Taxation: Preemption; Sterling Act
Williams, et al. v. City of Phila., 164 A.3d 576 (Pa. Cmwlth. 2017), allocatur granted January 30, 2018, appeal dockets 2 EAP 2018, 3 EAP 2018
The Supreme Court granted allocatur to review Commonwealth Court’s conclusion that Philadelphia was empowered to enact the Philadelphia Beverage Tax (PBT) under the Sterling Act and that the City’s authority to do so was neither explicitly nor impliedly preempted by Commonwealth statutes such as the Tax Code and the Local Tax Reform Act. Judge Wojcik wrote the majority opinion for an en banc panel and was joined by President Judge Leavitt and Judges Simpson, Hearthway and Cosgrove. Judge Covey dissented and was joined by Judge Cohn Jubelirer.
The Commonwealth Court majority summarized the PBT and its enactment as follows:
In June 2016, the City enacted Ordinance No. 160176. In Section 1, the City amended the Philadelphia Code, imposing the PBT effective January 1, 2017, to be paid quarterly. Phila. Code §19-4103(1); §19-4106(1). The PBT applies broadly to “sugar-sweetened beverages,” which are defined as “[a]ny nonalcoholic beverage that lists as an ingredient” either “any form of caloric sugarbased sweetener” or “any form of artificial sugar substitute,” and “[a]ny nonalcoholic syrup or other concentrate that is intended to be used in the preparation of a beverage and that lists” either of the foregoing sweeteners as an ingredient. Phila. Code §19-4101(3)(a), (b). The PBT provides the following as examples of “sugar-sweetened beverages”: “soda; non-100% fruit drinks; sports drinks; flavored water; energy drinks; pre-sweetened coffee or tea; and non-alcoholic beverages intended to be mixed into an alcoholic drink.” Phila. Code §194101(3)(d). The PBT specifically excludes: (1) baby formula; (2) “medical food” as defined under the Orphan Drug Act; (3) any product that is milk by more than 50% of volume; (4) any product that is fresh fruit, vegetable, or a combination more than 50% of volume; (5) unsweetened drinks to which sweetener can be added at the point of sale by the purchaser or seller; and (6) any syrup or other concentrate that the purchaser combines with other ingredients to create a beverage. Phila. Code §19-4101(3)(c).
The PBT defines “dealer” as “[a]ny person engaged in the business of selling sugar-sweetened beverages for retail sale within the City” and defines “distributor” as “[a]ny person who supplies sugar-sweetened beverages to a dealer.” Phila. Code §19-4101(1), (2). The PBT states that “[n]o dealer may sell at retail, or hold out or display for sale at retail any sugar-sweetened beverage . . . unless . . . [t]he sugar-sweetened beverage was acquired by the dealer from a registered distributor; and . . . [t]he dealer has complied with the notification requirements . . . and received confirmation from the registered distributor of such notification, as well as confirmation that the distributor is a registered distributor . . . .” Phila. Code §19-4102(1).
The PBT imposes a 1.5ȼ per fluid ounce tax, generally payable by a distributor, “upon each of the following: the supply of any sugar-sweetened beverage to a dealer; the acquisition of any sugar-sweetened beverage by a dealer; the delivery to a dealer in the City of any sugar-sweetened beverage; and the transport of any sugar-sweetened beverage into the City by a dealer.” Phila. Code §19-4103(1), (2)(a). “The tax is imposed only when the supply, acquisition, delivery or transport is for the purpose of the dealer’s holding out for retail sale within the City the sugar-sweetened beverage or any beverage produced therefrom.” Phila. Code §19-4103(1). The PBT is also imposed upon “the per ounce of syrup or other concentrate that yields [1.5ȼ] per fluid ounce on the resulting beverage, prepared to the manufacturer’s specifications.” Phila. Code §19-4103(2)(b).
“The tax shall be paid to the City by the registered distributor; and the dealer shall not be liable to the City for payment of the tax; so long as the registered distributor has received from the dealer notification . . . that the recipient is a dealer.” Phila. Code §19-4105(1). However, “a dealer who fails to provide the notification [of dealer status]; and a dealer who sells at retail, or holds out or displays for sale at retail, any sugar-sweetened beverage in violation of §194102(1), shall be liable to the City for payment of any tax owing under this Chapter . . . .” Phila. Code §19-4105(2).
