Soda taxes: Old and new

By Christian Sorensen, J.D.; Alec Mullee, J.D., LL.M.; and Harley Duncan, Washington

Editor: Mary Van Leuven, J.D., LL.M.

One hot trend in the state and local tax arena is the enactment of special excise taxes on soda and other sweetened beverages. Those taxes have recently been enacted in four California localities; Boulder, Colo.; Cook County, Ill.; Philadelphia; and the Navajo Nation. (The trend is actually worldwide: Portugal recently enacted such a tax.) However, it may come as a surprise that a variety of state soda taxes are already on the books. A look at the differences between old and new soda taxes reveals how these taxes (and the motivation for enacting them) have changed over the years and puts the newest batch of taxes in perspective.

Older taxes

The older soda taxes were enacted at various times but generally go back two decades or more. They differ by type, base, exemptions, collection and remittance obligations, and purpose. The older taxes exist primarily in the southeastern United States and are imposed at the state level.

Alabama: Since at least 1975, Alabama has imposed an annual licensing tax on persons engaged at each level of the soft drink industry. Specifically, persons engaged in manufacturing or bottling soft drinks, selling soft drinks at wholesale, or selling soft drinks at retail must obtain a license (Ala. Code §§40-12-65, 40-12-69, and 40-12-70). The license amounts are relatively minor compared with some other soda taxes, particularly those of more recent vintage; for example, the wholesaler license is $50. In addition to conventional soda, the bottling license tax applies to soda water, fruit juices, and even flavored milk. The retail license tax applies to retailers selling soft drinks in bottles and cans as well as by tap.

Arkansas: Since 1992, Arkansas has imposed an excise tax on soft drink manufacturers and distributors. The tax is set at $1.26 per gallon of soft drink syrup, 20.6 cents per gallon of soft drink, and 20.6 cents for each gallon of soft drink that may be produced from powders (Ark. Code §26-57-904; H.B. 1162, 91st Gen. Assem., Reg. Sess. (Ark. 2017) (enacted)). In addition to conventional sodas, "soft drink" is defined to include any fruit or vegetable drink with less than 10% natural juice, and any bottled coffee or tea. Exemptions include infant formula, dietary supplements, nonflavored and noncarbonated water, any product containing milk, and any powder intended to be mixed at home. The tax is imposed on the manufacturer or distributor, and any retailer purchasing covered products from an unlicensed manufacturer or distributor is liable for the tax. The tax proceeds are dedicated to the Arkansas Medicaid Program Trust Fund.

Tennessee: Since at least 1987, Tennessee has imposed a gross-receipts tax on the privilege of manufacturing and selling or importing and selling "bottled soft drinks" in the state (Tenn. Code §67-4-402). The rate is currently set at 1.9% of Tennessee gross receipts from those activities. "Bottled soft drinks" includes all nonalcoholic beverages, whether carbonated or not. Exemptions include milk and undiluted fruit or vegetable juice. A portion of the revenue generated from the tax is allocated for the prevention and collection of litter.

Virginia: Since 1984, Virginia has imposed an excise tax on every wholesaler or distributor of carbonated soft drinks, based on gross receipts from Virginia sales (Va. Code §58.1-1702). Unlike Tennessee's, the Virginia tax is stated in flat dollar amounts based on the volume of gross receipts. For example, if gross receipts are over $10 million but less than $20 million, the tax is $7,200. All revenue is deposited into the Litter Control and Recycling Fund.

Washington: Since 2009, Washington has imposed an excise tax based on the volume of syrup sold at wholesale or retail in the state (Wash. Rev. Code §82.64). "Syrup" is defined as a concentrated liquid that is added to carbonated water to produce a nonalcoholic, carbonated beverage. The rate is $1 per gallon. Wholesalers collect the tax from buyers but are liable themselves if they do not collect it. A retailer purchasing from a noncollecting wholesaler must pay the tax. Pending legislation would repeal the syrup tax and replace it with a tax on sugar-sweetened beverages (H.B. 1975, 65th Leg. (Wash. 2017)).

West Virginia: Since 1950, West Virginia has imposed an excise tax on bottled soft drinks as well as syrups and dry mixtures used to make soft drinks that are manufactured or distributed in West Virginia (W. Va. Code §11-19-2). The tax is set at one cent per one-half liter of bottled soft drinks, 80 cents per gallon of soft drink syrup, and one cent per 28.35 grams of dry mixture. The term "bottled soft drinks" is defined broadly as all nonalcoholic beverages, whether carbonated or not, including fruit juices when any water, flavoring, or syrup is added. The tax was enacted to aid in financing a school of medicine, dentistry, and nursing at West Virginia University.

