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It is no secret that states generate high amounts of tax revenue from excise tax. For public policy and political reason, alcohol and tobacco seem ripe for state governments to extort money from its citizens. As a result of high tax rates, businesses that buy and sell large quantities of alcohol and tobacco products find it worthwhile to fight rogue state agencies, such as the various Departments that regulate alcohol and tobacco tax. In a recent Louisiana case, McLane lost against the Department of Revenue in its challenge of the state’s tobacco tax.

Like many states, Louisiana levies a 20% excise tax on the distribution of smokeless tobacco in its state. Louisiana takes the position that the first person to distribute tobacco in Louisiana is liable for the tobacco tax. Specifically, the Louisiana law says that tax is due on 20% of the “invoice price” — an “invoice price” being the “manufacturer’s net invoiced price as invoiced to the tobacco dealer by the manufacturer.” Clear enough? In this particular case, McLane purchased its smokeless tobacco from US Smokeless Tobacco Brands, which is a subsidiary of UST Manufacturing. McLane then sells its tobacco to customers in Louisiana.

At its core, McLane had a simple and straightforward argument that it should not be liable for the tax. McLane argued that it was not a manufacturer so how could Louisiana tax them at the “manufacturers net invoice” price because it buy tobacco from UST Brands, which is not a manufacturer. Even if it was liable for the tax shouldn’t the tax be at the invoice price charged from the Manufacturer to its sales arm?

The appellate court in Louisiana didn’t think so. It held that the statute “is clear and unambiguous.” Therefore, McLane owes tax on the price it paid to UST Brands.
McLane also made a more technical legal argument by stating that the taxing structure violates the dormant Commerce Clause. McLane alleged that the tobacco tax at issue discriminated against interstate commerce (3rd prong of Complete Auto). This argument was also a loser for them in Colorado, and the Louisiana Court agreed with the Colorado analysis. Therefore, McLane lost on both grounds.

It is unclear from the record, and I would be interested to see if shipping charges were part of the “invoiced price.” Making an argument to exclude shipping from the taxable base has been successful in some states. For example, in Florida, under Micjo, only the tobacco charge itself is subject to the tobacco tax. I applaud McLane for its continued fight into this seldom disputed area of the law.

About the author: Mr. Donnini is a multi-state sales and use tax attorney and an associate in the law firm Moffa, Gainor, & Sutton, PA, based in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini is currently pursuing his LL.M. in Taxation at NYU. If you have any questions please do not hesitate to contact him via email or phone at 954-642-9390.

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