The Texas Supreme Court earlier this month upheld the constitutionality of a law enacted in 2013 imposing a fee on certain tobacco companies that were not parties to a 1998 settlement with the state. The court ruled that the Legislature had a rational basis to distinguish between the tobacco manufacturers that were assessed the fee and those that had agreed to make annual payments to the state under the earlier settlement.
The law authorizing the fee had been challenged by a coalition of small tobacco companies arguing that it was a tax in violation of a requirement under Tex. Const., Art. 8 that taxation be equal and uniform. The Third Court of Appeals in 2014 ruled that the tax was not equal and uniform because it treated identical products differently based on the entity that was making the product.
The Supreme Court this month reversed the court of appeals decision. Noting that “products do not pay taxes, taxpayers do,” the court said in its April 1 opinion that the nature of the taxpayer must be considered in an “equal and uniform” inquiry. It was within the Legislature’s discretion to consider the effect of a settlement when establishing tax classifications for non-settling manufacturers (NSMs), the court said.
The 1998 Texas Comprehensive Settlement Agreement required large tobacco companies to pay to the state about $500 million a year in perpetuity to cover health care costs and other damages associated with the companies’ products. In enacting HB 3536 by Otto, the 83rd Legislature in 2013 cited recovery of health care expenditures from NSMs as one of the goals of the 55-cent per pack fee.
The Supreme Court said that without the 2013 tax, the NSMs by their own admission would be making no comparable payment to the state despite health care costs associated with their products. If NSMs did not bear those costs, the court said, they could offer their products at substantially lower prices, which would entice youth and undermine the goal of reducing underage smoking.
The Supreme Court remanded the case to the Austin-based Third Court of Appeals for consideration of the Small Tobacco Coalition’s other challenges.
For more on this issue, see previous post: Fee on certain tobacco products ruled unconstitutional
by Michael Marchio