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.
The true fundamental disagreement came down to the “taxable components of the wholesale sales price.” The question was whether the term wholesale sales price refers to only the unit price of tobacco without additional federal excise tax and shipping costs or whether the term included any additional costs passed on to the distributor. Essentially, with an 85% OTP tax in Florida, the decision would have a large effect on tobacco tax distributor’s tax liability.
Looking at the statute itself, wholesale sales price is defined as “the established price for which a manufacturer sells a tobacco product to a distributor, exclusive of any diminution by volume or other discounts.” Section 210.25(13), Florida Statutes. As quickly as DBPR raised their argument that the term includes all costs, the DCA denied the argument since the meaning of the statute and legislative language of the term was so clear.
Unquestionably, wholesale sales price is based only on the manufacturer’s price of the tobacco product. When given its plain meaning, as the court will always defer to first, the term “manufacturer” is of great significance to the wholesale sales price definition. “Manufacturer” is defined “as someone who “manufactures and sells tobacco products.” Section 210.25(5), Florida Statutes. What is missing from the definition? Domestic distributors. The DCA accurately pointed out that “distributers” have been awarded its own definition in the Florida Statutes. Taking all factors into consideration, plain language indicates that the critical point where the established price is determined is at the point where the manufacturer sells to the tobacco to the distributor.
Tobacco tax distributors may once again give praise to the courts for accurately curtailing a state agency’s attempt to generate more tobacco tax revenue. With this landmark decision setting precedent in Florida so 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, the same approach may be taken nationwide.
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.