Pennsylvania’s Top Court Hears Philly Soda Tax Dispute (1)

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Leslie A. Pappas

The fate of Philadelphia’s 1.5-cent per ounce tax on sweetened beverages lies in the hands of the state’s highest court.

The Pennsylvania Supreme Court heard argument May 15 on whether the city’s tax violates the state’s Sterling Act, a statute that prevents local governments from levying sales tax on goods already taxed by the state. After generating more than two years of noisy protests, the tax prompted few questions from the court’s seven justices, who focused their questions on how the tax differs from the state’s existing 6 percent tax on retail sales.

A coalition of business owners, retailers, and industry groups sued to stop the tax, which went into effect Jan. 1, 2017. Led by the American Beverage Association, which represents beverage makers such as Coca-Cola Co. and PepsiCo Inc., the coalition is appealing Pennsylvania’s Commonwealth Court’s June 2017 decision to uphold the tax.

The case has the potential to eliminate the tax, which has been under fire since Philadelphia Mayor Jim Kenney (D) first pitched the idea more than two years ago. When the Philadelphia City Council passed the tax in June 2016, Philadelphia became the nation’s first major city to tax sweetened beverages. An increasing number of jurisdictions have since adopted similar taxes on soda, including Seattle and San Francisco.

Opponents of the tax say it’s illegal and hurts local businesses. Supporters of the tax say Philadelphia has the right to levy it, and it brings in desperately needed revenue for parks, libraries, and recreation centers. More than a dozen friend-of-the-court briefs, both for and against, have been filed in the case.

‘Relentless’ Attack

The coalition’s attack on the tax “has been long and relentless” the city said in its April 13 brief to the court.

Philadelphia’s tax is levied on distributors of sweetened beverages, including diet drinks, and not on retailers, which is why it doesn’t violate the law, the city argued.

The Philadelphia Beverage Tax “only taxes distribution-level transactions that happen independent of any subsequent retail transaction,” the city said, asking the Pennsylvania Supreme Court to uphold the Commonwealth Court’s decision.

As the Commonwealth Court explained, “taxes do not duplicate each other when they tax different activities or transactions, even if the two taxes relate to a common physical object or material,” according to the brief.

The question the court must consider is “what is the tax on or upon? Not what is it related to,” Mark A. Aronchick, the attorney for the city, told the justices during oral argument. “Precision is critical.”

But doesn’t the tax “have to be for the purpose of retail sale?” Justice Max Baer asked.

“There is no trigger that there has to be a retail sale,” Aronchick said. A store owner could throw away the soda or never sell it; the tax is on the distribution, he said.

Justice David N. Wecht wanted to know, if upheld, could the city also tax the distribution of other goods, such as automobiles? “There’s no principal stopping point, right?” he asked.

Aronchick said that other distribution taxes could be imposed if other codes and regulations permitted it.

No Right to Tax

The coalition says the tax is clearly duplicative and goes beyond the city’s authority.

“It really is a tax on retail in the city,” Marc Sonnenfeld, the attorney representing the coalition, argued May 15.

The Sterling Act, passed in 1932, imposed “significant limits” on the city’s taxing authority, allowing Philadelphia to tax only within its borders and specifying that the city “could not tax subjects taxed by the state,” the appellants argued in their April 23 reply brief.

Even if the tax weren’t duplicative, the city has no right to tax “non-retail distribution transactions” because the city’s power to tax is confined to transactions within its city limits, they said.

“In short, the City’s Tax is defined and measured by retail commerce within Philadelphia. It is not, despite the City’s efforts to get around the Sterling Act, a tax on ‘non-retail distribution transactions,’” the brief said. “Because the Tax falls on the same ‘transaction [or] subject’ as the state sales tax, it is barred by the Sterling Act.”

‘Retail Sale Within the City’

As written, doesn’t the Philadelphia Beverage Tax apply to the “supply, acquisition, delivery, and transport” of sweetened drinks? Justice Baer asked.

The modifying phrase “for retail sale within the city” upends that, Sonnenfeld argued. Because of that, distributors outside the city pay the tax only when selling to retailers inside the city, while distributors located within the city limits avoid the tax if selling to other counties. That proves that the tax is really a tax on retail sales, he said.