Moreover, “[w]here a dealer is also a registered distributor, no additional tax shall be owing on the supply of any sugar-sweetened beverage by such dealer/distributor to another dealer if the tax already has been imposed on the supply or delivery of the beverage to the dealer/distributor or the acquisition of the beverage by the dealer/distributor.” Phila. Code §19-4105(3). Nevertheless, “[i]n the event that a court of competent jurisdiction rules in a decision from which no further appeal lies that any portion of this Chapter cannot be applied to a distributor . . . then any dealer that holds out for retail sale in the City sugarsweetened beverages . . . shall be liable to the City for the tax on those sugarsweetened beverages.” Phila. Code §19-4105(4).
The Ordinance further provides that “a violation of §19-4102(1) (sale of product purchased from other than a registered distributor or without proper notification to a registered distributor) shall constitute a Class II Offense . . . and each separate sale, transaction or delivery shall constitute a separate offense,” but that “the Department may grant a full or partial waiver to a dealer from the provisions of §19-4102(1)” “[u]pon a showing of extraordinary circumstances, where distribution channels would make purchase of sugar-sweetened beverage from a registered distributor substantially impracticable . . . .” Phila. Code §§194107(1), 19-4108(1).
Slip op. at 2-5 (footnotes omitted).
In September 2016, Lora Jean Williams, a number of Philadelphia retail and wholesale establishments, and the American, Pennsylvania and Philadelphia Beverage Associations as well as the Pennsylvania Food Merchants Association (Objectors), filed a complaint in Philadelphia Common Pleas Court seeking declaratory and injunctive relief. The City and its Revenue Commissioner filed preliminary objections. The court sustained the preliminary objections and dismissed Objectors’ complaint. Objectors appealed. See Slip op. at 5-12.
The Commonwealth Court majority addressed the merits of Objectors’ appeal in four sections. In the first, the majority addressed Objectors’ claim that common pleas erred when it held that the PBT is expressly authorized by the Sterling Act and erred in concluding that it is not expressly or impliedly preempted by state law. The Supreme Court’s allocatur grant squarely implicates this claim. We therefore quote at some length the Commonwealth Court majority’s reasoning rejecting the Objectors’ Sterling Act/preemption issue, which will now be reviewed by the Supreme Court:
. . . . Objectors assert that the incidence of the PBT is impermissibly duplicative of the Sales Tax imposed under the Tax Code so it is not authorized under the Sterling Act. Objectors also contend that the PBT is preempted by the Tax Code because it subverts the exception in Section 201(k) relating to the resale of items at retail.
As the Pennsylvania Supreme Court has explained:
The matter of preemption is rooted in the relationship between the constitutional provisions vesting the legislative power of the Commonwealth in the General Assembly, Article II, Section 1, and providing for local government, Article IX, Section 1. In providing for the general welfare of the Commonwealth’s citizens, the General Assembly may choose to leave a subject open to control by local governmental bodies, it may enact laws of statewide application that simultaneously allow for local regulation, or local ordinances may be prohibited entirely.
There is generally no difficulty of application where a statute explicitly removes a given subject from local control. Similarly, where some local regulation is permitted its outer bounds can usually be clearly determined; municipal ordinances are valid if they are not contradictory to or inconsistent with the statutory law. In such situations any questions are readily resolved because, almost by definition, the intention of the General Assembly is plain. Difficulties arise only when the legislative intent is not explicit but must be inferred.
City of Philadelphia v. Clement & Muller, Inc., 715 A.2d 397, 398 (Pa. 1998).
As the Court further explicated:
In Department of Licenses and Inspections, Board of License and Inspection Review v. Weber, [147 A.2d 326 (Pa. 1959)], this Court explained two of the three closely related forms of preemption as follows:
Of course, it is obvious that where a statute specifically declares it has planted the flag of preemption in a field, all ordinances on the subject die away as if they did not exist. It is also apparent that, even if the statute is silent on supersession, but proclaims a course of regulation and control which brooks no municipal intervention, all ordinances touching the topic of exclusive control fade away into the limbo of ‘innocuous desuetude.’
