© 2015 The Texas Lawbook.
By Janet Elliott
AUSTIN (Jan. 29) – As small manufacturers of discount cigarettes gain market share from the large tobacco companies that settled a multibillion-dollar state lawsuit in 1998, the Supreme Court of Texas is reviewing the constitutionality of a 2013 law that enacted a tax on the non-settling companies.
Arguments in the case, heard by the court in December, focused on the Legislature’s reasons for enacting the fee of 55 cents per pack and a provision in the Texas Constitution that requires taxation be equal and uniform.
The Legislature had legitimate policy reasons when it enacted the tax on the small tobacco companies, Assistant Solicitor General Joseph D. Hughes told justices.
“This distinction between settling and non-settling manufacturers is a real and genuine difference that directly advances the policy goals underlying House Bill 3536,” Hughes said. “That is recouping healthcare reimbursement from all manufacturers, reducing underage smoking and protecting the state’s tobacco settlement revenues.”
Former Supreme Court Justice Craig Enoch, who represents the Texas Small Tobacco Coalition and Global Tobacco Inc., said the fee violates the Texas Constitution’s requirement of equal and uniform taxation and is an attempt by the state to protect Big Tobacco’s market share. The fee was not imposed on the group of large tobacco companies that currently pay more than half a billion dollars to the state each year under the settlement.
Enoch said the state settled with Big Tobacco over allegations of past misconduct and received immunity from future lawsuits.
“And what else did they get? Apparently Big Tobacco got the agreement from the state that the state would enforce its market share,” said Enoch.
Forcing this type of anticompetitive pricing is not a legitimate purpose for a tax, Enoch argued.
“If I can settle for my wrongdoing and I can convince the Legislature to tax my competitor, then my wrongdoing costs nothing,” Enoch said.
Same Products, Different Taxes
Justice Debra Lehrmann asked Hughes about the lower court’s focus on the products of small and large tobacco companies being the same. Hughes said the state often taxes the same products differently, referencing an amicus brief from the Texas Taxpayers and Research Association.
The brief cited several instances where the state, for legitimate policy reasons, treats identical products differently based on their use, purchaser or seller.
For example, certain machinery is exempt from sales tax if it is purchased for use in manufacturing; the state’s general business tax has lower rates for wholesale and retail businesses; churches, schools, and charitable organizations are allowed tax-free purchases of taxable items; and Texans don’t have to collect sales tax when they hold a garage sale.
“The Third Court’s ‘same products’ test for determining tax equality and uniformity also would dramatically restrict the legislature’s ability to enact future measures it deems essential to the establishment and maintenance of a fair and balanced system of taxation,” said the brief filed by George S. Christian.
The Legislature’s stated intent in passing HB 3536 was to ensure evenhanded treatment of manufacturers, as well as to recover state health care expenditures attributable to non-settling manufacturers and prevent non-settling manufacturers from undermining state efforts to reduce underage smoking. The Legislature also wanted to protect the tobacco settlement funds, which had been reduced by growth in sales of the non-settling manufacturers’ cigarettes.
Chief Justice Nathan Hecht asked Enoch if there is any way to determine when Big Tobacco’s payments stop being for past misconduct. The settling companies are required to pay 8 percent of their national sales to Texas in perpetuity.
“It seems to me to go to heart of your argument that if the set payments are for ongoing conduct, then Big Tobacco is disadvantaged vis-à-vis Small Tobacco and the tax is rational,” Hecht said.
Enoch said the difference is that the large companies got immunity from lawsuits while the small companies are paying a tax and not getting immunity. “Why would I not have agreed to pay in perpetuity a portion of my gross receipts to get immunity,” he said.
Texas, unlike other states that settled with the tobacco companies, did not establish escrow accounts into which non-settling tobacco manufacturers had to pay as a credit against future recoveries.
The case is Texas Comptroller Hegar and Texas Attorney General Paxton v. Texas Small Tobacco Coalition and Global Tobacco Inc., No. 14-0747.
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