This article was originally published by Law360 on August 24, 2018.
California is the latest to join a growing list of states to ban local taxes targeted at sweetened beverages or similar sugar taxes. California Assembly Bill 1838 signed into law on June 28, 2018, imposes a 13-year ban on any new local taxes on carbonated and noncarbonated beverages and other “groceries.”1 Arizona and Michigan have done the same and three more states, Oregon, Pennsylvania and Washington are considering similar bans. The public policy debates behind these recent legislative enactments are no different than the all too familiar “sin taxes” that harken of decades, if not centuries past.
Aside from the inherent differences between sugary groceries and the likes of tobacco, alcohol or gambling, sweetened beverage taxes imposed at local levels pose serious compliance issues for distributors and retailers. The recent popularity of these taxes at the local level not only has the beverage and retail industry fired up over the compliance issues, but citizens are beginning to recognize the paternalistic nature of these taxes and their regressive effects on the communities.
The Sugar Tax Rush
During World War I, the United States federal government levied the first soda tax on manufacturers, which was later replaced with a 10 percent tax levied on bottled soda sales and an additional charge on consumers equaling a penny for every ten cents spent. The war tax was eventually repealed but in 2009 federal lawmakers once again considered a national excise tax on soda to help fund the Affordable Care Act. The proposal was met with such resistance that it never made it past the planning stage.
Historically, states have also imposed excise taxes on sweetened beverages or syrup used to make sweetened beverages as a way to raise revenue and finance specific projects or programs. States such as Alabama, Arkansas, Tennessee, Virginia and West Virginia were early adopters of sugar taxes. Some state-level taxes still exist today. For example, Tennessee imposes a gross receipts tax on the production and sale of bottled soft drinks to fund a state litter and recycling program.2 And in 1951, to fund the state medical school, West Virginia implemented an excise tax on bottled soft drinks and syrups and dry mixtures used to make soft drinks.3 The state taxes are outdated as evidenced by West Virginia’s recent effort to revamp the excise tax, which died in committee.4
Unlike the United States, other countries such as France, Hungary and the United Kingdom have adopted sweetened beverage taxes at the federal government level. These taxes look to the sugar content in the drink, not the volume of the drink. For example, Hungary’s tax is a one-tier levy on drinks with relatively high sugar levels and the United Kingdom’s tax is a two-tier levy on both drinks with moderate sugar content and high sugar content.
In the last four years, we have seen a rise in localities across the United States turning to sugar taxes to boost revenue and purportedly curb unhealthy consumer habits. In 2014, the City of Berkeley in California became the first locality in the nation to pass a sweetened beverage tax. Since then, six localities, including Albany, Oakland, San Francisco, Boulder, Philadelphia and Seattle, have followed suit and passed similar taxes still in effect today. Unlike France, Hungary, the United Kingdom and other countries that have adopted sweetened beverage taxes, these local taxes look to the volume of the drink, not necessarily the sugar content.
The structure of these local sweetened beverage taxes is similar across localities, but the definitions and compliance procedures vary. The sweetened beverage taxes are typically excise taxes imposed on the wholesale distribution of sweetened beverages and syrups and powders used to make sweetened beverages. The tax rates range from one cent to two cents per fluid ounce and the burden to collect and remit the tax falls on the distributor.
Recent Challenges to the Local Level Sugar Taxes
On Aug. 2, 2017, Cook County, Illinois implemented a one cent per ounce tax on sweetened beverages. The ultimate responsibility for paying the tax was with the purchaser but distributors were first required to collect the tax from retailers, who then were required to pass the tax along to shoppers at checkout. Neither distributors nor retailers could absorb the tax.
Prior to the tax becoming effective, the Illinois Retail Merchants Association filed a legal challenge in court arguing the tax violated the uniformity clause of the Illinois Constitution and was unconstitutionally vague and impossible to implement and apply.5 A temporary restraining order was issued by the court, which postponed the ordinance’s initial effective date of July 1, 2017.
The court eventually found the complaint failed to set forth sufficient substance to withstand the county’s motion to dismiss, and granted Cook County’s motion and lifted the temporary restraining order.6 In deciding the uniformity issues, the Cook County Circuit Court found that the county set forth a real and substantial difference between the taxable ready-to-drink, premade sweetened beverages and those purchases of nontaxable on-demand, custom sweetened beverages; and Cook County’s interest in promoting public health to its residents, evidenced by the amount of money it dedicates to healthcare was enough to establish a reasonable relationship between the tax classification and the object of the legislation.7 Additionally, the court found the sweetened beverage tax was not unconstitutionally vague because it “provide[d] a person of ordinary intelligence a reasonable opportunity to understand what is required and it is sufficiently detailed and specific to preclude arbitrary enforcement.”8
Philadelphia is another locality that has been wrapped up in a court battle over its sweetened beverage tax, which recently ended in a Pennsylvania Supreme Court decision in Philadelphia’s favor.
Philadelphia adopted a beverage tax, effective Jan. 1, 2017, which imposes a 1.5 cent per fluid ounce tax on the distribution of nonalcoholic beverages containing any form of caloric sugar-based sweetener or artificial sugar substitute.9 Shortly after the tax was adopted, opponents brought suit in the commonwealth court alleging the tax violated the Sterling Act, an act prohibiting double taxation, by duplicating the 6 percent state sales tax on tangible personal property.10 The case made its way to the Pennsylvania Supreme Court where the court held the local beverage tax did not violate the Sterling Act because the states sales tax and the local beverage tax had “different subjects, measures and payers, and accordingly distinct legal incidences.”11
The Pennsylvania Supreme Court noted the general assembly has left an “enormously broad and sweeping power of taxation” to the cities but the legislature remains free to modify the cities’ power as it sees fit, subject to constitutional limitations.12 And states are doing just that.
