Philadelphia Beverage Tax - First Payment Was Due February 20, 2017
The Philadelphia Beverage Tax – or the so-called "Soda Tax" - took effect on January 1, 2017. As a result, the City of Philadelphia now imposes a 1.5 cents per ounce tax on the supply of "sweetened beverages." The tax has broad applicability, and includes all sweetened beverages containing either caloric sugar-based sweeteners or no-calorie artificial sweeteners. The tax is also imposed on any non-alcoholic beverage, syrup, or other concentrate used to prepare a beverage that contains caloric sugar-based sweeteners or no-calorie artificial sweeteners. The taxes owed on packaged drinks are fairly straight forward. The same is not true if a beverage, syrup or concentrate are used to make different beverages. We discuss in more detail below some of these implementation issues and other important information regarding the tax.
After our previous alert on the Philadelphia Beverage Tax, the Philadelphia Department of Revenue (Department) adopted Regulations providing guidance on the tax, and established a website, containing resources and Frequently Asked Questions (FAQs). Among other topics, the Regulations and FAQs provide detailed guidance in some areas, clarify the tax's scope, provide examples of taxable and non-taxable beverages, and discuss the treatment of milk alternatives and various issues pertaining to juices. The Regulations and FAQs should be consulted to ensure proper compliance.
The first tax payment was due on February 20th, 2017, for activity occurring in January of 2017. Subsequent monthly returns and payments will be due by the 20th of each month for the prior month. Tax returns and payments must be filed and paid electronically, and failing to do so will result in penalties.
Purchases Should be Made Through a Registered Distributor; At the Time of Purchase - Dealers Must Notify Distributors of Taxable Finished Beverages
As a reminder, the legislation was designed so that the tax occurred at the "Distributor" level. A Distributor is any person who sells sweetened beverages to a "Dealer." Distributors must register with the City of Philadelphia and, once registered, must remit the tax. Dealers, defined as any person who sells sweetened beverages at retail, should, in turn, notify a Distributor that they are a Dealer, and then purchase their sweetened beverages from only registered Distributors. There are exceptions to this general rule, including that a Dealer may register as a "Registered Dealer" or a "Special Dealer," which allows the Dealer to report and pay the tax directly (detailed below).
Syrups and concentrates, which are used to make taxable sweetened beverages, can present certain complexities, because the Dealer must notify its Distributor, at the time of purchase: (i) how much of the product will be used by the Dealer to make finished beverages (and is thus taxable), including the volume of the finished beverages; and (ii) how much of the product will be made available to the customer to add to a drink "on their own" (and is thus non-taxable). Once the Dealer notifies the Distributor of how much product will be used to make a finished beverage and the volume of finished beverage, the Distributor, in turn, must provide the Dealer with a written confirmation of the taxable transaction. On every confirmation the Distributor must do the following: (a) for bottled beverages, include the total volume of the sweetened beverages distributed; and (b) for syrups and other concentrates, include the amount of finished product based on the manufacturer's instructions. Regardless, the Distributor must be able to show either the volume of taxable beverages distributed in ounces or the amount of tax due on the transaction. A Distributor can present this information either item by item, or as a grand total of the tax collected.
Registered and Special Dealers
If a Dealer cannot (or does not want to) purchase all of its sweetened beverages from a registered Distributor, then the Dealer must register as a Registered Dealer or, depending on the specific circumstances, as a Special Dealer. Registered Dealers and Special Dealers have the same obligations as a registered Distributor. Consequently, both Registered Dealers and Special Dealers must file the required tax returns, pay the required taxes, and should make those allocations on their own returns.
Keep Detailed Records
The City has made a point to tell Distributors, Dealers, Registered Dealers and Special Dealers to keep all tax-related documentation for six (6) years after the return is due or filed (whichever is later). For example, a Dealer can be required to produce receipts showing that the tax associated with its purchases was in fact paid by the Distributor. Distributors, Dealers, Registered Dealers and Special Dealers must all look to the Regulations to ensure compliance with the document retention requirements. The City has made clear that Investigators and Auditors are being added to the City's staff as a means to garner compliance. Failing to comply with the law risks audits, fines, and/or penalties.
