Washington bucks national trend, taxes bottled water … again – Wacky Tax Wednesday

Updated 8.10.2017: The tax on bottled water took effect August 1. 

Soda taxes have been all the rage in recent years, both in the United States and abroad. Proponents tout a pair of benefits: The taxes improve consumer health by reducing consumption, and they raise revenue. So, what did Washington lawmakers slip into the biennial budget during June 30’s nail-biting midnight session, as a state government shutdown loomed? A tax on bottled water.

To be fair, the state of Washington already taxes sales of soft drinks. In December 2015, the Washington Department of Revenue published a special notice to help retailers better understand “how to tax soft drinks and other beverages.” It’s not always intuitive.

• Taxed: A bottle of tea or coffee that is sweetened
• Exempt: A bottle of tea or coffee that is sweetened but also contains “milk, milk products, or milk substitutes”

A glance at the beverage aisle of any grocery store reveals just how quickly compliance can become complicated; label reading is often required.

Furthermore, Seattle recently enacted a special local tax on sugar-sweetened beverages that will take effect January 1, 2018. Like many of these taxes, the Seattle soda tax aims “to improve health outcomes.” The ordinance references the rising rates of “diabetes, obesity, and tooth decay” and notes that “communities of color continue to be disproportionately affected.” Revenue raised by the tax will “fund programs that reduce educational disparities facing communities of color.”

In other words, Seattle and Washington are doing their part to dissuade consumption of sugary beverages by taxing them. This provides an excellent opportunity to encourage water consumption. According to the Centers for Disease Control and Prevention (CDC), “Drinking water instead of sugar-sweetened beverages would reduce caloric intake among youth.” The CDC praised a New York City initiative aimed at curtailing “sugared soda consumption by encouraging people to make water their default beverage choice.”

So, why would the Washington Legislature now choose to tax water?

It turns out the legislature has been trying to tax water for more than a decade.

Bottled water was subject to Washington sales and use tax until January 1, 2004, when the tax was dropped so state policy would conform to the Streamlined Sales and Use Tax Agreement (SSUTA). After the SSUTA was amended in 2010 to allow member states to tax bottled water, Washington lawmakers jumped at the opportunity. Starting July 1, 2010, Washington again taxed sales of bottled water — until voters intervened.

Initiative 1107, approved in November 2010, eliminated state and local sales and use tax on bottled water. The initiative also eliminated the state carbonated beverage tax and a sales and use tax on candy and gum. However, retail sales of bottled water, candy, and gum remained subject to tax when sold through a vending machine, or when sold by a business with prepared food sales exceeding 75 percent of their total food sales. See the Department of Revenue for more details.

The most recent elimination of the sales and use tax exemption for bottled water, which the budget highlights dub a loophole closure, is expected to generate $57 million during the 2017-19 budget period.

“Bottled water” is defined as “water that is placed in a safely sealed container or package for human consumption,” as well as water that is “calorie-free and does not contain sweeteners or other additives.” However, bottled water may contain the following:

• Antimicrobial agents
• Fluoride
• Carbonation
• Vitamins, minerals, and electrolytes
• Oxygen
• Preservatives
• Flavors, extract, or essences, but only if derived from a spice or fruit

The definition of bottled water also includes “water that is delivered to the buyer in a reusable container that is not sold with the water.”

The law (House Bill 2163) allows a sales and use tax refund for taxpayers who purchase bottled water with a prescription, and for those whose primary source of drinking water is unsafe.

Retailers in Washington have to keep their heads above water to remain in compliance with sales and use tax laws. As of this writing, it is unclear when the newest tax on bottled water will take effect.

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