Ashland Specialty Co. v. Steager

• Citation: 818 S.E.2d 827
• Decision Date: 01 May 2018
• Docket Number: No. 17-0437,17-0437
• Court: Supreme Court of West Virginia
• Parties: ASHLAND SPECIALTY CO. INC., Petitioner Below, Petitioner v. Dale W. STEAGER, State Tax Commissioner of West Virginia, Respondent Below, Respondent

818 S.E.2d 827

ASHLAND SPECIALTY CO. INC., Petitioner Below, Petitioner

v.Dale W. STEAGER, State Tax Commissioner of West Virginia, Respondent Below, Respondent

No. 17-0437

Supreme Court of Appeals of West Virginia.

Submitted: April 11, 2018

Filed: May 1, 2018

Floyd M. Sayre, III, Esq., Bowles Rice LLP, Martinsburg, West Virginia, Mark A. Lloyd, Esq., (admitted pro hac vice), Bingham Greenebaum Doll LLP, Louisville, Kentucky, Counsel for the Petitioner

Patrick Morrisey, Esq., Attorney General, Katherine A. Schultz, Esq., Senior Deputy Attorney General, Cassandra L. Means, Esq., Assistant Attorney General, Charleston, West Virginia, Counsel for the Respondent

WALKER, Justice:

Ashland Specialty Company, Inc. (Ashland) unlawfully sold 12,230 packs of cigarettes in West Virginia in 2009 that were not approved for sale by the Tax Commissioner of the State of West Virginia (Commissioner).¹ Acting pursuant to West Virginia Code § 16-9D-8(a) (2016), the Commissioner penalized Ashland $159,398 for selling those cigarettes unlawfully, a penalty equal to 500% of the cigarettes’ retail value. The Office of Tax Appeals (OTA) then ordered that penalty reduced by twenty-five percent. On review, the Circuit Court of Kanawha County reversed the OTA and reimposed the Commissioner’s original $159,398 penalty.

Contrary to Ashland’s arguments on appeal, we find that the Commissioner’s original penalty (1) is not an abuse of the discretion afforded the Commissioner under West Virginia Code § 16-9D-8(a) ; (2) should not be cancelled or reduced due to circumstances that Ashland argues mitigate their unlawful cigarette sales; and (3) does not violate the Excessive Fines Clause of the West Virginia Constitution or the Eighth Amendment to the United States Constitution. For those reasons, and as discussed more fully below, we affirm the April 11, 2017 order of the Circuit Court of Kanawha County reversing the OTA and reinstating the Tax Commissioner’s original $159,398 penalty.

I. FACTUAL AND PROCEDURAL BACKGROUND

Before addressing the facts specific to Ashland’s appeal, we first briefly review the statutes implicated by their arguments. These include West Virginia Code §§ 16-9B-1 through 4 (2016) ("Implementing Tobacco Master Settlement Agreement") and §§ 16-9D-1 through 10 (2016) ("Enforcement of Statute Implementing Tobacco Master Settlement Agreement"), related to the Tobacco Master Settlement Agreement (MSA) and subsequent efforts by the Legislature to ensure the MSA and its related requirements are enforced.

A. The MSA.

In 1998, leading tobacco product manufacturers entered into the MSA with the State of West Virginia.² In pertinent part, "[t]he master settlement agreement obligates these manufacturers, in return for a release of past, present and certain future claims against them ... to pay substantial sums to the State (tied in part to their volume of sales) ...."³ The following year, the Legislature enacted Article 9B of Chapter 16. In part, Article 9B requires cigarette manufacturers who are not part of the MSA, but whose cigarettes are sold in West Virginia, to make annual deposits into escrow accounts intended to pay a judgment or settlement resulting from a claim brought against the manufacturer by the State or a West Virginia resident.⁴

In 2003, the West Virginia Legislature enacted model legislation to prevent violations and aid enforcement of the obligations imposed by Article 9B of Chapter 16 of the West Virginia Code.⁵ This legislation, codified at Article 9D of Chapter 16 of the West Virginia Code, directs the Commissioner to create and maintain a directory of cigarette brands approved for sale in West Virginia.⁶ Chapter 16, Article 9D also charges the Commissioner with adding or removing manufacturers from the list as appropriate,⁷ but not without first notifying the manufacturer and distributors of the manufacturer’s affected brand or brands.⁸ However, a manufacturer or distributor’s failure to receive notice from the Commissioner of changes to the directory, or even the Commissioner’s failure to provide such notice, does not excuse a party from their obligations under Article 9D of Chapter 16 of the West Virginia Code.⁹

It is unlawful to sell, offer, or possess for sale in West Virginia a brand of cigarettes that is not included in the Commissioner’s list.¹⁰ Pursuant to West Virginia Code § 16-9D-8(a), the Commissioner may impose a wide range of penalties upon a party that sells a brand of cigarettes in West Virginia when that brand does not appear on the Commissioner’s list—that is, when the brand is "delisted."

