Colo. Dep't of Revenue v. Creager Mercantile Co., Supreme Court Case No. 15SC226

• Decision Date: 15 May 2017
• Docket Number: Supreme Court Case No. 15SC226
• Parties: COLORADO DEPARTMENT OF REVENUE and Barbara J. Brohl, in her official capacity as Executive Director of the Colorado Department of Revenue, Petitioners, v. CREAGER MERCANTILE CO., INC., Respondent.
• Court: Colorado Supreme Court

395 P.3d 741

COLORADO DEPARTMENT OF REVENUE and Barbara J. Brohl, in her official capacity as Executive Director of the Colorado Department of Revenue, Petitioners,

v.CREAGER MERCANTILE CO., INC., Respondent.

Supreme Court Case No. 15SC226

Supreme Court of Colorado.

May 15, 2017

As Modified on Denial of Rehearing June 19, 2017

Attorneys for Petitioners: Cynthia H. Coffman, Attorney General, Frederick R. Yarger, Solicitor General, Robert H. Dodd, Jr., Senior Assistant Attorney General, Denver, Colorado

Attorneys for Respondent: Edward Dale Parrish, LLC, Edward Dale Parrish, James W. Noland, Golden, Colorado, Blain Myhre LLC, Blain D. Myhre, Englewood, Colorado

Attorneys for Amicus Curiae McLane/Western, Inc.: Morrison & Foerster LLP, Scott F. Llewellyn, Nicole K. Serfoss, Denver, Colorado

En Banc

JUSTICE MÁRQUEZ delivered the Opinion of the Court.

¶1 Creager Mercantile Co., Inc., a wholesale distributor of groceries and tobacco products, sells Blunt Wraps, a type of cigar wrapper made of thirty to forty-eight percent tobacco. Blunt Wraps are designed to be filled with additional tobacco or marijuana and then smoked. We are asked to decide whether Blunt Wraps may be taxed as "tobacco products," as that term is defined in section 39-28.5-101(5), C.R.S. (2016). Because Blunt Wraps are a "kind" or "form" of tobacco, and are "prepared in such manner as to be suitable ... for smoking," we hold that Blunt Wraps fall within the plain language of the definition of "tobacco products" under section 39-28.5-101(5) and are taxable accordingly. We therefore reverse and remand to the court of appeals to address Creager's remaining contentions on appeal.

I. Facts and Procedural History

¶2 The State of Colorado's tobacco products tax has two components. The first component is a statutory tax enacted in 1986 that levies a tax of "twenty percent of the manufacturer's list price" on the sale, use, consumption, handling, or distribution of "all tobacco products" in Colorado. § 39-28.5-102(1), C.R.S. (2016). This tax is imposed when a distributor brings or ships tobacco products into Colorado, or manufactures tobacco products in Colorado for sale in this state. Id. The second component is derived from Amendment 35, which voters adopted in 2004. Colo. Const. art. X, § 21. The statute implementing this constitutional amendment levies another tax of twenty percent on tobacco products "in addition to the tax levied pursuant to section 39-28.5-102." § 39-28.5-102.5, C.R.S. (2016).

¶3 Both components of the tax rely on the definition of "tobacco products" in section 39-28.5-101, which, with the exception of cigarettes, broadly includes various kinds and forms of tobacco that can be chewed or smoked "in a pipe or otherwise":

cigars, cheroots, stogies, periques, granulated, plug cut, crimp cut, ready rubbed, and other smoking tobacco, snuff, snuff flour, cavendish, plug and twist tobacco, fine-cut and other chewing tobaccos, shorts, refuse scraps, clippings, cuttings and sweepings of tobacco, and other kinds and forms of tobacco, prepared in such manner as to be suitable for chewing or for smoking in a pipe or otherwise, or both for chewing and smoking, but does not include cigarettes which are taxed separately.

§ 39-28.5-101(5) (emphasis added).

¶4 Blunt Wraps did not exist when section 39-28.5-101 was enacted in 1986. The product evolved from rolling papers used to make roll-your-own cigars and cigarettes. Traditional rolling papers are sold in a sheath of small, dry papers that are folded together in a pop-up packet and can be pulled out one-by-one. In contrast to traditional rolling papers, Blunt Wraps are made from pulverized, homogenized tobacco leaves mixed with vegetable gum, and contain between thirty and forty-eight percent tobacco.

¶5 Blunt Wraps are packaged moist and are individually wrapped around a plastic straw in a sealed container. Before use, the straw is removed from the Blunt Wrap, leaving a pre-formed, small, hollow cigar shell. Like traditional rolling papers, Blunt Wraps are designed to be filled with tobacco, marijuana, or other smoking material and smoked. See generally Redman, How to Roll A Blunt , on Whut? Thee Album (Columbia Records 1992). When smoked, the Blunt Wrap is consumed along with the additional tobacco or other smoking material.

