Update 10/7: The tax is likely to be repealed next week, effective December 1.
http://www.thedancingaccountant.com/?p=653
Update 7/29: The tax is back, starting this Wed, Aug 2nd: http://www.chicagotribune.com/business/ct-cook-county-soda-pop-tax-lawsuit-20170728-story.html
Update: “Another hearing is scheduled for July 21st on a preliminary injunction against the soda tax, which would prevent it from taking effect until the court can hear the case completely.”
And in related news: 1,100 layoffs anticipated after Cook County soda tax blocked — Chicago Tribune
6/30/17 — BREAKING NEWS — A judge has temporarily blocked the new tax, until at least July 12th. I will post an update here as soon as I have one.
Our local governments have done it again. After the headache of figuring out and implementing the bag tax earlier this year, we now have Cook County’s new Sweetened Beverage Tax. This, by the way, is in addition to the soft drink tax and fountain drink tax that exist at the city level, and a proposed tax at the state level:
“The tax levied in this Article shall be in addition to any other taxes.”
Furthermore, the FAQ states that “exempt status for sales and use tax issued by the State of Illinois is not applicable to this tax.”
I won’t go into the debate on the social merits of the tax and how successful or unsuccessful this new tax is likely to be regarding public health. And I won’t argue about what the real underlying reason behind the tax is — be it economically-, socially- or politically-motivated. I also won’t comment on how many find the tax regressive, disproportionately hurting the poor.
What I will go into are the challenges in administration, implementation and complexity that transactional taxes such as this tend to be, especially for small businesses, and I’ll try to explain as simply as possible what the requirements are for different types of businesses in meeting this new ordinance.
What is the new Cook County Sweetened Beverage Tax?
Starting July 1, 2017, a $0.01-per ounce tax is imposed on the retail sale of all “sweetened beverages” in Cook County.
How will it be imposed?
(a) Distributors of bottled/canned soda and of “syrup”/powder to make soda will charge the tax to their retail customers; and,
(b) Retailers will pass the tax along to their consumers.
So far, pretty simple. The challenges lie in the definitions, the requirements, and the implementation.
Let’s start with definitions.
We all think we know what a sweetened beverage is, and what a syrup is. We’re wrong.
A sweetened beverage 1) is non-alcoholic, 2) is either carbonated or non-carbonated, 3) is intended for human consumption, 4) contains sweetener (caloric or non-caloric), 5) is available for sale in a container or through the use of “syrup” or powder. Not too confusing.
Here’s what a sweetened beverage is NOT, however…
Obvious: 100% natural fruit or veggie juice, infant formula, beverages for medical use, meal replacement beverages.
NOT OBVIOUS:
* beverage with >50% milk or milk substitute;
* beverages to which a purchaser can add, or can request that a retailer add sweetener;
* any “syrup” or powder that the purchaser himself or herself combines with other ingredients to create a beverage.
But wait… it gets more interesting. The reason I keep putting the word “syrup” in quotes is that it has its own definition:
“a liquid mixture, containing any caloric sweetener or non-caloric sweetener as an ingredient, intended to be used, or actually used, in making, mixing or compounding a sweetened beverage by combining the syrup with one or more other ingredients using a beverage dispensing machine.”
Did you catch that last bit? If the syrup is not used or intended to be used to make a sweetened beverage “using a beverage dispensing machine“, then it’s not syrup, and therefore doesn’t make a sweetened beverage. (This does not apply to powders, which are still subject to the tax if hand-mixed.)
This means that specialty coffee and cocktails are not taxable unless they are pre-packaged in a container. The FAQ points out that “in general, the ordinance taxes ready-to-drink beverages”.
As ridiculous as these definitions are, the good news here is that businesses that hand-mix syrups for coffee, tea, soda, milkshakes, cocktails, etc… are off the hook for this tax — in potentially more ways than one.
How will the tax be administered?
- Distributors must register with the County by July 31st. The distributor will then receive pre-printed tax returns (there is no online option for filing this tax).
- Distributors will charge the tax to their retail customers starting July 1st.
- Distributors will file a monthly return with the County (even if no tax is due) by the 20th of each month and remit the tax (just like state sales taxes).
- Retailers must pay the tax charged to them by the distributor on their vendor invoices.
- If a retailer purchases sweetened beverages from a distributor that is not registered, they must self-register and remit the tax to the County. This is just like the bag tax situation. There is a list at the bottom of the County Sweetened Beverage Tax webpage noting registered distributors. As with bag taxes, if you are a retailer, make sure you are buying your product from a registered distributor.
