Burdens of Taxation? Cook County's New Soda Tax Just a Drop in the Bucket

On July 1 – barring a court order or a last minute act of legislative wisdom or fear (at this point, we’ll take either) – Cook County will implement a “Soda Tax,” a brand new penny-per-ounce beverage tax on non-alcoholic drinks that exceed certain threshold of either regular or diet sweeteners. It will capture virtually all regular and diet soda pop, most juice drinks, and either many or most other flavored drinks, such as sport drinks, frappucinos, sweetened or diet iced teas, lemonade, etc.

Much has been said and written about the outlandish nature of this tax. Charged in addition to already record-setting state and local sales taxes, the penny-per-ounce Cook County soda tax will range from 25 to 50 percent of the price of the beverage, a simply unprecedented rate of taxation for such a product. (As just one example, this author regularly buys a 24 pack of Diet Dr Pepper for $5.88; the new tax will be an additional $2.88 on that case, a 49% tax rate).

The news of the day, however, gives us an opportunity to study other aspects of this case besides the confiscatory nature of the tax itself. On Tuesday, June 27, very much at the proverbial eleventh hour, the Illinois Retail Merchants Association, joined with many grocery stores and other retailers, filed suit against the County on the grounds that this tax is unconstitutional under state law.

CONSTITUTION: The Illinois state constitution – not some ancient document, by the way, since Illinois implemented a new, modern constitution in 1970 – requires that all taxes must be equally applied to products of the same class. The peculiar exceptions and thresholds in this tax would appear to violate this clause on its face, but we will have to see what the courts say, as it winds through the process.

Just as important as its legality, practically speaking, is its functionality. That is, if legally mandated, is it even possible to implement?

COLLECTION: The sales tax system is well-established in most US states: cash registers and more complex invoicing systems are designed to calculate the tax owed by the customer, based on the combination of the state, county, and local tax rates. The computer programmers who design these retail systems have had decades to perfect them; everything is in place to charge a sales tax easily and accurately, as there are typically different rates for foods, pharmaceuticals, luxuries, etc. In those years when Cook County or the City of Chicago chose to kick up their take a notch, the retailers’ systems have been automatically updated with a click of a mouse.

By contrast, this new soda tax works more like the horrible European concept known as the VAT: a retailer pays the tax when he buys a product, then gets reimbursed by passing on the tax when he sells it. So in Cook County’s case, this means that if a retailer buys a pallet of soft drink syrup or cases of juice boxes or cases of pop cans, he pays the tax, based on the usual formula, when he purchases it. Then, days or weeks later, he has to charge it correctly when he resells it to a shopper or customer.

For bottled or canned soda, that might be easy: Pay $2.88 per 24-can case when it arrives, then charge $2.88/case when you sell it.

But what about for fountain drinks? Different fast food cashiers, waitresses and bartenders pour drinks in different proportions; patrons order their drinks differently. One customer may ask for extra ice, so the 32 ounce glass has barely 16 oz of lemonade or pop in it, while the next may ask for easy ice, or noo ice at all, so his 32 ounce glass contains the full 30 to 32 ounces. Should they both be charged the same total tax, even though it’s then based on the size of the container rather than the quantity of beverage, as the law requires? How to design the system for this complexity?

Then there’s the food stamp challenge: With less than two weeks to go before implementation, the County decided to grant a massive tax break: people paying with welfare cards such as SNAP would not be subject to the tax. How to implement that… especially since the retailer already paid the tax upon receipt from his wholesaler? And is it even fair for the same customer to pay a tax when using one form of payment, but not when using another form of payment?

COMPLEXITY: This process is riddled with such challenges. Cash registers at retail shops, bars and restaurants, gas stations, hardware stores and fast food chains all vary from traditional point-of-sale cash dispensing machines to modern computer tablets, retrofitted to serve as both an ordering ticket and invoicing tool. It takes time, talent, and money to reprogram such systems, and with the changes and oddities in Cook County’s tax plan, it is believed that none of the providers have a program in place that can be fully tested and accurate by implementation day.

A shopping cart that includes cases of both La Croix and diet colas will result in the former being exempt and the latter being taxed, although the cases look and feel similar, holding a dozen or two of the same size 12 oz cans.

A shopping cart that includes four or five Ocean Spray or Langer bottles of juice may include a couple of unsweetened juices – not taxed - and a couple of sweetened juice cocktails – taxed. That's another sixty cents on the $2.50 bottle containing 60 ounces of cranberry juice cocktail (on top of the twenty-five cents applied as the normal ten percent sales tax), but not on the $3.00 bottle of pure unsweetened cranberry juice blend next to it, which only gets its normal sales tax. Most consumers don't even realize there IS a difference between these two types of beverages, sold on the same shelf in the same bottles, requiring careful reading of the labels.

