New regulation could tax some wine grape growers

The vice chairman of a little-known board that collects taxes and fees supporting state and local government in California is complaining that a proposed regulation crafted by her own agency on wine-based products could end up draining some wine producers and growers of millions of dollars.

At the heart of the tussle is a proposed rule that gives a new definition of "wine" for tax purposes.

Michelle Steel, vice chairman of the board, said, "It's more regulations. It's always bad especially in a recession like this. It makes no sense."

Steel was the only one of the five elected members to the California State Board of Equalization to oppose the regulation in a recent procedural vote.

"It's crazy the way agencies squeeze these people out of more money. For me, let's do more business and pay more taxes to the state. That's Economics 101," she said.

Jeff Wiens, owner of Wiens Family Cellars, and the recently elected president of the Temecula Valley Winegrowers Association, said, "Anytime you raise taxes to the consumer, you have to pass on the extra costs to consumers or lay people off. It's hard to pass along increases these days. It goes right down to the payroll."

Some growers in Wine Country near Temecula say the regulation may be aimed at certain wines, including ports and sherries, and wine coolers, but that definition for those affected is unclear.

"Fringe products could be an issue," said Joe Hart, co-owner of Hart Winery in Temecula. "Most wineries may not be affected."

The proposed rule, which would go into effect Jan. 1, would change the application of tax to wine-based products that contain distilled alcohol and change the definition of wine -- specifying that any wine-based product that contains "substantial amounts of distilled alcohol from sources other than the agricultural product of which the wine is made will be taxed as a distilled spirit, not as a wine."

This rule change -- which must still go through a public comment period until May, and a second and final vote of the tax board, is aimed at raising excise taxes for the state's depleted treasury.

From a tax standpoint, the proposed regulation would increase taxes on certain wine products from 20 cents per gallon up to $3.30 per gallon.

"If enacted," said Michael G. Walker, a vice president of wine giant Constellation Brands Inc., "The increased tax rate will increase the costs associated with making these wine products and force suppliers to make difficult decisions such as altering winemaking processes that could change taste profiles, affect the quantity of California grapes and other raw materials purchased, and increase the costs to large segments of the wine-product consuming citizens of California."

Walker also said the rule could lead to a discontinuation of some products.