Pennsylvania Supreme Court upholds Philadelphia’s beverage tax


Matthew Melinson
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Vito Cosmo
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Katherine Piazza
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Jamie C. Yesnowitz
Washington, DC
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Chuck Jones
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Lori Stolly
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Metisse Lutz
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On July 18, 2018, the Pennsylvania Supreme Court sustained the Philadelphia Beverage Tax (“PBT”), more commonly known as the “Soda Tax.”1 The Court affirmed the Commonwealth Court’s ruling finding the PBT to be a valid tax, holding that it does not duplicate Pennsylvania’s state sales tax and is not pre-empted by the Sterling Act.2 

Background In June 2016, Philadelphia became the first major city to enact a tax on sweetened beverages.3 Effective Jan. 1, 2017, the PBT is a 1.5-cent per fluid ounce tax levied on the non-retail distribution of sugar-sweetened beverages.4 This amounts to a tax of 24 cents per 16-ounce container, or roughly $1.01 per two-liter container. Beverages subject to the tax include non-alcoholic beverages with sugar and sugar substitutes, such as diet and low-calorie drinks.5 Specific examples of sweetened beverages provided in the PBT city ordinance include soda, non-100% fruit drinks, sports drinks, flavored water, energy drinks, pre-sweetened coffee or tea and mixers.6

The PBT broadly applies to the supply, acquisition, delivery or transportation of sweetened beverages to be sold at retail within Philadelphia city limits.7 In practice, the PBT is payable by distributors that transfer sweetened beverages to retailers for retail sale in the City. The City ordinance and regulations, promulgated by the Philadelphia Department of Revenue, require that retailers purchase sweetened beverages from registered distributors.8 If a retailer purchases a sweetened beverage from a non-registered distributor, the retailer becomes liable for payment of the tax.9 The ultimate consumer is never directly liable for the tax, although in practice, the economic impact of the tax has caused distributors to pass the tax down to retailers by increasing wholesale prices in order to recover the costs of paying the PBT. In turn, retailers have passed the tax down to consumers by increasing retail prices.

In September 2016, a group of beverage industry associations and affected local retailers filed suit to block enforcement of the PBT. On June 14, 2017, the Commonwealth Court affirmed a lower court ruling finding the PBT to be a lawful and binding tax, holding that it does not duplicate Pennsylvania’s state sales tax, is not pre-empted by the Food Stamp Act, and does not pose a uniformity violation.10 The Pennsylvania Supreme Court allowed an appeal on a limited basis to consider whether the PBT violates the Sterling Act.

Supreme Court upholds PBT In its majority opinion, the Pennsylvania Supreme Court affirmed the Commonwealth Court and specifically addressed the Sterling Act pre-emption issue, along with the Court’s limited role in influencing policy considerations.

PBT not pre-empted by the Sterling Act
The majority agreed with the Commonwealth Court that the PBT is not expressly or impliedly pre-empted by the state’s sales tax. The Court noted that the Sterling Act prevents Philadelphia from imposing a tax on any transaction that is also subject to a state tax.11 To determine whether the PBT duplicates the state sales tax, the Court considered the “legal incidence,” or true nature of the tax, as opposed to the “economic incidence.” The Court analyzed the substantive test of the city ordinance and did not consider the post-tax economic actions of private actors in response to the imposition of the PBT. In other words, the Court was concerned with the tax incidence on distributors and not whether distributors passed down the tax to retailers, who would consequently pass down the tax to consumers.

According to the majority, neither the subject nor the measure of the tax duplicates the state sales tax. The Court specifically determined the subject matter of the tax is “the non-retail distribution of sugar-sweetened beverages for sale at retail,” and the measure of the tax is “per ounce of sugar-sweetened beverage.” By contrast, the subject matter of the state sales tax is the retail sale to consumers, and the measure is the cost of retail sale. Thus, both the subject matter and measure of the PBT are distinct from the state sales tax. As a result, the Court found that the PBT is not duplicative, and therefore not pre-empted by the state sales tax.12

The Court specifically determined the PBT applies to transactions between a distributor and a dealer holding the beverage out for retail sale in Philadelphia, independent of whether any retail sale actually occurs.13 Thus, the entity paying the PBT is the distributor and not the purchasing customer as opposed to the Commonwealth’s sales tax, which is levied upon sales at retail, measured by the purchase price, and which falls directly on consumers. As a result, the majority found that both the subject matter and measure of the PBT are distinct from the state sales tax, ruling that “the taxes have different subjects, measures, and payers, and accordingly, distinct legal incidences.”

Policy concerns should be left to General Assembly
The majority explained that it was not the Court’s place to consider public policy concerns raised by the challengers, who argued that a ruling in favor of the PBT could open the floodgates to similar taxes imposed by other jurisdictions. Under statutory construction standards, “[w]here the language of the governing statute is clear, the solution is legislative – and not judicial – adjustment.” The Court referred to the superior resources available to the General Assembly in assessing matters of social policy. The Court cited the history of the treatment of the taxing power of Pennsylvania municipalities, explaining that the General Assembly has “left extant the enormously broad and sweeping power of taxation granted to the City by the Sterling Act.”14 Ultimately, the Court obviated the policy arguments made by the challengers as a public policy question for the legislature.

