Has the Challenge Lost its Fizz? The Commonwealth Court Upholds the Soda Tax

Philadelphia Soda TaxWhatever you may think about the wisdom of Philadelphia’s “Soda Tax,” the City has certainly done well against some fairly stiff opposition:

  • The beverage industry spent millions lobbying against the ordinance creating the tax. It passed anyway. City 1, Industry 0.
  • The beverage industry launched a case challenging the tax in the Court of Common Pleas. The plaintiffs’ complaint was promptly tossed as presenting no legally viable challenge to the tax. City 2, Industry 0.
  • The beverage industry appealed, enlisting thirty-six state legislators as support. On June 14th, the Commonwealth Court rejected that challenge. Williams v. City of Philadelphia, No. 2077 CD 2016, 2017 Pa. Commw. LEXIS 359 (June 14, 2017). City 3, Industry 0.

With the City clearly in the lead, the plaintiffs have indicated that they intend to seek review from the Supreme Court of Pennsylvania. While the trend is not in their favor, it would be premature to count out the challengers, as they have retained skilled counsel, and the structure of the tax is novel.

This much, however, is apparent: The City put careful thought into the legality of this tax before enacting it, a fact reflected in its success on the merits in both the Common Pleas Court and the Commonwealth Court.

What the City passed was a tax that is imposed upon a “distributor” of a “sugar-sweetened beverage” of $0.015 per fluid ounce. This tax is triggered if a distributor supplies or delivers a covered beverage to a “dealer” in the City of Philadelphia, or a dealer acquires a covered beverage or transports a covered beverage into the City, but only if the covered beverage is supplied, acquired, delivered or transported so that the dealer can hold it out for retail sale within the City. See Phila. Code § 19-4103(1).

In contrast, the challengers seek to ignore the structure of the tax and recharacterize it as a sales tax. This effort rests on the assumption that the tax will be passed down the chain of distribution in the form of increased costs and absorbed by the consumer who drinks the drink. Based on this premise, they then argue that the “Soda Tax” exceeds the City’s authority, is preempted by the Pennsylvania Sales and Use Tax, and violates federal law.

The argument has some surface appeal, as it would be reasonable to expect the dealers to pass along the additional cost. But there are two basic problems with the premise of the challengers’ argument:

  • While it would be reasonable to expect the dealer to pass on the additional cost, it does not always happen, and it can be maddeningly difficult to prove the cost was passed along in a particular case.1
  • More importantly, the downstream economic impact of a tax is irrelevant in considering whether it duplicates another tax. Instead, courts look at the “incidence” of the tax, an analysis that completely ignores the economic effect of the tax on other actors, focusing simply on the subject of the tax, the measure of the tax base, and the person who is subject to the tax. See Pocono Downs v. Catasauqua Area Sch. Dist., 669 A.2d 500, 502 (Pa. Commw. 1996).

The notion that the incidence of a tax ignores downstream economic effects has fairly deep roots: In 1975, the Supreme Court of the United States rejected a similar argument by a gasoline retailer who argued that a Mississippi sales tax should be calculated net of federal and state excise taxes, commenting that “the decision as to where the legal incidence of either tax falls is not determined by the fact that petitioner, by increasing his pump prices in the amounts of the taxes, shifted the economic burden of the taxes from himself to the purchaser-consumer.” Gurley v. Rhoden, 421 U.S. 200, 204 (1975). And the Supreme Court was not announcing a new rule of law; it relied on cases dating back to 1928.

In Pennsylvania, a similar focus on the language of the relevant tax law, rather than its economic impact, has animated the analysis of whether taxes are duplicative since at least 1938. See Blauner’s Inc. v. Philadelphia, 330 Pa. 342, 198 A. 889, 891 (1938) (“The subject of tax in the instant ordinance is the transaction of sale. The purchaser is made the taxpayer, and the seller the collector of the tax, for which he is compensated. Counsel for appellants argue ably that the tax is in fact on the vendor. The ordinance makes it clear that this is not so.”).

In light of this background, it is hardly surprising that the challengers had difficulty before the Commonwealth Court. Relying upon Pocono Downs and Gurley, the majority observed that “[t]he subject matter of the tax, the non-retail distribution of sugar-sweetened beverages for sale at retail in the City, and the measure of the tax, per ounce of sugar-sweetened beverage, are distinct from the Sales Tax imposed under the Tax Code upon the retail sale of the sugar-sweetened beverage to the ultimate purchaser.” Williams, 2017 Pa. Commw. LEXIS at *22. Consequently, the majority concluded that the “Soda Tax” did not exceed the City’s authority and was not preempted by the Sales and Use Tax: “As outlined above, the PBT taxes non-retail distribution transactions and not retail sales to a consumer. As a result, the PBT does not violate the duplicative-tax prohibition in the Sterling Act or encroach upon a field preempted by the Sales Tax because the taxes do not share the same incidence and merely have related subjects.” Id. at *23. The same analysis also doomed their arguments under the Food Stamp Act, since the “Soda Tax” was not levied on retail sales. Id. at *35.

The Commonwealth Court also rejected the challenger’s back-up argument, which was premised on the idea that the “Soda Tax” was really a property tax and was non-uniform because it was tied to quantity instead of value. Again, the court focused on what the relevant law provided and ignored the plaintiffs’ efforts to re-characterize it. Id. at *37-*38.

Perhaps the most interesting aspect of the Commonwealth Court’s disposition is that there were two dissenters. Their premise was that the tax “is only triggered when there is a retail sale involved.” Id. at *42 (Covey, J. dissenting). The majority, however, observed that this misconstrued the tax. Id. at *22.

What all of this suggests is that the challengers will need to convince the Supreme Court to make new law if they are to prevail. Whether they can do so remains to be seen.

1 Lawyers with antitrust experience will recognize this problem. See, e.g., In re Flonase Antitrust Litig., 284 F.R.D. 207, 220-26 (E.D. Pa. 2012) (discussing at great length competing expert evidence on the impact of monopoly prices on end users of prescription drugs). The issue is that cost is only one component that is taken into account in pricing products. While a vendor will want to pass along all of her costs, market conditions may limit her ability to do so in a particular case. Economists refer to this under the rubric “elasticity of demand.” Elasticity of demand will also govern the ability of the tax to generate revenue; to the extent it is high enough to alter consumer behavior, sales of covered beverages should decrease in the City.


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