Id. at 327. In addition to those two forms of preemption, respectively “express” and “field preemption,” there is also a third, “conflict preemption,” which acts to preempt any local law that contradicts or contravenes state law. See Mars Emergency Med. Servs. v. Township of Adams, [740 A.2d 193, 195 (Pa. 1999)] (citing, inter alia, W. Pennsylvania Rest. Ass’n v. Pittsburgh, [77 A.2d 616, 619-20 (Pa. 1951)]).
Nutter v. Dougherty, 921 A.2d 44 (Pa. Cmwlth.), aff’d, 938 A.2d 401, 406 (Pa. 2007).
As stated above, Section 1(a) of the Sterling Act empowers the City “to levy, assess and collect . . . such taxes on . . . transactions, . . . privileges, subjects and personal property . . . as it shall determine except that [it] shall not have authority to levy, assess and collect . . . any tax on a privilege, transaction, subject . . . or on personal property, which is now or may hereafter become subject to a State tax . . . .” 53 P.S. §15971. Thus, “[u]nder the Sterling Act . . . the city has broad powers to levy taxes for revenue purposes.” Blauner’s v. City of Philadelphia, 198 A. 889, 891 (Pa. 1938). Nevertheless, the above-cited provision “was intended to prevent double taxation of the same thing; in other words, the city was instructed that it could not tax subjects taxed by the state. . . . If, therefore, the tax proposed to be collected pursuant to the [Sterling Act] results in such double taxation, it is unauthorized and must be restrained.” Murray v. City of Philadelphia, 71 A.2d 280, 284 (Pa. 1950).
In Pocono Downs, Inc. v. Catasauqua Area School District, 669 A.2d 500, 502 (Pa. Cmwlth. 1996), quoting Commonwealth v. National Biscuit Co., 136 A.2d 821, 825-26 (Pa. 1957), appeal dismissed, 357 U.S. 571 (1958), this Court stated:
In determining whether a tax duplicates another tax and results in double taxation prohibited to local taxing authorities, the operation or incidence of the two taxes is controlling as against mere differences in terminology from time to time employed in describing taxes in various cases. The incidence of a tax embraces the subject matter thereof and, more important, the measure of the tax, i.e., the base or yardstick by which the tax is applied. If these elements inherent in every tax are kept in mind, the incidence of the two taxes may or may not be duplicative. [(Emphasis in original).]
However, a tax’s “operation or incidence” refers to the substantive text of the ordinance and does not concern the post-tax economic actions of private actors in response to the imposition of the PBT. See, e.g., Gurley v. Rhoden, 421 U.S. 200, 204 (1975) (citations omitted) (“[T]he decision as to where the legal incidence of either tax falls is not determined by the fact that petitioner, by increasing his pump prices in the amounts of the taxes, shifted the economic burden of the taxes from himself to the purchaser-consumer. The Court has laid to rest doubts on that score . . . at least under taxing schemes, as here, where neither statute required petitioner to pass the tax on to the purchaser-consumer.”).
As noted above, under Sections 19-4102(1) and 19-4105(1) of the Philadelphia Code, the PBT is paid by a distributor and a dealer is not liable so long as the dealer notifies the distributor, receives confirmation of that notification, and receives notification that the distributor is a registered distributor.16 Section 19-4105 outlines the circumstances under which a dealer may assume a distributor’s PBT liability, but there is no provision in the Philadelphia Code that ever shifts liability for the PBT to the ultimate purchaser at retail. Likewise, Example 2 of the Regulations, at page 19, explains that “[t]he tax is not a sales tax; the tax is imposed upon the supply of the [sugar-sweetened beverage] to the Dealer or the acquisition of the [sugar-sweetened beverage] by the Dealer, not upon the sale of [the sugar-sweetened beverage] by the Dealer to its customers.” The subject matter of the tax, the non-retail distribution of sugar-sweetened beverages for sale at retail in the City, and the measure of the tax, per ounce of sugarsweetened beverage, are distinct from the Sales Tax imposed under the Tax Code upon the retail sale of the sugar-sweetened beverage to the ultimate purchaser. Thus, the dissent’s claim that the PBT is duplicative of the Sales Tax is incorrect.
