Soda Taxes and the First Amendment

I am passionate about free speech and strangely fascinated by tax policy. These interests do not usually overlap, but the US Supreme Court’s ruling in Expressions Hair Design v. Schneiderman addresses government’s ability to dictate to businesses how they may describe prices and fees, and it may have implications for the upcoming Cook County, Illinois, sweetened beverage tax.

New York allows businesses to charge different prices for paying by cash or credit card but regulates the way businesses may communicate the credit card fee. It is OK to say that the price is $10 with a 30 cent or 3% discount for paying by cash, but it is against the law to say that the price is $9.70 plus a 30 cent or 3% credit card surcharge. The case has bounced around a bit and the lower courts have disagreed whether this is a regulation of conduct or speech. The Supreme Court found that the New York law regulates constitutionally protected speech and must therefore survive heightened scrutiny. The case has been remanded to the New York Court of Appeals so it can analyze the law as a limit on speech.

This case examines credit card fees that at least some businesses would like to visibly pass through. There are many reasons businesses might want to add the surcharge to a lower list price rather than deduct it from a higher one: The business might not want to raise prices for all customers to avoid having to eat the credit card fees of those who choose that method of payment; some businesses want customers to know how much the credit card companies charge; others might be using psychology to better position themselves against competitors; or maybe there is some other reason. In any case, the government is not telling a business how much to charge (which would be regulating conduct, and therefore not protected under the First Amendment), but rather is telling businesses how they may or may not describe their prices, which is speech. While this case involves sales price + fees, the same analysis should apply to sales price + taxes because the underlying issue is that the government is regulating how businesses express their prices.

Soda taxes are the new fad and different localities have different rules (or sometimes none) regarding how businesses may pass these taxes on to their customers. (Anyone who thinks additional costs to a business are not passed through at all does not understand basic economics.) Cook County will be imposing a penny per ounce tax on sweetened beverages starting July 1. The tax must be included in the sales price and may not be added to the sales price. Sellers may, if they choose, include a breakdown of the sales price that lists the tax and other price components of the price, but they may not list the item price and then add tax, like they would with sales tax. Sellers may also indicate that the tax is included in the price without stating how much of the sales price represents the tax.

On one hand, who cares? Prices are going up and everyone knows it’s because of the tax. Aside from the conceptual free speech issue that arises when government tells business what a selling price must or must not include, though, there are real economic costs here. Franchise royalties are usually calculated as a percentage of gross sales, excluding taxes. If Cook County is forcing restaurants to raise their selling price by 20 cents a bottle but demanding that the restaurants hand over the 20 cents, restaurants will owe royalties on money that was never theirs. This is a huge hit for businesses with tight margins.

This will eventually play out in two completely separate arenas. The New York courts will analyze the state law to determine whether it passes muster. If they decide that the credit card fee law is acceptable even though it regulates speech, the case could return to the Supreme Court. If the state court finds that the law fails as a speech law that may be the end of it. As far as the Cook County sweetened beverage tax, businesses have expressed their dismay at the requirement that they include the tax in the sales price. With any luck, the county will modify the requirement, allowing them to add the soda tax to the invoice the same way other taxes are separately stated. If not, maybe the First Amendment will provide relief to Cook County businesses.

Stay tuned…


Connie Eisenberg

All stories by: Connie Eisenberg

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