In recent years, the market for Ready-to-Drink (“RTD”) cocktails has taken off, with many existing distilleries and breweries pivoting operations to tap into this new market in the alcohol beverage industry.
However, the legal landscape surrounding RTD cocktails is still developing. Here are some of the legal issues that alcohol beverage manufacturers of RTD cocktails should consider before making the jump into this new industry.
In the United States, the production and sale of alcoholic beverages are regulated by the Alcohol and Tobacco Tax and Trade Bureau (“TTB”). TTB is the federal agency responsible for regulating the manufacturing, labeling, and advertising of alcoholic beverages. In addition, every state is different in the manner in which it regulates RTD’s, including the permits required to make and sell them.
At the federal level, producing a spirits-based RTD requires a Distilled Spirits Plant (“DSP”) TTB Basic Permit. Many breweries have already obtained or are currently obtaining DSP permits and creating “alternating premises” arrangements in order to use existing equipment and space to make RTD’s at their premises.
Labeling & Formula Requirements
Under federal law, all alcoholic beverages must be labeled with certain information, such as the name of the manufacturer, a net contents statement, and a statement identifying what the product is. These specific requirements can vary depending on the classification of the product.
Unlike malt beverage labels, which can be exempt from a Certificate of Label Approval (“COLA”) if sold solely within the state of production, spirits-based RTD products are generally considered “Distilled Spirit Specialty” products, and require a COLA regardless of whether the products are sold in interstate commerce. Additionally, all Distilled Spirits Specialty products require TTB formula approval.
In addition to the labeling and formula requirements, TTB also regulates the type of containers (or “Standards of Fill”) in which RTD’s can be sold in. It is important to know that containers which may be acceptable for one type of commodity (e.g. 1/2 barrel kegs for malt beverages) may not be allowable for other alcohol products. Lastly, keep in mind that states have their own requirements as well when it comes to labeling, formulation, and container requirements.
Federal Excise Taxes
Generally speaking, Distilled Spirits Specialty products are taxed similar to other distilled spirits products at the federal level, meaning that the Federal Excise Tax is calculated based on Proof Gallons. Although the default Federal Excise Tax for distilled spirits is currently $13.50 per Proof Gallon, as of 2023, a DSP is eligible for a reduced rate of $2.70 per Proof Gallon for the first 100,000 Proof Gallons removed for sale during the calendar year, and $13.34 per Proof Gallon on the next 22,130,000 Proof Gallons removed for sale that calendar year. Note that eligibility for these reduced rates can be lost if the product is not sufficiently “produced” by the DSP selling the product. Therefore, if you are sourcing bulk Grain Neutral Spirits ("GNS") from another DSP in order to make the RTD at your DSP premises, it is highly recommended to confirm that your method of production maintains eligibility for the reduced Federal Excise Tax rates. Similar to other RTD regulatory areas, each local state may apply its own excise taxes on the product.
Sales and Distribution Issues
Depending on the state, sales and distribution regulations may vary considerably. For example, some states may treat RTD’s essentially the same as high proof liquor, and therefore strictly regulate the sale and distribution channels of a canned 5% ABV RTD in the same way it would regulate a bottle of 80 proof whiskey.
Additionally, state “franchise” laws pertaining to distributorship rights may also apply. For example, some states may consider RTD’s covered under state franchise laws, some states may not, and some states may be silent on the subject. Regardless of what your state franchise laws regulate, an existing beer distribution contract may already contemplate and govern the sale of RTD products. Therefore, before seeking permits to make these products, it is generally recommended to review current sales and distribution restrictions to determine what obstacles exist, if any.
While the market for RTD cocktails continues to grow, manufacturers should be aware of the legal issues surrounding these products. If you have questions on making or selling RTD products, we recommend that you consult with an attorney experienced in this industry.