According to its backers, the Berkeley “Sugar Tax” is the future of sugar in America.  Berkeley’s Measure “D,” which garnered an overwhelming 75% “yes” vote, imposes a general excise tax of $0.01 per ounce on the distribution of sugar-sweetened beverages and the sweeteners used to sweeten such drinks:  this amounts to a 12 cent tax on a standard 12 ounce can of soda.  The ordinance takes effect on January 1, 2015.

The stated purpose of the tax is to “diminish the human and economic costs of diseases associated with the consumption of sugary drinks by discouraging their distribution and consumption in Berkeley through a tax.”  The revenue generated by the tax goes to the Berkeley general fund.

I don’t operate in Berkeley.  Why should I care?

As the expression goes, this may be “coming soon to a theater near you.”  Although Berkeley is the first California city to successfully implement a “sweet drinks” tax, it is not the first California city to try.  Similar measures failed in Richmond, El Monte and, most recently, in San Francisco.  Notably, the proposed San Francisco tax garnered more than 50% of the vote.  The particulars of the San Francisco tax required it to receive a “supermajority,” or two-thirds positive vote; had it been structured in the same manner as the Berkeley tax, a simple majority would have been sufficient.  Proponents of the Berkeley tax have been explicit in their intent to use the Berkeley ordinance as a model for other cities.

OK.  What do I need to know?

Although the exact means by which the tax will be administered and enforced are still up in the air (the ordinance directs the City Manager to, at some unspecified point in the future, create regulations to address administration and enforcement), the general parameters of the tax are set out in the ordinance.

The ordinance is specifically not a “sales tax” on sweetened drinks and (unlike tobacco taxes) is not charged directly to consumers.  Instead, the tax is imposed on the “privilege” of distributing sugar-sweetened beverages in the City, and is paid by distributors (including any in-house distributors of retailers and restaurants).  Distributors are free to pass—or not pass—the added cost of the tax on to retailers, and retailers may—or may not—do the same to consumers.

The tax applies to “Sugar-sweetened beverage products,” as defined in the ordinance.  Berkeley Mun. Code § 7.72.010(A) (2014).  A “Sugar-sweetened beverage product” includes “Sugar-sweetened beverages” and “Added caloric sweeteners.”  Id. § 7.72.030(P).  A “Sugar-sweetened beverage” is any drink “to which one or more Added caloric sweeteners has been added and that contains at least 2 calories per fluid ounce.”  Id. § 7.72.030(O).  An “Added caloric sweetener” is basically any substance used to sweeten a beverage that also adds calories, other than fruit or vegetable juice.  Id. § 7.72.030(A).

“Sugar-sweetened beverages” are taxed at the rate of 1 cent per ounce distributed.  The tax for “Added caloric sweeteners” is calculated by determining the “largest volume, in fluid ounces, of Sugar-sweetened beverages that could be produced” from the amount of sweetener distributed, when the beverages are mixed according to the manufacturer’s instructions or the distributor’s practices; the tax is imposed at the rate of 1 cent per calculated ounce.  Id. § 7.72.010(B)(2).

A number of beverages are specifically excluded from the tax.  The tax does not apply to any beverage in which milk is the primary ingredient, beverages for medical use, “meal replacement” drinks, baby formula or alcoholic beverages.  Id. § 7.72.030(O)(2).  The tax also does not apply to the distribution of “Natural” sweeteners (such as granulated white or brown sugar, honey and molasses), to the distribution of sweetened beverages to retailers with less than $100,000 in yearly gross receipts, and to the distribution of sweeteners to “Food Products Stores” (e.g., grocery stores), as long as the store is reselling the sweeteners to consumers for those consumers’ later use.  Id. § 7.72.020.

Although retailers are not directly required to pay the tax, the ordinance does impose obligations on retailers in order to aid the City’s collection efforts.  Depending on forthcoming regulations from the City Manager, retailers will be required to either (1) report to the City any receipt of sugary drinks from a distributor, including the volume received and the contact information of the distributor, or (2) collect the tax from the distributor and remit it to the City, or (3) provide evidence to the City that the distributor from whom the sweet drinks were received is registered with the City.  Id. § 7.72.050(B).

Seller beware!

It may be tempting—and in keeping with the expressed goals of the tax—for retailers and distributors to institute a “sugar surcharge.”  We recommend exercising caution in implementing this approach:  any miscalculation that arguably overcharges a customer is likely to trigger consumer claims.

Those distributors subject to the regulation also must be prepared to very quickly become compliant with the new law, or risk the imposition of penalties.  The tax takes effect January 1, 2015, but the regulations to implement it have not yet been issued.

The “sugar tax” will be enforced in the same manner as other City business taxes, and will be subject to the same penalties and appeal process.  Id. § 7.72.070.  The City Manager could presumably impose different or additional penalties via regulation.  See id.

What next?

It seems doubtful that the tax will have the intended deterrent effect of reducing consumption of sugary drinks.  The tax is not imposed on consumers or retailers, but on distributors.  It is possible that, between the distributor and retailer, no or little cost increase will ultimately be passed along to consumers.

Moreover, the money received from the tax will go to the Berkeley general fund, and therefore is not earmarked towards any plans or programs to reduce consumption of sugary drinks.  Although the ordinance creates a “panel of experts” to make “recommendations” to the City Council regarding the establishment and/or funding of such programs, the panel is advisory only, and the City Council is free to disregard their recommendations.

We’ll update this advisory once the Berkeley City Manager has promulgated its regulations on the logistics of tax collection.