(Super. Ct. No. 34-2008-00013031-CU-JR-GDS) APPEAL from a judgment of the Superior Court of Sacramento County, Shelleyanne W. L. Chang, Judge. Reversed with directions.
The opinion of the court was delivered by: Hull , J.
CERTIFIED FOR PUBLICATION
Plaintiffs Diageo-Guinness USA, Inc. (Diageo-Guinness), and The Flavored Malt Beverage Coalition (Coalition) appeal from a judgment entered in favor of defendant State Board of Equalization (Board) on plaintiffs' complaint for declaratory relief. Plaintiffs had sought a declaration that regulations adopted by the Board, which redefined "distilled spirits" to include flavored malt beverages (FMB) for purposes of excise taxation are void. Plaintiffs contend the classification of alcoholic beverages is within the exclusive jurisdiction of the Department of Alcoholic Beverage Control (Department), and the Department has consistently classified FMBs as beer, which is subject to a much lower tax rate. We agree the Board exceeded its statutory powers and reverse.
Prior to 1955, the manufacture, distribution and sale of alcoholic beverages was regulated by the Board. In November 1954, article XX, section 22, of the State Constitution was amended, transferring such regulatory power to the Department. As later amended, it reads in relevant part:
"The Department of Alcoholic Beverage Control shall have the exclusive power, except as herein provided and in accordance with laws enacted by the Legislature, to license the manufacture, importation and sale of alcoholic beverages in this State, and to collect license fees or occupation taxes on account thereof. The [D]department shall have the power, in its discretion, to deny, suspend or revoke any specific alcoholic beverages license if it shall determine for good cause that the granting or continuance of such license would be contrary to public welfare or morals, or that a person seeking or holding a license has violated any law prohibiting conduct involving moral turpitude. It shall be unlawful for any person other than a licensee of said [D]department to manufacture, import or sell alcoholic beverages in this State. [¶] . . . [¶]
"Until the Legislature shall provide otherwise, the privilege of keeping, buying, selling, serving, and otherwise disposing of alcoholic beverages in [various establishments], and the privilege of keeping, buying, selling, serving, and otherwise disposing of beers on any premises open to the general public shall be licensed and regulated under the applicable provisions of the Alcoholic Beverage Control Act, insofar as the same are not inconsistent with the provisions hereof, and excepting that the license fee to be charged [various establishments] for the privilege of keeping, buying, selling, or otherwise disposing of alcoholic beverages, shall be the amounts prescribed as of the operative date hereof, subject to the power of the Legislature to change such fees.
"The State Board of Equalization shall assess and collect such excise taxes as are or may be imposed by the Legislature on account of the manufacture, importation and sale of alcoholic beverages in this State."
To implement the foregoing, the Legislature enacted the Alcoholic Beverage Control Act (the ABC Act) (Bus. & Prof. Code, § 23000 et seq.). (People v. Frangadakis (1960) 184 Cal.App.2d 540, 551.) Business and Professions Code section 23001 declares: "This division is an exercise of the police powers of the State for the protection of the safety, welfare, health, peace, and morals of the people of the State, to eliminate the evils of unlicensed and unlawful manufacture, selling, and disposing of alcoholic beverages, and to promote temperance in the use and consumption of alcoholic beverages. . . ."
Business and Professions Code section 23051 states: "On and after January 1, 1955, the [D]department shall succeed to all of the powers, duties, purposes, responsibilities, and jurisdiction now conferred on the [Board] under Section 22 or Article XX of the Constitution and this division, except the power to assess and collect such excise taxes as are or may be imposed by law on account of the manufacture, importation, and sale of alcoholic beverages in this State, which shall remain the exclusive power of the [Board]."
The ABC Act defines "alcoholic beverage" to include "alcohol, spirits, liquor, wine, beer, and every liquid or solid containing alcohol, spirits, wine, or beer, and which contains one-half of 1 percent or more of alcohol by volume and which is fit for beverage purposes either alone or when diluted, mixed, or combined with other substances." (Bus. & Prof. Code, § 23004.) "Beer" is defined as "any alcoholic beverage obtained by the fermentation of any infusion or decoction of barley, malt, hops, or any other similar product, or any combination thereof in water, and includes ale, porter, brown, stout, lager beer, small beer, and strong beer but does not include sake, known as Japanese rice wine." (Bus. & Prof. Code, § 23006.) "Distilled spirits" is defined as "an alcoholic beverage obtained by the distillation of fermented agricultural products, and includes alcohol for beverage use, spirits of wine, whiskey, rum, brandy, and gin, including all dilutions and mixtures thereof." (Bus. & Prof. Code, § 23005.)
