by Jon Sanders
Research Editor and Senior Fellow, Regulatory Studies, John Locke Foundation
Alcohol entrepreneurship in North Carolina isn’t limited to craft beer, wine, and liquor. Seventh in the nation in apple production, North Carolina is also seeing a growth in producers of hard cider. There are now at least 28 cideries in the state, mostly in Western N.C., and most supported by apples from Henderson County, the seventh-most productive county for apples in the U.S.
Hard cider is different from wine and beer. It offers different flavor profiles and tasting nuances from either beer or wine. It has a lower alcoholic content than wine. It appeals to alcohol connoisseurs who want gluten-free beverages.
As seen time and again, government regulation plays a role in how slowly or quickly an industry grows. An earlier research brief discussed this dynamic over wineries, distilleries, and breweries. But the emergence of hard cider presents new questions to policymakers on how the government should classify and regulate it. And one factor that creates special problems for cideries is, it’s not as easy to control the precise alcohol content and carbonation levels in cider production.
The federal government has already tackled the problem. A portion of a law signed in late 2015 by President Barack Obama set into motion a change in the federal definition of “hard cider.” This change would have broad tax implications for cideries once the definition took effect in 2017.
Before, hard cider was defined in federal law as a
still wine derived primarily from apples or apple concentrate and water, containing no other fruit product, and containing at least one-half of 1 percent and less than 7 percent alcohol by volume.
This definition put the upper bound of alcohol content of hard cider at 7 percent, whereas ciders generally fall somewhere between 5 and 8.5 percent. Producing a cider with an alcoholic content greater than 7 percent would create many hardships for the cidery.
At 7 percent or less, it is taxed at a rate of 22.6 cents per gallon. But if it crosses that 7 percent threshold, it falls under the definition of wine, where it would be taxed at either $1.07 per gallon (nearly five times greater). Or if it contains too much carbonation (i.e., is not “still wine”), it would be considered either a sparkling wine ($3.40 per gallon) or artificially carbonated wine ($3.30 per gallon).
It would also require expensive new labeling. Labeling authority would transfer from the federal Food and Drug Administration to the federal Alcohol & Tobacco Trade and Tax Bureau, and the cider would be labeled like wine (and also need a Certificate of Label Approval).
The old federal definition also excluded perry, which is a similar alcoholic beverage made from pears.
The change in definition allowed for alcohol content of up to 8.5 percent, allowed for some carbonation, and permitted hard cider to be made from apples, pears, or concentrates of apples or pears and water.
In so doing, it ended the expensive confusion of some hard cider having to be defined as wine for the purpose of levying taxes.
A bill currently before the General Assembly, House Bill 995, would use that federal definition in order to address a similar concern here. After defining in state law what hard cider is, it then would place an excise tax on hard cider that is identical to the one imposed on beer.
Currently, hard cider is defined and taxed like unfortified wine. That excise tax rate is 26.34 cents per liter. The tax on beer is 61.71 cents per gallon.
Creating an apples-to-apples comparison of the two tax rates would make for a good word problem in an earlier era of math instruction. A gallon is about 3.79 liters, so the current excise tax on hard cider amounts to approximately 99.83 cents per gallon, which is 38.12 cents more per gallon than the tax on beer.
Taxing hard cider, so defined, as beer instead of unfortified wine would, therefore, amount to a 38 percent tax cut.
The effect of all these changes is a significant lowering of state and federal tax and regulatory costs on cideries. That should boost the emerging cider industry in apple-rich North Carolina.