Soda tax. Simple. You set a tax rate—say a penny an ounce. When the customer buys, you collect the tax and send it off to the state or county, or whoever it was that passed the law in the first place.
Easy peasy.
Except that it’s not, as a recently filed lawsuit demonstrates. The case involves the Cook County (Illinois) Sweetened Beverage Tax—a penny-an-ounce levy that was passed last fall and was scheduled to go into effect July 1. A group of retailers sued, arguing that the law was illegal as written and impossible to comply with. The judge in the case temporarily halted enforcement late in June and is scheduled to announce his decision on whether the case can go forward on Friday.
So what do Chicago-area retailers think is wrong with the sweetened beverage tax? Lots.
First, there’s the question of definition. Illinois’s constitution requires consistency. (Article IX, Section 2 states: “In any law classifying the subjects or objects of non-property taxes or fees, the classes shall be reasonable and the subjects and objects within each class shall be taxed uniformly.”)
The Sweetened Beverage Tax seems to negotiate this requirement pretty well for the most part. It excludes legitimate medical beverages, though not sports drinks. It includes drinks with artificial sweeteners, citing reasonable evidence that they cause negative health effects. They give juice a pass. (When will someone tackle that mess?) But then they distinguish between a drink in a bottle or a drink mix in a package and a sweetened drink made to order. Buy a Frappucino in a bottle and you’re taxed. Get the barista to make you the same drink, and you’re exempt. That surely sounds like it violates Article IX, Section 2.
And what about fountain drinks? Retailers are required to charge by the ounce of sweetened beverage. But how much sweetened beverage is in a large Coke with ice? You can estimate the average, but will it be accurate enough to fend off lawsuits? And what about self-service setups, where customers add the ice to their own taste? Or, God help us, free refills? The point, of course, is not that the retailers can’t come up with a way for the state to get its money. That’s easy. In fact, the way the law is set up, the state already has its money, paid by the distributor. But the law insists that the tax has to come out of the pocket of the final customer. Making individual customers pay the amount the law requires—not more, and not less—is almost impossible. The guy at self-service who decides to skip the ice will be underpaying by a few pennies; the guy who loves ice will be overpaying. You can’t charge by the price of the drink—the law requires that the tax be paid on a per-ounce basis. And that opens the retailers up to complaints and lawsuits. (Do you doubt that anyone would take on a case where the damage to the individual consumer would be measured in pennies here and there? Remember, in a suit like this, it’s the lawyer who gets the real payout, and it’s based on the cumulative damage, which could be millions.)
These objections aren’t trivial, but they don’t necessarily sound fatal. The real sticking point seems to be what happens when customers use their Supplemental Nutritional Assistance Program (SNAP) benefits to buy soda. (Should they be allowed to do this at all? That’s a whole ’nother question.) By federal law, SNAP purchases can’t be taxed. OK. Now the distributor has already charged the retailer a penny an ounce on the Coke that the customer buys with SNAP benefits. As near as I can tell, there’s no real provision for the retailer to ever recover that money, though the suit doesn’t raise that as an issue.
The problem is the transaction itself. Under the rules, the tax is supposed to be included in the retail price of the beverage. That means that when the sales clerk rings up your SNAP-funded Snapple, it overcharges you by a few pennies. No problem, right? You just give the customer his dime back and go on your merry way.
Wrong. For obvious reasons, SNAP prohibits cash refunds to customers. So which do you do? Violate the SNAP rules and run the risk of being thrown out of the program, or violate the county law? You’re not supposed to have to make those kinds of choices.
The county has blithely suggested that retailers can simply reprogram their point-of-sale systems to account for SNAP purchases, so that no matter what the tag on the shelf says, the SNAP purchase will ring up minus the tax. The retailers don’t seem to regard that as a practical option, especially given the short deadlines they’re operating under. The county also suggests that retailers who can’t reprogram their systems can simply temporarily register as distributors, though it’s hard to see how that would help.
Oh, and the obvious solution—where the retailer just pays the tax out of his own pocket, maybe raising prices a bit to cover it—is specifically prohibited under the law.
Worse still, the requirement to include the tax in the selling price of the drink creates a problem with other retail requirements. For example, a Chicago law requires retailers to post the unit price of the goods they sell—in this case, price per ounce. But the law requires the unit price to be calculated based on the selling price. So is the sweetened beverage tax part of the unit price or not?
And Illinois has something called a retail occupation tax. It’s calculated based on selling price, but that specifically excludes taxes, while the sweetened beverage law defines the price to specifically include the tax.
If the goal is to get people to drink less soda, the law might work by making it so complex and legally risky to sell the stuff that retailers just give up. As our president might have said: Nobody knew that soda could be so complicated.
The suit might or might not go forward, of course, and Cook County, which was counting on the tax to help balance its budget, is likely to fight hard. But the case is a good lesson for anyone thinking of going the sugar-tax route. The law, in many cases, is just a cheap sweater. Pull on a thread, and you’re suddenly looking at a tangle of yarn on the floor. Proceed with caution.