- Similarly, if a retailer produces their own sweetened beverages, they must register and remit the tax to the County.
- Retailers must charge the tax to their customers — the ultimate consumers of the sweetened beverage.
That last item is especially important. This is not like the bag tax, which a retailer can choose to absorb instead of passing along to the consumer. The sweetened beverage tax must be passed along to the ultimate purchaser.
“It shall be deemed a violation of this Article for any distributor or retailer… to otherwise absorb the tax.”
Including the tax in the sales price without violating city, state and federal laws
This is the part that — aside from the definitions — I am finding most challenging for my small business clients.
Initially it was easy: similar to the liquor gallonage tax (an excise tax), a distributor could just charge the tax to the retailers, who then simply adjusted their prices upwards to cover the extra cost of goods, without specifying how they were passing the cost along to their customers. In fact, the sweetened beverage tax ordinance specifically states that both the distributor and the retailer must include the tax in the sale price of the sweetened beverages, syrup or powder.
“It shall be deemed a violation of this Article for any distributor or retailer to fail to include the tax imposed in this Article in the sale price of the sweetened beverage, syrup and/or powder…”
Then the County (who some have accused of a disastrous rollout of this tax) was challenged by the City of Chicago, State of Illinois, and Federal Department of Agriculture.
1) The City of Chicago has a law that requires all taxes to be listed separately for consumers. From the County’s FAQ on the sweetened beverage tax:
“Q: The tax folded into the selling price may violate the City of Chicago’s requirements on what must be included on labels/receipts. Is the County working with the City on this? A: We have looked at the City requirements and do not believe this violates their labeling requirements. While the tax should be included within the shelf price, the tax may be separately stated on the receipt or invoice.”
Well, which is it? I don’t know a single small business that has a Point-of-Sale system advanced or complex enough to both include the tax in the sales price on labels and receipts, as well as separate the tax on receipts. This is a serious issue to which a solution has not yet been found. As a result, on June 13, 2017, the County was forced to amend one of their revenue regulations (2017-2) modifying the original ordinance (there have already been four such regs, two of which have been updated or amended).
“Understanding that distributors and/or retailers may need additional time to program their POS systems to allow for the tax to be reflected in the menu/advertised/shelf sale price, distributors and/or retailers will have an additional 6-month period, until January 1, 2018, to comply with the display requirements laid out in this regulation.”
2) The State of Illinois prohibits any tax to be levied on top of another tax. If retailers followed the County’s requirement to include this tax in the sales price of the sweetened beverage, then that would mean that the Chicago Soda Tax and the IL Sales Tax would both be charged on top of the County Sweetened Beverage Tax. Same situation as #1 in that the “solution” is to delay the requirement to reflect the tax in the sales price.
3) The initial solution to both (1) and (2) above was to make the soda tax a line-item at the point of sale, but “it ran afoul of the Department of Agriculture, which advised it was against federal law to tax transactions paid for with benefits from its Supplemental Nutritional Assistance Program (SNAP).” The Department of Agriculture stated that the soda tax “could be applied to SNAP purchases so long as it wasn’t imposed at the point of sale.” This caused the County to release Revenue Regulation 2017-3 on June 6th, which gives retailers these options:
Where a purchaser uses SNAP benefits to purchase sweetened beverages, the retailer must do one of the following:
1. If the sweetened beverage tax is separately stated on a retailer’s cash register receipts, the POS system should be programmed not to charge the tax when SNAP benefits are used.
2. If the sweetened beverage tax is included in the selling price on a retailer’s cash register receipts, the POS system should be programmed to reduce the price by the amount of tax when the beverages are purchased using SNAP benefits. If this programming is not possible, the retailer must put in place a procedure whereby a purchaser who uses SNAP benefits can receive an immediate refund at the customer service desk or other location within the retailer’s premises.
In both situations above, the retailers should be given a credit for these tax exempt purchases on the next bills from their distributors. Distributors will be permitted to claim a deduction on their monthly sweetened beverage tax return for the amount of the credits provided to retailers.
Really. That sounds convenient for everyone involved.
What is the tax charged on? Does ice count? What about free refills? What about donated and sampled beverages? What about alcohol mixers?
