Beverage Industry Sues to Block Philadelphia's Sweetened-Drink Tax

Beverage companies and retailers on Wednesday sued to try to halt Philadelphia's special tax on sweetened drinks slated to go into effect in January.

Philadelphia become the first large U.S. city to pass such a measure in June, when the city council approved a levy of 1.5 cents per ounce on non-alcoholic beverages with added sweeteners ranging from soda to sports drinks and energy drinks.

A civil complaint filed with the Philadelphia County Court of Common Pleas argues the tax is unlawful because such drinks already are subject to a state sales tax and that Pennsylvania law prohibits cities from imposing duplicate taxes.

Plaintiffs include the American Beverage Association, the Pennsylvania Food Merchants Association, beverage distributors and two city residents.

City officials have said they are confident they can defeat a legal challenge in part because the levy is imposed on distributors and isn't a sales tax. Mayor Jim Kenney championed the tax on distributors as a way to generate $91 million in annual revenue for prekindergarten and other city services.

The legal challenge, which had been expected, comes as other cities weigh special taxes on sugary drinks amid rising concern over obesity and diabetes rates. Residents in San Francisco, Oakland, Calif., and Boulder, Colo., will vote in November ballot initiatives.

Beverage makers like Coca-Cola Co., PepsiCo Inc. and Dr Pepper Snapple Group Inc. say such taxes are discriminatory by unfairly singling out products representing less than 10% of caloric intake. A federal judge put San Francisco's planned health warnings for sugary drinks on hold in June after the industry argued the warnings violate its free-speech rights under the First Amendment.

In Wednesday's 59-page lawsuit, plaintiffs estimated Philadelphia's tax would raise prices by an average of 31%, leading to fewer purchases and an annual revenue loss of $2.7 million to $7.8 million for Pennsylvania because of lower sales tax receipts.

They argued Philadelphia's special tax could set a precedent allowing local governments to tax thousands of goods ranging from over-the-counter drugs to cars, further undermining the state's tax-collection rights.

Plaintiffs also argued Philadelphia's levy violates the state constitution requiring uniformity of taxation because the levy is calculated by volume, not value. They estimated prices on larger, less-expensive items such as 2-liter soda bottles could more than double, while smaller energy shots would only have a single-digit percentage increase.

The complaint also asserts that cities or states are prohibited from taxing items including sweetened drinks purchased with federally funded food stamps under the Supplemental Nutrition Assistance Program, or SNAP. Nearly half a million residents of Philadelphia, or almost a third of the city's population of 1.6 million, receive SNAP benefits, according to plaintiffs.

Write to Mike Esterl at [e-mail]

(END) Dow Jones Newswires

September 14, 2016 15:45 ET (19:45 GMT)

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