Articles Posted in Tobacco Tax

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Our firm has been extremely involved with Florida’s wholesale tobacco tax for the past several years. Since Micjo in 2012, the Florida wholesale tobacco tax area has been fraught with seemingly endless litigation. In addition to the Micjo litigation, which focused on whether Florida tax applied to Federal Excise Tax (“FET”), there was another parallel of litigation which centered on a product called a blunt wrap or a cigar wrapper. Florida’s 1stDCA spoke loud and clear on April 6, 2016, by determining that the Wrap product is not subject to Florida tax, which appears to be a giant step towards putting an end towards at least 1 important issue for the industry.
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February 1, 2012 was a day in tobacco tax litigation that should go down as one of the greatest victories in tobacco tax history. On appeal from the Florida Department of Business and Professional Regulation (“DBPR”), Judge Black for the District Court of Appeal of Florida – Second District (“DCA”) stated that the term “wholesale sales price” is based only on the manufacturer’s price of the tobacco product and not the domestic distributor’s invoice price. This seemingly simple statement has now become the source of very successful tobacco tax distributor litigation in Florida and throughout the country. Micjo, Inc. v. DBPR has set the tone for all future tobacco tax litigation.

In a case of first impression, the DCA was called upon to interpret the phrase “wholesale sales price” within the Florida statutes on Other Tobacco Products (“OTP”). See section 210.25(13), Florida Statutes (2009). The facts of the case were far from complicated as Micjo was a tobacco tax distributor that imported and distributed hookah tobacco. Since Micjo was a Florida distributor, it was subject to Florida’s OTP tax. Micjo received its tobacco from domestic distributors and only paid taxes on the actual unit price of the tobacco and not the total invoice price. This is particularly relevant and ultimately the crux of the entire case, because the total invoice price would have included, among other things, federal excise tax and shipping costs. As such, an audit conducted by DBPR concluded that Micjo underpaid Florida OTP by roughly $48,000. Micjo then requested a formal administrative hearing on the calculation of tax.

Not so shockingly, DBPR concluded in its own hearing that it was correct in its audit result. The recommended order stated that “the [wholesale sales price] includes delivery charges and the federal excise taxes. It is all components on the invoice that make up the cost to get the product to the purchaser[;] therefore, all components are subject to be taxed.” Clearly, a different result would have cost DBPR potentially millions of dollars in future tax revenue, so why would it have concluded any other result. After having its exceptions to the recommended order be denied, Micjo filed an appeal for the record books.

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In December 2006, the Colorado Department of Revenue (“DOR”), on its own volition, unilaterally decided to increase their revenue stream by taxing more tobacco products. Taxpayers were given an FYI Notice stating that all products containing any amount of tobacco would be considered “tobacco products” within the meaning of the statute. When that was challenged in Creager Mercantile Company, Inc. v. Colorado Department of Revenue, the DOR issued a final determination that blunt wraps sold by Creager were “tobacco products” within the meaning of the statute despite not having any authority from the legislature to make such a determination. The taxpayer decided to fight back.
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As an avid sports fan and season ticket holder, I have now become more accustomed to seeing fellow fans smoking vapor products–a battery powered pen-like device that heats liquid nicotine into vapor-in the stadium seats. While some may wonder how people can possibly get away with smoking vapor products at stadium seats, or even at restaurant tables, I often ponder about how the vapor products are taxed at the state level. Are vapor products really tobacco products, are they cigarettes, or are they something completely different, and if so, are vapor products taxed at the wholesale level, as a sales tax, or some combination thereof?
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In 2012, a case shook the tax world for Florida’s wholesale tobacco distributors. Specifically, a case called Micjo was decided in favor of tobacco distributors at Florida’s appellate court level. Micjo taught us that if a taxpayer disagrees with a department’s tax decision, then it should fight for its money that is not due. Since the Micjo ruling, we have been filing refunds for many other tobacco distributors and fighting tax assessments based on the appellate case. After filing several Micjo refund cases, we discovered another Micjo case in Oregon. If the taxpayer is successful then it would put another chink in the armor of the state tobacco taxing agencies.
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Although nexus sounds like a terrible disease, it is just a fancy word meaning a connection or link. If a company has enough of a connection or link to a state, then the state can impose its power of the company. With nexus, a state can impose its laws on the business including sales tax laws. From a sales tax perspective it can require the business to charge, collect, and remit state taxes such as sales tax. In 1992, Quill v. North Dakota was decided, which announced that having a physical presence in a state was sufficient nexus to require a company to follow a state’s state and local tax laws. In other words if your business has an office, a warehouse, some inventory, or a person (employee and yes, an independent contractor) then it likely has nexus under the physical presence test in Quill.

For life in the 1990’s this was big news to businesses who engaged in innovative marketing. Businesses that were on the cutting edge that sent things like mail order catalogs and floppy disks to solicit customers were being harassed by states alleging they had nexus. Today, with the internet as the backbone to the modern economy, states are trying the same tactics by creating laws to get more companies under its rule.

