dollars, as for the most expensive one.

With state and local taxes, some are based on price, so buyers of premium spirits do pay more, but most are based on alcohol content, without regard for the product's price.

So the differences in price among products that all have the same alcohol content is generally not attributable to taxes.

Because of this, while more expensive products should obviously be more profitable, more expensive distilled spirits products are much more profitable since the average tax burden falls sharply as the price goes up.

The actual social benefit of high alcohol taxes is dubious since only a small percentage of alcohol consumers are abusers and only a small percentage of abusers are likely to be deterred by price, but hypocrisy in the tax code has also long been supported by liberals and conservatives alike.

September Is Bourbon Heritage Month.

September is Bourbon Heritage Month, as declared by the United States Congress and the Governor of Kentucky. Here are a few interesting facts, taken from Governor Steve Beshear’s proclamation:

• Kentucky’s whiskey-making industry accounts for about 3,200 Kentucky jobs, $115 million in state tax revenue, and $3 billion in gross state product.
• The approximately five million barrels of whiskey presently aging in Kentucky have a tax assessed value of $1.6 billion.
• Kentucky bourbon and other Kentucky-made whiskeys are a major export product and proud symbol of Kentucky tradition and craftsmanship throughout the world.
• 2009 marks the 10th anniversary of the Kentucky Bourbon Trail, one of the state’s leading tourism attractions.
• The annual Kentucky Bourbon Festival, in Bardstown, is September 15-20.

"From jobs to investment to tourism, bourbon is a vital part of the Bluegrass economy that benefits all of Kentucky’s citizens," Gov. Beshear said. "It’s also a key export and a proud symbol of our heritage that’s known and acknowledged around the world. My administration is committed to working with our distillers to help this essential part of our economy grow and thrive."

Whiskey makers are investing approximately $100 million in recent capital improvements at their Kentucky facilities, and whiskey tourism has drawn approximately 1.5 million visitors in the last five years. The Kentucky Bourbon Festival alone attracts about 55,000 visitors, according to Milt Spalding, the festival’s executive director.

Another Dubious Achievement for Illinois.

I've been meaning to write something about liquor taxes, especially since Illinois (where I live) has decided to lead the nation in yet another dubious capacity, this time with the highest liquor taxes.

Instead of writing about it myself, I'll refer you to this excellent piece by Sonja Kassebaum who is, among other things, a small distiller here in the Chicago area.

As Kassebaum points out, higher liquor taxes take a toll on the hospitality industry: bars, restaurants, and the people they employ. I've also read an analysis that shows how, because liquor taxes are so high already, higher taxes that supress demand can actually be counter-productive, in that if the higher rates are offset by weaker sales, tax revenues can actually decline.

But that's for another day.

Jack and Coke RTD Debuts in UK.

Although imbalanced tax and regulatory regimes make them unattractive in the USA, ready-to-drink (RTD) cocktails are very popular in the rest of the world.

In Australia, for example, one of the top international markets for American whiskey, more of it is consumed in RTDs than any other way. Jim Beam, Wild Turkey and others have popular RTDs that combine whiskey and cola.

Now Jack Daniel's, the world's most popular American whiskey, is joining the fray with Jack Daniel's & Cola in a 330 ml can, just released in the United Kingdom.

Susie Modhawadia, Jack Daniel's brand manager, said, "With consumer research demonstrating that over 40% of Jack Daniel's is consumed with cola, this new product is the perfect mix."

In the United States, where spirits products are taxed more heavily that beer and wine, and distribution is more limited, RTDs that contain the actual spirit product portrayed on the label have been a non-starter. Instead, many leading spirits brands have developed flavored malt beverages as line extensions, such as Black Jack Cola, which leverages the Jack Daniel's name and image but contains no actual Jack Daniel's whiskey.

Both types of products have been demonized by anti-alcohol crusaders who dub them "alcopops" and falsely accuse producers of targeting them at children.

The suggested retail price of Jack Daniels and Cola is GBP1.99 (US$3.30).

I Write a Little Bit About Alcoholism.

Although I write about alcohol all the time, I rarely write about alcoholism and other alcohol-related harms. I don’t think doing one creates any duty to do the other but just because I usually don’t write about it, that doesn’t mean I don’t think about it.

