Are tax rules impacting kombucha in need of a revamp? KOMBUCHA Act to be reintroduced in Congress

By Elaine Watson

- Last updated on GMT

KBI: ‘We just need the right tax vehicle to come along...’ (Picture: Gettyimages-GreenArtPhotography)
KBI: ‘We just need the right tax vehicle to come along...’ (Picture: Gettyimages-GreenArtPhotography)

Related tags kombucha

The ABV threshold at which kombucha switches from a non-alcoholic beverage to what is effectively 'beer' for tax purposes is currently set at 0.5%. The KOMBUCHA Act, set to be reintroduced to Congress this session, provided the right tax vehicle comes along, would raise that threshold to 1.25% ABV.

Representative Earl Blumenauer (D-OR-3) and Senator Ron Wyden (who is now chair of the Senate Finance Committee), aim to reintroduce The KOMBUCHA Act​ this legislative session, their offices have confirmed.

The Congressman does plan to re-introduce the legislation this Congress, though exact timing is still to be determined​,” said Rep. Blumenauer’s office, while Sen Wyden's office told us: "He is planning to introduce the bill again."

Sen Wyden: ‘It is common for non-alcoholic beverages, including soft drinks, to contain trace amounts of alcohol’

As the law currently stands, fermented beverages containing 0.5% or more of alcohol by volume are classified as beer for tax purposes, and are subject to federal alcohol excise taxes. In addition, notes a briefing document​ from Sen. Wyden, “taxable beverages are subject to extensive regulation including permitting of bonded premises, bonding requirements, formulation approvals, and regulation of distribution and sale.

“As a result of the production process, it is common for nonalcoholic beverages, including soft drinks, to contain trace amounts of alcohol (often between 0.1 and 0.3% abv). In the case of kombucha, these trace amounts are slightly higher, at as much as 1% abv. At these levels, kombucha is a non-intoxicating beverage (a person would have to consume, for example, between five and ten bottles of kombucha to equal the alcohol in one beer).

“However, today’s outdated federal tax rules still treat some kombucha as beer, and subject it to the related taxes and tax regulations. The KOMBUCHA Act would eliminate these unintended burdens by increasing the applicable abv limit for kombucha from 0.5% to 1.25%.”

To place this in context, popular light lager beers typically contain about 3.2% abv, while many craft beers can be 5% abv+.

‘Hard’ kombucha brands such as Flying Embers (7% abv), JuneShine (6% abv), Luna Bay Booch (6% abv) and Boochcraft (7% abv) - which are marketed to over-21 year olds and sold as alcoholic beverages - typically contain between 4-7% abv.

‘Today’s outdated federal tax rules still treat some kombucha as beer’

The KOMBUCHA Act​ (‘Keeping Our Manufacturers from Being Unfairly taxed while Championing Health Act’) defines kombucha as:

“(A) fermented solely by a symbiotic culture of bacteria and yeast,

(B) contains not more than 1.25% abv,

(C) is sold or offered for sale as kombucha, and

(D) is derived from—(i) sugar, malt or malt substitute, tea, or coffee, and (ii) not more than 20 percent other wholesome ingredients.”

KBI: ‘Our lobbying efforts have been well-received’

According to KBI president Hannah Crum (who argues that the 0.5% threshold was “not based on any scientific study or process”), ​​raising the threshold to 1.25% would make it a lot easier to make authentic raw kombucha using traditional methods, with alcohol levels that are still low and would “not get people intoxicated.”​​

She told FoodNavigator-USA: “Our lobbying efforts have been very well received and we have consistent bipartisan support for the bill. In the last four years, we've seen an uptick not only in staff members who drink or brew their own kombucha but also from members of Congress and the Senate who actively enjoy the beverage on a regular basis.

“Every two years, when we reintroduce the bill, we've managed to double our co-sponsors and anticipate that we will continue that trend as more brands learn about our efforts and join us to lobby.”

‘Now we just need the right tax vehicle to come along’

Due to the pandemic, KBI has been “able include a lot more brands in our lobbying efforts since we can now conduct our meetings virtually rather than needing to spend the time and money to fly into DC,” ​she observed.

“To date we've conducted 200 meetings with Senators and Representatives. Even if they don't co-sponsor, our education efforts are vital to ensuring when the matter does comes up for a vote that we are not rejected because they don't understand our issue. Now we just need the right tax vehicle to come along.”