The tax is charged at the rate of 1-cent-per-ounce, which is easy for pre-made beverages delivered in containers (bottles, cans, etc.). This is more challenging for syrups and powders (and remember, it’s only considered a syrup — and therefore a sweetened beverage — if it’s run through a beverage machine). The tax is applied to the total amount of beverage that the product will make per the manufacturer’s directions. It doesn’t matter if you make it differently — you apply the tax based on the volume it would make if you followed the instructions. I know. Yes, really.
As for ice: “the retailer should charge tax on the ounces sold. The addition of ice is at the discretion of the retailer/customer and does not affect the amount of tax due.”
Free refills are even more fun. The retailer must determine how much of the tax amount should be added to the sale price of the original beverage. So if you offer one free refill, you have to charge twice the tax on the original beverage sale, assuming the person will get a refill. Not fair, but easy. However, if you offer unlimited refills, how in the world do you estimate how many they will drink? The County says estimates are not acceptable. Good luck.
As for donated and sampled beverages — “the business that opens the beverages for self-use or samples or donates the beverages is the end user”. This means that if the product qualifies as a sweetened beverage, and the distributor or retailer donates or opens the beverage for floor samples or samples to potential customers… then that distributor or retailer is responsible for paying the tax on it.
If alcohol mixers themselves meet the definition of sweetened beverages (usually this would mean a canned, bottled, or fountain soda pop of some sort), then that portion of the drink — that many ounces — should have the tax charged on it. But not syrups added to a drink, since those would be hand-mixed. This should be fun!
Floor Tax Return – What is it and when is it due?
From the Sweetened Beverage Tax FAQ: “All businesses must begin collecting the tax on July 1, 2017. Because retailers may have inventory on that date that they obtained before the tax was in effect, they must remit the tax before collecting it from their customers. Accordingly, retailers must take inventory of bottled sweetened beverages, syrup and powder in their possession on June 30, 2017 and remit tax on those items directly to the Department by August 20, 2017 along with a floor tax return (will be posted on the DOR website). After July 1, 2017, retailers will submit the tax to registered distributors.”
A copy of the Floor Tax Return can be found in the “Downloads” section on on the right-side of the County webpage on the new tax.
It’s actually really easy to fill out — the difficulty is in figuring out how many ounces of product you need to declare (if you’re using syrup or powder, that is).
Refunds, Spillage, Product Preparation
A reduction of 5% of the calculated tax will be applied by distributors of syrups and powders to the vendor invoices sent to retailers, to account for spillage and product preparation. I am unable to tell from the County’s information whether distributors will do this automatically or if the retailer has to request it.
Retailers can request refunds from their distributors resulting from the return of product by a retailer (as well as breakage and spoilage), or due to tax-exempt sales to SNAP recipients, or sales outside of the county, etc. The distributor must refund the tax amount to the retailer before applying for a refund from the County — potentially putting them into a challenging cash flow situation.
Any claim for a credit or refund must be filed on forms provided by the County — but no more than four years after the situation which caused it to happen.
Timeline
March 1, 2017 – “Sweetened Beverage Tax ordinance goes into effect; distributors will receive information beforehand about registering with the Cook County Department of Revenue.” Supposedly. If they don’t know you’re a distributor, you won’t get anything. Or you may receive something because they think you’re a distributor, but you’re not. If you don’t get what you need, or if you get something and it doesn’t apply, immediately contact the County at revenuecompliance@cookcountyil.gov.
June 30, 2017 – “Sweetened Beverage Floor Tax inventory date; retailers must take inventory subject to sweetened beverage tax in which tax was not previously collected.”
July 1, 2017 – “Sweetened Beverage Tax goes into effect; retailers and distributors must begin collecting tax.”
August 20, 2017 – “Retailers must remit to the Department its floor tax return and payment.” (This refers to the inventory taken June 30th, on which tax to a distributor was not paid.)
August 20, 2017 – “Distributors must remit to the Department its tax payment and monthly return reflecting July 2017 activity.”
Main Sources: Sweetened Beverage Tax | CookCountyIL.gov and Sweetened Beverage Tax FAQ | CookCountyIL.gov — On these sites you can download the original ordinance, all related revenue regulations, all forms, and you can view the lists of registered distributors and products qualified as medical beverages.
Please remember that I’m not an attorney, I don’t work for the County, and I’m just doing my best to read, understand, and interpret the ordinance and related websites and resources for my own clients. None of this should be considered legal advice. If you have any questions, I encourage you to email revenuecompliance@cookcountyil.gov.