Reed Smith Client Alerts

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On July 14, 2009, Gov. Pat Quinn (D) signed into law amendments to the Illinois sales and use tax laws1 that, among other changes, incorporate the definitions of "candy" and "soft drinks" from the Streamlined Sales and Use Tax Agreement (SSUTA) into Illinois' sales and use tax laws, effective Aug. 1, 2009. These amendments, by themselves, are insufficient to bring the Illinois sales and use tax laws into substantial compliance with the SSUTA. However, the amendments will result in a five-fold tax rate difference between products that are classified as "candy" and "soft drinks" under the SSUTA definitions, and other products that would commonly be understood to be "candy" and "soft drinks" that will fall outside of the new definitions. This rate differential may be subject to challenge under the Uniformity Clause of the Illinois Constitution.

New 'Candy' and 'Soft drink' Carve-Outs

Under the amendments to the Illinois sales and use tax laws, Illinois will adopt SSUTA-based definitions for "candy" and "soft drink." These changes will have the effect of placing certain items previously subject to the 1 percent sales and use tax rate for "food" for human consumption to be consumed off the premises where sold, into new SSUTA-based "candy" and "soft drink" categories that are to be taxed at the full standard 6.25 percent sales and use tax rate.

The new definition of "candy" includes "a preparation of sugar, honey, or other natural or artificial sweeteners in combination with chocolate, fruits, nuts or other ingredients or flavorings," whether in bars, drops, or pieces, except if such a preparation "contains flour or requires refrigeration." The new definition of "soft drinks" includes "non-alcoholic beverages that contain natural or artificial sweeteners," except if such beverages "contain milk or milk-products, soy, rice, or similar milk substitutes, or greater than 50% of vegetable or fruit juice by volume."

Note that neither definition makes a distinction between products sold in single-serving packaging and in-bulk packaging. Thus, in-bulk preparations may fall into the high-rate candy or soft-drink classifications, even though they are purchased as ingredients for products that would, if resold or purchased in prepared form, fall within the low-rate food definition.

City of Chicago Impact

The City of Chicago imposes an additional 3 percent sales tax on soft drinks. The Chicago tax cross-references the Illinois sales tax definition of a "soft drink." As a consequence, the adoption of the SSUTA "soft drink" definition will also impact which products are subject to the Chicago tax.

State Uniformity Requirements

The Illinois Constitution includes a Uniformity Clause that requires that, "In any law classifying the subjects or objects of non-property taxes or fees, the classes shall be reasonable and the subjects and objects within each class shall be taxed uniformly."2 To survive scrutiny under this Uniformity Clause, a classification must be based on a "real and substantial difference" between those objects taxed and those objects not taxed, and the classification must bear some reasonable relationship to the object of the legislation or to public policy.

The party challenging a tax classification under Illinois' Uniformity Clause need not negate every conceivable basis that might support the classification. Once the plaintiff establishes a good-faith uniformity challenge, the taxing body must produce a justification for the classification, and it then becomes the plaintiff's burden to persuade the court that the justification is insufficient, either as a matter of law or as unsupported by the facts.3 For example, a classification under Illinois' liquor laws, which based the rate of tax on alcoholic beverages on the type of alcohol in a beverage (i.e., distilled or fermented), was successfully challenged under the Illinois Uniformity Clause by a distributor of beverages that included distilled alcohol. In that case, the Illinois Supreme Court held that the classification based on the type of alcohol was unreasonable and illogical, because both types of alcohol (wine and spirits) engendered similar ills that compelled regulation, but did not justify unequal taxation.4

Classifications can run afoul of the Illinois Uniformity Clause for being either over- or under-inclusive.5 Thus, deviations from the common meaning of statutory terms are ripe for scrutiny under the Uniformity Clause, if the deviations result in two persons or items commonly viewed as part of the same class receiving different tax treatment.6

The new "candy" and "soft drink" definitions would appear ripe for challenge under Illinois' Uniformity Clause, since the definitions exclude products that most people would commonly think of as candy or soft drinks, based on factors, such as the presence of flour or milk, that would appear to be unreasonable and illogical.

Confusing Application

The Department of Revenue issued an information bulletin (No. FY 2010-01) advising retailers that they "must check the ingredients label or package" to determine the proper classification of products under the new "candy" and "soft drink" definitions. For example, the bulletin provides that "if an item contains flour or requires refrigeration, it remains taxed as food (low rate)," but that "if an item contains sugar, it is taxed as general merchandise (high rate)." This guidance is simple enough, but perhaps misleading. In fact, sugar may be an ingredient in a product that is classified as food taxed at the low-rate, as well as an ingredient in a product classified as "candy" under the new definition. If an item contains both flour and sugar, or contains sugar but no flour and is required to be refrigerated, then it is "food" taxed at the low rate.

The examples in the bulletin raise further issues. The bulletin provides that "candy" will include, but not be limited to, "yogurt or chocolate covered fruits or nuts," as well as "snack mixes containing yogurt or chocolate." However, among the items listed in the bulletin as "food," because of the flour content, are "yogurt covered pretzels." The bulletin also classifies as "food" "plain dried fruits, and "nuts with no added sweeteners." Thus, it appears that in the Department's view, products that include "flour" are "food" no matter how corrupted with sugar the products may be, whereas a small amount of sugar may be sufficient to convert fruits and nuts from the "food" to the "candy" category. By the same token, although "milk" will suffice to keep a beverage in the food category and outside the "soft drink" category, "yogurt" (which is made from milk, by most accounts) will not suffice, by itself, to keep an item out of the "candy" category, even if it is coating fruit or nuts.

Potential Consequences

The immediate effect of the new definitions will be to force manufacturers to study the composition of their products and those of their competitors, to determine the market impact of the new Illinois definitions. At the same time, retailers will have to become experts in the content of the items they sell to determine which tax rate applies.

A challenge to the new definitions based on the Illinois Uniformity Clause seems unavoidable, either in defense to an audit liability or in a consumer class action. Some retailers will probably face suit for simply misclassifying products as either "candy" or "soft drinks," resulting in an over-collection of tax. Whatever happens, the Illinois courts are probably going to become more familiar with the ingredients lists for various food and beverage items than they ever imagined.


  1. Public Act 96-0034.
  2. Ill. Const. 1970, Art. IX, ยง 2.
  3. Empress Casino Joliet Corp. v. Giannoulias, 231 Ill. 2d 62, 896 N.E.2d 277 (2008).
  4. Federated Distributors, Inc. v. Johnson, 125 Ill. 2d 1, 530 N.E.2d 501 (1988).
  5. Rose v. Pucinski, 321 Ill. App. 3d 92, 746 N.E.2d 800 (2001).
  6. Northwestern University v. City of Evanston, 221 Ill. App. 3d 893, 582 N.E.2d 1251 (1991).