Newer taxes

The newer soda taxes are primarily excise taxes imposed at the municipal or county level on the first wholesale distribution in the taxing jurisdiction of sweetened beverages or the syrups and powders used to make these beverages. The taxes are designed to flow through to the retail price of the beverage product, and, for the most part, these taxes are specifically targeted at reducing consumption of sweetened beverages.

Albany, Berkeley, Oakland, and San Francisco, Calif.: Four localities in California have recently enacted sugar-sweetened beverage taxes. The city of Berkeley was the first to impose the tax, starting Jan. 1, 2015, followed by Albany (Dec. 5, 2016), Oakland (July 1, 2017), and the city and county of San Francisco (Jan. 1, 2018) (Albany, Cal., Code ch. 4-13; Berkeley, Cal., Municipal Code ch. 7.72; Oakland City Council, Res. No. 86161 C.M.S.; S.F., Cal., Bus. & Tax Reg. Code art. 8). In each jurisdiction, the tax takes the form of an excise tax on the first distribution of sugar-sweetened beverages and the powders or syrups used in making these beverages. The term "sugar-sweetened beverage" is defined broadly as any beverage that contains at least two calories per fluid ounce, for Albany and Berkeley, and 25 or more calories per 12 fluid ounces for Oakland and San Francisco. The four jurisdictions share many of the same exemptions, including any beverage in which milk is the primary ingredient, any beverage for medical use (as defined), any beverage sold for weight reduction or as a meal replacement, and infant formula. The tax in all four jurisdictions is set at one cent per fluid ounce, or the amount of syrup or powder required to make one fluid ounce of beverage. Distributors are generally obligated to collect and remit the tax. Retailers must demonstrate that they received covered products from a registered distributor. If they cannot, then retailers must either report the amount received and the contact information of the distributor or collect and remit the tax. Each tax shares a general stated intent. In the words of the San Francisco ordinance, the intent is to "discourage the distribution and consumption" of "sugar-sweetened beverages."

Boulder, Colo.: Effective July 1, 2017, Boulder, Colo., will impose an excise tax on the first distribution within the city of sugar-sweetened beverages (Boulder, Colo., City Council, Ordinance No. 8130). "Sugar-sweetened beverages" are defined as nonalcoholic beverages that contain at least five grams of caloric sweetener per 12 fluid ounces. The tax is set at two cents per fluid ounce (or the amount of syrup or powder required to make one fluid ounce of beverage). The tax exempts weight reduction or meal-replacement supplements, baby formula, beverages for medical use, beverages in which milk is the primary ingredient, and any sweetened medication such as cough syrup. Distributors must collect and remit the tax. Upon request, retailers must demonstrate that they have received covered products from a registered distributor.

Cook County, Ill.: Effective July 1, 2017, Cook County will impose an excise tax on the retail sale of all sweetened beverages in Cook County at one cent per fluid ounce (Cook County, Ill., Code of Ordinances §74-852). "Sweetened beverage" is defined as any nonalcoholic beverage, carbonated or noncarbonated, that contains any caloric sweetener or noncaloric sweetener. Distributors have a duty to collect the tax from retailers. Retailers, in turn, will collect the tax from purchasers. Any retailer acquiring covered products from an unregistered distributor must file a return and remit the tax. In addition, Cook County will impose an equivalent tax on the inventory of sweetened beverages (and syrups and powders used to make those beverages) in the possession of all retailers in the county on June 30, 2017.

Philadelphia: The city of Philadelphia, effective Jan. 1, 2017, also began imposing an excise tax on the first distribution of sugar-sweetened beverage products within the city (Phila., Pa., Code ch. 19-4100). "Sugar-sweetened beverage product" is defined as any nonalcoholic beverage that contains a caloric sugar-based sweetener or any artificial sugar substitute, or any syrup or concentrate intended to be used in preparation of such a beverage. The tax rate is 1.5 cents per fluid ounce. Distributors are responsible for collecting the tax from retailers, but a retailer selling sugar-sweetened beverages acquired from an unregistered distributor must pay the tax. Exemptions include baby formula; beverages defined as "medical food"; and any product containing, by volume, more than 50% milk, fruit, or vegetables.

Navajo Nation: The Navajo Nation imposes a tax on gross receipts received from sales of "minimal-to-no nutritional value food" items at a rate of 2% (CN-54-14, Res. of the Navajo Nation Council, 22d Navajo Nation Council—Fourth Year (2014) (enacted)). "Minimal-to-no nutritional value food" includes, among other items, sweetened beverages. Each person selling sweetened beverages must file a return indicating gross receipts from all such sales and remit tax due on at least a quarterly basis. The tax is used, in part, to fund community wellness projects.

