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.
As explained more thoroughly in a blog from 2015, the issue is relatively straightforward. In order for Florida wholesale tax to apply to the wrap product, the wrap must be a “tobacco product” under Florida law. A tobacco product for tax purposes is defined as:
[L]oose 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.
Since blogging about it several years ago, our position was that a rolling paper made of paper and bound tobacco was not loose tobacco suitable for smoking. Shocking the Division of Alcoholic Beverages and Tobacco (DABT) disagreed and took the position that any item made from tobacco was subject to Florida’s steep 85% tax.
In 2014, Brandy’s Products, a Florida distributor came to us with a roughly $70,000 assessment dealing with this product. Being that the parties were unable to reach a resolution, the case ended up going to court. The “trial” or final hearing took place in administrative court (Division of Administrative Hearings or DOAH) in January 2015.
After hearing the case, Judge Van Laningham turned to the question of whether the blunt wraps met the statutory definition of a “tobacco product.” The judge viewed the blunt wraps as “a distinct, cohesive, uniform product . . . cut to a predetermined shape.” Defined as such, the blunt wraps would not be considered taxable because they were not loose tobacco suitable for smoking. Following the judge’s order, the Department, DABT, ignored the judge’s recommendation and issued a Final Order against the taxpayer.
Faced with no alternative but to pay the steep assessment, Brandy’s was forced to appeal. After briefs being filed, an oral argument was heard by Florida’s First District Court of Appeal on March 8, 2016. After less than a month of deliberation the appellate court issued an opinionon April 6, 2016.
The sound and straightforward opinion delivered by judge Kent Wetherall, the First DCA spoke loud and clear. The DCA relied on the facts found by the administrative law judge (ALJ) in that the wrap was examined at hearing and is a “distinct cohesive uniform product . . . cut to a predetermined shape.”
Based on those facts the court performed a legal analysis to determine whether the wraps were loose tobacco suitable for smoking. The court started by concluding that the statute at issue was clear and unambiguous. Applying the words of the law, the court determined that loose tobacco does not include tobacco that is bound together to make a solid and uniform product. The court went on to shoot down the agency’s arguments that the statute should be read broadly to encompass the wraps because 1) taxing statutes are to be read narrowly, and 2) the word “loose” cannot be read out of the statute.
This case marks an important victory for Florida’s wholesale tobacco community. With an 85% tax rate many companies had large assessments or large refunds at stake. It will be interesting to see how other states follow Florida and Colorado’s lead on this issue. In particular, there may be significant refund opportunities for distributors in other states. It is also noteworthy that although Florida tried to amend the law to include wraps, it has been unable to do so to date. Therefore, it would be wise to file protective refund claims and to stop paying tax if and when this decision becomes final.
Following the Brandy’s decision on April 6, 2016, the taxing agency, Department of Business & Professional Regulation, Division of Alcoholic Beverages & Tobacco (DABT) admitted defeat on the issue of blunt wraps taxability. Specifically, DABT stated in a memo on April 11, 2016 that homogenized tobacco wrap products are not taxable.
The Division appeared to draw a distinction between the homogenized wrap product and the whole leaf tobacco product. However, the opinion issued in the first DCA does not seem to show such a distinction. In fact, the court opinion focused on whether the tobacco was “loose” or whether it a uniform, cohesive product, cut to a predetermined shape.
It does not seem to matter whether the wrap is made of paper or tobacco, contrary to the Department’s memo.
DABT also went on to state that any assessment will be dismissed. Interestingly, the Department did not appear to comment on any outstanding refund cases. However, it would appear that the Department has little choice but to also pay refunds to those who mistakenly paid Florida tax on the products.
It will be interesting to see the Department’s course of action going forward. More importantly for those who have paid tax on this product, they should likely file refunds to protect their rights whether they are distributing the homogenized or whole leaf product. I will do my best to keep the industry apprised as this issue unfolds.
Mr. Donnini also regularly represents cigarette, beverage, and tobacco distributors against the Division of Alcohol and Tobacco in connection with refund claims and audit defense. While at Nova Southeastern University, Shepard Broad Law Center, Mr. Donnini was the Notes and Comments Editor of Nova Law Review and Vice President of the Sports and Entertainment Law Society. Prior to attending law school at Nova in 2008, Jerry was an accountant for National Retail Properties, Inc. Mr. Donnini earned his LL.M. in Taxation at New York University. You can contact Mr. Donnini via email at JerryDonnini@FloridaSalesTax.com or call 954-642-9390.