Extras on Excise: State Soda Taxes May Put Coffee on Ice

CoffeeIt looks like soda taxes are here to stay as more states and localities consider taxing sugar-sweetened beverages to promote healthy living and generate extra revenue. So far, Seattle is the latest city to join the ranks of other localities that have enacted soda taxes in recent years. Massachusetts is considering a statewide soda tax measure. Meanwhile, Santa Fe tried and failed to pass a soda tax. And the beverage industry is battling against Philadelphia’s soda tax in court.

The Seattle City Council approved a $0.0175 per ounce privilege tax on distributors of sweetened beverages to raise revenue to improve public health, promote healthy eating, and expand early childhood education and college readiness programs. Beginning Jan. 1, 2018, distributors of soda, sports drinks, energy drinks, flavored water with added sweeteners, certain fruit juices, sweetened ice teas and coffees, and other drinks containing added sweeteners would be liable for the tax. Beverage companies with a worldwide gross income of more than $2 million a year, but less than $5 million in the previous calendar year, would have a reduced tax rate of $0.01 per ounce, as long as they apply to the Seattle government for a certification.

The ordinance exempts beverages containing natural milk as the primary ingredient, beverages for medical use or sold as a meal replacement, alcoholic beverages, baby formula, 100 percent fruit or vegetable juice, sweetened medications, and beverages with fewer than 40 to calories per 12 ounce serving.

So what does that mean for my Starbucks Caramel Frappuccino with soy that contains 47 grams of sugar? Under the ordinance, it remains unclear whether an exemption applies to syrups, like caramel, used in milk-based coffee beverages made-to-order by baristas. Clarity will likely come during the rulemaking process before the new tax goes into effect. However, Starbucks’ bottled Caramel Frappuccino distributed by PepsiCo, Inc. would be taxed.  

Over on the East Coast, lawmakers in Massachusetts are considering a state-wide tax on distributors of sugary drinks. S.B. 1562 would tax 12-ounce beverages containing between five and 20 grams of sugar at $0.01 per ounce, while the rate would be $0.02 per ounce for beverages with 20 grams of sugar or more per 12 fluid ounces. Beverages containing less than 5 grams of sugar per 12 fluid ounces, baby formula, beverages for medical use, beverages with milk as the primary ingredient, unsweetened fruit and vegetable juices, water, coffee, and tea would be exempt. Revenue from the tax would establish a Children’s Health Promotion Fund to promote children’s wellness.

Soda taxes have gained support from other governmental branches in Pennsylvania where the Commonwealth Court recently upheld Philadelphia’s $0.015 per fluid ounce sugar-sweetened beverage tax as legal under state law. In September 2016, the beverage industry filed a lawsuit claiming the tax was unconstitutional because state law prevents municipalities from imposing taxes on items already taxed at the state level. The court ruled that the tax was not duplicative of the sales tax. The American Beverage Association is expected to appeal to the state Supreme Court.

While soda taxes seem to be gaining momentum, at least one jurisdiction is not ready to pay more for their sodas and energy drinks. Santa Fe voters rejected a tax on sugar-sweetened beverages on May 2. The measure would have imposed a $0.02 per ounce tax on distributors of soda and other sugar-sweetened beverages.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do you think the soda tax will be able to achieve its health and revenue objectives? Are there are any downsides to taxing the sugar-sweetened beverage industry?

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