Cider makers press for tax changes

Published 12:00 am Thursday, June 21, 2012

Portlanders Aidan Currie and Tim McDonnell wanted to take their home-brewing hobby one step further and sell their product on a larger scale.

But with McDonnell’s gluten allergy (not to mention the abundance of breweries) and no vineyard at hand, they decided to carve a small space for themselves in the cider world.

Thus began OutCider Fermentations, which harvests local wild yeasts and works by the age-old concept of making alcohol with the products at hand. The business operates from a rented room in a North Portland warehouse, and expects its first yield in January.

But of the 73 ciders that will be available at Saturday’s second annual Cider Summit Northwest Festival in Portland, OutCider won’t showcase their product.

Like a growing number of local upstart cideries, OutCider is lobbying to eliminate what’s called the “champagne tax,” which places cider in a higher tax bracket than beer.

They say the federally mandated tax, regulated by the Alcohol and Tobacco Tax and Trade Bureau, puts them on an unlevel playing field and makes it tough to expand and compete.

“It’s a really confusing tax landscape that can be a huge barrier for small businesses trying to start up,” says Currie.

If a cider contains more than 39 percent carbon dioxide by volume, it falls under the “champagne tax,” and the per-gallon tax burden on that cider rises from a typical 23 cents to $3.30 per gallon.

“People tend to prefer more (than 39 percent) highly carbonated beverages, and I want to supply that, but at a 2,000-percent tax increase, it’s not going to happen,” says Currie.

There are even different brackets for natural and artificial carbonation. There is no such tax for beer.

Currie says U.S. cider brands compete with beers, but their growth is taxed in a far more complicated manner.

Saturday’s cider festival organizers expect to draw about 1,500 cider enthusiasts. There will be 73 ciders from five states and five countries: 49 are from the Northwest, 33 of which are from Oregon.

More arcane laws

That’s not the only odd tax law surrounding ciders. Those with less than 7 percent alcohol by volume are classified for excise tax purposes as “hard ciders,” and are taxed the same as most beers at 23 cents per gallon.

But ciders containing more than 7 percent alcohol are classified as “wines” and taxed on a sliding scale according to production volume: from 17 cents to $1.07 per gallon.

Neither wine nor beer is taxed according to alcohol percentage.

“It’s an antiquated and convoluted structure that makes it difficult in terms of money and creativity,” says Currie. “But hopefully in a few years we will have the ability to move past that and grow. For now, we’re just trying to make everything on the lowest tax level.”

Since cider is made from a fermented fruit, like wine, the alcohol percentage can change each season, depending on the crop. If wine goes from 12.5 percent to 13.5 percent, nothing changes.

On the other hand, if cider jumps from 6.5 percent to 7.5 percent one year, a much heavier tax is imposed. Currie says that only leaves two options: pay the extra money, or water your cider down.

“We’re trying to create our product as natural as possible,” he says. “But the more I have to fix it to meet these standards, the further I get from that idea.”

Currie says that it’s hard to get a foothold in the market with little money and expect to be able to produce a variety of ciders.

OutCider uses botanical infusions in their libations, which makes it even more confusing with the current regulations.

Regardless, Currie says Portland is an ideal place to start their cider company. “Portland is looking to not only become the beer capital of the Northwest, but also the cider capital,” he says.

Buddies, not adversaries

Alan Shapiro, founder and president of Seattle’s SBS Imports, (the company sponsoring this weekend’s festival), says cider has the potential to expand on a much larger scale.

“The cider business right now is very similar to what craft beer was 25 years ago, or what the Oregon wine industry was 10 years ago,” Shapiro says.

The industry has three to four times the growth rate of craft beer, he says.

Shapiro believes that with a few tweaks of the system, many more cideries could pop up, creating more jobs and stimulating the economy.

“The craft beer industry was given tax breaks for small breweries, and people became aware of how much that could help a local economy,” he says. “We are hoping, to some extent, that can happen with ciders.”

Shapiro says the industry is just starting to see the birth of small local companies, what he calls the “Widmers and Bridgeports to be, of the cider world.”

James Kohn, co-owner of Salem’s Wandering Aengus and west region representative of the U.S. Cider Makers Association, helped spearhead the movement to galvanize the cider industry.

“I wanted the U.S. cideries to see that we are all buddies, not adversaries,” Kohn says. “We have to work together to show that we are not a champagne that needs to be paying this luxury tax.”

Kohn and the association are hoping to erase the tax brackets on cider and try to get the drink to be taxed similarly to beer.

However, the association has made some compromises, and, as a first step, is working to eliminate the champagne tax for ciders. It would be an added bonus for the industry to change the hard cider/wine threshold to 8.5 percent alcohol.

Kohn is hoping to get a law passed within a year, something that will take congressional work.

According to Shapiro, cider makers across the country are finally on the same page, and ready to get the wheels rolling.