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.
Although three issues were raised on appeal, the appellate court agreed with the first claim that blunt wraps are not “tobacco products” within the meaning of section 39-28.5-101(5), Colorado Statutes. In tackling the issue, the court in Creager broke down its analysis into three parts based on tax law precedent: (1) In interpreting tax statutes, the court must resolve any doubts in favor of the taxpayer; (2) When a general term follows a list of things in a statute, the principle of ejusdem generis (rule of interpretation that a class of general wording must be followed and cannot be expanded upon) must be applied; and (3) Other provisions relating to tobacco products must be considered in relation to their other realms of statutory law. Ultimately, in interpreting the phrase “other kinds and forms of tobacco, prepared in such a manner as to be suitable for chewing or for smoking in a pipe or otherwise,” the court correctly resolved any ambiguity in favor of the taxpayer and against the taxing authority in deciding that blunt wraps were not included in the definition.
Clearly, the DOR failed to carefully read the definition of “tobacco products” before it sent out its FYI Notices and began the implementation of a policy that it had no authority to enact. The Colorado legislature specifically identified several types of cigars, chewing tobacco, and other types of tobacco used for a pipe or hand-rolled cigars or cigarettes as “tobacco products.” Noticeably missing from the definition were none other than the very blunt wraps the case was litigated over.
But even without the detailed, legal analysis, consider the nature of a blunt wrap. Unlike the items listed in the statute, a blunt wrap is not like other tobacco products. It is not intended to be used by itself and the tobacco within it is not even easily identifiable. At best, it is a vehicle used to facilitate the consumption of actual “tobacco products.” If the statute does not explicitly incorporate blunt wraps under the definition of “tobacco products” and they do not fit under the plain meaning of the term, why would the DOR attempt to enact such an extreme interpretation at the expense of Colorado taxpayers?
If Departments of Revenue always had their way, anything containing even the smallest amount of tobacco would be considered a “tobacco product.” Luckily for the tobacco industry, we have a legal process that can put a halt to many of these unfair and illogical agency final determinations. But it is up to the taxpayer to initiate the process.
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 obtained his LL.M. in Taxation at NYU. If you have any questions please do not hesitate to contact him via email JerryDonnini@Floridasalestax.com or phone at 954-642-9390.