Dissenting opinions
Two justices filed separate dissenting opinions. While both dissenting justices agreed with the majority’s application of the legal incidence test, the justices disagreed with the majority on the ultimate incidence of the PBT, arguing that when viewed in its entirety under an “economic incidence” analysis, the PBT duplicates the Commonwealth’s sales tax on the same broad category of beverages. One of the justices was of the view that the PBT ultimately applies to sugar-sweetened beverages retailed in Philadelphia and not just on the distributor alone, concluding that the PBT should be pre-empted by Pennsylvania sales tax. The second dissenting justice argued that the PBT duplicates the Commonwealth sales tax upon the same broad category of beverages, as the PBT effectively is tied not to distribution itself, but rather to any activity that contributes specifically and exclusively to the supply of sweetened soda beverages intended for retail sale within the City.15

Commentary The Pennsylvania Supreme Court’s decision may have consequences beyond Philadelphia. The Court’s ruling is likely to serve as a catalyst, motivating other localities throughout the country to impose a similar tax. Additionally, this appears to be the “last stop” for litigation, since the U.S. Supreme Court generally only grants certiorari for matters involving important federal questions, which does not apply in this case.

The focus on the Sterling Act is notable, since the legal argument was not whether this is a good or fair tax, but whether the PBT is a legal tax. If the majority had agreed with the dissenting justices in ruling that the PBT is a tax ultimately borne by the consumer under an “economic incidence” analysis, this case would likely have been decided in favor of the challengers. However, the Court applied a “form over substance” analysis. The result from this case is that future taxpayers may have a more difficult time arguing pre-emption pertaining to other taxes imposed by Philadelphia and other Pennsylvania municipalities, because this case has likely weakened a pre-emption argument by increasing the breadth of power of local, enabling legislation.

Much of the pre-emption language in the Sterling Act and the Pennsylvania Local Tax Enabling Act (“LTEA,” or “Act 511”),16 governing municipalities other than Philadelphia, is the same, but there are distinctions. While the majority relied upon .,17 a case concerning the LTEA, the Sterling Act conveys broader taxing power than the LTEA. The Sterling Act only limits the City of Philadelphia’s power to tax by the pre-emption language. In contrast, Act 511 limits municipalities the power to tax by both its pre-emption language and a delineation of limited types of taxes. It appears unlikely that other Pennsylvania municipalities could impose a new soda tax without further state enabling legislation, due to the delineation of taxes limitation within Act 511. Accordingly, the question of pre-emption would be moot. For example, when Pittsburgh wanted to enact its Payroll Expense Tax in 2004,18 replacing the more traditional Business Privilege Tax on gross receipts, the Pennsylvania legislature needed to grant authority by amending the LTEA, because the Payroll Expense Tax was not one of the delineated items of taxes contained within the LTEA.

The Sterling Act 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 do not overstep those imposed by the state. For purposes of the Act, first class cities are those with over one million residents. In Pennsylvania, Philadelphia is the only city that meets this standard.19 Now that the Pennsylvania Supreme Court has upheld the PBT, any potential, future remedy seemingly lies with the General Assembly.

Sin taxes
Sin taxes are growing in popularity as states continue to seek new, and constant, forms of revenue. Traditionally, sin taxes have been imposed on liquor, gambling and tobacco.20 Newer forms of sin taxes that have recently emerged include sugary beverage taxes and bag taxes, both of which have had mixed results.21 Of these, imposing a tax on sugary beverages has been at the forefront. As of October 2017, there were 19 countries and several local jurisdictions that imposed, or had planned to impose, a tax on sugary drinks. The majority of these taxes was specifically enacted to address health concerns associated with the consumption of these drinks.22 California has been at the forefront of states imposing tax on sweetened beverages. In March 2015, the City of Berkeley imposed a one cent per fluid ounce tax on sugary drinks. The tax is imposed on distributors and all funds collected are deposited into the City’s general fund.23 A 2016 University of California, Berkeley study indicated a 21% drop in soda and other sugary drink consumption in low-income neighborhoods after implementation of the tax.24 Another study published in April 2017 indicated that sales of sugary beverages declined under the tax.25 In addition, now that Pennsylvania has enacted a 36% tax on sports gambling,26 which is the highest rate in the nation, it remains to be seen whether it will raise the expected revenue or will deter sports betting in Pennsylvania.

