Why Kombucha Brewers Say an Outdated Federal Tax Threatens Their Industry

Producers are pushing for the passage of the KOMBUCHA Act to make sure the fermented health beverage is not treated like alcohol.

kombucha

Kombucha falls into the malt beverage category because it’s fermented with sugar. Photo credit: Evan Sklar

Editor’s note: We’re chronicling how tech is changing the way we eat and drink as we lead up to this fall’s Food Loves Tech. Our annual deep dive into appropriate food and ag technologies returns to Industry City on November 2–3, 2018, and you can get $20 off the regular admission price while our early bird special lasts.

Kombucha enthusiasts often brew and drink the fermented tea for its purported gut-health benefits. So it might surprise them to learn that in certain circumstances, a piece of the federal tax code means the drink can be lumped into the same category as beer.

To change that, producers across the industry—from indie Brooklyn brand Pilot Kombucha to the California powerhouse company Health-Ade—are pushing for the passage of the KOMBUCHA Act.

“Beer and kombucha are fundamentally different,” says Amelia Winslow, Health-Ade’s director of project management. “If we’re subject to excise taxes, that means a lot of the other rules that apply to beer could apply to us.”

It all comes down to a section of the internal revenue code that was written in 1933, long before the fizzy, fermented tea was commercially available, Winslow explains. The code says that malt beverages that are above 0.5 percent alcohol by volume (ABV) are subject to the federal excise tax.

Kombucha falls into the malt beverage category because it’s fermented with sugar.  But while a few brands brew specifically to create an alcoholic beverage that is labeled as such, most brands produce bottles that have just trace amounts of alcohol (which is a natural by-product of the fermentation process).

Those brands employ various measures to make sure their alcohol content stays below 0.5 percent, but guaranteeing that number can be tricky. “We’re brewing a living beverage that ferments and can change depending on the conditions,” Winslow explains. If there’s a long journey to the shelf and the product goes in and out of cold storage, for instance, the level of alcohol could tick up a tiny bit. “By the time a customer buys it, it goes a little bit above, and suddenly we’re categorized as a beer. It could put a lot of small producers out of businesses,” she says.

Brooklyn-based Pilot Kombucha founder Alex Ingalls says the supply chain issue doesn’t apply to her business since her product is shipped locally and consumed fresh each week. She has, however, had to throw out batches of product that tested slightly above 0.5 percent ABV before bottling, which was a huge cost.

“If for whatever reason we tested at 0.6 percent, it would be a huge blow to our businesses and the other small businesses we work with to sell our product,” she says. “We go through extensive lengths to make sure our product is below the threshold.”

Ingalls says the issue puts pressure on companies to pasteurize, and she knows of several big companies that do so already and at least one small producer in upstate New York that has chosen that route to avoid the issue. The problem with that approach is that the process of pasteurization kills the probiotics in the drink—which, for most people, are the reason for drinking it in the first place.

And as the kombucha industry grows and the beverage becomes more mainstream, safeguarding the integrity of real, unpasteurized kombucha will be even more important, brewers say.

To address all of this, Democrat Sen. Ron Wyden (from Oregon, naturally) introduced the KOMBUCHA Act in February 2017, with Republican co-sponsor Sen. Corey Gardner. (In D.C, by the way, you’re apparently not allowed to propose legislation without reaching for an acronym, so KOMBUCHA here stands for “Keeping Our Manufacturers from Being Unfairly taxed while Championing Health.”)

The bill would essentially raise the threshold so that kombucha would be exempt from the federal excise tax as long as it contained less than 1.25 percent alcohol by volume. That slightly higher (but still minimal) level would give producers some more wiggle room.

Trade group Kombucha Brewers International has been hosting visits to D.C. for brewers to talk to representatives about the law and has encouraged brands to keep writing in to their local legislators.

“This is a bi-partisan, widely supported, non-controversial, low-cost fix to a part of the tax code that affects kombucha specifically,” Wilson says. “We’re just asking for the flexibility to make the product people want without compromising it.”

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