It’s A Soda Tax, But It’s Not A Sales Tax

by Hanna Brooks Olsen

Seattle’s new tax on sugary beverage has critics on all sides—but many of them have the basic taxing authority wrong.

Beginning on January 1, consumers in the City of Seattle may have noticed a slightly higher price on their Gatorade, soda, or coconut water. They may also have seen signs at the grocery store, warning them about these increases or news coverage about the cost, the proponents, and the detractors.

Throughout all of this, they may have gotten the idea that the tax was a sales tax—that it was applied directly at levied directly to the customer. They would be incorrect.

Copious news coverage calling the sugar-sweetened excise tax simply a “soda tax” has the potential to confuse consumers, which appears to be exactly what the local grocery chains and national soda companies are hoping for.

To be perfectly clear, the new law is not technically a sales tax. It’s an excise tax, or a tax on businesses. It’s applied to the distribution of these beverages for retail sale, which means the tax occurs between wholesale and retail. The law, as it’s written, makes it clear that “distribution” “does not mean the retail sale to a consumer. 

But whether or not the retailers choose to pass the burden of the tax onto consumers is their choice. And, unsurprisingly, many of them have.

Sales vs. Excise and Why It Matters

Diligent efforts from organizations like All In WA and Trump Proof Seattle have helped forge a meaningful conversation around tax reform in Seattle and Washington State more broadly. Voters are used to, at this point, being asked to pay for everything we need—from transit to homelessness services to public schools—through a scotch-tape-and-gum system of sales and property taxes. And time and again, voters have agreed to squeeze out just a little bit more.

Recently, though, the willingness of voters to pony up has faltered some; King County voters rejected a tax that would help fund arts programming in schools, one of the few levies to be defeated in recent memory.

Lawmakers are left with little choice when it comes to finding funding; because of the state’s restrictions on taxing authority, the gridlock in Olympia between the “no new taxes” Republicans and the “we need this” Democrats, and a years-old Tim Eyman initiative that has kept property taxes (and property tax revenue) artificially capped, there are very few ways to drum up the cash for special projects or necessary improvements.

As a result, lawmakers are getting more creative—and turning to businesses to foot the bill just a little bit more. They’re floating ideas like Seattle’s employee hours tax, or Governor Jay Inslee’s carbon tax—both of which, critics say, will force businesses to raise prices, but more on that later.

In the meantime, sales tax increases are what voters are mostly used to, which is why it makes sense that a lot of people would just assume that the cost of something went up. They know a tax was involved, so it must be a sales tax.

Sales taxes on sodas and other sugary drinks have long been a favored tool by public health advocates looking to reduce the volume of empty calories that consumers ingest; a single 12-ounce can of Coca-Cola contains ten teaspoons of sugar. Critics, though, decry these taxes as regressive because, like most sales taxes on low-dollar items, they tend to hit lower-income folks the hardest. A tax on soda will impact a very different demographic than a tax on imported wines or other luxury items.

Sales taxes (often called “sin taxes”) are also viewed being punitive, rather than focused on encouraging improved behavior. Healthier options are more expensive (in large part because the price of soda is kept low thanks to corn subsidies and Big Soda’s influence on federal laws)—yet soda sales taxes rarely focus on bringing down the price of alternatives.

An excise tax, by comparison, has the potential to be kept between the distributor and the retailer; by design, it’s a tax on businesses, not on consumers, and a way to recoup some of the public health cost that soda has created in communities. Its intention is to change the distribution behavior—to encourage retailers to carry and sell fewer sugar-sweetened options and instead, move toward those which have some nutritional value.

But as distributors, retailers, and lobbyists in Seattle have made clear, the retailers and distributors have no intention of changing their behavior. Instead, they’re passing the tax along to customers.

Why Consumers Are Getting Taxed

Despite its lefty reputation, Washington State is a very “business-friendly” place, particularly for large chains, like grocery and convenience stores. Much like our regressive tax structure treats wealthy individuals more favorably, businesses, too, tend to pay a lower percentage of their overall income the more they earn. There are several reasons why that’s the case, but one of the most significant is the structure of the business and occupation (B&O) tax, which charges businesses based on their gross receipts and not, say, a percentage of their overall business. Higher prices from distributors as a result of a tax, therefore, will likely be easily absorbed by Target and Safeway.

But, like many other taxes (or labor laws, for that matter) levied against business, the sugar-sweetened beverage tax may be a factor in pricing in the long-run. It will certainly be a part of the overall calculation that many distributors and retailers make, especially if it eventually curbs or changed behavior.

However, if customers are feeling it immediately after going into effect, it’s not because of the decisions of lawmakers, but instead, because of the actions of businesses.

According to the law, “the tax is not collected by the retailer nor is the tax burden intended to fall onto the consumer.” Restaurants, grocers, and convenience store owners are not the ones who are expected to pay this tax; instead, one of the many beverage distributors is expected to pay. But of course, if a business can pass on a cost, they almost always will.

