Extras on Excise: For Powdered Alcohol, States Disagree on Stepping Up to the Bar


Powdered alcohol: It’s the perfect way to improve an afternoon hike, or as many state lawmakers fear, for teens to get hurt by snorting it between Pre-Cal and AP World History. So is it ready to be taxed and regulated, or will policymakers ban it?

Last year, the Tobacco Tax and Trade Bureau accidentally granted and subsequently revoked approval to sell “Palcohol,” powdered alcohol blends created by Mark Phillips, whose inspiration for the brand was a desire to take drinks along for outdoor activities. Palcohol is now legal after receiving label approval from the agency on March 10 for four types of Palcohol beverages. 

In the meantime, states have been in a frenzy to stop the beverage from reaching their borders. The concerns cited are primarily over the risk to public health. Among these are powdered alcohol falling into minors’ hands more easily than normal liquid beverages and the damage that could arise, like snorting the powder and surreptitiously mixing it into other people’s drinks.

In 2014, eight states considered bills banning powdered alcohol, according to the National Conference of State Legislatures. Out of these, three were successful: H.B. 4399 in South Carolina, Vermont’s S.B. 299 and S.B. 204 in Louisiana. Alaska already has provisions banning powdered alcohol, and Massachusetts law defines alcoholic beverages as liquids.

The organization also reports that legislators in 28 states have filed bills that concern the prohibition of Palcohol. Virginia Gov. Terry McAuliffe (D) has already approved Virginia’s S.B. 1034, which bans crystalline or powdered alcohol and will go into effect on July 1, 2015.

Colorado is another state with a prohibition bill. However, Colorado being a trail blazer in legalizing and taxing controversial substances, the bill provides the state with a back-up plan. H.B. 1031 would place a ban on the products unless the Tobacco Tax and Trade Bureau approves it, which would instead require the state to create a regulatory system and impose an excise tax. The tax rate would be $0.6026 per liter for each liter of water that the package suggests using. 

H.B. 1031 passed its third reading in the state House of Representatives on Feb. 2 and the third reading in the Senate on March 2. According to state legislative procedures, after a bill has gone through the third Senate reading, it is returned to the House. Because the Senate made amendments during its reading, the House would need to accept or reject these changes before further steps can be made.

In light of Palcohol getting TTB approval, the Colorado Department of Revenue’s Enforcement Division has issued a statement on their procedures moving forward. The division will create a working group to draft regulations for powdered alcohol and is accepting membership applications for the group. According to the statement, the effectiveness of these rules depends on H.B. 1031 becoming a law. 

Colorado is not the only state ready for a party. Washington’s S.B. 5292 would regulate powdered alcohol like other alcoholic beverages. California’s tax regulations treat powdered distilled spirits as normal distilled spirits; the regulatory code includes weight-to-volume conversions for determining the tax due.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do you think states should regulate and tax powdered alcohol, or should they ban it?

With a free trial to Premier State Tax Library, practitioners have a single, trusted resource that provides all of the tools and information they need to develop and implement the right tax strategies.

by Laura Lieberman