Compliance Concerns for Non-Alcoholic Beer

Alex Koral | April 12, 2023

It’s no secret that non-alcoholic beer is having a moment, and the segment is pointing to continued growth. First Key reports that dollar sales of non-alcohol (NA) beer, wine and spirits brands doubled between 2020 and 2022, with non-alcoholic beer accounting for over 80% of the market share of the category.

What was once a small, niche market has now become mainstream. The Brewers Association has predicted that in the coming years, NA will make up 5+% of the beer market.

There are a variety of reasons a consumer would opt for a NA beer, and brewers are looking to expand their market presence. Customers who once had one or two NA beer choices can now pick between alcohol-free but still hazy IPAs, hearty stouts and citrusy sours. Better quality NA beers are entering the market, with NA beer fans saying that alcohol-free versions are indistinguishable from their full-ABV counterparts.

While NA beers contain little to no alcohol, they still come with a variety of compliance concerns.

How is non-alcoholic beer regulated?

Since it’s “like” beer, the production, distribution and sale of NA beer can, like beer, be restricted by state and federal laws. Initially, this means recognizing whether a NA beer is subject to either of the two federal statutory codes that govern the production and distribution of alcohol: the Internal Revenue Code (Part 25 of CFR) and the Federal Alcohol Administration Act (Part 7 of CFR). Whether a given NA beer is subject to both or either of these statutes, however, depends on how it is made. If a product does not meet one or both statutes’ definitions of regulated beverages (which are different!), that could remove a heavy compliance burden from the producer.

The Internal Revenue Code (IRC) defines “beer” as a fermented beverage “brewed from malt, wholly or in part, or any malt substitute” that, importantly, contains 0.5% ABV or higher. This is opposed to the category of products called “cereal beverage,” which is a beverage that may or may not be fermented, is “derived in whole or in part from malt, or a substitute” and, critically, has an ABV of less than 0.5% when ready for consumption. Under the IRC, most products considered NA beers would be defined as “cereal beverages,” and so be subject to any applicable IRC laws relating to “cereal beverages.” It should be noted that the IRC specifically exempts any product with an ABV less than 0.5% from all federal alcohol excise taxes.

The Federal Alcohol Administration Act (FAAA), however, has slightly different definitions of these products. The FAAA, instead, governs what it calls “malt beverages,” defined as fermented beverages “derived from an infusion or decoction in potable water of both malted barley and hops.” Traditional NA beer would then most likely fall under the class type of malt beverages called “cereal beverages,” which are malt beverages that contain less than 0.5% ABV. Notably, to be subject to the FAAA, an NA beer would first have to be considered a “malt beverage,” so any malt beverage not made with hops would not be subject to the FAAA.

Licensing requirements

Federally, both the IRC and FAAA may require subject producers to receive a license before making their products. Under the FAAA, if an NA beer is considered a “malt beverage,” the producer would need to have a Brewer’s Notice. The IRC does not have any licensing requirement for its class of “cereal beverages,” but does note that those products may be produced at a brewery under any existing Basic Permit.

However, an NA beer producer may also need to receive a Distilled Spirits Basic Permit if they use specific techniques for removing alcohol from their products that are based on distillation techniques, such as reverse osmosis. If an NA beer is not produced using such a method (say, if it is made with non-fermenting yeasts), the distillery permit would not be required.

Labeling requirements

Both the IRC and FAAA set out rules for NA beer labeling. Generally, the standard labeling requirements for full-strength beer apply to NA beer, to include the producer, type and volume. Unlike traditional beers, NA beer labels must prominently include “Nontaxable under section 5051 I.R.C.” COLAs are only required if the product is subject to the FAAA and if it is sold interstate. Additionally, the Government Health Warning is only required on products containing greater than 0.5% ABV.

A common question is when to use “Alcohol Free” versus “Non-alcoholic.” Both identifiers are optional, but if you choose to print one on your label, be sure to be mindful of the requirements. Producers can’t use the phrase “Alcohol Free” if there is any alcoholic content at all in the product, but if label will say “0.0% alc by vol” anywhere, then “Alcohol Free” must also appear. “Non-alcoholic” can be used by any NA beer that contains more than 0.0% ABV, but then the phrase “contains less than 0.5% alc by vol” needs to be included as well.

How alcohol retailers can sell non-alcoholic beer

As with most things in the beverage alcohol industry, there isn’t a consensus among the 50 states on how to define or sell NA beer. When planning to sell NA beer, it’s important to focus on franchise laws and how the product is defined and regulated by states.

Many states are aligned with the federal definitions of NA beer, with a few notable exceptions. Kentucky and Vermont allow NA beers to contain up to 1.00% ABV, while Arizona, Georgia, Idaho, New York and Tennessee don’t have a minimum ABV threshold for malt beverages subject to state laws. For good measure, there are also some states that have laws specifically targeting NA beers.

In most cases, NA beer is not subject to three-tier requirements, which allows producers to consider distributing through direct-to-consumer shipping. Many traditional beer distributors do still make themselves available to support NA beer sales, but as ever when establishing a distributor relationship, make sure to fully review any agreements you may sign with them. Further, Texas and Illinois include NA beer in their franchise laws, which can severely affect your ability to amend or terminate a distributor contract in those states. As such, it is recommended to review all distributor contracts with counsel.

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