Computing Taxes Owed - Additional Complexities Associated with Syrups and Concentrates Combined to Make Beverages
One of the legislation's more nuanced aspects is the tax computation associated with non-alcoholic syrups or other concentrates that are used to make a "sweetened beverage." Calculation issues may arise if the syrup or concentrate can be used in different proportions to make different beverages. For example, calculating the tax owed may not be straightforward for "freestyle"-type soda machines or a combination of taxable and exempt beverages (i.e., a daiquiri purchased in a bar), since the tax rate is based on the ounces of the volume of the final taxable beverage produced from the syrup or concentrate (as opposed to just the raw syrup or concentrate).
The Regulations require the Department of Revenue to first look to the manufacturer's instructions (if any), and how the products will be used/sold. For example, if the manufacturer's instructions say that you should dilute 1 tablespoon of concentrated syrup with 20 ounces of water, then each tablespoon should be treated as having yielded 20 ounces of a completed beverage. A Distributor cannot know how a Dealer might vary the manufacturer's instructions, but in an attempt to provide a bright line method, the calculation will be made based on the manufacturer's instructions even if the Dealer deviates from those instructions. Thus, if the instructions state that 1 teaspoon will yield 20 ounces of a completed beverage, the tax will be on 20 ounces even if the Dealer uses 1 teaspoon to make 40 ounces of the completed beverage.
If there are no instructions pertaining to the preparation of the beverage, or there are both taxable and exempt uses for the same container of syrup or concentrate, then the taxpayer has to determine an appropriate methodology for calculating the amount of tax due on the taxable finished beverage. The FAQs provide some guidance regarding tax allocations. To accommodate the differences that can arise in various circumstances, the Department appears to be headed in the direction of permitting reasonable allocations as special situations are described to it. This, of course, brings us back again to the importance of record keeping.
While a Dealer could decide to calculate the Philadelphia Beverage Tax using an alternative assumption based on the Dealer's own historical or anticipated mix of product sales or product use, the Dealer would still have to communicate what the Dealer considers to be the appropriate tax calculation. A Distributor cannot act on any contrary assumptions to calculate the Philadelphia Beverage Tax unless provided by the Dealer. Discussion with the Department may be helpful to confirm the appropriate methodology when the tax computation has special circumstances and also to ensure appropriate record keeping.
There May Be a Silver Lining for Bars and Restaurants that Serve Alcohol
The premise of the tax is a calculation based on the volume of the finished beverage. If a cocktail mix is added to alcohol, the assumption is that the tax should be calculated based on the total ounces of the cocktail mix plus alcohol. However, in response to an inquiry we made, the Department provided guidance that the volume of alcohol in the finished drink should be ignored for purposes of the tax calculation. This exclusion should be based on the special regulation and taxation of alcohol. In sum, while the 10% liquor tax still applies to alcoholic beverages purchased, there should be no additional 1.5 cents on the volume of alcohol associated with an alcoholic beverage; rather, only the non-alcohol volume of the finished beverage should be considered for purposes of the new beverage tax. If multiple sweetened beverages are used to make an alcoholic drink, the Dealer must allocate the tax as described above among the component sweetened beverages in the recipe, ignoring the alcohol volume. If different drinks may be made from the same mixes, but used in different proportions, the allocation procedure discussed above should be considered. Of course, to ensure compliance, you may want to consult with the Department regarding your own questions and circumstances.
Self-Adjusting Mechanism for Necessary Corrections
Given the legislation's complexities, the computations involved, and the fact that products may not be sold or used as originally intended, errors can occur in the preparation, filing and payment of the taxes. The Regulations provide a mechanism to (a) file an amended return to correct an underpayment; (b) claim a credit, in the case of an overpayment, or (c) claim a refund, if a taxpayer is no longer required to file a beverage tax return. There is also guidance on adjusting the tax on future purchases if there is adequate documentation of the adjustment. Once again, careful retention of receipts will be important in each of these instances.
Soda Tax Case Pending in the Commonwealth Court
To date, legal challenges have resulted in decisions in favor of the City. However, the Commonwealth Court is expected to hear arguments on a continued legal challenge to the tax this April. Opponents of the tax have focused on three primary arguments: (i) preemption, arguing that since sweetened beverages are already subject to sales tax and usage tax, the Sterling Act preempts further taxation; (ii) a violation of the Pennsylvania Constitution's Uniformity Clause, since the tax cannot be imposed on products equally due to the tax being based on volume or quantity; and (iii) a violation of public policy. In the meantime, it is important that businesses comply with the statute, as best they can.
This publication is a summary of legal principles. Nothing in this article constitutes legal advice, which can only be obtained as a result of a personal consultation with an attorney. The information published here is believed accurate at the time of publication, but is subject to change and does not purport to be a complete statement of all relevant issues.