After judge OKs Philly sugary drink tax, appeal may bring thorny legal battle

A soda tax protester outside Philadelphia City Hall (WHYY, file)

A soda tax protester outside Philadelphia City Hall (WHYY, file)

A Pennsylvania state judge handed Philadelphia Mayor Jim Kenney’s administration a victory Monday as he rejected the beverage industry’s bid to halt a tax on sweetened drinks set to start in January.

The tax, projected to generate about $91 million with a 1.5-cents-per-once levy on distributors of soda and other sweetened drinks, will support expanded pre-kindergarten and improvements to the city’s parks, libraries and recreation centers.

Kenney hailed Judge Gary Glazer’s decision, saying that children in Philadelphia have waited too long for investments in early childhood education. But Kenney also said that he hoped the soda industry would “understand how important this is to our children’s’ future and our city’s future, and not proceed.”

Nonetheless, the American Beverage Association legal team intends to appeal to the Commonwealth Court, the appeals court in Harrisburg that handles disputes involving government agencies.

What might the next stage of the legal battle look like?

We asked attorney Jim Malone (pictured below), a tax specialist who focuses on tax disputes with government agencies. The interview has been edited for clarity. (Malone is not involved in the drinks tax litigation.)


Since the city is poised to start collecting the tax from distributors next month, won’t it be a little harder to stop it?

If the tax is illegal, the tax is illegal. The fact that it’s in the process of being collected would, to my mind, only go to the remedy. Normally, if the court subsequently determines that a city, a county, a municipality, a federal government is collecting an illegal tax, whoever paid the tax would be entitled for a refund. That’s how it normally works. But in terms of the Commonwealth Court’s view of the merits of the tax, I would be highly surprised if the fact that it’s being collected had any bearing.

Is there precedent for this kind of tax refund in the state?

In Pennsylvania, it’s not exactly clear. I would say that the better rule is that someone who pays a tax that is subsequently determined to be illegal has a right to a refund, but I would also acknowledge that there is some precedent that would cast some doubt on that. It is conceivable that, hypothetically, the tax is overturned on appeal. But the remedy might simply be prospective. In other words, the city would be precluded from continuing to collect.

If you were picking out potential legal vulnerabilities with the tax, where would you focus?

This is a relatively novel tax structure. So, in and of itself, it makes it harder to predict because it’s not something that completely fits the mold of what’s been done before. But if I were picking issues that I thought the plaintiffs can get traction on, the one that I think intrigues me is uniformity, because of the way the tax is imposed. (By law in Pennsylvania, taxes must be consistent, across classes. Opponents of the tax have said that the soda tax is “non-uniform” because different groups may carry the burden of the tax differently: distributors, retailers and consumers.)

The other issue, pre-emption, to my mind, I think they have more of an uphill battle there. (Pre-emption being, as the soda industry has argued, that the city can’t tax where the state already does because that would be an illegal double tax. It’s determined based on a tax’s “incidence,” a legal term that examines where the tax applies and who pays it.) The plaintiffs are relying on a theory that you should consider the downstream impact of the tax. That’s a creative theory. I think it’s good advocacy. I think Judge Glazer’s opinion accurately reflects the current state of the law. Now, that’s the current state of the law. That doesn’t means the plaintiffs can’t convince the Commonwealth Court — or the state Supreme Court — that you should consider the downstream effects.

In November, the Pennsylvania Supreme Court rejected the beverage industry’s emergency petition, known as a King’s Bench petition, asking the high court to immediately consider the tax. Does this mean it might reject a future petition to hear the case?

No. I would view those as completely separate. The King’s Bench is discretionary, and I would read the disposition of that petition as an indication that the court just didn’t see the reason to deal with it as an original jurisdiction matter, which could be read as, one, they want the record developed in trial court. Or two, a judgment on their part that it’s not an emergency. It really doesn’t have to be decided in advance of the time the tax is collected. I certainly wouldn’t read one of those orders as an indication that a petition to the state Supreme Court is dead on arrival.

Is one possibility that the Commonwealth Court remands the case back to Judge Glazer?

Yes, and I would not assume he wouldn’t change his mind. Judges don’t like being reversed, but if they tell him that, ‘No, you missed this, you whiffed on this, please take another look at this, we think this is a problem,’ I would expect him to follow the mandate of the higher court. I’m sure he’ll take careful attention to what the court instructs him to do.

Have you seen the theory that, “since distributors may pass off some of the tax to consumers that it is, in effect, a sales tax” win in court in any other situation?

It comes up in anti-trust litigation in some states like California, where indirect purchasers can sue. So they have to prove that the price fix at the distributor level got passed off to them. And economists will tell you that you generally expect the increased price to pass down the distribution chain. But the reality is, when you try to prove that, it becomes tricky. OK, if you raise the price of soda, am I going to switch to drinking something else just because you raised the price? So it’s not 100 percent clear. I’m not necessarily sure that, at the end of the day, it’s going to be that easy to prove that 100 percent this tax gets passed down the food chain.

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