Arty's, LLC v. Wis. Dep't of Revenue
| Decision Date | 13 September 2018 |
| Docket Number | Appeal No. 2017AP886 |
| Citation | 919 N.W.2d 590,384 Wis.2d 320,2018 WI App 64 |
| Parties | ARTY’S, LLC, Petitioner-Appellant-Cross-Respondent, v. WISCONSIN DEPARTMENT OF REVENUE, Respondent-Respondent-Cross-Appellant. |
| Court | Wisconsin Court of Appeals |
On behalf of the petitioner-appellant-cross-respondent, the cause was submitted on the briefs of Lance E. Mueller of Mueller, S.C., Milwaukee.
On behalf of the respondent-respondent-cross-appellant, the cause was submitted on the briefs of Brian P. Keenan, assistant attorney general, and Brad D. Schimel, attorney general.
Before Lundsten, P.J., Blanchard, and Fitzpatrick, JJ.
On behalf of the petitioner-appellant-cross-respondent, the cause was submitted on the briefs of Lance E. Mueller of Mueller, S.C., Milwaukee.
On behalf of the respondent-respondent-cross-appellant, the cause was submitted on the briefs of Brian P. Keenan, assistant attorney general, and Brad D. Schimel, attorney general.
¶1 Arty’s, LLC, mixes various types of distilled spirits with soda, water, and various flavorings to produce seven-ounce bottles of "premixed cocktails." Arty’s sells its bottled products to liquor wholesalers, who sell them to retailers. Arty’s buys in bulk from a distillery the various distilled spirits that it uses to create its products. It is undisputed that these activities of Arty’s involve sales of "intoxicating liquors," see WIS. STAT . § 125.02(8) (2015-16), and that sales of intoxicating liquors are subject to a state occupational tax, see WIS. STAT . § 139.03(2m).1
¶2 Based on differing statutory interpretations, Arty’s and the Wisconsin Department of Revenue dispute two closely related questions regarding Arty’s liability for the intoxicating liquor occupational tax. When does Arty’s incur liability, and how much of the contents of each bottle is subject to the tax? The Department argues that Arty’s incurs tax liability when it sells its mixtures in bottles to wholesalers and that the taxes are calculated based on the entire contents of each bottle (alcoholic and non-alcoholic ingredients). Arty’s argues that it incurs liability when Arty’s purchases distilled spirits in bulk from a distiller and that taxes are calculated later based only on the distilled spirits portion of the contents of each bottle.
¶3 The Tax Appeals Commission agreed with the Department’s statutory interpretation. Arty’s petitioned for judicial review, and the circuit court affirmed the commission’s ruling and order. Arty’s appeals.
We agree with the commission and accordingly affirm the circuit court on this statutory interpretation issue. We conclude that the tax liability is incurred when Arty’s sells to its customer wholesalers, and that the entire volume of each bottle is taxable as an intoxicating liquor.
¶4 Arty’s also makes a constitutional argument, based on the assumption that the Department prevails on the statutory interpretation issue just described. This argument is based on two facts: (1) sales of intoxicating liquors are taxed at higher rates than are sales of the same volumes of wine, which are in turn taxed higher than sales of the same volume of fermented malt beverages (beer); and (2) Arty’s products have alcohol contents that are lower or roughly equivalent to some wines and beers. Properly framed, Arty’s argues that, if the commission is correct in its statutory interpretation, the statutes on their face violate the constitutional guarantee of equal protection of the laws, because sellers of intoxicating liquor pay higher occupational tax rates than sellers of wines or beers containing the same or higher alcohol contents, without a rational basis to justify this distinction.
¶5 The commission rejected Arty’s constitutional argument. On review, the circuit court remanded the constitutional issue to the commission on the ground that it "has not been appropriately developed on summary judgment." The Department cross appeals the circuit court’s decision to remand. We agree with the Department that remand to the commission is not necessary. We also conclude that Arty’s fails to demonstrate that there is no rational basis for the legislation. We discern a rational basis in the pursuit of the efficient and effective collection of the taxes for the benefit of the public, including deterring and detecting tax cheating. Accordingly, we reverse the circuit court’s remand order and, instead, affirm the commission decision on the constitutional issue.
¶6 The facts are undisputed. Arty’s produces and sells bottled "premixed cocktails." One example is what Arty’s calls a "ready to drink" bottle of "Brandy Old Fashioned Sweet." Each seven-ounce bottle produced by Arty’s consists of: 1.2 ounces of distilled spirits (for example, brandy); and 5.8 ounces of soda, water, and flavoring.