But she added: “This is our best position yet because now that the Senate has swung Democrat, our champion Sen Ron Wyden is now the chair of the Senate finance committee​.”

What is kombucha and why does it contain alcohol?

To make traditional kombucha, firms typically brew tea, add sugar, and then ferment the mixture with a kombucha culture or 'SCOBY' (symbiotic culture of bacteria and yeast). The yeast converts some of the sugars to alcohol, most of which is consumed by the bacteria and converted into acetic acid (explaining the slightly vinegary taste) and other organic acids.

Keeping the alcohol level under 0.5% throughout the shelf-life has been a challenge for the industry from its inception, with firms using a variety of techniques such as heat pasteurization to kill off residual yeast; micro-filtration to remove yeast and prevent secondary fermentation in the bottle; spinning cone technology to remove alcohol; or other approaches such altering the shape of fermentation vessels​.

However, some purists take issue with some of these approaches, arguing that ‘authentic’ kombucha is a raw, ‘living’ product that should be manufactured in a particular way, prompting a protracted debate over standards of identity​ in the category.

The TTB (Alcohol and Tobacco Tax and Trade Bureau) took a close interest in the alcohol levels in kombucha in 2010, prompting a high-profile withdrawal of products in Whole Foods. However, since then the pressure to address the alcohol compliance issue has been driven by lawsuits, with multiple brands in the space being sued by competitors or by consumers.

‘There are a lot of companies, including small companies like mine, who are compliant, and don't want to see the threshold raised’

While the Act is supported by the KBI and backed by high-profile KBI members including GT Dave, some kombucha brands who say they have invested a lot of money to ensure compliance with the 0.5% limit, have argued that raising the threshold would be a mistake.

Robert Deering, chief development officer at Portland, OR-based Camellia Grove Kombucha Co,​​​ said: “It seems that if the Kombucha Act passes (which seems inevitable at some point), it will help small producers and that is a good thing.  It won't do anything to change that fact that many Kombucha products are over even the 1.25% level specified in the Act, not to mention Kombucha products that are much higher. 

"I'm concerned that the 1.25% level as the legal limit for kombucha will confuse consumers who want a low alcohol product, and provide cover for producers who are over that limit.  I would like to see a commitment to enforcement of this alcohol level, but that doesn't seem to be a concern of regulators."

Jamba Dunn, CEO at Rowdy Mermaid​​​ said: “Kombucha should be safe for pregnant women, children, and people with autoimmune diseases. I feel like if we don’t as an industry get alcohol and sugar under control, we’re going to alienate consumers.”

He added: "Alcohol laws currently in place are there to protect the consumer, as even low levels of ethanol can inhibit the absorption of nutrients necessary in the complex formation of hemoglobin. By raising the 'non-alcoholic' level of kombucha to 1.25%, however, The Kombucha Act threatens to undermine the expectation of the consumer in support of the manufacturer. Rowdy Mermaid believes the consumer and the planet are of more importance than the challenges of manufacturing." 

KBI: 'Laws of man don't always harmonize with the laws of nature'

Crum at the KBI responded: "KBI agrees that transparency is vital for consumers to make informed choices which is why we are pursuing a Seal Program to uphold the Code of Practice​. We also advocate for consumer access to Kombucha that is unadulterated and as close to the way Mother Nature intended.

"The alcohol in Kombucha is a natural preservative that prevents pathogens or mold from growing in it; it is also medicinal in that it alleviates stress and makes it easier for the body to absorb the nutrients, nowhere near the legal definition of 'intoxicating.'"
She added: "Laws of man don't always harmonize with the laws of nature. This is why KBI remains steadfast in our lobbying efforts to update to the tax code so we can protect consumers' access to the healthiest products they can find in the marketplace."

The kombucha category

US retail sales of refrigerated kombucha and other fermented beverages edged up 2.4% to $703.2m in measured channels in the year to July 12, 2020, with dollar sales up 5.1% in the conventional (MULO) channel but down -6.1% in the natural channel, according to SPINS data.

Within the MULO channel – which accounts for the bulk of sales in the category - Brew Dr Kombucha (+57.6%) and Health-Ade (+30.3%) both posted strong dollar sales growth over the period, while market leader GT's posted 4% growth. The #2 player in the category - KeVita (PepsiCo) - experienced a -2.2% decline in sales, despite a rebrand​​​.

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