A shopping cart that includes a few boxes of children’s juice boxes will similarly have a differentiation that requires careful reading of the labels, if the UPC symbols aren’t correctly loaded in the computer already. Depending on their formula, some children’s juice boxes are exempt, while others share the same penny per ounce tax rate, another 67.5 cents per box of ten 6.75oz pouches.

And to a cashier in a hurry, processing a long line of shoppers, these packages all look alike.

If they had years to prepare and test, and the law was clear, the computer programmers could have accommodated. As it is, it’s doubtful that restaurants, bars, and stores will be able to charge this tax successfully without occasionally applying the tax to sales that don’t deserve it, and vice versa.

Conservatives have long made the point – while objecting to the income tax in general, of course – that at least a flat-rate income tax would be less onerous a burden than our current uncharted jungle of a tax code. The cost burden on our economy caused by the income tax is well-established, a subject for the political debate every time tax hikes or tax cuts or in the news.

This new soda tax is just such a burden. Unlike the reasonably manageable "ad valorum" taxes to which we are accustomed (taxes assessed as a simple percentage of the price), the new soda tax differentiates between drinks that are almost identical to the naked eye. Minuscule differences result in a sway from zero to 50% in financial impact.

In complexity and bottom line cost to both the consumer and the retailer, this is unprecedented in its scale.

> Think of the restaurant that must decide whether to absorb the tax on free refills or program their computer to pass it on to the patron.

> Think of the unsophisticated neighborhood convenience store or bar without a cash register that was always able to rely on its employees to easily assess sales tax manually, and no longer can.

> Think of the Walmart, Meijer or K-Mart, with massive modern ERP systems, so complex that the slightest software change costs tens of thousands of dollars, tying up high-priced computer engineers for months in the implementation and debugging phase? And now, think of this, not as an unprecedented shock, but as just another in a long line of cost burdens, known as unfunded mandates, that our government has long placed on our private sector, again and again, as barriers to entry, driving companies out of business and keeping businesses from starting in the first place.

We forced companies to fund unemployment insurance programs and workmen’s comp programs. We forced them to redesign their doors, hallways, staircases, meeting rooms, and restrooms, to accommodate the handicapped. We force the sellers of food and drink to pay for costly testing so they can label their products with not only what they know (the ingredients, the weight or volume, where made), but also to print what they would not otherwise know (specific calorie counts, fiber counts, the contributions to certain vitamin or mineral RDAs)…

Every year or two, there’s been another burden, another weight, placed upon the shoulders of our private sector. Some are well intentioned, some genuinely do seem worthwhile – but in the aggregate, all constitute yet another burden that weighs down the business, especially the small business, until, eventually, that business must give up, or be defeated by the enormity of it all.

Writers, politicians, and the affected businesses have done their best, concentrating on this new tax, to explain the issues to the public, and too often, these complaints fall on deaf ears.

We explain that the cost to the shopper will be enormous, driving many shoppers to leave the county and do their shopping in Lake, DuPage, Will, or even Indiana. We even have other cities' experience, like Philadelphia's, where such a tax resulted in massive layoffs and a plummeting of business, and the the Chicago politicians who run Cook County couldn't care less.

We explain that the cost will even be crippling in other ways, for the shopper who doesn’t leave, because the shopper who continues to buy his drinks here in Cook County will have less to spend on other things as a result. One 24-pack of soda per week is another $150 per year. That’s a hundred fifty dollars per year that this shopper will not spend on other foods, or on luxuries, or other things in the county. That hundred fifty could have been clothes for kids, gifts for a spouse, visits to a museum, tickets to a play or concert in the city, any of dozens of possibilities that help our retail sector and produce tax revenue... but instead, it’s gone, reducing the other spending that shopper might have done with that $150.

Multiply that figure by the millions of people in Cook County and you get a feel for the enormity of this effect on our residents, our businesses, and even our tax base.

We explain that this loss in business will cause a commensurate reduction in staff, as grocery stores, discounters, restaurants, fast food places, and gas stations all lay off as much as 20% of their stockboys, cashiers, and baggers. Yes, that’s what happens when you lose shoppers; you must cut your staff.

