Effective January 1, 2018, the City of Seattle implemented a tax on the distribution of sweetened beverages. With the many nuances of the tax, questions have arisen since its implementation, including: What constitutes a “sweetened beverage?” Which party is liable for the tax? What are the exceptions to the tax? We’ll dive into these questions, but first, what’s the idea with this soda tax, Seattle?
The goal behind the Sweetened Beverage Tax is to discourage the purchase and consumption of sugary drinks. Excessive consumption has been linked to heart disease, obesity, and type 2 diabetes. The city plans for the resulting revenues to support education and provide food for low-income families. While the goal seems reasonable, numerous arguments outline the negative implications of such a tax.
Some argue that charging a tax on certain caloric beverages will only result in consumers choosing alternative products that are just as unhealthy as those falling under the tax. Others argue that this will disproportionately penalize low-income families in Seattle as consumption of sugary beverages is more prevalent among the low-income community. Perhaps consumers will simply choose to drive outside city limits to purchase their sugary drinks, driving business, and revenue, outside the city.
Despite community backlash, the tax was passed in June 2017 and was effective January 1, 2018, and as of September 2018, the tax has raised $16.9 million. Details of the Sweetened Beverage Tax are explained in Seattle Business Tax Rule 5-593 (“Tax Rule 5-593”).
How Much Will This Cost?
The tax charges $0.0175 per fluid ounce (1.75 cents) of sweetened beverages. For caloric sweeteners (syrups) or beverages sold in concentrated form, that tax is calculated on the largest volume that would typically be produced by the amount of concentrate distributed.
While seemingly small, the tax adds up quickly, with a 12-pack of soda (12-ounce cans) amounting to an additional $2.52.
However, some relief is available for small companies. A special rate of only $0.01 per fluid ounce (1 cent) is available for “certified small manufacturers.” Manufactures falling under this category have between $2 million and $5 million in worldwide annual gross revenues. Manufacturers with less than $2 million in worldwide annual gross revenue are exempt from paying the tax entirely.
What Constitutes a Sweetened Beverage?
The tax specifically describes drinks with “added caloric sweeteners.” This is further defined as “any substance or combination of substances that contains calories, is suitable for human consumption, and that humans perceive as sweet.” Direct sales of caloric sweeteners are also taxed at distribution. This term includes sweeteners such as high fructose corn syrup, sucrose, and glucose. To fall under the tax, drinks must also contain greater than or equal to 40 calories per 12-ounce serving. The most prevalent beverages include soda, fruit juices, and sports drinks.
A few items explicitly excluded from the Sweetened Beverage Tax, include the following:
- Alcoholic drinks
- Beverages for medical use or meal replacement (not including sports and energy drinks)
- Baby formula
- 100% natural fruit juices with no added sweeteners
- Diet sodas
- Beverages where milk (or a milk substitute) is the primary ingredient
- Concentrates that get combined with other ingredients by the end consumer
Who is Responsible for Paying This Tax?
In short, the distributor. For example, a Seattle convenience store purchases soda from a distributor to sell in its store. The distributor will pay the Sweetened Beverage Tax on the sodas it sells to the convenience store.
However, as with all laws, it’s not as straightforward as it seems. If the Seattle convenience store purchases its soda from a distributor outside the City of Seattle, the store would be considered a “self-distributor” under the definitions of the Tax Rule. In this case, the convenience store would be liable for paying the tax.
The tax will be paid on the same frequency as the City of Seattle B&O taxes of the responsible entity, either annually or quarterly, but on a separate return from the City of Seattle B&O taxes.
The Exceptions to the Rule
Tax Rule 5-593 lists out numerous examples in an effort to clarify application of the Sweetened Beverage Tax. Here are a few scenarios that are likely to arise:
Certified Small Manufacturers:
As mentioned above, “certified small manufacturers” are eligible for a reduction of, or even an exemption from the Sweetened Beverage Tax. Companies with worldwide annual gross revenue less than $2 million are exempt from paying the tax. Manufactures with greater than $2 million and less than $5 million are not entirely exempt from the tax, but are eligible for a reduced rate of only $0.01, rather than the full $0.0175. To receive the reduced rate or the exemption, the manufacturer must apply with the city.
Direct to Customer Sales:
A distributor selling sweetened beverages directly to the end consumer (without engaging a third-party retailer), is exempt from paying the tax. For example, if a company makes its sweetened beverage in-house, it is not responsible for the tax on sales to consumers.
Tax Rule 5-593 also excludes sweetened beverages where the consumer is ultimately choosing how much sweeter to add. A coffee shop leaving a simple syrup out on the counter for customers to add to their liking is not required to pay tax on those beverages.
Alternate Uses of the Sweetener:
A distributor selling caloric sweetener to a retailer is originally charged tax on all sales within the City of Seattle. However, depending on how the retailer uses the sweetener, an exemption may apply. If the sweetener is used by the retailer for something other than a beverage, the distributor is not required to pay tax on the sweetener used for those purposes. This may be the case if the retailer is using the syrup in a beverage where milk is the primary ingredient, or in a separate food product.
To make this distinction, the retailer must provide the distributor with written documentation of the amount to be excluded. The distributor must maintain documentation of the exclusion to avoid being charged tax on these specific items.
While the tax is placed on distribution of sweetened beverages to retailers, most distributors and retailers are likely to pass the added cost down to the final consumer, resulting in an overall rise in the price of sugary beverages. If this added cost is passed down to the retailer by a distributor as a separate item on invoices, it becomes part of the gross selling price and is subject to wholesaling B&O tax. If retailers pass down the sweetened beverage tax to their customers as a separate item on invoices, it is subject to retailing B&O and retail sales tax. Companies from major distributors down to single-store restaurants are impacted and should evaluate how to best adapt to this new tax.
To aid companies in properly reporting and remitting the tax, the City of Seattle has provided 20 separate examples within Tax Rule 5-593. For more information, please contact State and Local Tax Senior Manager, Sonjia Barker.