RTD Cocktails and the Law

Everywhere you look these days, it feels like there’s a new ready-to-drink (RTD) cocktail on the market. These products have taken the beverage alcohol market by storm over the last few years, with seemingly everyone and their brewer now making their own margarita in a can.

Consumers are clearly happy about this—RTD cocktails are now a billion-dollar market, and all forecasts predict explosive growth over the next decade. The ability to have one’s favorite mixed drinks, which normally would require a well-stocked bar, in a convenient and easily transportable container meets a lot of modern wants.

But as ubiquitous as they are, not all RTD cocktails are equal—at least from a regulatory perspective. From where they can be sold to how they are taxed, one Moscow mule in a can may be treated very differently from another.

This is because, for both federal and state alcohol laws, what matters most about a given product is how it derives its alcoholic content. Depending on what the RTD cocktail is made of, there will be different rules for how it can be produced, sold and consumed.

While this may cause some consumer confusion—why they can find one brand of daiquiri in gas stations but not others—this regulatory disparity can make things very complicated for the suppliers making these products. A supplier can minimize that confusion and even recognize novel ways for them to sell their creations by understanding what rules may apply to a given RTD cocktail.

It’s what’s inside that counts

It’s a joke among attorneys that the answer to every question is, “it depends.” But when it comes to how a given RTD cocktail can be sold, the joke becomes a truism. What matters with regulating RTD cocktails is not that it is a cocktail or that it’s in a can, but what it is made of. This is because most alcohol laws are based on a three-part breakdown of alcoholic products: all alcohol is a beer/malt beverage, a wine or a spirit (though in a couple states, it’s a tetrad, with cider being its own category).

There are different rules for each product type. A given product will need to be fit into an established category of alcohol to understand who can produce it, who can sell it, how it is taxed and where it can be consumed.

Since an RTD cocktail can be made effectively sourced from any alcoholic sugars (at least with enough flavoring agents), it’s critical then to recognize how it is produced, as a mojito made from a neutral grain or sugar base (a “malt beverage”) will be regulated differently than a mojito sourced from rum.

Different regs for different kegs

The primary concern when it comes to regulating an RTD cocktail is recognizing who can even produce it. Both federally and at the state level, there are separate manufacturing licenses for the different product types—a brewer cannot just turn around one day and start making spirits or wine. So, when a producer wants to begin making RTD cocktails, they need to stay in their lane and limit themselves to sourcing the alcoholic content from the category type designated for the license they already have.

There are also different rules for distributing each product type that can affect how an RTD cocktail can get into a given market. For instance, in control states, spiritous beverages are treated very differently from malt beverages. Where a malt-based RTD cocktail would be sold in the private sector (except for in Utah), a nearly identical spirits-based RTD cocktail would need to go through the control board and perhaps be sold only in state-run package stores.

Even in open states, franchise rules, which restrict how alcohol suppliers can establish and manage contracts with their distributors, could lead to distinct go-to-market routes for a malt-based old fashioned versus one made with whisky.

Divergent rules on what certain retailers can sell can also affect where a consumer can find their favorite RTD cocktails. If a cosmo in a can is made from malt sugars, it can often benefit from permissions that allow convenience and grocery stores to sell beer, whereas a cosmo produced with vodka may be restricted to liquor stores.

Taxes are perhaps the highest profile way that RTD cocktails are treated differently. Malt beverages are almost always taxed at a much lower rate than wines, which are in turn taxed less than spirits. This again creates disparity between similarly situated products and can lead to some RTD cocktails being more expensive (or at least less profitable) than others.

And then there is the case of direct-to-consumer (DtC) shipping. Again, state laws depend on specific product definitions to determine how a rule applies. So, if a state does permit DtC shipping of wine, then as long as the product otherwise meets the definition of “wine” (usually, a fruit or vegetable-based alcoholic beverage), then it should be able to be shipped under the state’s DtC laws. This is a key consideration, as most states prohibit DtC shipping of malt beverages and spirits, while wine DtC shipping is nearly ubiquitous. That would be a huge benefit for wine-based RTDs over other ones, though overall most RTD cocktails do seem to be derived from malt sugars or spirits.

Changes to RTD cocktail rules

Beyond consumer confusion, this state of regulatory affairs leads to some clear unfairness in the market. After all, why should seemingly identical products be taxed and sold differently?

Some states have taken efforts to address this, mostly by distinguishing RTD spirits from other spirits in their statutes. For instance, Vermont earlier this year established that spirits-based RTD cocktails may be sold much like malt beverages in the state. That means they do not have to be distributed through the control board, can appear in grocery stores, will be taxed less and can be DtC shipped by licensed suppliers. Michigan and Ohio have different rules for lower-ABV spirits. While much of these changes have happened in control states, even open states like Arkansas have altered their policies to create parity within how RTD cocktails can be sold, regardless of their origin.

It is very likely that we will see similar changes in more states in the coming years. And perhaps the time has come for a broader rethinking of how different alcoholic products are defined and regulated. But until that happens, it will be critical for everyone involved in the production and sale of alcohol to recognize that, when it comes to RTD cocktails, it matters more what’s in the can than what it’s called.