Many of Washington’s beverage distribution companies are family-owned; Big Soda, for all of its economic fortitude, doesn’t always vertically integrate to cover both manufacturing and distribution. However, they do make sure that the entire product chain is designed to be profitable. In Soda Politics, long-time food journalist Marion Nestle notes that “one of Coca-Cola’s guiding rules is to ensure that everyone who touches its products along the way to the consumer should make money doing so.”

The soda industry—one that relies on taxpayer subsidies at many steps of the process, including the use of municipal water to create most of this products—is able to both pass profits along to its partners, including distributors and retailers, as well as savings on to customers. This is strategic and it’s how the soda industry has grown into an industry worth more than $900 billion. However, it’s also an industry that, overall, pays low taxes and is responsible for little of the public cost of its products, including litter, diabetes, and tooth decay.

Opponents of this excise tax have familiar talking points; several years ago, the restaurant lobby made similar assertions that increasing the minimum wage will necessarily force businesses to raise prices. Those who objected to higher minimum wages—including one of the leading researchers on the University of Washington’s minimum wage research team—have referred to it as “a tax on food” because it would certainly drive up the cost.

Research later showed that there was no such increase; the conclusion of a 2017 paper from that same UW team which compared supermarket food prices states that “there is no evidence of change in supermarket food prices by market basket or increase in prices by food group in response to the implementation of Seattle’s minimum wage ordinance.” Meanwhile, restaurateurs like Tom Douglas, who transparently passed the cost on were raked over the coals.

Grocers and other soda retailers are savvier this time around, though.

Signage found at QFC makes it clear that the tax is coming and that it will increase prices. In small print, it notes that the tax applies to the “distribution” of sugar-sweetened beverages—but speaking to people in the store, including a QFC employee, it’s the local government who’s to blame, not the company, which is owned by grocery giant Kroger, who boasted an annual profit of $115.3 billion in 2016. Stickers and signs around the store point out which products are subject to the tax—in spite of the fact that, by the intention of the law, the consumer never really has any need to know about it.

“Yup, it’s another tax from the City Council,” sighed the employee.

“If they tax us any more, we’ll have nothing left!” exclaimed another man outside the store.

Upon being informed that it wasn’t a sales tax, but instead, a tax on the distributors who provide soda to retailers, both expressed disbelief. And why shouldn’t they? They were, in fact, getting taxed in a way.

Regardless of a person’s feelings about sales and sin taxes—whether they curb behavior, whether they’re classist, or whether they’re even effective at raising revenue—it’s important to draw the distinction between a sales tax and a tax on businesses. In the case of Seattle’s sugary beverage tax, the additional cost to the consumer is not due to legislative fiat, but instead, to corporate interests.

Hanna Brooks Olsen is a co-founding editor of Seattlish and has written for the Atlantic, CityLab, and Seattle Met. When not stringing together words or making sounds she enjoys music on vinyl, bourbon, college football, making impulse purchases at second-hand stores, ballet, and sitting in dark bars with friends. She also sings a mean rendition of Walking in Memphis.

Featured image is a cc licensed photo attributed to Ian Muttoo

26 thoughts on “It’s A Soda Tax, But It’s Not A Sales Tax”

  1. A Seattle Democrat tries (and fails) to argue that even though poor and working people are paying more money out of their pockets, this “soda tax” isn’t really a tax on them.

    Folks, this is exactly why liberals can not solve the problems we have. Even when they have the best of intentions, their naive faith in the “goodness” and “reformability” of the system is unshakeable. Stop shaking a finger at working people and telling us “you don’t understand the tax system” when it’s clear the author of this piece doesn’t understand how capitalism works AT ALL.

    1. True,

      The author truly does not understand capitalism.

      Businesses offer what customers want.

      Businesses will offer the products at a price which they can afford to pay for the products in inventory, and still make a profit.

      Of course the cost burden will be passed to the customer. To not do so would cause a loss to the business.

      What do people think, that my small 7-11 store owner should loose money just because he should sell me a soda that is subsidized by his wallet?

      1. Precisely. Businesses have to make money in order to spend money and yes, liberals i know this is crazy economics right here – you have to have money to hire new employees and also just simply pay employees! Crazy!

  2. You need your mental abilities tested if you think any business is just going to eat your seattle tax increases – of course they will be passed to the consumer, just as are the minimum wage hikes, paid leave, sick leave, maternity leave, employee tax, parking tax (any business expense). Obvious you’ve never owned a business and had to make payroll.

  3. One is prompted to wonder whether Ms. Olsen might have penned this after a long stay in one of those “dark bars” she professes to enjoy. It’s one of the most profoundly stupid rationalizations I’ve ever read.

  4. Pull your head out of your ass dear. Any tax or addition expenses levied on business will, at some point be passed onto the customer. The
    way you avoid this is simply not buy any coke in the city of Seattle. Job done.

