A divided Pennsylvania Supreme Court held that Philadelphia’s tax on sweetened beverages (Soda Tax) was not preempted by Pennsylvania’s Sales and Use Tax. Williams v. City of Philadelphia, Nos. 2, 3 EAP 2018 (Pa. July 18, 2018) (4 to 2). The Sterling Act authorizes Philadelphia to tax “persons, transactions, occupations, privileges, subjects and personal property … except that [the city] shall not have authority … [to tax] a privilege, transaction, subject or occupation, or on personal property which is now or may hereafter become subject to a State tax or license fee.” 53 P.S.§105971(a). Stating that prior decisions were not consistent in the application of the language, the court held that whether a city tax is preempted under the Sterling Act will depend on the incidence of the tax — that is, on what or whom the tax is imposed.

The majority accepted the city’s argument that the Soda Tax is imposed on distributors, while the Sales Tax is imposed on purchasers at retail of taxable property. Opponents of the tax claimed that the Sales Tax and Soda Tax are both in substance consumption taxes imposed on the property that is consumed. The court characterized the argument as looking to the economic effects of the tax and not its actual incidence and therefore dismissed the argument.

Two dissents argued that the Soda Tax in substance was not a tax on distributors but a tax on sweetened beverages sold at retail and was therefore preempted by the Sales and Use Tax. The court disregarded language in United Tavern Owners v. School District of Philadelphia 272 A.2d 868 (Pa. 1971) that would have looked to the actual operation of the tax to determine whether the tax duplicated a state tax. The court stated that United Tavern Owners was largely based on the state’s treatment of the sale of alcoholic beverages. Thus, the court looked to the form of the tax in reviewing the application of the Sterling Act’s language. The court cited various criticisms of the Sterling Act in this author’s treatise, J.Bright, Taxation, 26 & 27 Summary of Pa. Jurisprudence 2d §§7:3, 13:15, 14:5 (2017).