Chameleon Alcopops

Funny business with funny drinks:

Reporting from Sacramento -- Substance-abuse foes cheered last year when state officials cracked down on sweet, sometimes fizzy, intoxicating drinks such as Mike's Hard Lemonade that -- save for their alcohol content -- bear a remarkable resemblance to soda pop.

The sugary beverages had long been taxed as flavored beers. But state authorities reclassified them as liquor, raising the levies on a six-pack by a factor of 16 to match the rate consumers pay on vodka, rum and other distilled spirits. The move was supposed to generate $38 million in annual revenue for the state.

Now the numbers are in: The state has collected about $9,000 since the new tax rate kicked in Oct. 1. Some officials and activists suspect fraud.

Beverage makers admit they aren't paying the new taxes. They say they don't have to because they have reformulated the drinks -- more than 6,000 varieties -- to transform them into simple beers by limiting the amount of distilled spirits they contain.

They won't explain how. The formulas, they say, are trade secrets. And beverage-industry officials and federal regulators say there are no tests to determine how much distilled spirits the drinks contain.

"We're suspicious," said Mike Scippa, advocacy director at the Marin Institute, an alcohol-industry watchdog. "These drinks are not beer. They don't taste like it, smell like it or look like it. But they are being sold like beer."

A showdown is brewing between the beverage companies and state officials.

...The feud is being watched nationwide. California is one of a handful of states aggressively campaigning against makers of "alcopops" -- also called flavored malt beverages -- such as Smirnoff Ice Raspberry Burst, Bacardi Silver Peach and Mike's Hard Lemonade.

Critics, including the American Medical Assn., say manufacturers are using the cheap, sweet, convenience-store beverages to lure teenagers into drinking. They point to marketing campaigns that they say are aimed specifically at underage girls, something the manufacturers deny.

The Board of Equalization approved the reclassification in November 2007 after extensive testimony from anti-substance-abuse activists, including some teenagers. The new levies were intended to raise the price of a typical six-pack by $1.74 -- or 20%. Advocates were hoping that would deter teenagers from buying the brews.

Just before the new tax rate took effect in October, Gov. Arnold Schwarzenegger signed a law requiring alcopop containers, many of which resemble soda bottles, to have a prominent label that states: "CONTAINS ALCOHOL."

But manufacturers now say that since the drinks are no longer alcopops, the products are not subject to labeling requirements. In fact, they say, they're simply doing what they said they would do if the tax rules were changed.

"What happened is exactly what we said was going to happen," said Marc Sorini, an attorney with the Flavored Malt Beverage Coalition, a consortium of producers. "We told them over and over again at the hearings that this is what we would do."

The only government agency that has access to the formulas is the federal Alcohol and Tobacco Tax and Trade Bureau, which is declining to share them with California investigators. Bureau spokesman Art Resnick says his agency is prevented from providing the information to state officials by the Federal Trade Secrets Act and provisions of the federal tax code governing such confidential material.

Jim Mosher, an analyst at the CDM Group, a consulting firm that researches substance-abuse policies, called the refusal of federal regulators to provide the formulas "an outrage."

"They consider protecting industry trade secrets more important than protecting the public's health," Mosher said.