A controversial tax on sweetened beverages in Chicago is putting the entire state of Illinois at risk for losing millions in federal funding for the Supplemental Nutrition Assistance Program (SNAP, commonly referred to as food stamps), according to a warning sent by the U.S. Department of Agriculture to state regulators.

Federal law prohibits states from collecting taxes on any SNAP-eligible grocery items, but Cook County, IL — which includes all of the city of Chicago — recently began adding a $.01 per ounce tax on most sweetened beverages.

Some retailers are able to automatically remove the soda tax on SNAP beverages, but there are plenty of stores in Cook County that don’t have this ability. The Cook County rules allow for these stores to charge the soda tax so long as they offer SNAP customers a way to get an instant refund in the store.

But Illinois Secretary for Human Services James Dimas says the USDA’s Food & Nutrition Service (FNS) agency has determined that this tax workaround is inadequate.

“It is FNS’s strict interpretation that retailers may not charge the tax to SNAP recipients at any time,” wrote Dimas in a memo [PDF] to the Cook County Board of Commissioners. “[P]roviding an immediate subsequent refund at a customer service desk does not cure the problem or the violation of the law.”

In addition to blasting out letters to all Cook County retailers advising them that this tax-then-refund practice is unacceptable, Dimas said the USDA is threatening to “to suspend administrative funds to the State of Illinois unless corrective action is taken.”

USDA’s FNS provided $86.8 million to Illinois in the last fiscal year, noted Dimas. Cook County now has until Aug. 21 to provide a “Corrective Action Plan” for how it plans to resolve this problem.

In a statement to the AP, a Cook County spokesman indicated the Board did not know until this memo that FNS had any issues with regard to the soda tax. The rep told the AP that the County still believes that it is complying with federal law, but that “We do however recognize that USDA’s powers against the state in this regard are substantial and we will work collaboratively with both the state and USDA to address USDA’s concerns.”

When reached by Consumerist, a rep for USDA provided the following statement:
“USDA is working with the State of Illinois to make sure Cook County and its retailers are operating in accordance with the law. The Food and Nutrition Act prohibits state or local sales tax from being collected on food purchased with SNAP benefits to ensure the purchasing power of SNAP recipients is protected. We are confident that the State, the County, and the retailers are working to remedy this issue to make certain they are all adhering to the law.”

The question of SNAP customers and soda tax has similarly been a concern in Philadelphia, which also launched its own per-ounce tax on sweetened beverages this year.

The Philadelphia tax is charged at the wholesale distributor level, with retailers left to decide for themselves whether to increase the price they charge to consumers. With regard to SNAP, critics of the Philadelphia tax argue that these retail cost increases are effectively guaranteeing that SNAP customers pay the distributors’ tax. Given that SNAP funding comes from taxpayers and is intended to supplement the food-buying power of low-income American’s shopping dollars, tax opponents say Philadelphia is, in effect, shifting federal money into the city tax coffers while reducing the value of SNAP benefits.

However, the USDA rep confirms to Consumerist that FNS has not sent any such warning letter to the Pennsylvania Dept. of Human Services with regard to the Philadelphia tax.

(Updated to include USDA statements and clarification.)

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