What does Illinois Private Letter Ruling ST 18-0007-PLR conclude about Liquor Tax?

Plain-English summary

An importer and distributor of a flavored malt beverage called "PRODUCT" (14% alcohol by volume) asked the Illinois Department of Revenue to rule that its product should be taxed as "beer" under Article VIII of the Liquor Control Act (235 ILCS 5/8-1) -- at the lower rate of $0.231 per gallon -- rather than as "wine," which the Department's Alcohol & Tobacco Processing Section had already indicated should apply at $1.39 per gallon. The taxpayer argued that PRODUCT is a malt-based beverage that the FDA itself had described as a malt beverage in 2010, and that it therefore fit the Liquor Control Act's statutory definition of "beer" (235 ILCS 5/1-3.04), which does not vary the tax rate based on alcohol content the way the rates for wine, spirits, and cider do.

The Department rejected that argument and ruled that PRODUCT must be taxed as wine with 14% or less alcohol by volume, at $1.39 per gallon. The Department's reasoning relied heavily on the Illinois Supreme Court's decision in Federated Distributors, Inc. v. Johnson, 125 Ill.2d 1 (1988), which held that Article VIII of the Liquor Control Act is a revenue-raising tax subject to the uniformity clause of the Illinois Constitution of 1970, and that a "real and substantial differences" test governs whether products can be taxed differently. In Federated Distributors, the court found no real and substantial difference between a distilled "New Products" beverage and a fermented wine cooler, and taxed both as wine. Applying that same reasoning here, the Department found no real and substantial difference between PRODUCT, wine coolers, and the "New Products" beverage in Federated Distributors -- all being flavored beverages with an alcohol content comparable to wine -- and concluded that taxing PRODUCT as beer, a category the legislature taxes at a lower rate because it poses less risk of alcohol abuse, would run counter to the Liquor Control Act's stated purpose of fostering temperance (235 ILCS 5/1-2).

Because the manner in which alcohol is produced (fermentation for beer versus other processes for higher-alcohol beverages) was not, under Federated Distributors, a sufficient basis to justify different tax treatment, the Department held that PRODUCT's malt origin did not control. What mattered was that its alcohol content (14% ABV) placed it in the same practical category as wine and wine coolers for uniformity purposes.

This particular letter carries a notable caveat printed directly at its top: "NOTE: This letter is superseded by ST 18-0012-PLR." The file does not explain further what changed or why a later PLR superseded this one -- readers relying on this topic area should treat ST 18-0012-PLR, not this letter, as the Department's current position.

What this means for you

Importers and distributors of flavored malt beverages

If you import or distribute a flavored alcoholic beverage with an alcohol content similar to wine (here, 14% ABV), do not assume that being "malt-based" or fitting the literal statutory definition of "beer" (235 ILCS 5/1-3.04) guarantees the lower beer excise tax rate. The Department applies a "real and substantial differences" uniformity analysis from Federated Distributors, Inc. v. Johnson, and has ruled that a beverage this potent can be taxed as wine at $1.39 per gallon rather than as beer at $0.231 per gallon.

Business owners and accountants handling excise tax classification

This ruling is a reminder that Article VIII excise tax classification under the Liquor Control Act (235 ILCS 5/8-1) is not purely a matter of ingredients or brewing method -- it can turn on constitutional uniformity analysis comparing a product's practical characteristics (like alcohol by volume) to already-taxed categories. Because this letter is marked as superseded by ST 18-0012-PLR, do not rely on it as the Department's current position; consult the superseding letter and a tax professional for present-day guidance on this issue.

Tax professionals researching PLR history on this topic

This letter documents the Department's 2018 reasoning and its heavy reliance on Federated Distributors, Inc. v. Johnson, 125 Ill.2d 1 (1988), but the Department itself flagged it as superseded by ST 18-0012-PLR. Treat this ruling as historical context for how the analysis developed, and look to the superseding letter for the Department's later position.

