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Cider is Hot, But Outdated Laws May Chill Its Growth

by / Wednesday, 05 March 2014 / Published in Blog

7901453_ml (2)Although craft beer generates a lot of buzz regarding its substantial growth, the hottest segment of the alcohol industry is probably cider.  Cider is still low man on the marketplace totem pole, but consider this:  for 2013, cider volume (as measured by restaurant and bar orders) grew by roughly 49%, while craft beer grew by only about 4%.  While this resurgence of popularity is great for cider, that growth could be even more explosive if the laws governing it, especially tax laws, were updated.

Cider, like beer, wine, and spirits, is regulated by the state and federal governments, which automatically makes the legal environment very confusing.  Beer and wine, however, are pretty well-defined categories.  Cider, on the other hand, generally floats between other alcohol categories depending on, among other things, how much carbonation it has.  For example, in Pennsylvania, if cider has an alcohol volume of 5.5% or less and carbonation of less than 3.92 grams per liter, it is considered a “malt or brewed beverage” (i.e., beer).  If it has more carbonation or a higher alcohol content, it is considered wine.  At the federal level, cider is defined as hard cider if it has an alcohol by volume of less than 7%.  If the alcohol exceeds 7%, it is considered an apple wine.  Importantly, irrespective of the alcohol level, if the carbonation exceeds 3.92 grams per liter, it is considered sparkling wine (i.e. Champagne).  These definitions are very important because a beverage’s classification as either beer, cider, or wine has significant tax consequences.

At the federal level, cider (less than 7% ABV) is taxed between $.17 and $.226 per gallon.  Apple wine on the other hand (7% or more ABV) is taxed between $.17 and $1.07 per gallon.  (The $.17 tax rate is a discounted rate for those that produce less than 100,000 gallons/year).  If the carbonation exceeds 3.92 grams per liter, a manufacturer is looking at a tax rate between $2.40 for small producers to $3.40.  As you can see, that is a pretty big spread and even slight variations in ingredients/processes could result in a new classification with a much higher tax rate.  For Pennsylvania, cider that is 5.5% ABV or less is considered a malt beverage, which is taxed at $.08 per gallon – pretty cheap.  Cider that is greater than 5.5% ABV, however, is taxed as wine/liquor, which is a flat tax of 18% of the sale price.

With cider’s popularity on the rise, cider manufactures are pushing for changes to these classifications to allow for a little more flexibility in cider production, at least at the federal level, without crossing the wine tax threshold.  Cider manufacturers believe the consumer wants more carbonation, more akin to beer and European cider, as well as a higher range of alcohol content. Legislators in “apple” states have responded and have introduced the appropriately named CIDER Act for consideration.  The CIDER Act would expand the definition of cider to include pear cider and increase the ABV level for cider to 8.5%.  This would give cider manufacturers a little more flexibility in producing their product without jumping to much high tax levels.  As cider is gaining some of the momentum that craft beer has lost, I expect that the laws regulating it will get another look in the near future and it will become a more independent alcoholic beverage category .

Cheers!

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