B. Ashland’s Violations of § 16-9D-3(c).

Ashland is a Kentucky corporation that distributes cigarettes to convenience stores in West Virginia and other states. It is undisputed that between June and September 2009, Ashland sold 12,210 packs of delisted GP and GP Galaxy Pro brand cigarettes and 20 packs of delisted Berley brand cigarettes in violation of West Virginia Code § 16-9D-3(c). The Commissioner identified these illegal sales during a 2012 audit. In August 2012, pursuant to his authority under § 16-9D-8(a), the Commissioner assessed a $159,398 penalty upon Ashland, a penalty equal to 500% of the retail value of the 12,230 packs of delisted cigarettes.

The Commissioner previously assessed a $3,808 penalty upon Ashland for selling 56 cartons of delisted cigarettes from 2001 to 2003. Ashland had also paid a $5,127 penalty for selling 62 cartons of delisted cigarettes from 2005 to 2008. Like the penalty imposed by the Commissioner in 2012, these penalties equated to 500% of the retail value of the delisted cigarettes. Ashland did not contest these smaller penalties.

C. Review before the OTA.

Ashland timely petitioned the OTA to review the Commissioner’s August 2012 penalty assessment. The administrative law judge (ALJ) conducted an evidentiary hearing in August 2013. Testimony offered at the hearing by a representative of the West Virginia State Tax Department indicated that the Commissioner consistently imposes a 500%-of-retail-value penalty for violations of West Virginia Code § 16-9D-3(c). Specifically, the Commissioner’s representative testified:

Yes. My auditors have no discretion. I mean they have the ability to come to me.

I have the ability to go to my director and get anything—to request something less. It’s never happened. I mean we—in my recollection, they’ve all been 500 percent that we’ve done. And these are rare. There’s not many of them. ...

I’ve never gone up the food chain for any—. I’ve never heard a good explanation to go up the food chain. Our audit program is locked in at 500 percent. I mean I don’t—. Like I said, these were rare. I don’t recall any reason to ask for a reduced rate.

When asked to justify the 500%-of-retail-value penalty imposed by the Commissioner in this case, the representative explained that Ashland had "two previous audits, that they’ve been forewarned, and—they’re still continuing to do so, I don’t really see any need to reduce it. I mean, they’ve had plenty of warning and they keep making the same error."

In August 2014, the ALJ issued a written order finding the Commissioner’s $159,398 penalty to be "erroneous, unlawful, void, or otherwise invalid[.]" The ALJ reasoned that "the Tax Commissioner exercised no discretion at all in issuing the penalty" to Ashland because the evidence demonstrated that the Commissioner invariably assessed the 500%-of-retail-value penalty for the sale of delisted cigarettes. Additionally, the ALJ concluded that the $159,398 penalty was too harsh because "[c]ommon sense tells us that the maximum penalty should be reserved for the worst offenders, for example, a seller who deliberately sells delisted brands or who engages in some criminal activity in connection with cigarette sales." Consequently, the ALJ reduced the penalty by 25% to $119,548.50.

D. Review before the Circuit Court of Kanawha County.

Both the Commissioner and Ashland appealed the OTA’s reduction of the Commissioner’s original penalty, and briefing on the matter proceeded before the Circuit Court of Kanawha County.¹¹ On April 11, 2017, the circuit court entered an order reversing the order of the OTA and reinstating the Commissioner’s original penalty. The circuit court found, among other things, that: (1) the OTA erred in concluding that the Commissioner exercised no judgment, when the $159,398 penalty imposed was not the maximum permitted by West Virginia Code § 16-9D-8(a) ; (2) the OTA erred in concluding that the Commissioner abused his discretion by imposing the same, proportional penalty on all violators of § 16-9D-3(c) ; and (3) the $159,398 penalty did not violate the Excessive Fines Clause of the West Virginia Constitution or the Eighth Amendment to the United States Constitution. Ashland now appeals from that order.

II. Standard of Review

Ashland’s arguments implicate several standards of review. We set out each below within the analysis of the corresponding assignment of error.

III. Analysis

Ashland attacks the circuit court’s order on several fronts. First, it argues that the circuit court erred by reinstating the Commissioner’s original $159,398 penalty. Ashland contends that the OTA correctly concluded that the Commissioner’s consistent application of a 500%-of-retail-value penalty is, itself, an abuse of discretion, and that by reinstating the Commissioner’s original judgment, the circuit court substituted its judgment for that of the OTA. Ashland also argues that the circuit court should have further reduced, or completely forgiven, the reduced penalty ordered by the OTA due to circumstances that Ashland contends mitigate its violation of West Virginia Code § 16-9D-3(c). Ashland next argues that the Commissioner’s original penalty violates the Excessive Fines Clause of the West Virginia Constitution and the Eighth Amendment to the United States Constitution. It also challenges the Circuit Court of Kanawha County as the appropriate venue for the proceedings below. We...