Appellate court panel grills both sides on Philly soda tax

PITTSBURGH -- Attorneys for the city and a coalition opposing its sweetened-beverage tax fielded rapid-fire questions from a judicial panel Wednesday morning  about the legality of the levy.

The hour-long hearing before seven justices of Commonwealth Court in Pittsburgh centered on whether the city's new tax duplicates the state sales tax, rendering it illegal.

The American Beverage Association, along with several Philadelphia residents and businesses, filed suit against the tax in September. A Common Pleas Court judge rejected their arguments and upheld the tax in December. The decision was appealed to Commonwealth Court,  responsible for appellate cases involving local governments.

Stakes are high for both sides. The 1.5-cent-per-ounce tax is to fund Mayor Kenney's pre-K program and community schools, and help pay for a rebuilding of parks and recreation centers citywide. While the tax is in litigation, the growth of those programs has been largely halted.

For retailers reporting losses and the beverage industry, which spent millions challenging the tax before Council passed it in June, a reversal of the lower court's decision would be a huge win.

State law prohibits Philadelphia from enacting taxes on items or transactions the commonwealth already taxes. The beverage tax is levied on distributors who sell and transport beverages to dealers for retail sale.

Attorney Chip Becker of Kline & Specter, representing the appellants, argued that the beverage tax is in effect a double tax on consumers because the cost is passed  to them at the register, where they also pay sales tax. He said the city is simply shifting the tax up the distribution chain to make it appear different.

"The city has sent the tax collector a block up the street," Becker argued before the panel, adding that "fundamentally, it's a tax on the same thing."

Judge Joseph M. Cosgrove interjected, "That happens with every tax. It's always going to be passed on to the consumer."

Becker said that economic reality served to underscore his argument that the tax is hitting the same object twice. He said the panel must look at the actual operation of the tax beyond the wording of the ordinance.

The city has argued that distribution is its own untaxed business, and in a line of questioning from Judge Michael H. Wojcik, Becker conceded that the state does not tax the distribution of sweetened beverages.

"You're admitting, I think, that they're not" taxing distribution, Wojcik said.

The panel asked tough questions on both sides.

Mark Aronchick, an attorney representing the city, presented his argument second and asked the panel to make its decision based on a "precise textual analysis" of the ordinance and the tax.

Judge Anne E. Covey asked whether taxing the act of putting something up for sale was all that different from taxing the object itself. What, Covey asked, would stop the city from taxing distribution of all toys or vegetables that are going to be sold in Philadelphia?

"Isn't this just a tax on a tax?" she asked as Shanin Specter, an attorney for the challengers, nodded at the appellant's table.

"Distribution is its own business, and transactions are not immune  to taxation," Aronchick said, adding that fear often accompanies new tax proposals. "The industry always runs in and it's always 'the sky is going to fall,' but  somehow the sun rises and we move forward."

Aronchick argued the city and legislature have the responsibility to determine whether any potential copycat taxes should go into effect, not the courts. "The courts have a different task," he said.

"We understand our task," Covey responded.

The panel gave no indication of when it would make its decision.

"This is a very interesting case," President Judge Mary Hannah Leavitt said at the hearing's end. "A very difficult case and very well argued."

Attorneys from both sides said they were confident in their presentations.

"I thought the court was very attentive, I thought they asked very good questions, I thought they did a good job of exposing some of the weaker arguments of the city... and I'm confident that they'll do their best to reach a just result." Specter said.

He said the case is about the city's overstepping its power, not the power of the beverage industry.

"The argument of the city seemed to focus more on the economic power of the soda industry, which is a political argument, not a legal argument," Specter said.

Aronchick, for his part, said he thought his side successfully argued the tax was within the authority of the city.

"I thought all the issues were aired out pretty thoroughly," he said. "I feel very good about our presentation, and I feel very good about our position."