In every society that consumes alcohol, which is just about every society on the globe, there are individuals who cannot metabolize ethanol safely. There is increasing evidence that this condition is genetic.

If you cannot consume alcohol safely then you should not consume it at all. If you need help to either stop drinking or maintain abstinence, you should get it.

I wanted to write a little something about that side of drinking so I did what any writer would do, I Googled it.

First, the premium paid links. There are three of them, all from private-pay rehabilitation clinics. Tip: If you are going to have a substance abuse problem, the best exit strategy is wealthy parents.

The first unpaid link is to Alcoholics Anonymous. That makes sense. Nobody gets more or better PR than Alcoholics Anonymous. But I’m not planning to stop drinking. I’m looking for something a little broader, about the negative effects of alcohol on the human body and on communities.

Next up is something Google calls the alcoholism home page, which is actually the alcoholism entry on About.com. After that is a sampling of timely news stories involving alcoholism, followed by the Wikipedia entry.

Not counting the news stories, the Medline page on alcoholism comes up fourth. Medline is the Federal Government, specifically the National Institutes of Health, the official word on the subject. It’s interesting that AA, About, and Wikipedia all beat the government.

Next is the Mayo Clinic and one of WebMD’s sites. The Illinois Department of Human Services and another WebMD site wrap up the first page.

Based on that quick survey, I think someone looking for information about alcoholism, for whatever reason, would be well served by Google. AA has a bit of an attitude, but all of the rest are reliably neutral and science-based; not a neo-dry crusader among them. Only two of the first page sites are government-sponsored. They mostly talk about the personal effects of alcohol consumption and alcohol abuse, not the societal effects. But I probably can get there using one of the personal health sites as a portal.

I was wondering when some phony-baloney outfit like the Center for Science in the Public Interest would show up and am gratified to discover that by page six, it still has not, though it is likely that some of the site sponsors I don't recognize are similarly self-serving donation mills.

Since the top sites on Google are the ones people use most, it looks like people researching alcoholism are getting their information from good sources. Government policymakers should start their research the same way.

Sunday Liquor Sales in Bardstown, the Inside Story.

Yesterday I told you about how Bardstown, Kentucky, is now permitting liquor sales on Sunday, with the county around it, Nelson, about to follow suit.

Here is the inside story.

It was Heaven Hill Distilleries, perhaps by accident, that got the ball rolling. Heaven Hill has probably the best visitors center in America's whiskey country. It is open six days a week. It is legal for them to provide a free tasting and they also sell their whiskeys in their gift shop. Although they have a special license for this, they are still subject to the local option laws of their local jurisdiction, which in their case is the city of Bardstown. So if Bardstown prohibits Sunday sales, which it did, Heaven Hill can't sell on Sunday.

Since the visitors center is closed on Monday, that meant they could only sell five days a week. Since they get the most traffic on weekends, they were losing one of their best days of the week too.

So Heaven Hill asked the Bardstown city council to let them sell on Sunday. The council could have passed an ordinance permitting Sunday sales just for the local distilleries, excluding other retailers, and that's what Heaven Hill requested. Once that was on the table, though, the local bars started to clamor for Sunday by-the-drink sales, then the local liquor stores started to clamor for Sunday packaged goods sales. The opposition to Sunday liquor sales apparently is not what it used to be, so the city council said okay to all of them.

Almost immediately, the bars and liquor stores in the rest of the county asked the county government to put them on an equal footing with their competition in the city.

The city ordinance is already in effect so last Sunday, for the first time, the Heaven Hill visitors center, and the local bars and liquor stores, could sell alcohol on Sunday. The county has passed the first hurdle and seems likely to legalize Sunday sales as well.

Yesterday, I speculated that tourism might have been the reason this change occurred at this time. Indirectly, it was.

Many thanks to my friends on the ground there for giving me the inside skinny.

Enough With The Alcohol Taxes Already.

Kentucky isn’t the only state that wants to balance its budget on the backs of drinkers. Illinois lawmakers are currently looking at sales tax hikes too, maybe on beer and wine, but certainly on distilled spirits.

Alcoholic beverages are always an inviting target They are seen as non-essential and some people favor high taxes to deter consumption. Even the language—-‘sin tax,’ ‘hard liquor’—-is loaded.