Common questions

Q: Did the Department rule that this flavored malt beverage should be taxed as beer?
A: No. The Department ruled that the beverage ("PRODUCT," a 14% ABV malt-based product) must be taxed as wine with an alcohol content of 14% or less, at $1.39 per gallon, not as beer at $0.231 per gallon, despite the taxpayer's argument that it fit the statutory definition of "beer."

Q: Why didn't being a "malt beverage" settle the question in the taxpayer's favor?
A: Under Federated Distributors, Inc. v. Johnson, the Illinois Supreme Court held that Article VIII of the Liquor Control Act is subject to the constitutional uniformity clause, and that the "real and substantial differences" test -- not merely the production method (fermentation vs. distillation) -- governs whether products can be taxed at different rates. The Department found no real and substantial difference between PRODUCT and wine coolers/the "New Products" beverage taxed as wine in that case.

Q: Can I rely on this letter for my own tax situation?
A: No, on two independent grounds. First, as a Private Letter Ruling issued under 2 Ill. Adm. Code 1200.110, it is binding on the Department only as to the specific taxpayer who requested it, and only to the extent that taxpayer's facts were correct and complete -- no other taxpayer may rely on it. Second, this letter's own text states it is superseded by ST 18-0012-PLR, so even background researchers should look to that later letter for the Department's current position.

Q: What is the difference between this Private Letter Ruling and a General Information Letter (GIL)?
A: The ruling text explains that a PLR is issued in response to a specific taxpayer's facts and is binding on the Department for that taxpayer only (2 Ill. Adm. Code 1200.110), while a GIL merely directs taxpayers to existing regulations or other information sources and is not a statement of Department policy and is not binding at all (2 Ill. Adm. Code 1200.120).

Citations and references

Statutes, regulations, and constitutional provisions:

• 235 ILCS 5/8-1 (Article VIII, Liquor Control Act -- excise tax rates on beer, wine, spirits, cider)
• 235 ILCS 5/1-2 (statement of purpose -- temperance in consumption of alcoholic liquors)
• 235 ILCS 5/1-3.04 (statutory definition of "beer")
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedures and binding effect; 10-year expiration)
• 2 Ill. Adm. Code 1200.120 (General Information Letters)
• Ill. Adm. Code Part 420.10 (Department regulation summarizing excise tax rates)
• Illinois Constitution of 1970, uniformity clause

Case law cited in the ruling:

• Federated Distributors, Inc. v. Johnson, 125 Ill.2d 1, 125 Ill. Dec. 343, 530 N.E.2d 501 (1988) (Article VIII is a revenue tax subject to the uniformity clause; "real and substantial differences" test)
• Federated Distributors, Inc. v. Johnson, 163 Ill. App.3d 27 (1st Dist. 1987) (appellate decision below)
• Northwest Airlines, Inc. v. Department of Revenue of Ill., 295 Ill.App.3d 889 (1st Dist. 1998) (ambiguous tax statutes construed against the government)
• Van's Material Co. v. Department of Revenue, 131 Ill.2d 196 (cited within Northwest Airlines)

Related ruling:

• ST 18-0012-PLR -- this letter's own header states it is superseded by that later PLR.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2018.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2018/st-18-0007-plr.pdf

Original ruling text

ST 18-0007-PLR 07/12/2018 LIQUOR TAX
This letter discusses the applicability of the Uniformity Clause to the tax imposed by Article 8 of
the Liquor Control Act (235 ILCS 5/8-1). See Federated Distributors, Inc. v. Johnson, 125
Ill.2d 1, 125 Ill. Dec. 343, 530 N.E.2d 501 (1988). NOTE: This letter is superseded by ST
18-0012-PLR. (This is a PLR)

July 12, 2018

Re:

