Already facing a litany of potential litigation threats, retailers in Cook County could soon need to take steps to minimize a new threat, popping up thanks to what they call Cook County’s poorly written and potentially unlawful “soda tax.”
Next week, a Cook County judge is scheduled to rule on whether a group of grocers and their trade group, the Illinois Retail Merchants Association, can secure an injunction blocking the implementation of the county’s new 1-cent-per-ounce sweetened beverage tax.
Late last week, with just hours to spare before the county could begin collecting the tax on July 1, Cook County Circuit Judge Daniel Kubasiak granted a temporary restraining order, bottling up the county tax enforcement effort, for now. He scheduled a hearing on July 12 to consider whether to more permanently block the tax.
The Cook County Board, at the urging of Cook County Board President Toni Preckwinkle, sought to plug a hole in the county’s annual budget by slapping the special tax on the sale of a variety of sweetened beverages in Chicago and suburban Cook County. The tax would apply particularly to all kinds of soda, including diet soda, as well as sweetened tea and coffee beverages, among a number of other drinks. The tax would apply to those sold in bottles and cans, as well as fountain beverages and other drinks sold in non-pre-measured containers.
Retailers launched a campaign against the tax, asking the county to rescind it, asserting the tax would drive consumers to purchase their drinks out of the county, harming retailers and consumers alike, particularly in the county’s suburbs.
Tanya Triche Dawood, general counsel for IRMA, said their messages to the county to either rescind or rewrite the ordinance to make it more business-friendly fell largely on deaf ears. Instead, the county moved in the days leading up to the tax’s July 1 effective date to tweak the tax collection rules to make them even more confusing and concerning to retailers, said Dawood.
And that, she said, prompted the retailers to ask the court to intervene to block the tax from taking effect, at least until the potential logistical and legal nightmare associated with the collection of the tax could be wound down and addressed.
“We’re looking for it ultimately to be overturned,” said Dawood.
She said IRMA recognizes such a decision could leave the county with budget “challenges,” but she said IRMA and its members hope such a decision could prompt the county to “go back to the drawing board and write it (the sweetened beverage tax ordinance) in such a way that it is lawful.”
In arguing against the ordinance, the retailers have pointed to several troubling aspects of the tax collection rules, including collection requirements which could jeopardize the ability of certain Cook County grocers and other retailers to comply with federal requirements for participation in the Supplemental Nutrition Assistance Program (SNAP), also known as food stamps.
Retailers have also pointed to what Dawood called a very real and looming threat of lawsuits stemming from the county’s complicated soda tax collection rules.
In other places in which such a tax has been or will be applied, such as Philadelphia and Boulder, Colo., the local governments require beverage distributors to pay the tax, forcing them to pass on the cost increases to retailers and ultimately to consumers , in the form of more expensive beverages.
However, in Cook County, it is retailers who are tasked with collecting and remitting the tax to the county.
Under the county’s collection rules – which, Dawood said, have changed twice in June – retailers, and particularly those who sell fountain drinks and other non-pre-measured beverages, could be placed in a situation in which they either make consumers pay more in tax than they should, or in which they don’t charge consumers enough tax.
Either of those options, Dawood said, would leave retailers exposed to lawsuits.
On one hand, retailers could face so-called “qui tam” actions. Under Illinois law, private citizens are allowed to sue, ostensibly on behalf of the state and other governments, to force businesses and others to pay tax they may have miscalculated or intentionally underpaid. Such qui tam plaintiffs then are allowed to receive a cut of whatever price the alleged tax-dodging business is ordered to pay, or which the defendant agrees to pay in a negotiated settlement.
In Cook County and Chicago federal courts, qui tam actions are abundant. One lawyer, attorney Stephen Diamond, for instance, has brought more than 900 such qui tam actions alone, collecting nearly $30 million in settlements in the past 15 years, according to an analysis of public documents in a report published by Bloomberg Business.
Most recently, tax-related qui tam actions have been brought against wine makers who ship products to Illinois consumers. Diamond has also brought qui tam actions against the makers of the popular My Pillow products, failing only because of a recent state appeals court ruling, to collect $600,000 in attorney fees, in addition to his share of the damages ordered against My Pillow.
“We (IRMA) are aware that there are persons and organizations out there who specialize in these kinds of lawsuits,” said Dawood. “We want to be able to collect tax appropriately, and we have to be able to limit our members’ exposure to lawsuits.”
In this particular instance, Dawood said some retailers’ issue may center on the inclusion of ice in a drink. While a consumer may use, for instance, a 20-oz or 32-oz cup to hold their fountain beverages, some portion of the total volume in that cup could be ice, which is not a sweetened beverage and should not be subject to the tax.
The issue becomes further complicated should consumers be allowed to refill the beverages, such as many fast food establishments now allow for dine-in customers.
Yet the county, Dawood said, has not offered any meaningful guidance to retailers concerning how to properly collect the tax on such purchases, potentially leaving retailers exposed to qui tam lawsuits alleging they either charged too much or too little tax.
Similarly, retailers could also face litigation threats from class action lawyers and plaintiffs, who could bring legal actions asserting consumers were charged too much tax or otherwise improperly charged when buying beverages.
In recent months, for instance, Walgreens faced a lawsuit brought by a man who claimed the retail pharmacy chain had improperly charged him and many others a 5-cent tax imposed on the sale of bottled water by the city of Chicago.
A judge dismissed the lawsuit in February, but plaintiff Destin McIntosh has appealed. The appeal remains pending, according to Cook County court records.
Dawood said the costs imposed by the litigation threat, however, would come only on top of the “enormous” expense retailers already are facing simply to comply with the tax collection rules, as they must write and rewrite software code for their registers and other bookkeeping systems to ensure proper collection.
“All of this takes significant time and expense, and the county has simply not given us adequate time to adjust,” she said.