The Complexities of the Soda Tax
The impacts of the soda tax in Cook County
Why is it even called a soda tax, when the locals call it pop?
Whatever you call it, this tax has stayed in the news for weeks. From consumer and retailer backlash to legislative attempts to repeal the tax to various government agencies questioning the legality of the tax as it is being imposed, the Cook County sweetened beverage tax has generated a huge amount of discussion. A survey found that 87% of people polled disapprove of the tax; retailers are worried, especially those near the Cook County border; consumers have been overcharged and are suing; the United States Department of Agriculture and the Illinois Liquor Commission have raised concerns; Illinois State Representatives and Cook County Commissioners have proposed repealing the tax; and the Illinois Retail Merchants Association is continuing its legal fight.
Cook County adopted the “soda tax” – a penny-per-ounce tax on sweetened beverages (including both caloric and non-caloric sweeteners) – last November, with the tax originally scheduled to go into effect July 1. A lawsuit filed in late June led to a temporary restraining order (TRO), which was lifted at the end of July. The tax went into effect on August 2 and hilarity ensued. And by “hilarity” I mean “confusion.”
The ordinance very explicitly states that the reason for the tax is to promote public health. The ordinance cites studies showing adverse health effects linked to both sugary and diet beverages, so from a health perspective, applying the tax to diet drinks makes sense.
While the ordinance is all about healthy habits it quickly became apparent that fiscal, as well as physical health, was a concern. The official county statement on the day the TRO was handed down noted that revenue from the tax was “critical” to both the 2017 and 2018 budgets, and two weeks later, the county announced 300 layoffs. In an astounding move, the county sued the retailers’ association that had filed the suit that prompted the TRO, seeking $17 million dollars in damages. In a hearing on August 1, the judge said “I can tell you that I am troubled by this, the chilling effect of the government saying that you best not challenge us because if you are proven wrong we will come and get damages from you.” The county withdrew the petition for damages and the retailers’ case is working its way through the appeals system.
Implementation of the tax has been challenging. Large retailers including Walgreens, 7-Eleven and Subway have been sued for applying the tax incorrectly. (A suit against McDonald’s was dismissed.) Alleged violations include taxing items that should be exempt and improperly calculating the tax on beverages containing ice. An even odder example of erroneously applying the tax occurred when an Indiana Walmart charged the Cook County (Illinois) soda tax.
There are several quirks to this tax:
For starters, it applies by the ounce, not to the selling price. That’s a totally different way of looking at taxes than is usually done at the retail level. (Volume taxes are common at the distributor level, especially for alcoholic beverages.)
Additionally, the definition of taxable beverage differs from the definition used to identify beverages subject to sales tax (technically retailers’ occupation tax.) For example, beverages containing 50% juice are eligible for the (lower) food sales tax rate, but they have to be 100% juice to be exempt from the soda tax.
Furthermore, the imposition is unusual. Distributors collect the tax from retailers and distributors are the ones who file the returns, but the ordinance requires that retailers must collect the tax from their customers. The fact that retailers don’t file returns with the county also leads to some complexity as far as refunds, because the distributor, with whom the beverage consumer has no relation, is the one who has to file for a refund in case of overpayment, since only the business that remits the tax may file for a refund. An unintended consequence of the refund mechanism will become apparent in a few paragraphs …
Next comes the sales tax issue. Under state law, sales tax is not charged on the amount of consumer taxes. In a normal distributor-type tax situation, such as alcohol, the tax is charged to the retailer, the retailer rolls the tax into the selling price, and the entire selling price is subject to sales tax. Here, though, because the soda tax is imposed on consumers, not on retailers, the soda tax is not subject to sales tax. On one hand, the Cook County ordinance requires that the soda tax be part of the selling price, but on the other hand, the state excludes the soda tax from the sales tax base. Retailers have to maintain two sets of selling prices – one for the soda tax and another for sales tax.
