Extras on Excise: Pennsylvania Supreme Court Dives into Soda Tax Debate

Soda Tax1

On June 20, 2016, Philadelphia Mayor Jim Kenney (D) signed Philadelphia Ordinance No. 160176, amending Philadelphia Code § 19-4101 through § 19-4108 to impose a sugar-sweetened beverage tax—also known as a “soda tax”—in the city beginning Jan. 1, 2017. Even though the tax is just over a year old, its future is in doubt after the Pennsylvania Supreme Court issued a Jan. 30, 2018, order granting appeal to a case questioning the legality of the tax.

As background, Ordinance No. 160176 amended Philadelphia Code § 19-4103 to impose a $0.015 tax per fluid ounce on sugar-sweetened beverages that are supplied, acquired, delivered, or transported into Philadelphia for the purpose of being sold at retail. Examples of beverages subject to the tax include soda, sports drinks, and energy drinks. Distributors of these beverages are generally subject to the tax, unless a dealer—generally defined as a retail seller of sugar-sweetened drinks—fails to inform an applicable distributor that the dealer is located in Philadelphia and is thus subject to the tax.

While this may seem straightforward enough, the case that will be heard before the Pennsylvania Supreme Court—Williams v. City of Philadelphia, Pa., Nos. 321 EAL 2017 and 322 EAL 2017—shows the intricacies concerning the legality of the tax.

In Williams, Lora Jean Williams, et al., (the “Objectors”) appeal the Pennsylvania Commonwealth Court’s June 4, 2017, ruling, which upheld the validity and legality of Philadelphia’s sugar-sweetened beverage tax.

The Pennsylvania Supreme Court’s order limits the issue on appeal to the sugar-sweetened beverage tax as it relates to—and potentially violates—the Sterling Act (53 P.S. § 15971), which generally prevents certain localities, including Philadelphia, from imposing a tax on the same subject as a Pennsylvania state tax.

The Objectors’ main point of contention is that retail sales of soft drinks are already subject to a tax—the statewide sales tax, per 52 P.S. § 7202 and § 7201(a).

The commonwealth court generally disagreed with the Objectors by differentiating the sugar-sweetened beverage tax from the statewide sales tax.

The commonwealth court explained that the “incidence,” “subject matter,” and “the measure of the tax” are important in determining if one tax duplicates another tax and found that, after examining these terms, the sugar-sweetened beverage tax did not impose a tax on the same subject as Pennsylvania’s sales tax.

The court specifically explained that the subject matter of the sugar-sweetened beverage tax was “the non-retail distribution of sugar-sweetened beverages for sale retail in [Philadelphia],” and that the measure of the tax was “per ounce of sugar-sweetened beverage.” The court further explained that both are distinct from Pennsylvania’s sales tax, which is imposed “upon the retail sale of the sugar-sweetened beverage to the ultimate purchaser.”

The majority opinion also noted that the sugar-sweetened beverage tax is generally paid by a distributor, as opposed to the sales tax, which is paid by a dealer.

Even though the commonwealth court’s majority opinion may make this appear to be an open-and-shut case, the lone dissent from Judge Anne E. Covey provides several interesting and persuasive points that likely preview the arguments the Objectors will make to the Pennsylvania Supreme Court.

While the dissenting opinion does not dispute that “incidence,” “subject matter,” and “the measure of the tax” are important in determining if one tax duplicates another tax, the dissent differs from the majority in the application of these terms as they relate to the sugar-sweetened beverage tax.

One of the dissent’s main arguments focuses on Philadelphia Code § 19-4103, which states the sugar-sweetened beverage tax is imposed only if the delivery, transport, acquisition, or supply of the sugar-sweetened beverage to a dealer is “for the purpose of the dealer’s holding out for retail sale within the City the sugar-sweetened beverage.”

This language, the dissent argues, clearly shows the sugar-sweetened beverage tax “is only triggered when there is a retail sale involved.”

In addition, the dissent points to Philadelphia Code § 19-4105(4) and Philadelphia Code § 19-4107(1), which provide circumstances in which a dealer, as opposed to a distributor, would be liable for payment of the sugar-sweetened beverage tax.

These arguments—in addition to the fact that taxing statutes must be strictly construed against the government—led the dissent to conclude that the subject-matter and the incidence of the sugar-sweetened beverage tax are the same as Pennsylvania’s sales tax, and thus the sugar-sweetened beverage tax is barred by the Sterling Act.

Regardless of which side prevails in front of the Pennsylvania Supreme Court, the plethora of persuasive arguments between well-established judges helps set the stage for one of the more interesting state Supreme Court cases on excise taxation in the nation.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do you find the majority or the dissent’s argument more persuasive?

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