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I-1107: Soda tax has its sour note for a low-sugar maker

DRY Soda, which has offices in Pioneer Square, grew out of a quest for a non-alcoholic drink that would be worthy of pairing with fine food. But the low-sugar result got caught in a state revenue fix.

DRY Soda has its offices in Seattle.

DRY Soda has its offices in Seattle. Courtesy of DRY Soda

Sharrelle Klaus, founder of DRY Soda

Sharrelle Klaus, founder of DRY Soda Courtesy of Sharrelle Klaus

Sharelle Klaus is the founder and chief executive of a company called DRY Soda, whose tony headquarters are located on the ground floor of an office building at First Avenue and South Jackson Street. Her neighbors include an art gallery, a fine woodworking shop, the arts organization One Reel, and the Italian restaurant, Il Terrazzo Carmine.

Before getting into the soft drink business, Klaus was a consultant for the accounting firm Price Waterhouse (now PwC), and later an internet entrepreneur who started a web portal for tweens that did not survive the bursting of the internet bubble.

She owes her entry into the beverage industry to her ambition, her ability to analyze the market, and mostly her uterus.

“Really the idea came to me because I enjoy pairing wine with food, but I kept getting pregnant,” Klaus said. “Four times.”

Unable to drink wine, she created a soft drink that she considered worthy of fine food. Five years after mixing a batch of gourmet soda in her home kitchen, her DRY Soda brand of soft drinks is carried in Whole Foods stores all over the country. Sales of DRY are growing at each store, she said, although her company still makes most of its sales (more than 35 percent) in Washington.

Investors have helped expand the operation, which is still very much a homegrown enterprise. Her labels and packaging were designed by Turnstyle, a local Seattle firm. DRY’s bottler is in Portland. Her company employs seven people. It is not yet profitable but Klaus hopes it will be in a few years.

If there is such a thing, Klaus is one of the real faces behind state Initiative 1107, which will be on the Nov. 2 ballot. If passed, the initiative would repeal the state sales tax on candy and the temporary sales tax on bottled water; it would roll back a business and occupation tax on processors of certain kinds of canned food; and it would repeal a temporary excise tax on carbonated beverages, the element of the initiative that has attracted the most attention.

These taxes were instituted earlier this year to ease the state’s budget shortfall, and are estimated to be worth more than $200 million in revenue to the state over the next two years, at a time when it is struggling with a huge deficit.

Supporters of I-1107 consider the taxes poorly defined and characterize them as a precedent for a grocery tax, even though food-related taxes are a very small part of this initiative (the tax in question is less than half of 1 percent) and something that consumers will never see (only the food processors will pay it). Indeed the vast majority of funds (about $14 million) donated to the campaign to pass the initiative have come from the American Beverage Association, a national lobbying group that represents the interests of the soft drink industry. By comparison, the campaign to defeat the proposal received far less than $1 million in donations.

Opponents of I-1107 cast the fight as one between ordinary people and the soda giants like Coke and Pepsi, which have an interest in keeping soda taxes from spreading to other states (as of last year, 33 states had taxes on soda). Soda is a small-margin, high-volume business. Profits per can amount to pennies, making it necessary to sell millions of cans, which the soda industry does.

While the current state tax on bottled water and candy are sales taxes paid by the consumer, the taxes on soda are an excise tax paid by the distributors at the first point of sale. Distributors generally pass along the tax (which averages 2 cents per 12-ounce serving) to the beverage maker.

The rationale for taxes like those on soda, candy, cigarettes, and alcohol, is that they are at best luxuries, and at worst, sins, and therefore should be taxed. Soda, in particular, has been linked to rising levels of obesity, diabetes and heart disease; taxation would presumably curb its use. But the state tax makes no exceptions for sodas that attempt to strike a healthier balance like DRY, which uses small amounts of cane sugar in its drinks. Its sodas are only faintly sweet and contain about 50 calories per 12-ounce serving.


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Comments:

Posted Tue, Oct 12, 9:58 a.m. Inappropriate

I enjoyed seeing this more human face to I-1107. Perhaps the governor would have heard of Dry earlier had she been as big a fan of rhubarb as I am!

This bears repeating: "It is difficult to argue that DRY Soda, a conscientiously and locally produced beverage, or a can of Coke for that matter, are any more of a vice than a box of Oreo cookies or a bottle of apple juice, which are not taxed. Research has indicated that fruit juices are not appreciably healthier than canned soda. Both contain plenty of sugar and empty calories."

Some, of course, would say that Oreos should therefore be taxed as well. (Apple juice will likely remain sacrosanct, given its popularity with children, and the fact that this is, after all, Washington.) In fact, I see this as a more likely outcome.

Wouldn't it make more sense, though, to cut back the subsidies that result in junk food being so much cheaper than healthy, than to tax "sinful" food? It can be a minefield anyway, determining what's a sin. Most agree on things like Coke, much as I love it, but just wait until taxes start appearing to target one particular ethnic cuisine....

Posted Tue, Oct 12, 11:48 a.m. Inappropriate

Do I understand correctly that the tax in question is 2 cents on a bottle of soda costing $1.50? If so, it doesn't seem that this is going to register with the consumer and reduce sales. Perhaps the real concern is that "taxes are being used intelligently", whatever that means.

Posted Tue, Oct 12, 1:04 p.m. Inappropriate

Oh the horrors! An unfairly applied tax. Welcome to Washington State where we tax "sin", ie gasoline, alcohol, tobacco, expensive cars & homes.

I fail to see where even if some percentage of the population stops buying soda that the sky will fall. And bottled water don't get me started. That's the biggest scam foisted on people who have excellent tasting water known to mankind.

GaryP

Posted Tue, Oct 12, 3:19 p.m. Inappropriate

State legislatures fix laws all the time. This is no big deal.

Posted Tue, Oct 12, 5:23 p.m. Inappropriate

The 2 cent soda tax was intended to bolster revenue to support Washington children and families who are falling into poverty in record numbers during the recession. Right now, that $352 million will help pay for health care and education for our kids in the next five years – two intelligent ways to spend money.

If out-of-state soda companies manage to buy this election (at $16 million in contributions and counting), hundreds of millions in state and local services will be lost for families who need it most. Vote for our families and kids. Vote no on 1107!

Posted Wed, Oct 13, 8:32 p.m. Inappropriate

"Soda"? Do you mean the chemical element Na? After reading the article, it seems we're talking about pop here.

dbreneman

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