This leads to the next issue, which is food stamps, or SNAP. Under federal law, SNAP may not be used to pay taxes. Cook County has issued some guidance to retailers allowing them to not apply the soda tax to SNAP purchases, but implementation is very tricky. The county allows retailers to tax and then refund SNAP purchases, but the Illinois Health and Human Services Secretary sent the county a letter indicating that the United States Department of Agriculture determined that charging SNAP recipients the tax and then issuing a refund violates federal law, so Cook County may lose $87 million in administrative funds.
UPDATE: On August 17, 2017, Cook County issued a revised regulation, requiring that retailers somehow figure out how to not charge SNAP recipients the soda tax and removing the charge-then-refund option. On August 18, Albertsons, parent of Jewel-Osco, was sued for having improperly applied the soda tax to beverages purchased with SNAP earlier in the month. Rob Karr, president and CEO of the Illinois Retail Merchants Association, said about the revised regulation “Not only did the county refuse to recognize this issue from the very beginning, but it has continued to show little regard for the hurdles the retail community has to go through.”
What’s more, the Illinois Liquor Control Commission got in on the act, sending a letter to the County expressing concern about how retailers will be reimbursed for tax they had pre-paid on beverages that were later purchased using SNAP. As noted above, only the vendor who paid the tax to the county can obtain a refund from the county, so retailers who overpaid the tax because they paid for beverages that ended up being exempt have to request refunds (or credits) from their distributors.
The Illinois Liquor Control Act prohibits liquor distributors from providing anything of value to licensed retailers, and as the Liquor Commission interprets “value,” refunds or credits of the soda tax would (or possibly would) violate the liquor control act. The Liquor Commission letter notes that multiple distributors sell both alcoholic beverages and beverages subject to the soda tax, and they do not have the resources to investigate each credit memo “for potential ‘of value’ violations.” According to news reports the county does not intend to respond to the Liquor Commission. “We do not support this two-month-old concern that a credit properly documented to address a tax refund would be deemed something of ‘value’ under the Liquor Control Act,” [Cook County Board President Toni] Preckwinkle spokesman Frank Shuftan said in an email. “Plus, this addresses beverages that are NOT under the jurisdiction of the commission. It is our understanding the trade group has provided guidance to their members on this matter, and the county remains available to the commission.”
The intersection of the county soda tax law, federal law prohibiting SNAP from being used to pay taxes, and the state liquor law leaves retailers in a bind. Businesses have to pay the soda tax when they buy beverages for resale, with the expectation that they will be reimbursed when they sell the beverages to consumers. If a beverage is purchased with SNAP, the customer doesn’t pay the tax but the retailer can’t get a refund based on the Liquor Commission’s interpretation, so unless something changes, retailers may end up paying the soda tax out of pocket for beverages their customers purchase with SNAP.
The Cook County soda tax has only been in effect a couple of weeks but early information about the impact on businesses is not encouraging. There’s more data about Philadelphia’s soda tax, which may be instructive. Philadelphia imposed a 1.5 cent per ounce tax on sweetened beverages (also including non-caloric beverages) on January 1, 2017. News reports indicate that beverage sales plummeted in Philadelphia while they grew in the suburbs. Reduced beverage sales not only negatively impact the amount of (anticipated) soda tax revenue but also decreased sales and income taxes paid by businesses that sell such beverages, along with all of the economic fallout that results from job losses. But, as the Wall Street Journal notes, it’s not all bad news: Beer is now cheaper than soda.
Nobody knows whether the Cook County soda tax will survive or which other locales will adopt similar taxes. What we have seen so far is that soda taxes are incredibly complex, both in terms of the items that are subject to the tax and in how they are implemented. Great tax software, properly implemented, can make it easier to swallow.
 www.ilga.gov/legislation/BillStatus.asp?DocNum=4082&GAID=14&DocTypeID=HB&LegId=107639&SessionID=91&GA=100 , www.ilga.gov/legislation/BillStatus.asp?DocNum=4083&GAID=14&DocTypeID=HB&LegId=107645&SessionID=91&GA=100