On June 20, 2016, Philadelphia Mayor James Kenney approved the "Sugar-Sweetened Beverage Tax," commonly known as the "soda tax."1 The ordinance imposes a 1.5 cent per ounce tax on sugar-based drinks starting on January 1, 2017. This amounts to 24 cents per 16-ounce bottle, or roughly $1.01 per two-liter bottle. This ordinance is the first successful attempt to tax soda beverages in a major city in the United States.2 The Philadelphia Department of Revenue recently has released proposed regulations for the new tax.3 On September 14, 2016, a complaint was filed in the Philadelphia Court of Common Pleas by a group including the beverage industry, restaurants and individuals to try to prevent enforcement of the tax.4
Overview of the Soda Tax
There are two main components of the soda tax: (i) the types of beverages subject to tax and (ii) the individuals affected by the tax.
Beverages Subject to Tax
Under the ordinance, any sugar-based non-alcoholic beverage is subject to tax.5 The definition of sugar is so expansive that it includes sugar substitutes found in diet and lowcalorie drinks.6 The law expressly taxes:
- non-100 percent fruit drinks;
- sports drinks;
- flavored water;
- energy drinks;
- pre-sweetened coffee or tea; and
The ordinance only allows exclusions for: (a) baby formulas; (b) medical foods defined by law; (c) drinks with more than 50 percent milk; (d) drinks with more than 50 percent fresh fruit or vegetables; (e) unsweetened drinks; and (f) customer-made syrup drinks.8 Although the Department's proposed regulations allow exclusions for some milk substitutes, like soy milk, other popular substitutes—such as almond milk and cashew milk—do not meet U.S. Department of Agriculture standards of milk nutrients and thus do not qualify for an exclusion.9 Thus, the law reaches drinks well beyond what a consumer typically considers to be a "soda" or "sugary" drink.
Imposition of Tax
The ordinance focuses its enforcement up the distribution chain for drinks that are supplied, acquired, delivered or transported for the purpose of selling in retail within the City of Philadelphia to consumers.10 First, distributors must register with the City.11 Second, dealers can only purchase from registered distributors.12 The distributor, whether or not located within the City, will be liable for the per ounce tax.13 If the dealer purchases from a non-registered distributor, then the dealer will be liable for the tax.14
Although the ordinance does not place a direct tax on consumers, it is still uncertain whether the consumers will ultimately bear the burden of the tax. Distributors can pass the tax on to the dealers by raising distribution prices, and the dealers can pass the tax on to the consumers by raising retail prices. This pass-through burden potentially can have a determinative outcome on the ordinance's legality. According to the Department, the first filing and payment will be due on February 20, 2017.15
Challenges to the Soda Tax
As it became likely that the soda tax would be enacted, impacted groups developed legal arguments concerning how such a tax might be challenged. Soon after the tax was enacted, a challenge to the tax was filed on September 14, 2016.16 This challenge advances a variety of arguments steeped in two general assertions: (i) the Pennsylvania sales tax preempts the imposition of the Philadelphia soda tax; and (ii) the Pennsylvania Constitution's Uniformity Clause prohibits the imposition of such tax.
Challenge #1: State Preemption of Sales Tax
The first challenge to the soda tax comes under the preemption principle. In essence, municipalities cannot tax goods without the state's permission. In Pennsylvania, a municipality's sole power to tax derives from either the Sterling Act of 1932 (applicable to Philadelphia), or the Local Tax Enabling Act of 1965 (applicable to municipalities other than Philadelphia). A municipality would not, otherwise, have the power to impose a tax. Thus, a municipality has to request the state legislature to pass enabling legislation. For example, Philadelphia has a higher wage tax than the rest of the state, only because the Commonwealth passed enabling legislation.
The beverage industry argues the soda tax is preempted by the Pennsylvania sales tax.17 Because the state already taxes these drinks through the sales tax, the municipality cannot implement an additional tax without the state's approval. The tax is triggered by a potential future sale to Philadelphia consumers, so the tax has a close relation to the Pennsylvania sales tax.
The City argues that the soda tax is not preempted because it does not constitute a sales tax.18 The City distinguishes the sales tax from the soda tax in two ways. First, the soda tax is imposed on distributors, while the sales tax is imposed on consumers. Second, the soda tax is measured on a per ounce basis, while the sales tax is solely based on price.