COMPANY’s Request for a Private Letter Ruling

Dear Xxxxx:
This letter is in response to your letter dated May 15, 2018, in which you requested
information. The Department issues two types of letter rulings. Private Letter Rulings (“PLRs”) are
issued by the Department in response to specific taxpayer inquiries concerning the application of a
tax statute or rule to a particular fact situation. A PLR is binding on the Department, but only as to the
taxpayer who is the subject of the request for ruling and only to the extent the facts recited in the PLR
are correct and complete. Persons seeking PLRs must comply with the procedures for PLRs found in
the Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General Information
Letter (“GIL”) is to direct taxpayers to Department regulations or other sources of information
regarding the topic about which they have inquired. A GIL is not a statement of Department policy
and is not binding on the Department. See 2 Ill. Adm. Code 1200.120. You may access our website
at www.tax.illinois.gov to review regulations, letter rulings and other types of information relevant to
your inquiry.
Review of your request disclosed that all the information described in paragraphs 1 through 8
of Section 1200.110 appears to be contained in your request. This Private Letter Ruling will bind the
Department only with respect to COMPANY, for the issue or issues presented in this ruling, and is
subject to the provisions of subsection (e) of Section 1200.110 governing expiration of Private Letter
Rulings. Issuance of this ruling is conditioned upon the understanding that neither COMPANY, nor a
related taxpayer is currently under audit or involved in litigation concerning the issues that are the
subject of this ruling request. In your letter you have stated and made inquiry as follows:
Please find enclosed COMPANY’s (the “Taxpayer”) executed power of attorney form
which identifies PERSON and PERSON 1 of the ABC Law Group as the Taxpayer’s
authorized representatives.
The Taxpayer, through its authorized representatives from the ABC Law Group,
respectfully requests that the Illinois Department of Revenue (“Department”) issue a
private letter ruling to the Taxpayer regarding the “excise” tax rate to apply to the
beverage alcohol product known as “PRODUCT”. Under the Illinois Liquor Control Act
(the “Act”), the “excise” tax rate on beverage alcohol varies based upon the product’s
classification as wine, spirits, cider or beer. With regard to spirits, wine, and cider, and
not beer, the tax rate also varies based upon the product’s alcohol by volume

ST 18-0007-PLR
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July 12, 2018
concertation [sic]. For example, Section 8-1 of the Act provides that malt beverage
products (or beer) shall be taxed at the rate of $0.231 per gallon and wine, other than
cider containing less than 7% alcohol by volume, shall be taxed at a rate of $1.39 per
gallon.
On or about DATE, the Department’s Alcohol & Tobacco Processing Section issued the
attached email stating that its legal department is of the opinion that the “PRODUCT”
products should be taxed at the same rate as wine for “excise” tax purposes ostensibly
because it contains 14% alcohol by volume. The Taxpayer seeks the Department to
issue private letter ruling which properly categorizes all of “PRODUCT’s” brands as
“beer” for purposes of the “excise” tax.
I.

Statement of Facts

“PRODUCT” is a malt based beverage alcohol product which COMPANY 1
manufactures in CITY, Illinois1.
In 2010, the Food and Drug Administration
acknowledged that “PRODUCT” is a malt beverage2 as it urged the manufactures of
“PRODUCT” and three similar drinks to remove caffeine from its malt beverage based
products because of safety concerns. While in December of 2010 COMPANY 1
removed caffeine, guarana and taurine from “PRODUCT,” the product remains a malt
beverage with food coloring. (See http://WEBSITE).
The Taxpayer imports and distributes “PRODUCT” products across the State of Illinois
to retail outlets. Pursuant to Section 8-1 of the Act, the Taxpayer pays the “excise” tax
on each gallon of “PRODUCT” it imports and distributes to State of Illinois retail outlets.
On or about MONTH #, 2018, the Department indicated that it believes “PRODUCT”
should be taxed at the rate of wine for “excise tax” purposes.
II.

Relevant Contracts and Documents

There is not a contract or document relevant to this private letter ruling request.

III.

Tax period at Issue

The Taxpayer seeks a ruling regarding the applicable tax rate on “PRODUCT” products
moving forward as well as a refund of all tax periods in which the Taxpayer wrongly
overpaid the “excise” tax pursuant to the Department’s incorrect ruling that “PRODUCT”
should be taxed as wine as opposed to a malt beverage product. The Taxpayer is not
aware of audit or pending litigation with the Department about this issue.