  5. this author doesn’t understand basic economics. To put this in millennial speak imagine the excise tax was on data used by your phone (because Seattle wanted you to spend less time looking at your phone). They decide to tax your carrier, Verizon, $10 dollars per month per Gig. But since they putting an excise tax on Verizon, they tell you, you shoudn’t see any changes right? So your 10gig plan will cost Verizon $100 in tax each month. But hey don’t worry consumer. Whats’ that? Verizon is passing that tax on to you? That’s Terrible! I mean Yes the tax we are charging verizon exceeds any profits they could hope to make from your account and we thought they would just pay the tax and keep loosing money so we are so UPSET with them and feel so BADLY for you, the consumer! We the politicians are on your side, really! It’s that bad old company charging you – for shame!

  6. “—it’s important to draw the distinction between a sales tax and a tax on businesses.”

    No. It is the important that they realize that there is no difference. Businesses pass on costs. Period.

  7. Hannah Brooks Olsen is a wholly owned subsidiary of Nick Hanauer and like him she’s happy to fuck over people who actually work for a living/own businesses.

  8. Honestly, even as a Seattle resident who’s pretty neutral on this tax, I read this entire article and kept waiting for the author to explain why this distinction matters, or why this is a good policy, and it never happened. If it creates a set of incentives that cause it to behave identically to a sales tax, it’s a sales tax. Period. If you want to sell people on it, then do that. Don’t spend ten paragraphs explaining why it isn’t what it looks like.

  9. You can’t write your way out of a wet paper bag. Last sentence is missing a “not,” as well as a whole lot of logic and common sense.

  10. Let’s recount how businesses put a PRICE on their products: Costs plus an acceptable profit margin (and, in the case of the grocery business, the profit margins are quite thin). To a business owner, extra taxes are nothing more than increased costs, which result in higher prices. In this case, businesses will raise prices and continue to sell soda as long as customers want to buy soda, even at the new and higher price.

    Political beliefs aside, blaming businesses for raising prices is completely misguided. The outcome we are seeing was 100% predictable, no matter what you “call” the tax or at whom it is levied. A scant few soda customers may change their thirst quenching buying habits, but the majority will pay the higher price and buy less of some other product.

    1. A more likely case is that consumers will choose to buy their sugary drinks outside of Seattle’s jurisdiction. In fact if you look at the track record of sugar sin taxes all have failed miserably due to consmers taking their business elsewhere and none have actually managed to generate the revenue or results that proponents claimed they would.

      The end result will be that sales for retailers and restaurants in Seattle will drop markedly as will tax revenue from the sin tax and sales taxes.

    1. The author’s opinion is steeped in progressive manure. The author, and the Seattle progressives in leadership, are delusional idiots. A distributor who moves 10,000 cases a week of 24 12 ounce cans now has a tax of $5.04 per case. That is over $200,000 per MONTH in new taxes on them, and these leftist pinheads thought that the distributors would be able to absorb nearly $2.5 MILLION per year in a single new tax, on top of all of the other taxes and fees they pay? At Costco, the tax on a 35 pack of Gatorade is $10,34, or nearly a 65% tax based on the retail price. Of course they are going to pass that cost along. As usual, the left continue to hurt the people they claim to want to help.

  11. Once again, the term “soda” is vague and was traditionally used in our region as meaning soda water not what we call pop or soda pop. Thanks to gentrification, we’re expected to call every thing a soda now, which a lot of us won’t. Calling it a “soda tax” implies club soda is now part of the sugar tax. Refer to it as a soft drink, to cover all the sweetened beverages. Further more we don’t live in California nor the East Coast where the term soda came from.

  12. The author, and the Seattle progressives in leadership, are delusional idiots. A distributor who moves 10,000 cases a week of 24 12 ounce cans now has a tax of $5.04 per case. That is over $200,000 per MONTH in new taxes on them, and these leftist pinheads thought that the distributors would be able to absorb nearly $2.5 MILLION per year in a single new tax, on top of all of the other taxes and fees they pay? At Costco, the tax on a 35 pack of Gatorade is $10,34, or nearly a 65% tax based on the retail price. Of course they are going to pass that cost along.

  13. This was a well thought-out and well-written article with accurate representations of all the tax structures in WA, and then in the last line it has to go and contradict everything it just said with “In the case of Seattle’s sugary beverage tax, the additional cost to the consumer is not due to legislative fiat, but instead, to corporate interests.”

    The author spent 20 paragraphs exploring (thoughtfully) the complex interplay between economics, taxes, and behavior and I felt like it was heading towards “it’s complicated but I want to straighten out the finer points of how this tax works,” only to have everything chalked up to nebulous “corporate interests” at the end. I enjoyed the article but the conclusion didn’t seem to match the rest of it.

    On further reflection, I’m wondering if meddling by editors is responsible for the last line–it really doesn’t feel like it was written by the author.