Statutory Interpretation – Intoxicating Liquor Occupational Tax

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WI Court of Appeals – District IV

Case Name: Arty’s, LLC, v. Wisconsin Department of Revenue

Case No.: 2017AP886

Officials: Lundsten, P.J., Blanchard, and Fitzpatrick, JJ.

Focus: Statutory Interpretation – Intoxicating Liquor Occupational Tax

Arty’s, LLC, mixes various types of distilled spirits with soda, water, and various flavorings to produce seven-ounce bottles of “premixed cocktails.” Arty’s sells its bottled products to liquor wholesalers, who sell them to retailers. Arty’s buys in bulk from a distillery the various distilled spirits that it uses to create its products. It is undisputed that these activities of Arty’s involve sales of “intoxicating liquors,” see WIS. STAT. § 125.02(8) (2015- 16), and that sales of intoxicating liquors are subject to a state occupational tax, see WIS. STAT. § 139.03(2m).

Based on differing statutory interpretations, Arty’s and the Wisconsin Department of Revenue dispute two closely related questions regarding Arty’s liability for the intoxicating liquor occupational tax. When does Arty’s incur liability, and how much of the contents of each bottle is subject to the tax? The Department argues that Arty’s incurs tax liability when it sells its mixtures in bottles to wholesalers and that the taxes are calculated based on the entire contents of each bottle (alcoholic and non-alcoholic ingredients). Arty’s argues that it incurs liability when Arty’s purchases distilled spirits in bulk from a distiller and that taxes are calculated later based only on the distilled spirits portion of the contents of each bottle.

The Tax Appeals Commission agreed with the Department’s statutory interpretation. Arty’s petitioned for judicial review, and the circuit court affirmed the commission’s ruling and order. Arty’s appeals. We agree with the commission and accordingly affirm the circuit court on this statutory interpretation issue. We conclude that the tax liability is incurred when Arty’s sells to its customer wholesalers, and that the entire volume of each bottle is taxable as an intoxicating liquor.

Arty’s also makes a constitutional argument, based on the assumption that the Department prevails on the statutory interpretation issue just described. This argument is based on two facts: (1) sales of intoxicating liquors are taxed at higher rates than are sales of the same volumes of wine, which are in turn taxed higher than sales of the same volume of fermented malt beverages (beer); and (2) Arty’s products have alcohol contents that are lower or roughly equivalent to some wines and beers. Properly framed, Arty’s argues that, if the commission is correct in its statutory interpretation, the statutes on their face violate the constitutional guarantee of equal protection of the laws, because sellers of intoxicating liquor pay higher occupational tax rates than sellers of wines or beers containing the same or higher alcohol contents, without a rational basis to justify this distinction.

The commission rejected Arty’s constitutional argument. On review, the circuit court remanded the constitutional issue to the commission on the ground that it “has not been appropriately developed on summary judgment.” The Department cross appeals the circuit court’s decision to remand. We agree with the Department that remand to the commission is not necessary. We also conclude that Arty’s fails to demonstrate that there is no rational basis for the legislation. We discern a rational basis in the pursuit of the efficient and effective collection of the taxes for the benefit of the public, including deterring and detecting tax cheating. Accordingly, we reverse the circuit court’s remand order and, instead, affirm the commission decision on the constitutional issue.

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Attorney Derek A. Hawkins is the managing partner at Hawkins Law Offices LLC, where he heads up the firm’s startup law practice. He specializes in business formation, corporate governance, intellectual property protection, private equity and venture capital funding and mergers & acquisitions. Check out the website at www.hawkins-lawoffices.com or contact them at 262-737-8825.