In 2008, New York led the innovative charge for click through nexus legislation. Also known as the “Amazon law,” due to its perceived targeting of Amazon, New York created a law that if a New York residents website generated over a certain number of sales in a 12 month period for a particular company, then there was a presumption that such company had nexus in New York. Amazon and Overstock took exception with this law, but ultimately lost at New York’s highest court. Unfortunately, the Supreme Court of the United States declined to hear the case.
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What is meant by a “cigarette” in Illinois? This question has been circulating through the tax community since December 2012. In August, 2013, it was reported that Illinois officially changed the definition of a “cigarette” and a “little cigar” for purposes of the Illinois tobacco tax regime. This is a major victory for tobacco products manufacturers and tobacco distributors in the state of Illinois.
As a starting point, Cigar Association of America v. Hamer, Cook County, 12 L 51033 was decided in December, 2012. That case was centered on a trade association arguing that Illinois’ definition of a cigarette was constitutionally invalid because it was too vague. In Illinois, a cigarette was defined as any roll containing tobacco that is suitable for smoking or if it met two of the following criteria:

(a) the product is sold in packs similar to cigarettes;
(b) the product is available for sale in cartons of ten packs;
(c) the product is sold in soft packs, hard packs, flip-top boxes, clam shells, or other cigarette-type boxes;
(d) the product is of a length and diameter similar to commercially manufactured cigarettes (e) the product has a cellulose acetate or other integrated filter;
(f) the product is marketed or advertised to consumers as a cigarette or cigarette substitute; or
(g) other evidence that the product fits within the definition of cigarette.

The association argued that this definition was too broad and successfully obtained an injunction.
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As many are aware, I have been writing a number of blogs and articles recently discussing the Department of Business and Professional Regulation here in Florida and its potentially unfair audit tactics. Many of you have seen cigar wrappers, or the more scientifically described “blunt wraps”, at convenience stores and gas stations throughout the state and country. Are those items tobacco products subject to Florida’s other tobacco products tax? On the surface it seems questionable, but after digging into the law and writing about this issue for some time now, the law seems to make it clear.

This was exactly the issue in a recent case,New Image Global Inc – Complaint.pdf. In short, the case was filed by New Image Global for a massive other tobacco tax assessment. The tax, penalty, and interest amounted to $1,082,494 at the time of the Complaint. The Assessment has since been reduced, but the argument still remains the same. The case addresses whether or not cigar wrappers, or their more informal title, blunt wraps, are subject to Florida’s other tobacco tax (“OTP”).
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Part 3 – Is the Item Taxable?

This article is a follow up to a previous article I wrote in dealing with tobacco tax audits. In addition to looking at the applicable statute of limitations and whether excise tax and shipping charges are included in the tax base any experienced Florida tobacco and beverage tax attorney should closely examine the taxable base to which the tax is being applied. As stated in other parts of the article, Chapter 210 Florida Statutes applies a surcharge and an excise tax on tobacco products. Part I of Chapter 210, F.S. works the same way for the tax on cigarettes. It is also noteworthy that the Florida beverage tax is applied in the same manner. It is simple math; the tax rate times the tax base equals the tax due. Being that the tax rate cannot be changed, a careful examination of the tax base must be undertaken to ensure the smallest amount of tax liability for the Florida taxpayer.

Although, the DBPR takes the position that many items are subject to the beverage and tobacco tax. However, as experienced tobacco and beverage attorneys we have learned that the almighty Florida DBPR often includes items that are not included in the taxing statute. Remember, the item has to be within the four corners of taxing statute to be taxable, and any ambiguities are to be resolved against the agency and in favor of the taxpayer. With that in mind, section 210.01, F.S., defines a cigarette to mean:

any roll for smoking, except one of which the tobacco is fully naturally fermented, without regard to the kind of tobacco or other substances used in the inner roll or the nature or composition of the material in which the roll is wrapped, which is made wholly or in part of tobacco irrespective of size or shape and whether such tobacco is flavored, adulterated or mixed with any other ingredient.

Similarly, section 201.25, F.S., defines a tobacco product as

loose tobacco suitable for smoking; snuff; snuff flour; cavendish; plug and twist tobacco; fine cuts and other chewing tobaccos; shorts; refuse scraps; clippings, cuttings, and sweepings of tobacco, and other kinds and forms of tobacco prepared in such manner as to be suitable for chewing; but “tobacco products” does not include cigarettes, as defined by s. 210.01(1), or cigars.

Is the item in which the DBPR is trying to assess you or your client included in those definitions? We have found that the DBPR often assesses items that are arguably outside of Chapter 210 and the 560’s (for beverage tax). Are items like cigar wrappers subject to the tax? What items have you encountered that may not be a tobacco product for chapter 210, F.S., purposes?
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Part 2 – Is the Tax on The Correct Taxable Base?

This article is a follow up to a previous article I wrote in dealing with tobacco tax audits. In addition to looking at the applicable statute of limitations, any experienced Florida tobacco tax attorney should closely examine the taxable base to which the tax is being applied. Chapter 210 Florida Statutes applies a surcharge and an excise tax on tobacco products. Part I of Chapter 210, F.S. works the same way for the tax on cigarettes. It is simple math; the tax rate times the tax base equals the tax due. Being that the tax rate cannot be changed, a careful examination of the tax base must be undertaken to ensure the smallest amount of tax liability for the Florida taxpayer.

Section 210.01, F.S., defines a cigarette to mean:

any roll for smoking, except one of which the tobacco is fully naturally fermented, without regard to the kind of tobacco or other substances used in the inner roll or the nature or composition of the material in which the roll is wrapped, which is made wholly or in part of tobacco irrespective of size or shape and whether such tobacco is flavored, adulterated or mixed with any other ingredient.

Similarly, section 201.25, F.S., defines a tobacco product as

loose tobacco suitable for smoking; snuff; snuff flour; cavendish; plug and twist tobacco; fine cuts and other chewing tobaccos; shorts; refuse scraps; clippings, cuttings, and sweepings of tobacco, and other kinds and forms of tobacco prepared in such manner as to be suitable for chewing; but “tobacco products” does not include cigarettes, as defined by s. 210.01(1), or cigars.

Should this tax base include shipping or federal excise tax charges because those amounts are included on the invoice?
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