We explain that this will have a net result of reducing the county’s tax collections, not increasing them, as stores go out of business, and those that remain produce fewer sales, and there are fewer employed workers paying taxes, and in fact, more unemployed workers, adding to the entitlements burden of the county, state, and nation.

We explain all this, but it has no effect, because the modern Left thinks only of the tax, and never of the consequences.

But we should also concentrate on the bigger picture, that picture we’ve captured in considering the implementation challenge, because this is the cost of modern government that is so easy to forget.

Published government budgets only project their revenues – “this tax will bring in $100 million this year, or $200 million, or $500 million” – but they never talk about the soft cost of determination and collection of that tax by the retail outlets that must produce it somehow.

When Cook County’s illustrious board of confiscators voted on this penny-per-ounce tax last year, how many of them understood what it would cost in alterations to the operations of the businesses within their county? How many even gave a thought to the massive expense for thousands and thousands of businesses, having to hire computer programmers and accounting firms to update their pricing and checkout systems, to capture and pay these taxes, to re-analyze their ingredients and recipes in ways they have never needed to before?

Public sector employees never think about what their actions do to the private sector.

And maybe that’s why there are so many public sector employees… but fewer and fewer private sector employees, at least in Cook County, every year.

Yes, the last person to flee Illinois will have a free hand with which to turn out the lights as he departs, because he obviously won’t be using it to hold a soda.

John F. Di Leo is a Chicagoland-based international trade compliance trainer, writer, and actor. A former political activist and one-timer Milwaukee County Republican Party Chairman, he has now been a recovering politician for twenty years.

Permission is hereby granted to forward freely, provided it is uncut and the IR URL and byline are included.

the County decided to grant a massive tax break: people paying with welfare cards such as SNAP would not be subject to the tax.

WTF? WTF? WTF? This stuff shouldn't be bought with welfare money anyway, but not only do they get to buy it with my money, they won't have to pay the same tax I would.

How many welfare people will use their cards to buy pop and then sell it for a price between their tax free price and the fully taxed price. Pick up fifty cases and sell them with a dollar profit instead of $2.88 tax.

Anyone who has lived in Chicago knows this will result in a bunch of fat blacks riding the El to the first stop outside Cook County. They’ll load up on soda and truck it back on the El, taking up valuable seats.

These stories of Liberals in government always reminds me of that video many years ago capturing a liberal congressman or local politician who increased sales taxes and then took his tax paid car out of his jurisdiction and purchased groceries and other items.

With less than two weeks to go before implementation, the County decided to grant a massive tax break: people paying with welfare cards such as SNAP would not be subject to the tax.

What a brilliant idea! Tax unhealthy products, but then exempt from the tax the very people it could most help - the overweight and diabetic, which is what a disproportionate percentage of welfare recipients are.

Should they both be charged the same total tax, even though it’s then based on the size of the container rather than the quantity of beverage, as the law requires?
....
By contrast, this new soda tax works more like the horrible European concept known as the VAT: a retailer pays the tax when he buys a product, then gets reimbursed by passing on the tax when he sells it.

So how does this work, exactly? Restaurants generally don't buy fountain drinks by the ounce, they buy them in boxes of sacks of concentrated syrup. then the dispenser mixes the syrup with carbonated water.
- So, is the restaurant paying the tax on the size of the syrup (a couple gallons), then charging customers per ounce by the drink (makes 20-50 gallons)? They'll be making bank on the difference here!!!
- What is the tax on a one-ounce packet of koolaid or gatorade powder? What if the sugar is added separately?
- What's the bonus tax on a bulk 10lb bag of sugar? Or is this tax only on liquid purchases, in which case are the aforementioned drink mix powders also exempt? (They're dry powder, but their purpose is to make a liquid drink!)
- What about sweet tea vs Commie tea?

Finally, I guess the self-fill drink stations are gonna be removed? Can't have people getting their own unknown amounts of sugar!

Yes, Svartalfiar, as you’re noticed, this is a complex, rather wacky tax.

For pre-made product, They pay the tax to the wholesaler when they buy the cans or bottles or jugs, then charge again at the same rate, a penny per ounce, when they sell it. Easy enough...

But as you described, there’s a challenge when you buy syrup for a fountain machine. In that case, they pay the tax when the retailer delivers it, based on the amount that it’s going to make. So for example if one cup becomes a gallon, then you pay a gallon’s worth of tax on that cup of syrup, because you’ll be selling a gallon to the customer.....

... except that you WON’T ... because you’ll be selling it with ice.

So it’s very peculiar, and that’s one of the main reasons the judged issued a stay this afternoon.

they’ll meet again in court in ten days.

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