Taxation of Beverage Syrups: A Sticky Situation

Authors: Katherine Audet and Edward Duhamel It is well known that in many states, food products bought for home consumption are either exempt from sales tax or are subject to a reduced rate of sales tax. But did you know that certain beverages, such as soft drinks, are not considered “food” by all states? Soft drinks are often taxed differently than most other food products and can even be subject to special additional fees. What is a soft drink? When most people hear the term soft drink, they think of carbonated soda or pop. This, however, is a misconception in the sales tax world. A soft drink can be any nonalcoholic beverage that contains natural or artificial sweeteners and it does not have to be carbonated. The guidelines for what constitutes a soft drink for sales tax purposes vary from state to state and can get confusing. For example, in Florida, things made with milk derivatives such as milk shakes and ice cream sodas, as well as lemonade and fruit punch are soft drinks. In New York, flavored water, fruit drinks containing less than 70% natural fruit juice, and sport drinks such as Gatorade or Powerade are considered soft drinks. In Pennsylvania, a soft drink is defined as a nonalcoholic beverage in either powder or liquid form. This inclusion of powders highlights the uncertainty of the term “beverage.” What is a beverage? Although the term “beverage” is widely understood simply to mean a potable liquid, there is also variation in state sales tax laws as to what a beverage really is – physically. In Pennsylvania, as noted above, a beverage can be either in powder or liquid form. Regulations such as this beg the question: what is a “beverage” and how would I treat (and tax) something such as a “beverage” syrup? In order to determine whether beverage syrup could be deemed a soft drink in those jurisdictions that tax soft drinks and exempt other food products, it is necessary to know whether syrup is, in fact, a beverage. In a state with a more narrow interpretation of the term beverage, such as Wisconsin, the tax exemption for food products applies to beverage syrups because they are not considered beverages, which means that they are not “soft drinks” in Wisconsin. According to guidance from the Wisconsin Department of Revenue, a “beverage” is a drinkable liquid. This means that items like powders and syrups meet neither the sales tax definition of a beverage nor, by extension, the sales tax definition of a soft drink. Very few states have addressed this particular issue by statute, likely because of a lack of legislative forethought, instead of intentional vagueness. It is, therefore, often necessary to ask for clarification from many jurisdictions across the country when dealing with this issue. What about Syrup Fees? Just to add to the confusion, a few states charge a special fee for beverage syrups. West Virginia’s Soft Drinks Tax imposes an extra tax of eighty cents on every gallon of soft drink syrup, or eighty-four cents on each four liters. The syrup tax statute, contained in the West Virginia Code, broadly defines the products to which it will apply. The definition includes dry and liquid components that are mixed with any product suitable to make a soft drink; it specifically includes a long list of products from “simple syrup” to something called “oh boy drink.” Given the increasing use of technology, the administration of this specific tax seems to be a bit of an anachronism. A special soft drink stamp or tax crown is required to be affixed to the container of syrup. Though a piece of software obviously cannot attach a physical stamp, Taxware products will now calculate the tax amount that will be imposed on soft drink syrups in West Virginia. Washington’s Syrup Tax, in contrast, does not apply to nearly as many products. For purposes of the Washington tax, under the state’s Revised Code, “ ‘Syrup’ means a concentrated liquid which is added to carbonated water to produce a carbonated beverage.” Many of the products that are taxable under the West Virginia Soft Drinks Tax are not taxable under the Washington Syrup Tax, such as powders to make beverages and any syrup that is mixed with anything other than carbonated water. The special Washington tax circles us back to the traditional view of soft drinks and only applies to liquid syrups that are used to create a carbonated beverage. Arkansas also has a Soft Drink Tax that is imposed upon the sale of soft drinks, syrups, powders and other base products used to make soft drinks. The tax is imposed on manufacturers, wholesalers and distributors and it may be passed on to the retailer or other purchaser. The rate of tax varies depending on the type of product. The rates imposed are: $2.00 per gallon of soft drink syrup, $0.21 per gallon of bottled soft drink and $0.21 per gallon of soft drink which may be produced from a powder or base product. Lastly, the good old city of Chicago, Illinois imposes a Fountain Soft Drink Tax on sales of syrup or concentrate by a supplier to a retailer. The tax is 9% of the syrup price and this tax is collected by adding the tax to the selling price of the syrup or concentrate paid by the retailer. Clearly, the scheme of taxation for beverage syrups is complex and “sticky.” This level of detailed understanding is why Taxware has the most granular tax content available today. Have Questions? Taxware Systems support content related to beverages and beverage syrups. For more information please contact Taxware or Ask a Tax Expert today.