Multi-State Tax Law Blog
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?
Unable to reach a result within the agency, MICJO filed in administrative court to have the matter heard before an administrative law judge. Unfortunately, the administrative hearings are held by the agency itself. It is no surprise that, at the administrative hearing conducted by the AB&T, the AB&T supported its own finding and held that all invoice components (the bottom line total of the invoice) were subject to the FL OTP tax.
MICJO was forced to either pay the assessment or appeal the court. Of course, MICJO was not done fighting and timely appealed the administrative decision to the 2nd District Court of Appeal (“2nd DCA”). Although MICJO asserted several arguments to the appellate court, the crux of the case was the same as the initial audit: what does the phrase “wholesale sales price” mean? Does it mean amount of all line times totaled on the bottom of the invoice or just the line-item unit price for the tobacco itself?
On February 1, 2012, the 2nd DCA overturned the Department of Business and Professional Regulation, Division of Alcoholic Beverages and Tobacco’s (“AB&T”) final agency order holding (with the full case downloadable below) and stating:
Although AB&T focuses on the term established price, it fails to give that term its plain meaning within the context of the sentence. The established price is for the sale of the tobacco product. The various other distributor invoice costs for reimbursement of federal excise tax, shipping costs, and other charges, are not part of the tobacco. See ยง 210.25(11) (defining “tobacco products”). Although the domestic distributor adds those charges to the total invoice price, they are not part of the price that the domestic distributor paid the manufacturer for the tobacco, and thus, they are not part of the manufacturer’s sales price for the tobacco. Further, items such as shipping costs could vary depending on where the domestic distributor ships the tobacco in Florida, and the total invoice price for the same tobacco would not be an established price. See Black’s Law Dictionary 586 (8th ed. 2004) (defining “establish” as “to settle, make, or fix firmly”).
Florida’s Second District Court of Appeal ruled in favor of MICJO because the tax is based on the tobacco price and not on other extraneous costs.
While I have written on this case on numerous occasions, I am unaware of anyone challenging a similar case for cigarettes or alcoholic beverage sales. Arguably, the same logic should apply and I would love to see a case litigated.
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..