¶6 Blunt Wraps are marketed to consumers as "all natural tobacco wraps" and are patented as a tobacco product; the patent description summarizes their production and intended use:

Wrapping moistened tobacco leaves around a cylindrical form casing forms the shell. The leaves are allowed to dry, and the shell is ready for sale to a consumer. After the form casing is removed, the consumer can fill the shell with a favorite blend of tobacco.

In one of the embodiments, a longitudinal slit is formed through a wall of the shell to allow prying open of the shell body and removal of the form casing. After crushed tobacco leaves are deposited into the central opening of the shell, the edges of the slit are moistened and brought together to seal the slit. A cigar is ready for smoking.

U.S. Patent No. 6,321,755 (filed Dec. 7, 1999).

¶7 Creager began distributing Blunt Wraps in 2003. The Colorado Department of Revenue ("the Department") audited Creager in early 2004 for the 2001–2003 tax period, but levied no tax assessment against Creager for selling Blunt Wraps.

¶8 In 2006, in response to several taxpayer inquiries, a unit at the Department construed section 39-28.5-101(5) to include products that contain any amount of tobacco. The Department issued a notice called an "FYI" to inform distributors of tobacco products of this interpretation of the statute.¹

¶9 In 2007, the Department audited Creager for the 2004–2006 tax period and issued an assessment and notice of deficiency, asserting that Creager had failed to collect tobacco products tax on the sales of Blunt Wraps during that period. Creager protested the results of the Department's audit, arguing that Blunt Wraps do not meet the statutory definition of tobacco products.

¶10 Following a hearing, the Department issued a final determination concluding that Blunt Wraps are "tobacco products" under the definition in section 39-28.5-101(5). The Department's final determination imposed a tax assessment, penalties, and interest against Creager.

¶11 Creager appealed to the district court, which conducted a trial de novo. The district court affirmed the tax assessment but reversed the imposition of penalties and interest.² The court held that Blunt Wraps are taxable "tobacco products" under section 39-28.5-101(5). It reasoned that under the plain language of that provision, a tobacco product is: (1) a kind or form of tobacco; and (2) prepared in a manner as to be suitable for chewing or for smoking in a pipe or otherwise. The court concluded that Blunt Wraps satisfy both requirements because they "are a kind or form of tobacco" and "are designed to be filled with tobacco, rolled, sealed, and smoked." The court rejected Creager's argument that Blunt Wraps do not meet the definition of "tobacco products" because they are not capable of being smoked "independently" or "on their own." The court explained that Creager's suggested reading of section 39-28.5-101(5) would require the court to add language to the statute.

¶12 The court of appeals reversed, concluding that Blunt Wraps are not "tobacco products" within the meaning of section 39-28.5-101(5), because, although they contain tobacco, "they are not particularly well adapted or appropriate for smoking on their own ." Creager Mercantile Co., Inc. v. Colo. Dep't of Revenue , 2015 COA 10, ¶ 11, ––– P.3d –––– (emphasis added).

¶13 The court reasoned that the statute is ambiguous because it is unclear whether the legislature intended products like Blunt Wraps to be subject to the tax. Id. at ¶ 12. On one hand, the court observed, Blunt Wraps are a form of tobacco "suitable for smoking" in some circumstances (namely, when wrapped around other smoking material). Id. On the other hand, if Blunt Wraps are taxable "tobacco products," then so are all products that contain any amount of consumable tobacco. Id. Yet, the court of appeals reasoned, if this was the legislature's intent, it could have said so. Id. The court concluded that to read the statute so expansively would render the bulk of its language superfluous. Id.

¶14 To resolve the ambiguity, the court invoked various principles of statutory interpretation and concluded that Blunt Wraps are not "tobacco products" within the meaning of section 39-28.5-101(5). Id. at ¶¶ 13–18. First, it invoked the principle that, in interpreting ambiguous tax statutes, courts resolve doubts in favor of the taxpayer. Id. at ¶ 14 (citing Bd. of Cty. Comm'rs v. ExxonMobil Oil Corp. , 192 P.3d 582, 586 (Colo.App.2008) ); see also Douglas Cty. Bd. of Equalization v. Fid. Castle Pines, Ltd. , 890 P.2d 119, 125 (Colo.1995) ("Generally, we interpret ambiguous tax statutes in favor of the taxpayer."). Second, it applied the principle of ejusdem generis and concluded that the statutory phrase "other kinds and forms of tobacco, prepared in such manner as to be suitable for chewing or for smoking in a pipe or otherwise" includes only products that are a "focus of consumption." Id. at ¶¶ 15–16. The court reasoned that Blunt Wraps are not a focus of consumption because they are "only suitable for consuming other products." Id. at ¶ 16. Third, the court of appeals considered how the term "tobacco products" is defined in the criminal code. The court noted that originally both the tax code and the criminal code used the same definition of "tobacco products," but over time, the legislature expanded the criminal code definition of the term, whereas the tax code definition remained unchanged. Id. at ¶ 17. The court thus concluded that the term "tobacco products" has a narrower meaning in the tax context than in the criminal code. Id.

¶15 We granted the Department's petition for a writ of certiorari to...