However, not all municipalities have been successful in trying to impose a beverage tax. A tax on sweetened beverages which went into effect in Cook County, Illinois, enjoyed only a brief existence. The Cook County Sweetened Beverage Tax Ordinance became effective Nov. 10, 2016, which imposed a tax rate of one cent per ounce on the retail sale of all sugary drinks.27 However, a challenge was brought by the Illinois Retail Merchants Association, and several grocers argued that the tax violated the uniformity clause of the Illinois Constitution and was unconstitutionally vague.28 Despite their success in court, Cook County eventually repealed the tax on Oct. 11, 2017, due to its widespread unpopularity.29

While the uncertainty surrounding the PBT apparently has been resolved by the Pennsylvania Supreme Court, the uncertainty regarding how much revenue the PBT will bring into Philadelphia remains. On July 18, 2018, Mayor Jim Kenney released a statement on the decision, which reads in part “[this decision provides] a clear path towards substantive, tangible improvement in [the lives of those families living in poverty.] It is a path that will bring the educational gains of free, quality pre-K seats, the benefits to neighborhoods brought by Community Schools, and the quality of life improvements and economic benefits brought by rebuilding parks, recreation centers, playgrounds, and libraries.”30 These programs will be funded by the PBT. However, sources indicate that the tax has failed to bring in the revenue originally projected. The PBT raised $72.3 million in its first 11 months, about $15 million less than the City has planned in its current budget.31 In addition to claims that the tax is harmful to business owners, the City has decreased the number of pre-K seats and community schools it planned to open in the next five years.32 

1  Williams v. City of Philadelphia, Pennsylvania Supreme Court, Nos. 2 & 3 EAP 2018, July 18, 2018.
2  As discussed below, the Sterling Act provides certain taxing powers to Philadelphia and prevents the City from imposing a tax on any transaction that is also subject to state tax.
3  New York City had previously attempted to enact a similar tax but the effort failed to pass its city council.
4  PHILA. CODE §§ 19-4100 to 19-4108, enacted by Bill No. 160176, June 20, 2016. For a detailed discussion of this tax, see GT SALT Alert: Philadelphia’s New Soda Tax Is Being Challenged.
5  PHILA. CODE § 19-4101(3)(a), (b).
6  PHILA. CODE § 19-4101(3)(d).
7  PHILA. CODE § 19-4105(1), (2)(a).
8  PHILA. CODE § 19-4105(1).
9  PHILA. CODE § 19-4105(2).
10  Williams v. City of Philadelphia, Pennsylvania Commonwealth Court, Nos. 2077 C.D. 2016, 2078 C.D. 2016, June 14, 2017.
11 Act of Aug. 5, 1932 P.L. 45, § 1 (53 PA. STAT. §§ 15971-73). Note that the Sterling Act only applies to cities of the first class. Philadelphia is the only city that qualifies as a first class city.
12 The Court dismissed the challengers’ argument that the PBT taxes the same subject as the Commonwealth sales tax, explaining that “matters that are distinct, for instance at a transactional level, can often be described as having a single subject ‘if the point of view be carried back far enough.’” Citing Commonwealth v. Neiman, 84 A.3d 603, 612 (Pa. 2013) (quoting Pennsylvanians Against Gambling Expansion Fund, Inc. v. Commonwealth, 877 A2.d 383, 395 (Pa. 2005)).
13 Matt Fair, Ruling OK’ing Philly Soda Tax Tees Up Legislative Fight, TAXLAW360, July 19, 2018.
14 Citing Commonwealth v. National Biscuit Co., 136 A.2d 821, 825-26 (Pa. 1957).
15 The dissenting justices pointed to the broad list of taxable activities provided in Phila. Code § 19-4103 — supply, acquisition, delivery, and transport — which was viewed as effectively and exclusively capturing any logistical activity that served the end goal of retail sale of a sweetened soda beverage.
16 Act of Dec. 31, 1965 P.L. 1257, No. 511 (53 PA. STAT. §§ 6924.301 et seq.).
17 136 A.2d 821 (Pa. 1957).
18 Act 222 of 2004, effective Jan. 1, 2005.
19 Kelly Phillips Erb, Double Tax Argument Falls Flat as Pennsylvania Supreme Court Rules Soda Tax Legal, FORBES, July 18, 2018.
20 Jamie Yesnowitz and Emily Fiore, The History and Purpose Behind Sin Taxes, BLOOMBERG BNA DAILY TAX REPORT: STATE, Oct. 17, 2017.
21 Id.
22 Id.
23 Id.
24 Id.
25 Id.
26 Act of Oct. 30, 2017, P.L. 419, No. 42.
27 Sweetened Beverage Tax, Cook County Ordinance No. 16-5931.
28 Illinois Retail Merchants Association, No. 17 L 50596, filed June 27, 2017.
29 For further information, see GT SALT Alert: Cook County, Illinois Board of Commissioners Repeals Soda Tax.
30 Press Release, Office of Philadelphia Mayor Jim Kenney, July 18, 2018.
31 Laure McCrystal, Philly Soda Tax Revenue Falling Short, City Adjust Plans for Pre-K and Other Programs, THE INQUIRER, March 1, 2018.
32 Id.

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