291 S.W.3d 873 (Tenn. 2009), E2006-02225-SC-R11-CV, Waters v. Farr

Docket Nº:E2006-02225-SC-R11-CV.
Citation:291 S.W.3d 873
Opinion Judge:GARY R. WADE, J.
Party Name:Steven WATERS et al. v. Reagan FARR, Commissioner of Revenue for the State of Tennessee.
Attorney:Robert E. Cooper, Jr., Attorney General and Reporter; Michael E. Moore, Solicitor General; and Brad H. Buchanan, Assistant Attorney General, for the appellant, Reagan Farr, Commissioner of Revenue for the State of Tennessee. A. Philip Lomonaco, Knoxville, Tennessee, for the appellee, Steven Waters.
Judge Panel:GARY R. WADE, J., delivered the opinion of the court, in which JANICE M. HOLDER, C.J., and WILLIAM M. BARKER, J., joined. WILLIAM C. KOCH, JR., J. filed a separate opinion concurring in part and dissenting in part, in which CORNELIA A. CLARK, J., joined. WILLIAM C. KOCH, JR., J. filed a separate ...
Case Date:July 24, 2009
Court:Supreme Court of Tennessee
 
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Page 873

291 S.W.3d 873 (Tenn. 2009)

Steven WATERS et al.

v.

Reagan FARR, Commissioner of Revenue for the State of Tennessee.

No. E2006-02225-SC-R11-CV.

Supreme Court of Tennessee.

July 24, 2009

Session May 7, 2008.

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Appeal by Permission from the Court of Appeals, Eastern Section Chancery Court for Loudon County, No. 10710; Frank V. Williams, III, Chancellor.

Robert E. Cooper, Jr., Attorney General and Reporter; Michael E. Moore, Solicitor General; and Brad H. Buchanan, Assistant Attorney General, for the appellant, Reagan Farr, Commissioner of Revenue for the State of Tennessee.1

A. Philip Lomonaco, Knoxville, Tennessee, for the appellee, Steven Waters.

GARY R. WADE, J., delivered the opinion of the court, in which JANICE M. HOLDER, C.J., and WILLIAM M. BARKER, J., joined. WILLIAM C. KOCH, JR., J. filed a separate opinion concurring in part and dissenting in part, in which CORNELIA A. CLARK, J., joined.

OPINION

GARY R. WADE, J.

Effective January 1, 2005, the Tennessee General Assembly enacted a tax on the possession of unauthorized substances for the purpose of generating revenues to assist state and local law enforcement agencies in their efforts to combat drug crimes. Subsequently, Steven Waters was assessed with taxes, penalty, and interest in the total amount of $55,316.84 by the Tennessee Department of Revenue after purchasing nearly a kilogram of cocaine from a confidential informant. In a declaratory judgment suit in the Chancery Court of Loudon County, Waters challenged the constitutionality of the statute on grounds of self-incrimination, double jeopardy and due process. The chancellor declared the statute unconstitutional and set aside the assessment. On direct appeal, the Court of Appeals affirmed, holding that the enactment exceeded the General Assembly's taxing power under article II, section 28 of the Tennessee Constitution. Initially, we hold that the statute imposing the tax on unauthorized substances does not violate the constitutional protections against self-incrimination and double jeopardy or abridge the guarantee of procedural due process. Because, however, the tax cannot

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be classified as either a tax on merchants, a tax on peddlers or a tax on privileges, as authorized by our state constitution, the judgment of the Court of Appeals is affirmed.

Facts

On April 25, 2005, Steven Waters (" Waters" ), a fifty-one-year-old resident of Loudon County, was arrested after purchasing nearly a kilogram of cocaine from a confidential informant as part of a " reverse sting" conducted by officers in the Narcotics Unit of the Knox County Sheriff's Office. Based upon Waters' possession of the cocaine, the Tennessee Department of Revenue (" Department of Revenue" ) subsequently issued an assessment under the newly enacted tax on unauthorized substances.2 Waters then challenged the constitutionality of the tax by filing a declaratory judgment action against the Commissioner of Revenue of Tennessee (" Commissioner" ).

By the time of his arrest, Waters, a carpenter specializing in trim and interior work in new homes, had worked in and around Loudon County for twenty of his thirty-five years in the trade. The evidence in the record indicates that at some point during this period of time, Waters began to use cocaine on a " [w]eekend basis." He claimed that the substance " [k]ind of made [him] feel better," and gave him " a little burst" to make him " feel better about work." While explaining that he regularly purchased his cocaine in an area " down off of Western Avenue" in Knox County, he insisted that he had never sold the drug to anyone. He believed that until his arrest, his wife, Naomi Waters, had been unaware of his use of the illegal substance.