With the growing popularity of local sweetened beverage taxes, it remains to be seen whether the industry will continue to challenge these taxes targeting sugar.
The States’ Responses
States are stepping in and placing a statewide ban on local taxes targeting sweetened beverages. Michigan13 and California14 have banned all local taxes on the sale, manufacture or distribution of food, including sweetened beverages, while Arizona15 now prohibits localities from targeting specific products by requiring localities to apply a tax equally across the board. Three other states are considering banning sweetened beverage taxes: Oregon (Measure 103), Pennsylvania (House Bill 2241) and Washington (Initiative 1634).
Supporters of the ban at the statewide level argue that sugar taxes like a sweetened beverage tax is highly regressive, taxing both rich and poor at the same fixed amount placing a disproportionate share of the tax burden on those with the fewest resources. Supporters also cite to the paternalistic nature of the sweetened beverage taxes. A paternalistic tax takes away the freedom of choice in an area of daily living, such as food and drink. By implementing sweetened beverage taxes, local governments are determining what is or is not good or healthy to eat and drink. As the sweetened beverage taxes have shown, paternalistic taxes are all too often regressive in nature, putting an unfair tax burden on those citizens that are more vulnerable.
Additionally, states are passing the ban to prevent the harm the taxes are causing to businesses. Specifically, some states found evidence that sweetened beverage taxes have led to loss of beverage industry jobs and hurt small grocers. The taxes cause shoppers to travel outside the locality with the tax to buy sweetened beverages and likely other groceries. The decrease in customers cuts into retailers’ revenue and costs retail employees their jobs. The taxes also cause new businesses not to locate to counties or cities with sweetened beverage taxes.
Tax Compliance Burdens
Sugar taxes, especially those imposed at a local level, present serious compliance issues for distributors and retailers alike. The local taxes vary by purpose, definitions, exemptions and collection and remittance obligations, making it difficult for distributors and retailers to track the taxes across the jurisdictions. Localities impose the taxes on a select number of sweetened beverages, as opposed to all sweetened beverages. The narrow focus of the taxes combined with the differing definitions and exemptions make it increasingly costly for distributors and retailers to determine the taxability of beverages across the jurisdictions. Retailers and distributors in each jurisdiction are required to spend time and money updating their point of sale software in order to comply with the new rules. The variance in the taxes and a lack of guidance at the local level adds additional costs for retailers and distributors in the form of legal advice, in addition to opening retailers and distributors to significant liability exposure through class action lawsuits or false claim act lawsuits for claimed over or under collection of the tax.
These challenges are made worse by the lack of guidance local jurisdictions provide to distributors and retailers. Local jurisdictions typically piggyback on the type, base, exemptions, collection and remittance obligations provided by the state government when levying taxes. Using similar definitions and collection and remittance obligations makes local taxes easier to comply with and administer. No state has recently adopted a sweetened beverage tax or other sugar tax. With the exception of the outdated state-level taxes discussed earlier, there is nothing for the local jurisdictions to piggyback off of at the moment to make the compliance burdens lighter for taxpayers.
If the tax is only imposed at the distributor level, this does help ease some of the compliance burdens. Collecting at the distributor level makes the platform from which the tax is collected smaller and more connected to a specific community or jurisdiction. In localities like Berkeley and Philadelphia, a backstop exists if retailers purchase from noncompliant distributors. The retailer is required to collect and remit the tax from the end customer. This creates greater compliance issues for retailers because the tax is based on product volume rather than sales price.
These compliance issues became apparent to residents in Cook County, Illinois, after the Board of Commissioners implemented its sweetened beverage tax. Large retailers had difficulty implementing the tax, resulting in residents suing the retailers for incorrectly applying the tax. Cook County’s tax was immediately met with opposition and became the first local sweetened beverage tax to be repealed.
Will the Sugar Tax Trend Continue?
States are beginning to acknowledge the regressive nature of the sweetened beverage taxes and some cities, such as Philadelphia, are finding the tax is failing to generate the revenue anticipated. The taxes place the largest burden on the people with the fewest resources, they hurt local businesses and may well cause a loss of jobs. Sugar taxes are meant to curb private, individual behaviors upon which the government and public disagree. While proponents argue sugar taxes will increase health and reduce health care costs by addressing obesity, opponents argue the tax is hurting retailers and affecting jobs.
So where does this leave the tax? In states like California, localities such as Stockton, Richmond, Santa Cruz and Marin County, which had measures on the ballot or organizing efforts underway, will have to wait. Opponents of the 13-year ban in California expect the state will see a 2020 ballot initiative proposing a statewide 2 cent per fluid ounce tax on sweetened beverages. And, at least one California assembly member has voiced plans to reintroduce a “health impact fee” on sugary beverages. Taxpayers in states with bans like California should continue to watch for new measures proposing sugar taxes at the state level.
On the other hand, taxpayers in states without sugar tax bans should continue to watch for ballot initiatives at both the local level, imposing a tax on sweetened beverages, and the state level, banning taxes on sweetened beverages. Taxpayers will need to weigh the pros and cons of a sugar tax in their locality specifically focusing on whether the revenue generated from the tax will outweigh the impact on retailer profits, the regressive nature of the tax and the possible inability to secure new retailers in the area.