Prior to the challenge to the tax, former Pennsylvania Supreme Court Chief Justice Ronald D. Castille wrote commentary explaining why the soda tax is preempted by the state's sales tax.19 Castille describes the soda tax as a "thinly disguised sales tax" because the tax will be passed on to the consumers. The City has argued that the soda tax is intended to be solely imposed on distributors and the tax will not be passed on to consumers.20 Castille refutes the City's contentions as implausible because "rational sellers" will not take a hit on their profit margin.21
Another argument considered by those aggrieved by the soda tax claims that such tax conflicts with the federal Supplemental Nutrition Assistance Program (SNAP) (food stamps) that prohibits participating states from collecting state or local sales tax on food purchases made under this program.22 Under Pennsylvania law, beverages that are eligible under SNAP are exempt from the Pennsylvania Soft Drink Tax as well as the City's additional sales and use tax.23 Preemption again comes into play here, as an argument can be made that the soda tax is preempted by the state soft drink tax exemption.
According to the complaint, the soda tax "implicates two types of preemption."24 Under the concept of express preemption, "a state statute includes language that specifically bars or otherwise limits local authorities from acting on a particular subject matter already subject to state regulation."25 The other type of preemption, conflict preemption, occurs "where a local enactment (a) irreconcilably conflicts with or stands as an obstacle to the execution of the full purposes of a state statute or (b) renders compliance with a state statute impossible."26
The complaint requests declaratory judgment and injunctive relief barring enforcement of the soda tax based on: (i) express preemption under the Sterling Act; (ii) conflict preemption by the state soft drink tax; and (iii) conflict preemption by the state soft drink tax exemption for purchases under SNAP.27
Challenge #2: State Constitution's Uniformity Clause
The second challenge to the soda tax ordinance derives from the Uniformity Clause of the Pennsylvania Constitution.28 The Uniformity Clause requires a class of goods to be taxed at the same rate throughout the state.29 Classification of goods becomes an important task because if certain goods are classified differently than other goods, then these goods can be taxed at a different rate. The City argues that the soda tax does not violate the Uniformity Clause because there is a legitimate distinction between classes of goods taxed.30 In essence, there is a clear distinction between sugar-based drinks and unsweetened drinks.
The beverage industry argues that there is no distinction of goods for the distributors and retailers.31 The argument highlights that if the tax is targeted at distributors, the analysis of the class of goods should also be with respect to those in the distribution chain. In his commentary, the former Chief Justice explains this distinction by stating that a distributor outside Philadelphia will inevitably pay a different tax rate for the same goods sold in Philadelphia than those sold outside Philadelphia.32
The complaint addresses the uniformity argument by specifically requesting declaratory judgment and injunctive relief barring enforcement of the soda tax based on nonuniformity through: (i) "the unequal burden on beverages at the retail level and the distributor level;" (ii) "the creation of an unreasonable taxpayer class and unequal burden on distributors;" (iii) the "unequal burden on retailers;" and (iv) "the unequal burden on consumers."33
The beverage industry is challenging the soda tax to prevent a domino effect in other major cities. Berkeley, California is the only other city in the United States that has a similar beverage tax.34 However, Philadelphia's law affects a much bigger market (nearly 15 times larger) and has a potential domino effect in other cities. Currently, Oakland, California has a similar tax initiative—but through a ballot vote this November—and other large cities like Seattle and Portland are considering similar legislation.35
The beverage industry reportedly has spent approximately $10 million attempting to prevent the soda tax in Philadelphia.36 Also, the beverage industry has successfully defeated a New York law that limited the maximum size of similar beverages. Thus, it is not surprising that the beverage industry is challenging Philadelphia's soda tax in court.
Nonetheless, the tax will likely be enforced in the meantime despite the pending litigation, which may take years to resolve. A court will not grant a preliminary injunction unless there is a risk of irreparable harm and there is a substantial likelihood the legal challenge will succeed. At this point, distributors should start registering with the City and dealers will need to plan to purchase from a registered distributor.
1 PHILA. CODE §§ 19-4100 to 19-4108, enacted by Bill No. 160176, June 20, 2016.
2 See Allison Aubrey, Taxing Sugar: 5 Things to Know About Philly's Soda Tax, NPR, June 9, 2016, 3:08 pm (stating New York and San Francisco tried to impose similar soda tax but failed to pass in council).
3 Proposed Sugar-Sweetened Beverage Tax (SBT) Regulations, Philadelphia Department of Revenue, released Sep. 9, 2016. These proposed regulations are available at https://alpha.phila.gov/documents/proposed-sweetened-beverage-tax-regulations.