On the morning of April 25, 2005, Waters received a telephone call from an individual he had known for about a year and a half, and with whom he had used cocaine in the past. The individual informed Waters that she had nine kilograms of " nearly pure" cocaine from Miami and that she was " trying to move it and get out of town fast." She offered to sell the cocaine at a price of $17,000 per kilogram and arranged to meet Waters in the parking lot of a bakery in Knoxville. After trying a small amount of the cocaine as a sample, Waters acknowledged the high quality of the drug but declined to purchase. Later that evening, the woman telephoned again and offered the cocaine at a reduced price of $12,000 per kilogram. Waters, believing that the street value was far greater than the price, consented to the terms. At the hearing, he explained that he had planned to use the cocaine " a little at a time" and claimed that he had no intention to either sell the substance or give it to anybody else.

Unbeknownst to Waters, the individual from whom he had agreed to purchase cocaine was a confidential informant working in cooperation with the Narcotics Unit of the Knox County Sheriff's Office (" Sheriff's Office" ). Captain Bernie Lyon, a twenty-seven-year veteran of the Sheriff's Office, testified that he had been acquainted with the informant for approximately twenty years, that he had known her to use drugs in the past, and that he had instructed her to try to sell the cocaine to Waters. Captain Lyon further testified that the " going price" for a gram of cocaine " on the street" was about $100 per gram.3 After Waters had agreed on the

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purchase price, Captain Lyon and Sergeant James Hammond, the supervisor of the Narcotics Unit, provided the informant with a brick of cocaine from the drug vault at the Sheriff's Office. The package weighed 999.2 grams, indicating that the estimated street value of the cocaine Waters had agreed to purchase for $12,000 could have been as high as $99,200.

The officers followed the informant to the parking lot of a restaurant near the intersection of Walker Springs Road and Kingston Pike in Knoxville, where Waters paid $12,000 for the drugs. When the informant and Waters drove their respective vehicles away from the scene, Captain Lyon followed the informant to retrieve the money as Sergeant Hammond and several other officers followed Waters. After about a quarter of a mile, the officers apprehended Waters, searched his truck, and recovered the cocaine. Waters was then arrested and taken to jail. At trial, both Captain Lyon and Sergeant Hammond acknowledged that there was no evidence suggesting that Waters had ever sold drugs or intended to sell any drugs, including the cocaine he had purchased from the informant.

In accordance with a policy developed in January of 2005, Karen Phillips, the drug technician at the Sheriff's Office, completed a form for the Department of Revenue documenting the arrest and the amount of cocaine seized. The form provided that 75% of the money collected from the tax on the cocaine that Waters had possessed was to be distributed to the Sheriff's Office, with the remaining 25% payable to the Department of Revenue.4 On or about May 20, 2005, Eugene Johnson of the Department of Revenue's Unauthorized Substance Tax Reports office in Knoxville hand-delivered to the Waters residence a Notice of Assessment and Demand for Payment (" Assessment" ) in the sum of $55,316.84, which included $49,940 in tax liability 5 plus $5,376.84 in penalty and interest. One week later, the Department of Revenue notified Waters by mail that it had filed a lien against the residence he owned jointly with his wife in order to secure payment of the tax. Further, the Department of Revenue sent a Levy Notification and Notice of Levy to several banks in East Tennessee in an attempt to recover any assets that those banks might have been holding for Waters. Afterwards, the Department of Revenue received approximately $3,800 from the checking account Waters had at First Tennessee Bank.6

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Procedural History

On July 12, 2005, Waters and his wife, who was subsequently dismissed as a party to the litigation, filed suit in the Chancery Court for Loudon County against the Commissioner, seeking declaratory and injunctive relief.7 The Office of the Attorney General was served with a copy of the complaint, appeared on behalf of the Commissioner, and represented the Commissioner throughout the course of these proceedings.8 Waters alleged that Tennessee's tax on unauthorized substances violated the state and federal constitutional protections against self-incrimination and double jeopardy and also failed to afford due process of law.

At the conclusion of the proceeding, the trial court abated the assessment, ruling that the tax on unauthorized substances violated the state and federal constitutional prohibitions against compelled self-incrimination, imposed a criminal rather than a civil penalty, and authorized a tax far in excess of the amount Waters paid for the illegal drugs. The trial court further held that the Department of Revenue's procedures for assessment and collection of the tax on unauthorized substances failed to satisfy the procedural due process requirements of the state and federal constitutions. Because a jury had not been empaneled in Waters' criminal prosecution, the trial court found that Waters had not yet been exposed to double jeopardy. An allegation of entrapment was not addressed.9

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On direct appeal, the Court of Appeals affirmed the trial court but based its ruling upon different grounds. The Court of Appeals unanimously held that the tax on unauthorized substances exceeded the Tennessee General Assembly's power to impose a privilege tax as provided in article II, section 28 of the Tennessee Constitution.10 Waters v. Chumley, No...

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