The Legislature also enacted the Alcoholic Beverage Tax Law (the Tax Law) (Rev. & Tax. Code, § 32001 et seq.). Under the Tax Law, "[t]he issuance of any manufacturer's, winegrower's, wine blender's, distilled spirits manufacturer's agent's, rectifier's, wholesaler's, importer's, customs broker's license, or wine direct shipper permit under [the ABC Act] shall constitute the registration of the person to whom the license or permit is issued as a taxpayer under [the Tax Law]. . . ." (Rev. & Tax. Code, § 32101.)
Beer is taxed at a rate of $0.04 per gallon plus a surcharge of $0.16 per gallon, for a total of $0.20 per gallon. (Rev. & Tax. Code, §§ 32151, subd. (a), 32220, subd. (a).) Distilled spirits are taxed at the considerably higher aggregate rates of either $3.30 or $6.60 per gallon, depending on alcohol content. (Rev. & Tax. Code, §§ 32201, 32220, subds. (e) and (f).)
An FMB is a hybrid containing characteristics of both beer and distilled spirits. As described by the Board, "FMBs are produced from a base of fermented malt beverage that is treated to remove the basic characteristics of a malt beverage, including color, bitterness, and taste. The base is then mixed with flavorings or other ingredients containing distilled alcohol." Plaintiffs describe FMBs somewhat differently: FMBs "begin with a base of brewed and fermented beer, to which a variety of ingredients are added. Those ingredients include one or more flavors, which ordinarily contain alcohol obtained by distillation, but which are 'unfit for beverage purposes' . . . ." Plaintiffs explain the fact that an ingredient is "unfit for beverage purposes" does not mean it is unfit for human consumption. Rather, the term "is derived from the Prohibition era when the Legislature wanted to exempt liquids containing alcohol, like kitchen flavors, that were not consumed like a typical alcohol beverage from the ban required by Prohibition."
FMBs have traditionally been classified by the Department as beer for purposes of licensing and regulation. Prior to the regulations at issue in this matter, the Board likewise taxed FMBs as beer.
In October 2006, the Board received a petition requesting that it begin taxing FMBs as distilled spirits, and the Board thereafter initiated formal rulemaking procedures. On April 8, 2008, the Board adopted regulations redefining "beer" and "distilled spirits" for purposes of taxation. Those regulations were approved by the Office of Administrative Law on June 10, 2008.
The new regulations are contained in title 18 of the California Code of Regulations as sections 2558 et sequitur. (Hereafter these regulations shall be referred to as Regulation followed by the section number or collectively as the FMB Regulations.) Regulation 2558 reads: "Effective October 1, 2008, any alcoholic beverage, except wine . . . , which contains 0.5 percent or more alcohol by volume derived from flavors or other ingredients containing alcohol obtained from the distillation of fermented agricultural products, is a distilled spirit."
Regulation 2559 creates a rebuttable presumption that any alcoholic beverage other than wine is a distilled spirit within the meaning of Regulation 2558. Regulation 2559.1 provides the means by which an interested party may rebut the presumption. Subdivision (a) of that regulation reads: "On or after July 10, 2008, the presumption in Regulation 2559 may be rebutted by the manufacturer of the alcoholic beverage filing a report, under penalty of perjury, with the Board stating that the alcoholic beverage contains less than 0.5 percent alcohol by volume derived from flavors or other ingredients containing alcohol obtained from the distillation of fermented agricultural products and specifying the sources of the alcohol content of the alcoholic beverage, including the alcohol by volume derived from flavors or other ingredients containing alcohol obtained by distillation."
Regulation 2559.3 requires the Board to maintain a list of all alcoholic beverages "that have been found to have successfully rebutted the presumption set forth in Regulation 2559." (Regulation 2559.3, subd. (a).) Finally, Regulation 2559.5 reads: "Effective October 1, 2008, for purposes of tax reporting, a taxpayer will be deemed to have correctly classified an alcoholic beverage as not being a distilled spirit, as defined by Business and Professions Code section 23005, if at the time taxes are imposed, as set forth in the Revenue and Taxation Code, division 2, part 14, chapters 4, 5 and 5.5, the alcoholic beverage was included on the Board's list pursuant to Regulation 2559.3."
Diageo-Guinness is a Delaware Corporation with its principle place of business in Connecticut. It holds a Type 10 license (beer and wine importer) from the Department and sells beer and FMBs to California wholesalers. The Coalition is an association of six manufacturers and/or marketers of alcoholic beverages, including FMBs. On June 12, 2008, plaintiffs filed a complaint against the Board containing two causes of action, one seeking a declaration that the FMB Regulations are void as beyond the Board's authority and not reasonably necessary to effectuate the Board's taxing function and the other claiming a violation of the Commerce Clause of the United States Constitution. Plaintiffs later dropped their Commerce Clause claim.
Plaintiffs moved for a preliminary injunction to prevent the Board from implementing the Regulations. The trial court denied the motion. Plaintiffs thereafter moved for summary ...