When the State Board of Equalization passed a regulation (2559.3) last year to classify flavored malt beverages as distilled spirits (increasing the tax on the product from 20 cents per gallon to $3.30 per gallon), it expected to get $38 million in new revenue. However, manufacturers announced in December that the formulas for their various beverages have been changed, so they no longer qualify as distilled spirits. In October and November, the board collected only $6,451.49 from the regulation.
Even as a Sacramento Superior Court judge was holding that the regulation was validly adopted, the Department of Finance was asking the board to, in effect, withdraw its request for $1,328,000 from the state's general fund to implement the regulation in 2009-10.
At the BOE's February 3 meeting, the board faced a decision of whether to, in effect, withdraw the budget request or continue efforts to implement the regulation.
Lynn Bartolo, in charge of board special taxes, said the BOE has received 700 forms from the beverage industry saying their products fall within the rebuttable presumption that they are not taxable.
Board Member Dr. Judy Chu, who has been the main proponent of increasing taxes on flavored malt beverages, said the developments were disturbing. She said she was not willing to "pull the plug" on the regulation, and said the board should wait on sending a letter to the Department of Finance on the issue. Although the letter is due at the end of next week, BOE Assistant Director of Administration Liz Houser said she was sure she could get an extension.
Mr. Leonard observed that the manufacturers of flavored malt beverages lost in court but won in the chemical lab, and he urged the board not to "throw good money after bad" to continue to implement the regulation. He said the state's general fund is in dire straits, and money spent on implementation would not be well invested. He urged withdrawal of the Department of Finance letter.
Board Chair Betty Yee said the board still needs to implement the regulation. Dr. Chu suggested that the board could redirect existing staff resources to develop a testing program to check the chemical makeup of various beverages to determine whether they should be taxed as distilled spirits. The board asked staff to investigate the idea and bring back the issue in March, when a decision will be made. (Cal-Tax: The idea that the board could redirect staff could raise suspicions that there is "fat" in the board's budget.)
Cal-TaxReports, February 10, 2009
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