“Doesn’t that prove the opposite?” asked Justice Christine Donohue.

The court should uphold its 1971 opinion in United Tavern Owners of Philadelphia v. School District of Philadelphia, 272 A.2d 868 (Pa. 1971), in which the court said a tax at the distribution level “was a classic sales tax,” Sonnenfeld said. “The opinion has never been repudiated.”

That decision wasn’t unanimous, Justice Baer told Sonnenfeld. It came with two concurring opinions and two dissents, he said. “You can’t get more shaky.”

The case represents the first time in 50 years that the court has been asked to apply the Sterling Act, Sonnenfeld said.

‘Dangerous Precedent’

Some lawmakers in the state’s capitol are trying to kill the tax. Rep. Mark Mustio (R) introduced H.B. 2241, which would preempt Philadelphia’s soda tax and make it unlawful for other municipalities to levy one.

Harrisburg lawmakers also filed a friend-of-the-court brief asking the court to reject the tax.

The Philadelphia Sweetened Beverage Tax “is an impermissible sales tax no matter how it is phrased or couched,” state Sen. Anthony Williams (D), state Rep. Angel Cruz (D), and 32 other state lawmakers said in a friend-of-the-court brief. “If allowed to stand, it sets a dangerous precedent.”

Sweetened beverages are already subject to the state’s 6 percent sales and usage tax on beverages, and Philadelphia hasn’t gotten any special permission from the Legislature to tax beverages, so the Sterling Act preempts it, the lawmakers’ brief said.

If upheld, the tax could become “the blueprint” for similar local taxes “that could disrupt and distort beverage and other product markets throughout Pennsylvania,” a coalition of business associations,including the National Federation of Independent Small Businesses, the Pennsylvania Chamber of Business and Industry, and the Pennsylvania Restaurant and Lodging Association, said in a friend-of-the-court brief.

Freedom to Tax

The city’s soda tax is different from Pennsylvania’s tax on soda in “both practical and legally significant ways” and isn’t duplicative, the International Municipal Lawyers Association, an association of attorneys representing cities, counties, and municipalities, argued in its brief.

“The Sterling Act was intended to enable Philadelphia to raise additional revenue and to provide the City with the freedom to craft its own tax laws and its own tax policies,” the brief said. The Philadelphia beverage tax “is a modern revenue-generating tax that fits squarely within the autonomous taxing power granted to Philadelphia through the Sterling Act.”

Berkeley’s Experience

The city of Berkeley, Calif., which was the first city in the country to pass a soda tax in 2014, filed a brief in support of Philadelphia. Implemented in March 2015, Berkeley’s 1-cent-per-ounce excise tax on the distribution of sugar-sweetened beverages “has not only been an effective tool in addressing public health concerns, but has also generated over $3.57 million in general fund revenue,” Berkeley said in its brief.

While many retailers have reported a drop in sales of soda, “most retailers reported no or only minor impacts on overall business or sales,” the Berkeley brief said. Studies in Berkeley also found that the average grocery bill didn’t increase, and food sector jobs actually increased after the tax was passed.

However, not all efforts in other jurisdictions have been as positive. Cook County, Ill., which includes Chicago, repealed its soda tax in October amid controversy. And legislative efforts in Michigan, Arizona, and Washington state seek to bar soda taxes at the state level.

Former New York Mayor Michael Bloomberg, a long-time critic of the health effects of sweetened beverages, favors Philadelphia’s soda tax and has paid for advertising that supports it. Bloomberg is the founder of Bloomberg L.P. Bloomberg Tax is is an affiliate of Bloomberg L.P., the global business, financial information, and news leader.

It isn’t known when the court will render a decision. Generally, the court issues its decisions within about 150 days from oral arguments.

The case is Williams v. Philadelphia , Pa., Nos. 2, 3 EAP 2018, oral argument 5/15/18 .

To contact the reporter on this story: Leslie A. Pappas in Philadelphia at

To contact the editor responsible for this story: Ryan C. Tuck at

Copyright © 2018 Tax Management Inc. All Rights Reserved.

Request Daily Tax Report: State