4 Williams v. City of Philadelphia, complaint filed in Philadelphia County Court of Common Pleas on Sep. 14, 2016; see also Alison Burdo, Lawsuit: Phila.'s Soda Tax Will Cost Pa. Up to $7.8M, Violates State Law, PHILA. BUSINESS JOURNAL, Sep. 14, 2016; Claudia Vargas and Tricia L. Nadolny, Beverage Association Sues to Block Soda Tax, PHILLY.COM, Sep. 14, 2016.
5 PHILA. CODE § 19-4101(3).
6 Diet drinks were added to the ordinance in order to lower the originally proposed tax of 3 cents per ounce. The compromise achieves the purpose of expanding the tax base and reaching a wider range of beverages, thus allowing for a 1.5 cent per ounce tax instead. Additionally, by including diet drinks, the ordinance also addresses potential Uniformity Clause issues of taxing only sugary drinks.
7 PHILA. CODE § 19-4101(3)(d).
8 PHILA. CODE § 19-4101(3)(c).
9 The proposed regulations also explicitly define beverages that do not qualify for an exclusion as medical foods, such as Gatorade, coconut water, Muscle Milk, Smartwater or Vitaminwater. Proposed SBT Regs., Art. I, § 102, released Sep. 9, 2016.
10 PHILA. CODE § 19-4103(1).
11 PHILA. CODE § 19-4102(2).
12 PHILA. CODE § 19-4102(1).
13 PHILA. CODE § 19-4105(1). Registered distributors, or the taxpayer, must file monthly returns by the 20th of the following month, detailing the fluid amount of sugar drinks and amount of tax generated. Proposed SBT Regs., Art. V, § 501.
14 PHILA. CODE § 19-4105(2). Dealers are obligated to assure that the distributor is registered and formal notifications (with liquid amounts and tax amounts) are exchanged at the time of purchase. Proposed SBT Regs., Art. IV, § 403.
15 For additional information on the tax, see the Philadelphia Department of Revenue's Web site at https://alpha.phila.gov/services/business-taxes/sweetened-beverage-tax.
16 Williams v. City of Philadelphia, complaint filed in Philadelphia County Court of Common Pleas on Sep. 14, 2016.
17 See Beverage Assoc. of Philadelphia, Memorandum on Sugar-Sweetened Beverage Tax from Sozi Pedro Tulante, City Solicitor, to James F. Kenney, Mayor ("Industry Memo"), Mar. 1, 2016 (arguing Solicitor flawed in interpreting Uniformity Clause and preemption issues).
18 See Sozi Pedro Tulante, Sugar-Sweetened Beverage Tax ("Solicitor Memo"), Mar. 1, 2016 (describing reasons tax can be enacted notwithstanding legal concerns).
19 Ronald D. Castille, Commentary: Mayor, Council Pushing Unconstitutional Soda Tax, PHILLY.COM, June 16, 2016.
20 See Solicitor Memo, supra note 18.
21 See Castille, supra note 19.
22 Williams v. City of Philadelphia, filed in Philadelphia County Court of Common Pleas on Sep. 14, 2016; 7 U.S.C. § 2013(a).
23 72 PA. STAT. § 7204(46).
24 Williams v. City of Philadelphia, complaint filed in Philadelphia County Court of Common Pleas on Sep. 14, 2016.
28 Id. PA. CONST. art. VIII, § 1 states: "All taxes shall be uniform, upon the same class of subjects, within the territorial limits of the authority levying the tax, and shall be levied and collected under general laws." For further discussion and application of Pennsylvania's Uniformity Clause, see Vito Cosmo Jr., Matthew Melinson & Patrick Skeehan, The Power Behind Pennsylvania's Uniformity Clause, PA. CPA JOURNAL, Fall 2015.
29 See Stephen St. Vincent, Is the Soda Tax Legal?, THE PHILADELPHIA CITIZEN, June 15, 2016; see also Castille, supra note 19.
30 See Solicitor Memo, supra note 18; see also Tricia L. Nadolny, Kenney's Soda Tax Expected to Face Court Fight, PHILLY.COM, June 20, 2016.
31 See Industry Memo, supra note 17.
32 See Castille, supra note 19.
33 Williams v. City of Philadelphia, complaint filed in Philadelphia County Court of Common Pleas on Sep. 14, 2016.
34 See Aubrey, supra note 2 (comparing Berkeley's population of 112,000 versus Philadelphia's 1.5 million).
35 See Leon Stafford, Bloomberg Backs S.F., Oakland Soda Taxes, AJC.COM, June 20, 2016, 12:36 pm.
36 See Vargas and Nadolny, supra note 4.
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