The Pennsylvania Supreme Court handed the City of Philadelphia a win today when it upheld a previous ruling that the tax on sweetened beverages is legal.
Philadelphia Mayor Jim Kenney welcomed the news, saying in part, “I am grateful to the Justices of the Pennsylvania Supreme Court for their fair and careful review of this case. We maintained from the day we proposed the tax that it stood on solid legal footing, and the Justices, like two courts before them, agreed.”
(You can read Mayor Kenney’s entire statement here.)
The Philadelphia Beverage Tax (PBT), sometimes called a “soda tax,” is a 1.5 cent per fluid ounce tax on “sugar-sweetened beverages.” Despite the label, the tax applies to any non-alcoholic beverage which contains “any form of caloric sugar-based sweetener” or “any form of artificial sugar substitute.” That means that in addition to sugary sodas, diet sodas are also subject to the tax. Certain juices and sports drinks are also included. The tax is imposed not directly consumers but on distributors. However, in response to the tax, many retailers have bumped their prices to include the hit.
The PBT is in addition to existing sales taxes. In Philadelphia, taxable sales are subject to a state sales tax of 6% plus a 2% local sales tax. Opponents of the tax had argued, among other things, that the PBT was unlawful and a violation of the Sterling Act because it imposed a second tax on the same subject or people. Today, the Supreme Court disagreed, instead agreeing with the lower and appellate courts, both of which had ruled in favor of the City.
The lower court explained that the BPT was not a second tax on the same subject or people because “[t]he respective taxes apply to two different transactions, have two different measures and are paid by different taxpayers.” The appellate agreed, finding an important legal distinction between the two: Even though the burden of the tax may be passed onto the consumer by the distributor, the legal responsibility for the tax is on the distributor and not the consumer.
The Supreme Court of Pennsylvania agreed, ruling by a vote of 4-2, that the city had not violated state law. Writing for the majority, Chief Justice Thomas G. Saylor declared, “The legal incidences of the Philadelphia tax and the Commonwealth’s sales and use tax are different and, accordingly, Sterling Act preemption does not apply.” Those justices voting with Saylor included Max Baer, Debra Todd, and Christine Donohue. (You can read the majority opinion, which downloads as a pdf here.)
(And yes, there are seven seats on the Pennsylvania Supreme Court: Justice Kevin M. Dougherty, who hails from Philadelphia, had previously recused himself from the case.)
The focus on the Sterling Act in the arguments and the opinions is notable since the legal argument wasn’t “is this a good or a fair tax?” but “is it a legal tax?” The Act, which has been around since 1932, allows cities of the first class certain taxing powers that other cities and towns do not have – including the ability to levy additional taxes so long as they don’t overstep those imposed by the state. For purposes of the Act, first class cities are those with over one million residents. In Pennsylvania, there’s only one city that fits the bill: Philadelphia (the next largest city in Pennsylvania, Pittsburgh, has just over 300,000 residents).
Philadelphia City Solicitor Marcel Pratt explained, “As we have stated since passing the Philadelphia Beverage Tax, the City of Philadelphia possessed the legal authority to enact the Philadelphia Beverage Tax because of the broad taxing authority granted by the Sterling Act.” He went on to say, “As the Pennsylvania Supreme Court recognized, the Sterling Act is an embodiment of Depression-era legislation intended to enhance the City of Philadelphia’s ability to address essential local needs and issues—which is precisely why the City of Philadelphia enacted the Philadelphia Beverage Tax to fund programs and initiatives that our City needs.
However, to bolster their claim that the tax was an overreach, the appellants (a group of consumers, retailers, distributors, producers, and trade associations who sued in opposition to the tax) stressed that the beverage tax has a strong retail-sale nexus, writing in the complaint, “On its face, the plain language of the Tax demonstrates that it is intended to burden the retail consumer.”
If you think you’ve seen that word – nexus – before in a tax context, you’re right. Nexus is a legal term for a connection and is an essential factor when it comes to tax. On a federal level, states must establish a relationship between a taxpayer and the state to impose tax. That was the central issue in the recent online sales tax case (sometimes just called Wayfair) tackled at the U.S. Supreme Court.
(You can read more about Wayfair here.)
In this case, the question wasn’t whether there was a connection to a physical location – there clearly is – but whether the link to consumers and products would be strong enough that it essentially constituted a second consumer sales tax. If it did, the tax would not have been allowed.
The PBT applies to a transaction between a distributor and a dealer and is payable even if no retail sale occurs: The payer is the distributor, and not the purchasing consumer. That, the majority writes, means that “the taxes have different subjects, measures, and payers, and accordingly, distinct legal incidences.” Accordingly, the ruled that the tax was legal.
In response to the decision, the Ax the Philly Bev Tax Coalition, a partnership between Philadelphia families and businesses impacted by the soda tax, said, “We are clearly disappointed that the Pennsylvania Supreme Court ruled against local businesses and consumers today in upholding Philadelphia’s wildly unpopular beverage tax, which is opposed by 60 percent of Philadelphia voters and has cost nearly 1,200 jobs. It is now up to our elected officials to listen to the concerns of their constituents and provide Philadelphians much needed relief by reversing this tax.”
You can bet that the ruling – popular or not – will have consequences beyond the City of Brotherly Love. While Philadelphia is the largest city in the United States to enact a soda tax, it’s not the first: Berkeley, California imposed the first such tax in 2015. Today, similar taxes exist in San Francisco, Oakland, Boulder and Seattle and other cities have tossed around the notion of a tax on sugary drinks.
However, not all cities are looking to jump on board the soda tax revenue train. A tax on sugary drinks which went into effect in Cook County, Illinois was wildly unpopular and was eventually repealed. At the time, Sam Toia, president of the Illinois Restaurant Association, likened the repeal to another era, saying, “Today we’re going to party like it’s 1933, because it is the end of our own prohibition.”
The case is Williams et al v. City of Philadelphia et al (Soda Tax case) No. 3 EAP 2018.
(Author’s note: Updated to reflect a statement from the Ax the Bev Tax Coalition.)