Vermont lowers ready-to-drink spirits taxes

Vermont Gov. Phil Scott (R) has signed legislation lowering taxes on ready-to-drink spirits, the latest front in an ongoing battle within the alcoholic beverage industry that pits distillers against beer and wine makers across the country.

The new law, approved by the Democratic-controlled legislature, will amend the state liquor code to allow grocery stores and convenience stores to sell canned cocktails made with liquor. Currently, liquor in Vermont can only be sold at the 82 liquor stores run by the state.

States typically tax spirits at much higher rates than they tax beer and wine. The Vermont bill reduces taxes on packs of ready-to-drink spirits from $7.68 per gallon, the rate at which spirits are taxed, to $1.10 per gallon.

“This bill takes important steps forward to modernize our liquor laws and support economic growth,” Scott said in a statement. 

The products impacted, including brands like Cutwater and High Noon, are among the fastest growing segments in the liquor industry. A report earlier this year from BevAlc Insights, the research arm of the alcohol delivery service Drizly, found sales of ready-to-drink cocktails grew 126 percent in the last year, accounting for more than $1 billion in revenue for the first time.

Their rise has set off a behind-the-scenes battle between producers of different alcoholic beverages, who constantly jockey for market share and shelf space. Beer and wine producers say the ready-to-drink cocktails deserve the higher tax rates and limited sales space because of the type of alcohol they deliver.

The bill Scott signed “was a massive handout to the liquor industry at the expense of Vermont taxpayers and brewers,” said Alex Davidson, director of public affairs at the Beer Institute. “Vermont has a thriving local beer industry that was hit hard by the pandemic, and as local brewers recover, legislation like this puts the local industry at a disadvantage by giving a tax cut to out-of-state liquor companies.”

The liquor side of the alcoholic beverage business says the disproportionate tax rate imposed on ready-to-drink cocktails — a legacy of Prohibition-era legislation — unfairly burdens makers of spirits that have alcoholic contents comparable to beer or wine.

“There is no reason products with the same or similar alcohol content should be taxed at such wildly varying rates. Creating a more equal tax rate for spirits-based [ready-to-drink cocktails] will support Vermont’s distillers, lower costs for consumers and bring in revenue for the state,” said Jay Hibbard, who heads state government relations at the Distilled Spirits Council of the United States, the industry trade group.

The Vermont legislation came about a year after the governors of Michigan and Nebraska signed bills to lower excise taxes on ready-to-drink cocktails in their own states.

The internecine warfare between alcohol producers has become even more complicated in recent years as beverage companies have diversified. Anheuser-Busch, a founding member of the Beer Institute, bought the brewery that makes Cutwater Spirits in 2019. High Noon, the best-selling ready-to-drink cocktail, was launched the same year by E&J Gallo Winery, the world’s largest wine producer.

Because of the different tax rates between types of alcohol, a typical pack of ready-to-drink spirits can cost far more than a similar pack of beer or hard seltzer, or a bottle of wine, even if they carry the same price on the shelf. 

Tax rates differ by state, but in almost every state, spirits are taxed at a higher rate than beer or wine. The difference ranges from just a few dollars per gallon in Texas, Indiana or Tennessee, to more than $20 per gallon in Washington and Oregon, and almost that much in Virginia and Alabama. 

At the federal level, malt-based beverages and sugar-based beverages — like a hard seltzer — are taxed at five cents per 12 ounce serving. A wine-based spritzer is taxed at twice that rate, while a spirits-based cocktail carries a 13-cent tax rate.