¶7 Arty’s does not ferment substances to produce alcohol, nor does it distill alcohol from any product of fermentation. Instead, Arty’s purchases distilled spirits in bulk from a distillery, then dilutes the distilled spirits in a mixture of soda, water, and flavoring. Arty’s sells the bottled mixtures to licensed liquor wholesalers.
¶8 The distilled spirits that Arty’s purchases are 40 percent alcohol by volume. After dilution, each Arty’s bottle is 6.9 percent alcohol by volume. To elaborate briefly regarding alcohol, the parties do not dispute the chemical and mixing processes involved. "Alcohol is a product of fermentation," and alcohol is "separated, not produced, by distillation." Pennell v. State , 141 Wis. 35, 38, 123 N.W. 115 (1909). In general, distillation involves boiling and condensation to separate components of a liquid mixture.2 In particular, "[d]istillation of fermented products produces distilled beverages with a high alcohol content."3 In contrast, with wine or beer, the process ends with fermentation, producing a liquid containing alcohol which is not distilled, thus resulting in a lower alcohol content.4 Here, the distiller takes fermented alcoholic products and distills them into products with more highly concentrated alcohol levels (called distilled spirits or liquor), which are then sold to Arty’s.
¶9 Arty’s remitted payments to the Department for the intoxicating liquor occupational tax for the period March 31, 2012, through June 30, 2013. This was at the statutory rate of 85.86 cents per liter imposed on "intoxicating liquor." See WIS. STAT . § 139.03(2m). However, in paying these taxes, Arty’s counted only the distilled spirits portion of its products and not other ingredients. The Department assessed an additional tax, calculated based on the entire volume of each bottle. Arty’s filed a petition for redetermination, which the Department denied.
¶10 Arty’s petitioned the commission, challenging what Arty’s described as the Department’s decision to "attach[ ] tax to [sales of] non-alcohol ingredient[s]," namely, the soda, water, and flavoring, as well as presenting its constitutional argument. On cross motions for summary judgment, the commission rejected both Arty’s statutory interpretation argument and its constitutional argument.
¶11 Arty’s filed a petition for review in circuit court. The court rejected the statutory interpretation argument made by Arty’s. On the constitutional issue, the court remanded to the commission because the court deemed the issue insufficiently developed. Arty’s appeals the first decision and the Department cross appeals the second.
¶12 We address the statutory interpretation issue first and then the constitutional issue.
A. Standard Of Review And Statutory Interpretation
¶13 "In an appeal following a decision of the Tax Appeals Commission, we review the Commission’s decision, not the circuit court’s." Xerox Corp. v. DOR , 2009 WI App 113, ¶ 8, 321 Wis.2d 181, 772 N.W.2d 677. There are no factual disputes in this appeal and cross appeal, only disagreements about the interpretation and application of statutes. We review de novo legal conclusions of an administrative agency. Tetra Tech EC, Inc. v. DOR , 2018 WI 75, ¶ 84, 382 Wis.2d 496, 914 N.W.2d 21.5
¶14 "[T]he purpose of statutory interpretation is to determine what the statute means so that it may be given its full, proper, and intended effect." State ex rel. Kalal v. Circuit Court for Dane Cty. , 2004 WI 58, ¶ 44, 271 Wis.2d 633, 681 N.W.2d 110. " Id. , ¶ 45 (quoted source omitted).
¶15 "[S]tatutory language is interpreted in the context in which it is used; not in isolation but as part of a whole; in relation to the language of surrounding or closely-related statutes; and reasonably, to avoid absurd or unreasonable results." Id. , ¶ 46. Also, "[s]tatutory language is read where possible to give reasonable effect to every word, in order to avoid surplusage." Id.
¶16 " ‘If this process of analysis yields a plain, clear statutory meaning, then there is no ambiguity, and the statute is applied according to this ascertainment of its meaning.’ " Id. (quoted source omitted). If, instead, statutory language is ambiguous, then courts may examine legislative history to resolve the ambiguity. See id. , ¶¶ 50-51.
B. WISCONSIN STAT . Chs. 125 And 139
¶17 We now provide an overview of pertinent provisions of chapters 125 and 139 of the state statutes, as context for the analysis that follows. We address Wisconsin law only, and reject Arty’s invitation to interpret the Wisconsin occupational taxes on alcoholic beverages "in harmony with" the federal alcohol sales taxation structure. Without going into detail regarding the federal system, it is sufficient to know that the federal government taxes products that contain distilled spirits, based on alcohol by volume, in a manner entirely different from that used by the Department to collect Wisconsin’s occupational tax on intoxicating liquor. See 26 U.S.C. §...
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