For some, it tastes like "alcoholic lemonade". For others, it's "a light sour beer" - likewise, for tax purposes, the latest fad drink being downed by Australian punters can be modified to taste.

Seltzer is a huge trend in the United States, where brands like the popular White Claw are being made with distilled alcohol, fizzy water and some fruity flavouring.

Since companies caught onto the trend 18 months ago in Australia, seltzer has been marketed to consumers as a healthier alcoholic option with low calories.

It is now a major growth category for grocery giants such as Woolworths.

While its origins are as a spirit-based drink, in Australia many craft brewers, and even the supermarket giant Aldi, are going through a complicated process to make seltzer as a beer. 

Beer attracts a lower tax rate than spirits.

The bizarre situation of having one drink made and taxed in different ways highlights the complicated and controversial intricacies of Australia’s alcohol excise code.

And some want seltzer “loopholes” closed.

What even is seltzer? 

Alcohol giant Diageo is making its seltzer with a vodka base.

“It’s very similar to a vodka and soda, with a dash of lime,” Diageo Australia’s managing director Angus McPherson told ABC News.

That sees its seltzer classified as a spirit-based “ready to drink” or RTD.

RTDs were famously slugged with the ‘alcopop’ tax more than a decade ago, due to their association with easily downed sugary drinks and teenage binge drinking.

The tax on them is the same as distilled spirits and is the highest of any alcohol.

The tax is worked out using the drinks’ alcoholic content, with a rate of $87.68 per litre of alcohol. For a standard 250mL glass of seltzer with 4.5% alcohol, this works out to $0.99 tax.

The most well-known seltzer being imported into the Australian market, White Claw, is being made overseas using triple-distilled spirits.

White Claw’s importer Lion Nathan confirmed that this saw it taxed as an RTD.

Yet Lion Nathan also confirmed that it had been producing another seltzer called Quincy that was “classified as a beer for excise tax purposes”.

Mid-strength beer gets a far lower tax rate than spirits, at $51.77 per litre of alcohol. It also gets a 1.15 per cent leeway on alcohol that is not taxed.

That works out to just $0.43 tax per 250mL of seltzer with 4.5% alcohol.

At half the tax than a spirit-based drink, the incentive for companies to produce a seltzer that is classified as a beer is obvious.

But passing the pub test with the Australian Tax Office is complicated.

How do you make seltzer as a beer for tax purposes?

Australia’s tax law doesn’t make it easy.

Beer is typically made from grains or cereals, it goes through fermentation with yeast, it has hops for bitterness, and it is usually lower in alcoholic content than wine or spirits.

The Excise Tariff Act 1921 maps this out with a bunch of legal jargon under its definition of “beer”.

Some of its little intricacies are that beer can’t be considered a beer if it has artificial sweeteners and that it has to have an international bitterness unit (IBU) rating of 4.0 or above. (More on IBU later.)

Sauce Brewing in Sydney is one of many craft breweries making seltzers that are being classified as a beer for tax purposes.

Its founder Mike Clarke is open about the process and checked it off with the ATO before going ahead, to ensure he is sticking to the legal definition of a beer.

“The long and short of it is the excise rate is lower,” he said.

“We need to do a few things to meet the requirements.

“Firstly, the (sugar) needs to come from a grain or grain based spirit. So, in our case we use rice to create the sugar.”

Using rice as the base creates a more flavourless alcohol suited to seltzer’s profile and is the method most Australian brewers are going for when they make seltzer.

There is also the issue of the IBU. An IBU of 4.0 is actually a very low amount of hops, so Sauce Brewing just adds a “spritz” to their seltzer to have it pass the law.

“We add just a tiny bit of hops or hop extract just to give it the bitterness without impacting any other flavours or colors,” Mr Clarke said.

“And finally, we just need to brew it so we put it in a fermenter and give it time.

“The alternative being an RTD, you would just buy alcohol, mix it with water and flavours and it'll be done in less than a day."

Mr Clarke said his company's seltzers are a healthier alternative to regular pre-mixed drinks and that he does not consider them as being RTDs. 

As a passionate craft brewer, he is also aware they are not a typical beer either.

“Seltzer does not taste like a beer at all," he said.

“We haven't found any loopholes. 

“It's a new category of drink, and until something exists for it to be classified as seltzer in the excise regime, it needs to be classified as something.”

It’s not just craft brewers making seltzer as a beer.

German supermarket Aldi confirmed that the seltzer it sold over Summer was being taxed as a beer. It was selling it for just $10 for a four-pack or just $2.50 a pop. 

Its rivals Coles and Woolworths are also making seltzers in-house under various private labels, but neither would disclose how they are being taxed.

What about wine seltzers?

New Zealand company Villa Maria is selling what it calls a “wine seltzer” in Australian bottle-shops. 

However, Villa Maria would not confirm what its 4.8 per cent alcoholic seltzer is being classified as for tax purposes. 

“As this information is commercially sensitive, we are unable to comment,” a spokesperson for its Australian operations said. 

It is possible that it is being taxed in various ways, depending on its alcohol content and what is being added to the final product.

Wine gets a whole other tax system based on wholesale value. Whatever it is sold to a retailer for (different to the final sale price) gets taxed at 29 per cent. 

Wine’s tax system is called "WET - the wine equalisation tax -  and it has long been controversial because wine producers can pay different levels of tax depending on how cheaply they sell it.

Wine producers also get a higher tax rebate of $350,000 per financial year compared to beer and spirits producers which only get up to $100,000.

Both Diageo and Sauce Brewing are worried about the potential for wine-based seltzers to enter the market and compete with a lower tax rate.

Sauce Brewing’s Mike Clarke is also annoyed that beer has to battle a more complicated tax code than other categories.

There are many different ways to tax beer, depending on what strength it is and even whether it’s served in a keg or a bottle.

“You pretty much need a masters in mathematics to do your excise each month,” Mr Clarke quipped.

“(The tax code for alcohol) is horrendously complex. There's all sorts of things in there that that don't achieve the aims that they're trying to achieve.”

Story By | Emilia Terzon