Are premixed cocktails a spirit? This court battle over taxes may hold the answer

 A Clintonville company that makes ready-to-drink cocktails has lost a court battle over how its products are taxed, but plans to continue the fight.

Timothy Pappin and Ryan Mijal started Arty's Legendary Cocktails six years ago. The uncle and nephew were inspired to make premixed cocktails while staring down the bar of a Northwoods supper club where they watched as an army of old fashioned drinks were delivered to diners.

Arty's sells its bottled products to liquor wholesalers, who then sell them to retailers. The company offers a premixed Bloody Mary and Moscow Mule and three kinds of old fashioned cocktails — a brandy sweet, a whiskey sweet and a whiskey sour — all of which are sold at retail sites such as Pick 'N Save and liquor stores.

At the heart of the dispute: When does Arty's pay the excise tax and how much of the contents of each bottle is subject to the tax? A second argument questions the constitutionality of the higher taxes set for distilled spirits vs. beer and wine. 

The Wisconsin Department of Revenue says Arty's owes taxes calculated on the entire contents of each bottle — the spirits and the non-alcoholic ingredients. The Tax Appeals Commission agreed, in a decision on Sept. 13. 

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Arty's, which buys the spirits for the cocktails from distilleries, acknowledges that collections of the tax, based on Arty's transactions with distillers, are delayed until Arty's makes sales to wholesalers (known as transfer in bond).

Arty's pays two types of taxes: federal excise and state excise. "For our business, tax obligations on both are allocated at the time of sale of the bottle to wholesalers," Pappin said in an email. "However, the tax on the spirit (according to federal law) is assigned at the time the spirit comes into existence. So it is attached at the time of distillation but further amended at the state level due to the non-alcoholic ingredients being added.”

The company also argues that the liquor tax should apply only to the alcoholic portion of an intoxicating liquor beverage, since Arty’s does no further distillation.

Arty's cocktails are sold in 7-ounce bottles, each one consisting of 1.2 ounces of distilled spirits and 5.8 ounces of soda, water and flavoring. The distilled spirits that Arty's purchases are 40 percent alcohol by volume.

After they are mixed, each Arty's bottle is 6.9 percent ABV.

The company argued that tax classifications violate the constitutional guarantee of equal protection of the law because sellers of intoxicating liquor pay higher occupational tax rates than sellers of wines or beers with the same or higher alcohol contents.

Comparison ABV levels include beer, which can range from 4 percent ABV to 14 percent for a 12-ounce pour, according to alcohol.org. Wines average 12 percent ABV for a 5-ounce pour. Distilled spirits run between 28 percent and 48 percent ABV for a 1½-ounce pour, depending on the spirit. 

The Wisconsin Court of Appeals disagreed with both arguments. 

Pappin said that ruling is not likely the last word in the case.

"The appeal is not 100% complete or final, so I’m going to ask our legal counsel on guidance at this time in terms of inquiries," he said.