Likewise, Objectors’ claim that the PBT may be refunded if the sugarsweetened beverage is not ultimately sold at retail is not correct. While Section 19-4107(1) states that “the Department may grant a full or partial waiver to a dealer from the provisions of §19-4102(1)” “[u]pon a showing of extraordinary circumstances, where distribution channels would make purchase of sugarsweetened beverage from a registered distributor substantially impracticable . . . ,” there is no indication that the non-sale of a sugar-sweetened beverage is such an “extraordinary circumstance” warranting a refund of the PBT. Section 501(f) of the Regulations states:
When a Taxpayer discovers an overpayment of tax, the Taxpayer shall file an amended return to claim a credit or, if the Taxpayer is no longer required to file a [P]BT return, the Taxpayer will be entitled to claim a refund of the overpaid [P]BT. A credit or refund may be claimed only if the later filed [sugar-sweetened beverage] return or refund claim is filed by the Taxpayer no later than three (3) years after the later of the date of payment of the overpaid [P]BT or the due date for such payment.
As outlined above, the PBT taxes non-retail distribution transactions and not retail sales to a consumer. As a result, the PBT does not violate the duplicative-tax prohibition in the Sterling Act or encroach upon a field preempted by the Sales Tax because the taxes do not share the same incidence and merely have related subjects. As the Supreme Court has explained, “in several cases the United States Supreme Court has upheld taxes on the use of personal property as a form of excise tax.” John Wanamaker v. School District of Philadelphia, 274 A.2d 524, 526 (Pa. 1971) (citations omitted). Based on this precedent, the Court held that the City’s business use and occupancy tax imposed on the use or occupancy of real estate for commercial or industrial activity was not an impermissible direct tax on the real estate because the tax liability flowed from the voluntary election by the owner to use the real property in a certain manner. Id. at 526-28.
In Blauner’s, Inc., 198 A. at 891, the Supreme Court held that a City ordinance imposing a sales tax did not “invade the field pre-empted by the Commonwealth” under a capital stock tax because “the ordinance taxes neither the same subject nor the same person as the State taxes referred to.” The Court also held that the ordinance did not impermissibly duplicate the state net income tax:
We have held an income tax to be a property tax, and the corporate net income tax specifically to be such[.] The sales tax and the net income tax vary widely. The former is an excise tax on sales and services; the latter is a property tax upon income from any source. The former is a tax on “transactions,” whereas the latter is a tax on “property.” The persons taxed are wholly different. The sales tax is imposed upon the purchaser or consumer; the net income tax is on the corporation receiving the income.
Id. (citations omitted).
The Court also held that the ordinance did not invade the field preempted by the state mercantile license tax, stating:
The state mercantile license tax and the city sales tax are similar in that they are both excises, but the similarity goes no further. The city tax is a levy on sales, the state tax is a levy imposed for the privilege of conducting a particular kind of business, albeit the amount of the tax is measured by gross sales. The sales tax is imposed upon the transaction whereby the property is acquired; the mercantile tax is an imposition for the privilege of doing business.
Id. at 892. The Court concluded “that the city sales tax ordinance and the Mercantile License Tax Act do not tax the same subject, nor the same person, and that the field covered by the ordinance had not been preempted by the mercantile license tax.” Id. Correspondingly, in this case, the PBT and the Sales Tax do not tax the same subject, or the same person, and the field covered by the PBT has not been preempted by the Sales Tax.
Finally, Objectors’ argument that the exception of “transfer[s] . . . for the purpose of resale” from the application of the Sales Tax in Section 201(k) of the Tax Code somehow limits the City’s authority to enact the PBT under the Sterling Act is unpersuasive. In Provident Mutual Life Insurance Company v. Tax Review Board, 750 A.2d 942 (Pa. Cmwlth. 2000), Provident Life Insurance Company (Provident) merged with Covenant Life Insurance Company (Covenant) which held mortgages on a number of properties in the City. After Provident subsequently acquired the properties by deed in lieu of foreclosure, the City assessed a realty transfer tax pursuant to Section 19-4103(1) of the Philadelphia Code. Provident sought a refund of the tax, asserting that the transfers were exempt under Section 19-4105(14) of the Philadelphia Code, but the City’s Tax Review Board found that the tax exclusion did not survive Provident’s merger with Covenant and the exclusion was not available to Provident. On appeal, the trial court affirmed.
