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INSIGHT: Outdated Federal Law Should Be Changed to Foster Growing Kombucha Industry

June 24, 2019, 1:00 PM

Kombucha—the increasingly popular fermented tea that contains a trace amount of alcohol and is a healthy soft-drink substitute—is poised to take off in the marketplace nationally, if only Congress can enact a minor, non-controversial change to the tax code.

In 2017, the kombucha industry had an estimated economic impact of $800 million. That figure is expected to grow to $2 billion by 2020. In the U.S., more than 7,500 people work in the industry.

Today, most kombucha sold in the U.S. contains less than 0.5% alcohol-by-volume (or “ABV”), due to the natural fermentation that occurs in the product. By comparison, popular light lager beers typically contain about 3.2% ABV, while the ABV levels of many craft beers are often 5% or higher (and noted on their labels).

Here, however, is the critical difference between kombucha and beer: Consumers do not drink kombucha for its trace amount of alcohol. Rather, they drink it for its taste, and because it is naturally rich in probiotics and healthy acids that aid in digestion.

Nevertheless, the tax code, for the purpose of assessing federal excise taxes on beer, defines the term “beer” broadly to mean “beer, ale, porter, stout, and other similar fermented beverages (including sake or similar products) of any name or description containing one-half of 1% or more of alcohol by volume, brewed or produced from malt, wholly or in part, or from any substitute therefor.”

The current definition of “beer” encompasses kombucha, if the kombucha contains one-half of 1% (or 0.5%) of ABV.

For kombucha brewers, this federal law presents a real dilemma. While most kombucha is below the 0.5% ABV threshold when it leaves the kombucha brewery, the ABV level can increase slightly—in a few cases even above 0.5% ABV—if the product is not stored or refrigerated properly.

Under current federal law, kombucha brewers effectively have a Damocles sword hanging over their heads. That is, their kombucha may leave the brewery with an ABV below 0.5%. But if the product is not stored properly, its ABV level may actually go slightly above 0.5%, thus subjecting the brewer to federal excise taxes.

For years, hard cider makers faced a somewhat similar problem. Federal law provided that hard cider could not exceed 7% ABV. However, cider makers—particularly small cider makers—could not easily manipulate the ABV levels, due to the natural fermentation of the apples used to make cider.

Congress recognized the hardship placed on cider makers, and addressed this problem in 2015 by increasing the allowable alcohol content in cider from the then-existing limit of 7% to less than 8.5%.

While cider is an alcoholic beverage and kombucha is not, the two products nonetheless share a similar issue: the alcohol level in each can go up due to fermentation.

Fortunately, this dilemma and the anxiety it causes kombucha brewers can be remedied through enactment of the common-sense, bipartisan Kombucha Act now being considered in Congress. That legislation—sponsored in the Senate by Sen. Ron Wyden (D-Ore.) and in the House by Rep. Earl Blumenauer (D-Ore.)—would create an exception in the tax code for kombucha, so long as the ABV level of the product is 1.25% ABV or lower.

Kombucha brewers believe that their product would seldom test at 1% ABV or above, but have asked for some flexibility in the law. (It should be noted that there are some alcoholic kombucha products on the market, and the brewers who make them pay the federal excise tax that is required.)

Every kombucha brewer I know is committed to complying with their legal obligations. But it is doubtful that Congress ever intended to subject the fermented tea kombucha to federal excise taxes meant for beer. In fact, kombucha, with a trace amount of alcohol, is not an alcoholic beverage.

We are hopeful that Wyden and Blumenauer—who sit on their chambers’ tax-writing committees—and their colleagues on both sides of the aisle can succeed in getting this legislation enacted into law this year.

If they do succeed, they’ll win the ever-lasting gratitude of the nation’s kombucha brewers and the growing legion of kombucha drinkers all across the country.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Hannah Crum is the President of the Kombucha Brewers International, the trade association that represents the interests of kombucha brewers.