Some regard Kentucky as a unique case because it is a major producer, primarily of bourbon whiskey. Fewer people, even here in Illinois, know that our state is one of the top producers of grain neutral spirits, the basis for vodka, gin and many other distilled spirits products.

In addition to threatening those manufacturing jobs, higher taxes on alcohol have a negative impact on every business that sells liquor of any kind. Whether you’re talking about bars, restaurants, hotels, stores, or sports venues, the alcohol they sell is usually more profitable than just about anything else, so if higher prices caused by higher taxes hurt alcohol sales, the bottom line suffers more than it would from just about any other cost increase.

Few people realize how much drinkers already pay in taxes. If you drink, smoke and gamble, you probably should get some kind of citizenship award.

With distilled spirits, taxes cost more than the product! Here is the rundown, courtesy of the Distilled Spirits Council (DISCUS).

The retail price of a typical 750ml bottle of 80 proof distilled spirits is about $12. Of that, about $7—-nearly 60 percent-—is taxes and fees. Out of that $12, the producer, distributor and retailer split $5 among them. That $5 pays the farmer who grows the grain, the distiller who makes the product, the bottle manufacturer and label maker, the wholesaler, the retailer, and all of their employees and suppliers.

Out of the $7, the federal government takes about $2.15. state and local taxes account for another $2.40. Those are the extraordinary taxes that are there just because it’s alcohol. The rest, about $2.45, represents the normal tax burden on the various businesses involved and their employees.

One way to look at it is as a 60/40 split, with the government taking the lion’s share. Another way to look at it is as a 140% mark-up that makes a product which should cost $5 cost $12 instead.

No other consumer product, except perhaps tobacco, carries such a heavy tax burden.

Just as there is no such thing as a free lunch, there are no painless taxes. By fostering the illusion that there are in order to collect as much as possible, politicians try to pit taxpayer groups against one another. I’m a soft touch for taxes on gambling and tobacco, because those aren’t my vices. Alcohol is.

When the United States was just formed, its only taxes were import duties. Imported goods were viewed as luxuries, non-essential. It was even argued that taxes on imports were good because they encouraged domestic production. When they didn’t produce enough revenue, the government turned to taxes on distilled spirits. Distilled spirits consumers have paid more than their fair share ever since.

Arguably, those high taxes on distilled spirits have been a good thing. They have raised a lot of needed tax revenue and people probably would drink more if it cost less. But let’s be realistic. There is such a thing as killing the golden goose and it doesn’t say much for us as a society if we increasingly fund our government by exploiting our own weaknesses.

KDA Fights the Good Fight.

Columnist Tom Eblen, in the Lexington Herald-Leader (online here), did a good job yesterday of describing Kentucky’s fraught relationship with one of its signature industries, whiskey-making. His subject was Bill Samuels, president of Maker’s Mark, who spoke to the Bluegrass Hospitality Association in Lexington on Wednesday. In the course of unveiling a new look for the Kentucky Bourbon Trail (see my post, here), Samuels talked about whiskey’s economic contribution to Kentucky, its growth potential, and the commonwealth’s seemingly counterproductive beverage alcohol tax policies.

Knowing a few more facts makes the story even better.

Samuels was speaking on behalf of the Kentucky Distillers Association (KDA). Eric Gregory has been president of that 128-year-old organization for a little more than a year. He is a young leader who is shaking things up and showing his members (i.e., the distilleries) how to lobby and promote effectively. Gregory is also smart enough to pick a fight he believes he can win.

Bill Samuels and Maker’s Mark are now part of Beam Global Spirits and Wine. Counting Maker’s, Beam has three Kentucky distilleries in three different counties, plus a warehousing and bottling site in a fourth county. Even though Beam is based here, in Illinois, it has a lot at stake down there. Beam’s vice president for government relations and public affairs is Chris Swonger, another savvy young man who knows how the political game is played. The other companies have smart people working for them too. This isn’t just Bill Samuels shooting from the hip.

But Samuels is a good choice because he is always colorful, and if he goes too far it can easily be shrugged off. He can get away with attacking religious conservatives who see high sin taxes as deterrents. Even if that argument is not a winner, it makes the topic hot, which gets it more coverage.