IV.

1
2

Prior Requests for Rulings

http://WEBSITE
https://www.fda/gov/Food/IngredientsPackagingLabeling/FoodAdditivesIngredients/ucm19036 6.htm

ST 18-0007-PLR
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July 12, 2018
To the best of the Taxpayer’s and its authorized representative’s knowledge, the
Department has not made a ruling on the applicable “excise” tax rate for “PRODUCT”
products for the Taxpayer or Taxpayer’s predecessor or otherwise made a formal ruling
on this issue.
V.

Analysis of Relevant Authorities

Section 8-1 of the Act provides that, “[a] tax is imposed upon the privilege of engaging in
the business of manufacturing beer or as an importing distributor of beer at the rate of [ ]
$0.231 per gallon.” The Act does not provide differing “excise” tax rates for beer based
upon alcohol by volume concentrations or any other differing characteristic – as it does
for wine, spirits and cider. Further, Part 420.10 of the Illinois Department of Revenue
Regulations summarizes the “excise” tax rates prescribed in the Act and also does not
provide authority to tax beer at different rates.
The Act defines “beer” as “a beverage obtained by the alcoholic fermentation of an
infusion or concoction of barley, or other grain, malt, and hops in water, and includes,
among other things, beer, ale, stout, lager beer, porter the like.” (235 ILCS 5/1-3.04).
As noted above in Section I, in 2010 the FDA acknowledged that “PRODUCT” meets
the Act’s definition of “beer” as it is a malt based beverage. “PRODUCT” also denotes
on its webpage that it is a malt based product and there is no authority contradicting the
fact that “PRODUCT” meets the Act’s definition of beer.
While respectfully we do not believe there is any doubt that the legislature did not intend
to tax beer differently based upon alcohol by volume concentrations, any doubt
regarding the applicable statute’s interpretation must “be construed most strongly
against the government and in favor of the taxpayer.” Northwest Airlines, Inc., v.
Department of Revenue of Ill. 295 Ill.App.3d 889 (1st Dist. 1998) (citing Van’s Material
Co. v. Department of Revenue, 131 Ill.2d 196).
If the underlying statute is
unambiguous, the statute must be construed according to its terms. Northwest Airlines,
Inc. 295 Ill. App. 3d 889.
Accordingly, the Department must rule that “excise” taxes for “PRODUCT” brand
products shall be taxed at the rate of $0.231 per gallon.
VI.

Statement of Authorities Contrary to the Taxpayer’s view

The Taxpayer is not aware of any authority contrary to the Taxpayer’s view.
VII.

Trade Secrets to be deleted from the publicly disseminated version of the
private letter ruling.

The Taxpayer requests that any information about the volume of alcoholic liquor
distributed by the Taxpayer be removed from the Department’s public version of the
private letter ruling. Further, any information about the amount of taxes imposed as a