Observations

While the older soda taxes are generally imposed for the purpose of collecting revenue and financing specific projects or programs, the newer sweetened beverage taxes are primarily aimed at altering consumer behavior. For example, the West Virginia soda tax (enacted in 1950) provides revenue for a state medical school while the Arkansas tax is dedicated to Medicaid funding. The Virginia and Tennessee taxes both fund state litter and recycling funds. The newer taxes, on the other hand, commonly have a stated goal of reducing consumption of sweetened beverages. For example, all four California municipal ordinances have the stated intent of discouraging the consumption of sugar-sweetened beverages.

The most significant differences between the older and newer taxes involves their structure and administration. The older soda taxes (with the exception of West Virginia's and Washington state's) take the form of a license or gross-receipts tax aimed at taxing the business process generally. For example, Alabama imposes a license tax, while Tennessee and Virginia impose a gross-receipts tax. By contrast, the newer taxes generally take the form of an excise tax based on the amount of sweetened beverage product sold in the jurisdiction. Of the newer taxes, all but the Navajo Nation tax are imposed on a volumetric basis, i.e., per fluid ounce of product.

The older soda taxes cast their net broadly by using an expansive definition of "soft drinks," often failing to exclude products that do not contain sugar or other sweeteners. For example, the Tennessee definition specifically includes soda water. Given that the Tennessee tax funds a litter prevention program, including even unsweetened bottled beverages seems appropriate. The Arkansas tax base includes bottled coffee or tea, regardless of sugar content.

By contrast, the newer taxes are more narrowly focused on reducing the consumption of sweetened beverages. They tend to define the tax base with reference specifically to the caloric content of the beverage. For example, Boulder imposes its tax only on beverages that contain at least five grams of caloric sweetener per 12 fluid ounces. Berkeley's tax applies to beverages that contain at least two calories per fluid ounce. Cook County and Philadelphia are exceptions to this general rule. Both jurisdictions specifically tax beverages that use noncaloric sugar substitutes ("non-caloric sweeteners" in Cook County and "artificial sugar substitutes" in Philadelphia).

The Washington tax illustrates the transition from a conventional, broad-based soda tax to one focused on sweetened beverages. As it currently exists, the Washington tax on syrup applies to syrup added to carbonated water to produce a carbonated beverage, a definition that is broad enough to include beverages that do not contain caloric sweeteners. However, the state Legislature is considering a measure that would replace the syrup tax with a tax on sugar-sweetened beverages (H.B. 1975, 65th Leg. (Wash. 2017)). Similar to Cook County and Philadelphia, the proposed Washington legislation would also apply to "diet beverages," defined as beverages that contain artificial noncaloric or low-calorie sweeteners.

In general, the newer taxes have much more in common with each other in terms of structure, base, and exemptions than their older counterparts do. Although the definitions used and exemptions delineated have generally grown more complex over the years, these tax concepts have developed in uniform if not predictable ways. This is evident in the way that newer taxes deal with beverages used for weight-reduction, meal-replacement, or medical purposes. Of the older taxes, only Arkansas contains such an exemption. By contrast, newer taxes such as those in California and Boulder exempt weight-reduction and meal-replacement supplements. Similarly, the taxes in Cook County and Philadelphia exempt food or beverages used for medical purposes or described as "medical" in nature.

It seems likely that the recent wave of soda taxes is not over. Although these newest taxes share many characteristics, they can be more complicated than initially expected. Further, it is important to keep the predecessors to these newest taxes in mind—mainly because they are still on the books and can be quite varied in structure.

EditorNotes

Mary Van Leuven is a director, Washington National Tax, at KPMG LLP in Washington.

For additional information about these items, contact Ms. Van Leuven at 202-533-4750 or mvanleuven@kpmg.com.

Unless otherwise noted, contributors are members of or associated with KPMG LLP.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG LLP. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. ©2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Newsletter Articles

SPONSORED REPORT

CPEOs provide peace of mind around payroll services

The creation of these new IRS-certified service providers for small businesses clarifies some issues around traditional professional employer organizations.

PRACTICE MANAGEMENT

2016 Best Article Award

The winners of The Tax Adviser’s 2016 Best Article Award are Edward Schnee, CPA, Ph.D., and W. Eugene Seago, J.D., Ph.D., for their article, “Taxation of Worthless and Abandoned Partnership Interests.”