To pour more 140-proof bourbon on the fire, Samuels pits Kentucky’s 30 most populous counties, where alcohol sales are permitted, against the other 90, where it is either banned or restricted. According to Eblen, “Samuels suggested legislation removing all local-option restrictions and forcing counties that want to ban alcohol sales to vote ‘dry’ again. And, he said, those that did should not get any alcohol tax revenues.”

That won’t happen, but it gets people talking, even though the argument is specious.

Does anyone suppose that people who live in dry counties don’t drink? Of course they do, and although some of them buy from bootleggers, most do not. They buy legally where it is legal to sell and they pay all the taxes. Even bootleggers and their customers pay taxes, since virtually all bootlegged liquor is bought legally at retail, with all taxes paid.

Dry means no sales, which means drinkers who live in those counties just pay their taxes someplace else. It is legal everywhere in Kentucky for anyone of legal age to possess and consume alcoholic beverages, that’s not the issue, and there are tax-paying alcohol consumers in every Kentucky county, so making this a wet v. dry fight is not really logical, but politics seldom is.

What matters here is that if the KDA shows legislators it can make their phones ring, it has leverage for its real agenda.

Which is, Kentucky will collect more taxes by encouraging us than it will by strangling us.

You can bet that what they are emphasizing behind closed doors is economic development.

It makes sense. Kentucky’s practical monopoly on bourbon production is a historical accident, but real nonetheless, and bourbon’s popularity is growing. Kentucky can capitalize on that, or not.

Kentucky’s whiskey-makers directly employ 3,200 people now. Could that number grow to 6,000 or 10,000, or even more in the future? Whiskey directly creates $3 billion in gross state product now. What if that could be $6 billion or $10 billion or more down the road? Or would you rather it be $2 billion, or $1 billion, or nothing?

Then there is bourbon tourism, which is why Samuels’ speech was made to representatives of the Kentucky tourism industry. Tourism is a big, fat tax pie too.

I haven’t seen them but I’m sure there are polls that show most Kentuckians, by a wide margin, believe their state should be behind all that and not trying to kill it, regardless of whether or not they, personally, drink. If the question is asked the right way, most Kentuckians will agree that encouraging whiskey-makers should be one of the state’s highest economic development priorities.

Every whiskey-maker in Kentucky is part of a diversified company that makes a lot more than bourbon. Some have more of their operations in Kentucky than others. This sort of campaign is exactly what the KDA exists to do. It is refreshing to finally see it doing it, and doing it so effectively.

No Laughing Matter, Kentucky's New Alcohol Tax Takes Effect Tomorrow.

It was passed on Friday the 13th and takes effect on April Fool’s Day but, unfortunately, the alcohol tax rushed through by the Kentucky legislature is not a joke. It takes effect tomorrow, April 1. That's when consumers will start to pay an additional 6 percent sales tax at their favorite package store.

The new tax is on top of five other taxes on liquor, said Eric Gregory, President of the Kentucky Distillers’ Association. In fact, the sales tax already was being collected as part of a broader wholesale tax put into effect in 1982.

More than half – 53 percent – of an average bottle of spirits goes to local, state and federal taxes, Gregory said. Kentucky already has the third-highest effective tax rate on spirits in the country, and is the highest among most neighboring states.

"The legislature has really put Kentucky’s signature bourbon industry over a barrel with this unfair tax scheme," he said. "It’s a double tax that puts Kentucky at a significant competitive disadvantage with surrounding states and the rest of the country."

The KDA is closely monitoring sales and tax figures for any impact on the historic industry. Wholesale, case and excise tax receipts on spirits plunged 14 percent in February compared to last year, according to the Office of the State Budget Director.

"That raised a red flag and we’ll be watching to see if it’s a trend," Gregory said. "Everyone understands that the economy is down, which is why we argued for a more comprehensive solution instead of a short-term fix."

Gregory also expressed concern about potential harm to the 3,470 retailers that will be collecting the tax, as well as the tourism and hospitality industries. Only 30 of Kentucky's 120 counties permit alcohol sales, although revenue from alcohol taxes is distributed statewide, including in dry counties.

Gregory said he is looking forward to working with the legislature when it takes up comprehensive tax reform. "Kentucky bourbon is a home-grown industry that deserves better treatment. This might be April Fool’s Day, but we’re not laughing."