Soda tax snafu – Wacky Tax Wednesday

This post has been updated. It was originally published in September 2015.

In July 2015, Vermont slapped a sales tax on soft drinks in hopes of raising approximately $7 million annually for the state. In the following months and years, sellers struggled to make sense of the tax on “nonalcoholic beverages that contain natural or artificial sweeteners.” According to some retailers, compliance has been a nightmare.

You’d think it would be simple to discern which products are soft drinks (taxable) and which are not (exempt). And for many products, it is simple. Yet a trip down any soda aisle reveals an astonishing array of bottled beverages; to determine whether or not they’re taxable, labels must be read.

For example, tonic water, typically sweetened with corn syrup, is taxable. Seltzer water, which contains no sweetener, is not. Nonalcoholic beer or “near beer” is subject to the tax, as are sugary sports drinks like Gatorade. Less obviously taxable: Pedialyte.

Milking the sales tax exemption

No matter how sugary they are, beverages containing milk or milk products; or soy, rice, or similar milk substitutes are not considered “soft drinks” and therefore are exempt.

Though I’d never call a bottled Starbucks Frappuccino a soft drink, its 32 grams of sugar per 9.5-ounce serving certainly meets my definition of a nonalcoholic beverage containing natural or artificial sweeteners. I’d also judge the Frappuccino taxable because “coffee or tea drinks that contain sweeteners” are listed as taxable on the Vermont Department of Taxes website. However, Frappuccinos contain milk so they’re exempt.

It’s easy to see what all the fuss is about — why one Vermont convenience store owner called this “the most confusing tax policy I have ever come across in all my years in business.” It’s also easy to see how many retailers could improperly apply sales tax to one man’s favored black cherry Schweppes seltzer. After all, other bubbly Schweppes drinks are taxable.

Soda tax compliance challenges

Beverages that are subject to the Vermont soda tax are exempt when purchased with food stamps or through Vermont’s Supplemental Nutrition Assistance Program (SNAP). This is fairly standard.

More confusing is the fact that normally taxable soft drinks are exempt from Vermont sales tax when:

Purchased from a vending machine
Part of a bundled transaction (with a sandwich and chips, for example)
Sold at a restaurant as part of a taxable meal

In these cases, however, Vermont meals and rooms tax applies.

Mistakes seem inevitable. “The Legislature passed a definition that is hard to administer and understand,” observed Jim Harrison, who was president of the Vermont Retail & Grocers Association when the soda tax took effect. “It is very confusing for the consumer and the retailer.”

Fortunately, the Department of Taxes has worked hard to help retailers and consumers understand the tax on soft drinks. Vermont also has the support of the Streamlined Sales Tax Governing Board, as Vermont is a member state and adheres to the organization’s definition of “soft drink.” Harrison urged consumers to “please be patient with your retailers.”

Mary Peterson, who was the Vermont Tax Commissioner in 2015, acknowledged that larger chains with sophisticated point-of-sale and inventory systems probably have an easier time implementing the soft drink tax than mom-and-pop businesses.

Sales tax software can also help businesses comply with the Vermont soft drink tax. Learn more about automating tax compliance.

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.