ST 18-0007-PLR
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July 12, 2018
result of the Taxpayer’s distribution of “PRODUCT’ be removed from public
dissemination.
DEPARTMENT’S RESPONSE:
The Illinois Liquor Control Act of 1934 (“Act”) regulates the sale and distribution of alcoholic
liquors in Illinois. 235 ILCS 5/. Article VIII of the Act provides for the taxation of alcoholic liquors.
Except for the duties imposed on the Department of Revenue pursuant to Article VIII, the Illinois
Liquor Control Commission is responsible for administering and enforcing the Act.
The Supreme Court of Illinois in Federated Distributors, Inc. v. Johnson, 125 Ill.2d 1, 125 Ill.
Dec. 343, 530 N.E.2d 501 (1988), had occasion to review the history and purpose of the Act. The
court was asked to determine the proper tax rate to apply to a new type of alcoholic beverage (“New
Products”). New Products were very similar to wine coolers. They contained water, flavoring, fruit
juices, vegetable juices, sugar, sugar syrup, preservatives, and artificial carbonation and contained
less than 14% alcohol by volume. New Products were not produced by either fermentation or
distillation. Federated Distributors at 6.
The Department of Revenue, in its initial letter to Federated Distributors, held that the New
Products should be taxed in the same category as wine coolers, at the rate of 23 cents per gallon. In
a subsequent letter to Federated Distributors, the Department changed its earlier position and
concluded New Products should be taxed in the category of spirits, at the rate of $2 per gallon. Id. at
6-7. The trial court upheld the Department’s classification of New Products as spirits, taxable at the
rate $2 per gallon. The appellate court reversed the trial court and ordered New Products to be taxed
at the same rate as wine and wine coolers, at the rate of 23 cents per gallon. Federated Distributors,
Inc. v. Johnson, 163 Ill. App.3d 27 (1st Dist. 1987).
On appeal to the Illinois Supreme Court, the Department argued that the Act is entirely
regulatory in nature, and the classifications of alcoholic liquor based on the method of production
were not arbitrary and unreasonable for purposes of taxation. Federated Distributors argued that
taxing New Products at the rate of $2 per gallon violated its constitutional guarantees of due process,
equal protection and uniformity and frustrated the Act’s stated purpose – fostering and promoting
temperance in the consumption of alcoholic liquors. Federated Distributors, Inc. v. Johnson, 125
Ill.2d 1, 8 (1988).
The court reviewed the contents of New Products and wine coolers and determined that the
only real difference between the two products was that New Products were fortified with the addition
of spirits obtained through distillation and wine coolers were fortified with the addition of wine
obtained through fermentation. Id. at 6 & 15. The court concluded there was no real and significant
difference between New Products and wine coolers, and New Products should be taxed as wine
containing less than 14% alcohol by volume. Id. at 21.
The court held “that, while the majority of the Liquor Control Act is regulatory in nature, article
VIII of the Act is a tax for revenue purposes and is therefore subject to the uniformity clause of the
Illinois Constitution of 1970.” Id. at 8-9.

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July 12, 2018
“The validity of a tax classification under the uniformity clause is to be determined based
on the “real and substantial differences” test and on whether the classification bears
some reasonable relationship to the object of the legislation or to public policy.”
Id. at 15. The court held there was no real and substantial difference between New Products and
wine coolers to justify taxing New Products at a different rate than wine coolers. Id.
The court reviewed the history of making beer, wine and spirits and pointed out that all alcohol
has one source – the fermentation of sugar. Distillation is the process of separating alcohol from
water to obtain a drink with higher alcohol content.
“Fermented cereal grains (as found in beer) may be distilled to whiskey, fermented fruits
(as found in wine) may be distilled to brandy, and fermented sugar cane may be distilled
to rum. The alcohol in spirits is thus qualitatively no different than the alcohol in wine—it
has merely had some of its water content removed and is only quantitatively different.
The process of distillation generally produces a product that is 40% to 50% alcohol by
volume. (H. Hillman, The Gourmet Guide to Beer, at 166 (1983).) Is this quantitative
difference enough to trigger the “real and substantial difference” test when the alcohol is
mixed with fruit juices to create a product that is qualitatively no different than a wine
cooler and which contains the same amount of alcohol by volume? The answer is no.”
Id. at 18. Having determined the source for the added alcohol was not a sufficient basis to find a real
and significant difference between New Products and wine coolers, the court examined whether
placing New Products in the same category as wine with 14% or less alcohol by volume had a
reasonable relationship to the purpose of the Act.
Section 1-2 of the Act states:
“This Act shall be liberally construed, to the end that the health, safety, and welfare of
the People of the State of Illinois shall be protected and temperance in the consumption
of alcoholic liquors shall be fostered and promoted by sound and careful control and
regulation of the manufacture, sale, and distribution of alcoholic liquors.”
235 ILCS 5/1-2. “The Act has as a primary purpose the promotion of temperance in the consumption
of alcoholic liquors.” Federated Distributors at 20.
The appellate court’s explanation of the purpose of the Act is most helpful.
“The evil sought to be remedied by the Act is also not served by the Department’s
interpretation. The evil addressed by the Act is the abuse of alcohol. The Act seeks to
alleviate that danger by making certain alcoholic beverages more expensive than
others. The legislature determined that a greater danger of abuse is posed by these
beverages, such as hard liquors which have a higher alcoholic content. As a means of
discouraging their consumption, the Act places a higher tax on those beverages. By
making hard liquor more costly, the public is discouraged from purchasing it and the evil
of alcohol abuse is curtailed. Similarily, a lower tax is placed on beverages with a lower
alcoholic content because they pose less danger of abuse when consumed.”

