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State's higher taxes on 'alcopops' are fizzling out

March 16, 2009|Evan Halper

SACRAMENTO — Substance-abuse foes cheered last year when state officials cracked down on sweet, sometimes fizzy, intoxicating drinks such as Mike's Hard Lemonade that -- save for their alcohol content -- bear a remarkable resemblance to soda pop.

The sugary beverages had long been taxed as flavored beers. But state authorities reclassified them as liquor, raising the levies on a six-pack by a factor of 16 to match the rate consumers pay on vodka, rum and other distilled spirits. The move was supposed to generate $38 million in annual revenue for the state.

Now the numbers are in: The state has collected about $9,000 since the new tax rate kicked in Oct. 1. Some officials and activists suspect fraud.

Beverage makers admit they aren't paying the new taxes. They say they don't have to because they have reformulated the drinks -- more than 6,000 varieties -- to transform them into simple beers by limiting the amount of distilled spirits they contain.

They won't explain how. The formulas, they say, are trade secrets. And beverage-industry officials and federal regulators say there are no tests to determine how much distilled spirits the drinks contain.

"We're suspicious," said Mike Scippa, advocacy director at the Marin Institute, an alcohol-industry watchdog. "These drinks are not beer. They don't taste like it, smell like it or look like it. But they are being sold like beer."

A showdown is brewing between the beverage companies and state officials.

"We have an obligation to the people of California to ensure that this regulation is being carried out," said Judy Chu, a Democrat from Monterey Park who chairs the state Board of Equalization, which collects alcohol taxes. "Without a verification process, the alcohol companies can claim anything they want."

The feud is being watched nationwide. California is one of a handful of states aggressively campaigning against makers of "alcopops" -- also called flavored malt beverages -- such as Smirnoff Ice Raspberry Burst, Bacardi Silver Peach and Mike's Hard Lemonade.

Critics, including the American Medical Assn., say manufacturers are using the cheap, sweet, convenience-store beverages to lure teenagers into drinking. They point to marketing campaigns that they say are aimed specifically at underage girls, something the manufacturers deny.

The Board of Equalization approved the reclassification in November 2007 after extensive testimony from anti-substance-abuse activists, including some teenagers. The new levies were intended to raise the price of a typical six-pack by $1.74 -- or 20%. Advocates were hoping that would deter teenagers from buying the brews.

Just before the new tax rate took effect in October, Gov. Arnold Schwarzenegger signed a law requiring alcopop containers, many of which resemble soda bottles, to have a prominent label that states: "CONTAINS ALCOHOL."

But manufacturers now say that since the drinks are no longer alcopops, the products are not subject to labeling requirements. In fact, they say, they're simply doing what they said they would do if the tax rules were changed.

"What happened is exactly what we said was going to happen," said Marc Sorini, an attorney with the Flavored Malt Beverage Coalition, a consortium of producers. "We told them over and over again at the hearings that this is what we would do."

The only government agency that has access to the formulas is the federal Alcohol and Tobacco Tax and Trade Bureau, which is declining to share them with California investigators. Bureau spokesman Art Resnick says his agency is prevented from providing the information to state officials by the Federal Trade Secrets Act and provisions of the federal tax code governing such confidential material.

Jim Mosher, an analyst at the CDM Group, a consulting firm that researches substance-abuse policies, called the refusal of federal regulators to provide the formulas "an outrage."

"They consider protecting industry trade secrets more important than protecting the public's health," Mosher said.

State authorities recently sent a letter to a dozen manufacturers asking them to list the ingredients of the drinks by the end of the month.

Asked whether her company would comply, Zsoka McDonald, spokeswoman for Smirnoff Ice manufacturer Diageo, one of the largest producers, told The Times that the formulas "are proprietary and they have been filed" with the federal government. Sorini said his clients also view the formulas as proprietary.

State regulators are now considering whether to ask the Legislature for $250,000 to hire an auditor to keep pushing for the formulas and trying to verify their validity.

"We need to verify the contents of these products," Chu said.

But as her five-member board prepares to vote Tuesday on whether to move forward, some members are resisting. Board member Bill Leonard, who voted against the initial tax hike, said that although he is curious about how the industry managed to change thousands of drink formulas in a year, "it is probably impossible for us to ever figure out whether the formula is what they say it is."

Federal officials say the only way to know for sure what's in the beverages is to send teams of investigators and chemists to monitor the ingredients as they are added.

"It is one of these investigations that is just more costly than it is worth," Leonard said.

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evan.halper@latimes.com

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