Over the past few years, we have been intricately involved in ongoing litigation with the Department of Business and Professional Regulation, Division of Alcoholic Beverages and Tobacco (“ABT”). There still remains ongoing litigation in connection with the Micjo issue. Micjo dealt with whether non-tobacco charges, such as federal excise tax and shipping charges, are subject to Florida Other Tobacco Products Tax and the Surcharge on Other Tobacco Products (“OTP Tax”). Down another path there is current litigation in Brandy’s, which deals with cigar wraps, or blunt wraps, which are subject to Florida’s OTP Tax. Recently, however, another case was filed in late 2014 that has a far broader reach than any other case filed to date.
As mentioned above, Florida imposes a 25% tax and a 60% surcharge that burdens tobacco wholesalers to remit 85% of their purchase price of tobacco products to the state. Similarly, Florida imposes a heft excise tax and a surcharge on cigarettes at the wholesale level. Interestingly, Florida exempts a seemingly similar product, known as a cigar, from all Florida wholesale tax. Many know that Florida is the Mecca for cigars and most cigars sold nationwide are produced here in Florida. From a taxing perspective, the obvious question arises – can a state, Florida, tax cigarettes and other tobacco products, but not tax cigars?
In late 2014, a case was filed by McLane a large tobacco wholesaler who has sizable operations in Florida. McLane believes that this obvious discriminatory practice to favor an in-state industry amounts to clear discrimination. Many know that a taxing statute can be discriminatory if it is discriminatory on its face or if its application results in discrimination to unfairly favor an in-state activity over one out of state. If McLane can prove that the law has a discriminatory effect then it is likely on to something.
If they are right what does that mean for other cigarette and tobacco wholesalers? The obvious answer seems to be to file protective refund claims. If McLane is successful in striking down the law as unconstitutional then every tobacco and cigarette distributor may be entitled to refunds. This case will likely take significant time and it would likely be wise to preserve your rights and protect your rights in the event McLane is successful.
McLane’s 7 count complaint is not without its risks as well. In (1992) there was a sales tax case that had the effect of disadvantaging magazine companies in favor of newspaper companies. Specifically, the charges for newspapers were exempt, while the same charges for magazines were taxable. The Magazine Trade Association took the case up to the Florida Supreme Court. The Supreme Court agreed that this clearly was discriminatory, however, rather than to also exempt magazines, it decided the proper remedy was to impose a similar tax on newspapers. While the magazine association technically won the battle, few would argue that the war was lost for all.
There was also Mckesson, a case with a similar fact pattern. In that case, Florida created a preferential tax treatment for alcoholic beverages manufactured from certain citrus products grown in the state. The Florida Supreme court agreed, however, it refused to give the taxpayer a refund. Ultimately, the case made its way to the Supreme Court of the United States and the Supreme Court of the land remanded the case to force Florida to provide the appropriate relief.
The McLane case will certainly have broad reach and will be on the top of my list to follow over the next several years. If you or your client’s company pay wholesale cigarette or other tobacco products taxes then there is little to lose by protecting your rights and filing protective refund claims. If McLane is successful then it would result in huge refund claims for Florida wholesalers.
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.