ST 18-0007-PLR
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July 12, 2018

Federated Distributors, Inc. v. Johnson, 163 Ill. App.3d 27, 33-34 (1st Dist. 1987). See also Federated
Distributors at 20.
Taxpayer argues PRODUCT is a malt beverage and should be classified as beer and taxed at
the rate of $0.231 per gallon. The Department has indicated to the Taxpayer that PRODUCT should
be placed in the same category as wine having 14% or less alcohol and taxed at the rate of $1.39 per
gallon.
PRODUCT has an alcohol content of 14% by volume. According to Taxpayer, PRODUCT is a
malt beverage and contains natural and artificial flavors. Flavors listed on the Taxpayer’s website
include watermelon, sour apple, fruit punch, grape, and strawberry lemonade. Taxpayer provides no
additional information regarding the products’ ingredients.
Taxpayer’s sole argument is that PRODUCT is a malt beverage, falls within the definition of
“beer” and should be taxed as beer.
The Department made a similar argument in Federated
Distributors, arguing that the manner in which the alcohol is produced should determine the rate of
tax. The court rejected the Department’s position. Federated Distributors makes it clear that the
process used to derive the alcohol contained in a beverage is not controlling.
The court held that New Products should be taxed in the same manner as wine with 14% or
less alcohol, although no fermentation actually took place to make New Products. The court also
raised no objection to wine coolers having been placed in the same category as wine with 14% or
less alcohol. Generally, wine coolers are malt beverages with added flavors. Wine coolers have
historically been taxed as wine with an alcohol content of 14% or less.
The court held that the issue was whether there was a real and substantial difference between
wine coolers and New Products. The court in Federated Distributors did not find a real and
substantial difference between wine coolers and New Products. The Department does not find a real
and significant difference between New Products, wine coolers and PRODUCT. By taxing
PRODUCT as wine with an alcohol content of 14% or less, the Department is treating and taxing all
three of the products – New Products, wine coolers and PRODUCT – in a uniform manner.
Taxpayer is asking the Department to place its flavored malt beverage with an alcohol content
similar to wine in the same classification as beer, a class of beverages that the legislature has
determined to have less danger for abuse. As the court noted, the legislature saw a greater risk of
alcohol abuse as the alcohol content of a beverage increased. By making liquor with higher alcohol
content more expensive to purchase, consumers are discouraged from purchasing it. Beer has a
lower tax placed on it because the legislature determined beer poses less of a danger of abuse than
wine. Placing PRODUCT in the same category as beer runs counter to the purpose of the Act.
For the reasons set forth above, PRODUCT is to be taxed as wine with an alcohol content of
14% or less, at the rate of $1.39 per gallon.
The factual representations upon which this ruling is based are subject to review by the
Department during the course of any audit, investigation, or hearing and this ruling shall bind the
Department only if the factual representations recited in this ruling are correct and complete. This

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July 12, 2018
Private Letter Ruling is revoked and will cease to bind the Department 10 years after the date of this
letter under the provisions of 2 Ill. Adm. Code 1200.110(e) or earlier if there is a pertinent change in
statutory law, case law, rules or in the factual representations recited in this ruling.
If you have further questions related to the Illinois sales tax laws, please visit our website at
www.tax.illinois.gov or contact the Department’s Taxpayer Information Division at (217) 782-3336.
Very truly yours,

Richard S. Wolters
Chairman, Private Letter Ruling Committee
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