When the tax man comes for your kombucha
Since earlier this decade, the kombucha sector has grown exponentially, with some estimates suggesting year-over-year growth as high as 25%. As encouraging as this boom has been, things are not all rainbows and unicorns for kombucha brewers. Unfortunately, under antiquated federal tax provisions, kombucha can occasionally become subject to alcohol excise taxes despite the fact that the product, by nature, only has trace amounts of alcohol. In light of this, both to promote commercial freedom and as part of a greater push to modernize outdated alcohol laws, fixing this accident of history should be a priority for federal lawmakers.
Under the federal tax code, all “fermented beverages” that contain 0.5% of alcohol or more by volume are technically considered “beer” and therefore subject to alcohol excise taxes. Federal excise taxes on beer follow a relatively complicated formula, but they can range anywhere from $3.50 a barrel up to $18 a barrel, depending on the size of the brewery.
When kombucha is made, it is usually below the 0.5% threshold for alcohol. However, if it’s not properly refrigerated after leaving the factory for distribution, it continues to ferment, thereby raising the alcohol level above the intended amount.
Because it’s nearly impossible for kombucha producers to control the entire supply chain, from factory to delivery truck to grocery store shelf, the potential for rising levels of alcohol creates a huge administrative nightmare. In recent years, the Alcohol and Tobacco Tax and Trade Bureau has taken to sending warning letters to kombucha makers, informing them that their products tested slightly over the limit and threatening fines of more than $10,000.
This is for little reason, since the 0.5% level has absolutely nothing to do with intoxication but rather originally traces its heritage to the early 1900s, when pro-Prohibitionists used it as a means to control the spread of alcohol to new states. The man who claims to have invented the threshold, William Johnson, was a prominent temperance advocate and later admitted: “It is not a question as to whether one-half of one per cent is intoxicating … it is only a question of the adequate enforcement of any law prohibiting the manufacture and sale of intoxicating liquors.”
This enforcement provision then made its way to the federal level once Prohibition became nationalized. In order to enforce the 18th Amendment’s call for Prohibition, Congress passed the Volstead Act in 1919. Congressmen of that era openly noted that the 0.5% was chosen for taxation and enforcement purposes rather than any attempt by Congress to distinguish between beverages that were intoxicating or not. In fact, during hearings surrounding the Volstead Act, Congress even considered studies and testimony asserting that such a low level of alcohol actually couldn’t intoxicate an adult.
This history shows that the 0.5% taxation threshold was essentially created out of thin air. Today, nearly a century later, the result is that innovative entrepreneurs like kombucha makers are being made to suffer under a legal regime that has long since reached its sell-by date. While it may be unrealistic to expect the lawmakers of yesteryear to predict the advent of kombucha — although it should be noted that the concept of fermented beverages has been around for millennia — modern day congressmen have no such excuse.
Right on cue, Democratic Sen. Ron Wyden of Oregon and a bipartisan group of federal lawmakers have taken notice and introduced a straightforward bill that would raise the threshold for kombucha to 1.25% alcohol-by-volume. This small fix would modestly raise the threshold and ensure that kombucha would not find itself arbitrarily subject to federal alcohol taxes.
Such a reform would help free up the kombucha sector to grow even more in the years ahead. Given that the industry already employs over 7,000 workers nationwide and has an estimated economic benefit of $800 million, supporting it should be a priority.
America is rife with outdated and nonsensical laws involving alcohol. Updating and modernizing these rules is a simple way to expand economic freedom and generate more jobs. Accordingly, more federal rules surrounding alcohol, such as the Alcohol and Tobacco Tax and Trade Bureau’s burdensome and constitutionally suspect labeling regulations, should be reconsidered and reformed. But updating the tax threshold for kombucha makers is a good first step.
Image credit: Sheila Fitzgerald