On further appeal to this Court, Provident argued, inter alia, that the City did not have the authority to impose the tax under Section 1301(b) of the Local Tax Reform Act or the Sterling Act because the transfer of realty as in that case is specifically exempt from the state real estate transfer tax under Section 1102-C.3(16) of the Tax Code. We rejected Provident’s arguments, explaining:
The [trial] court addressed the City’s authority to tax under the Sterling Act and did not find Provident’s argument persuasive. The [trial] court noted that this Court previously addressed this issue. In Equitable Assurance Soc. v. Murphy, [621 A.2d 1078 (Pa. Cmwlth. 1993)], this Court held that the Sterling Act authorized the City to tax a transfer of stock in a real estate corporation when the real estate owned by the corporation was located within the City where the City had a real estate transfer tax in place. Although the present situation is not identical, it is similar insofar as the City has enacted a real estate transfer tax and has taxed a transfer of real estate within the City.
Further, we cannot agree that because a particular transaction is mentioned but not specifically designated as taxable in the [Tax Code] that this means the City has no authority to tax the transaction under Section 1301(b)(2) of the [Local Tax Reform] Act. Section 1301(b)(2) provides that the City may impose a local real estate transfer tax upon additional classes or types of transactions if the real estate transfer tax is imposed pursuant to the Sterling Act. Section 1 of the Sterling Act provides that the City may tax transactions within the City if that transaction is not “subject to a State tax or license fee.” 53 P.S. §15971(a).
Here, this transaction is not subject to a state tax or license fee because this transaction, the transfer of property from a mortgagor to the holder of the mortgage through a deed in lieu of foreclosure, is specifically exempt from the state realty transfer tax as contained in the [Tax Code] as enacted by the General Assembly. Therefore, because this transaction is not subject to a state tax, the City may levy the Tax on this class of transaction, the conveyance of property through a deed in lieu of foreclosure, pursuant to the Sterling Act and in compliance with Section 1301(b)(2) of the Local Tax Reform Act. Further, the General Assembly did not explicitly state that a Tax on this transaction is prohibited. To the contrary, the General Assembly granted broad authority to the City to tax under the Local Tax Reform Act and the Sterling Act. The [trial] court properly rejected the proposition that the City exceeded its authority by assessing the Tax.
Provident Mutual Life, 750 A.2d at 946. Based on the foregoing, it is clear that the exception contained in Section 201(k) of the Tax Code does not limit the City’s authority to enact the PBT under the Sterling Act.
Slip op. at 12-26 (footnotes omitted).
On that basis, the majority concluded that the trial court did not err in determining that the City was empowered to enact the PBT under the Sterling Act and that Objectors’ claims that the City’s authority in this regard is explicitly or impliedly preempted by Commonwealth statutes were without merit.
Objectors other claims before Commonwealth Court were that the PBT was implicitly preempted by the federal Food Stamp Act, its regulations, and Section 204(46) of the Tax Code, which preclude the imposition of a tax on items purchased at retail with food stamps; that the PBT violated the Uniformity Clause of the Pennsylvania Constitution; and, that the trial court erred in denying their request for a special injunction. The majority rejected each of these arguments in turn and affirmed the trial court. See Slip op. at 27-30; 30-33; 33-34. As noted, these claims will not be before the Supreme Court where the allocatur grant is limited to Sterling Act issues.
As to the Sterling Act issues, Judge Covey in her dissent “would hold that the Commonwealth has preempted the field through the Sales Tax, and the PBT is invalid under the Sterling Act.” Slip op. at AEC 8. In addition, Judge Covey would hold that as “this matter is an issue of first impression and the obvious doubt as demonstrated by the numerous positions presented, the determination of whether the PBT is invalid under the Sterling Act is not ‘free and clear from doubt,’” Id. and therefore would overrule the preliminary objections to Counts I and II of Objectors’ Complaint.
The Supreme Court on January 30, 2018, granted Objectors’ Petition for Allowance of Appeal limited to the issue set forth below, and denied allocatur as to the remaining issue. The issue, as stated by Objectors, is:
Does the City’s Tax violate the Sterling Act, 53 P.S. § 15971, which prohibits Philadelphia from imposing a tax on a transaction or subject that the Commonwealth already taxes?
Justice Dougherty did not participate in the consideration or decision of this matter.