Philadelphia Court of Common Pleas upholds soda tax
Philadelphia Beverage Tax set to take effect on Jan. 1, 2017
TAX ALERT |
On Dec. 19, 2016, the Philadelphia County Court of Common Pleas issued a decision upholding the Philadelphia Beverage Tax and dismissing a complaint challenging the tax in its entirety. The beverage tax, which imposes a 1.5 cents-per-ounce tax on the distribution of sweetened beverages, as well as syrups and concentrates used to make sweetened beverages, was signed into law by Mayor Jim Kenney on June 20, 2016, and scheduled to become effective on Jan. 1, 2017.
The beverage tax was subsequently challenged by Philadelphia consumers, retailers and distributors through a lawsuit seeking declaratory and injunctive relief to invalidate the tax. The Court of Common Pleas ruled that the imposition of the tax was neither preempted by Pennsylvania’s sales and use tax statutes nor the federal Supplemental Nutrition Assistance Program (SNAP), and did not violate the Uniformity Clause of the Pennsylvania Constitution.
First, the court found that the beverage tax pertains to the distribution of a narrowly-defined set of beverages whereas the sales tax affects all retail sales of tangible personal property. Accordingly, the burden of the beverage tax will be primarily borne by distributors while the sales and use tax is a tax on the retail purchaser. Moreover, unlike Pennsylvania’s sales tax, which is calculated based on an item’s retail price, the amount of beverage tax due is dictated by the volume of liquid transferred. Therefore, the beverage tax is not duplicative of the state sales and use tax and is not subject to state preemption.
Second, SNAP does not preempt the imposition of the beverage tax because SNAP participants are not subject to the beverage tax. Under federal law, states may only receive SNAP funds once the state agrees not to impose a sales tax on eligible grocery items, including soft drinks. However, the court reasoned that the beverage tax is not affected by this prohibition because the tax is only imposed on the distributor and not retail customers. As a result, the beverage tax cannot be classified as a sales tax on the purchase of food from retail grocery stores for which SNAP funds are used to pay.
Finally, the court held that the tax does not violate the Uniformity Clause of the Pennsylvania Constitution because neither its operation nor its effect produces discriminatory results. The beverage tax is levied based on the volume of sugar sweetened beverages distributed to dealers in Philadelphia at a rate of 1.5 cents-per-fluid ounce. All distributors are subject to the same calculation, ensuring no disparate treatment between distributors.
Representatives for the soda industry have expressed their intent to appeal the court’s decision. Despite a potential appeal, the tax remains scheduled to take effect on Jan. 1, 2017.
Takeaways and next steps
Philadelphia-based retailers should review the new law and its compliance requirements carefully. A retail seller of sweetened beverages is considered a dealer for purposes of the tax. Dealers are required to buy sweetened beverages from a registered distributor, or dealers may register and self-report the tax on their own behalf. Dealers are also required to notify their distributors that they are located in Philadelphia before Jan. 1. The Dealer Notification Form may be found here.
Additionally, distributors of sweetened beverages to retailers located in the city are required to register and may do so through the city’s beverage tax registration site. Registration should be completed before Jan. 1. A distributor’s first tax return and tax payment is due on Feb. 20, 2017. Distributors and retailers of qualifying beverages should consult with their tax advisors on whether and how the tax will impact their business and compliance processes.