Glob. Hookah Distribs. v. Dep't of Revenue, TC 5272

• Decision Date: 06 August 2021
• Docket Number: TC 5272
• Parties: GLOBAL HOOKAH DISTRIBUTORS, INC., a North Carolina corporation, Plaintiff, v. DEPARTMENT OF REVENUE, State of Oregon, Defendant.
• Court: Oregon Tax Court

GLOBAL HOOKAH DISTRIBUTORS, INC., a North Carolina corporation, Plaintiff, v. DEPARTMENT OF REVENUE, State of Oregon, Defendant.

No. TC 5272

Tax Court of Oregon, Regular Division, Tobacco Products Tax

August 6, 2021

ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF'S AND DEFENDANT'S MOTIONS FOR SUMMARY JUDGMENT

Robert T. Manicke, Judge.

Plaintiff ("Taxpayer") brings statutory and constitutional challenges to Defendant's (the "Department's") assessments of Oregon's Tobacco Products Tax (the "TPT") on tobacco products other than cigarettes, codified at ORS 323.500 to 323.645^[1] (the "TPT Act" or "Act"). The tax periods at issue are the 16 quarters ending December 31, 2008, and June 30, 2009, through December 31, 2012.

I. INTRODUCTION & FACTS

A. Overview of Taxpayer's Business

Unless noted otherwise, the facts are uncontested for the periods at issue. Taxpayer is a North Carolina corporation whose commercial domicile and sole place of business are in Charlotte, North Carolina. (Ptf's 1st Amend Compl at 1, ¶ 1; Def's Ans at 1, ¶ 1; Ptf's Decl of Appel at 1-2, ¶ 4 (filed under seal).) Taxpayer buys and sells "shisha" (a form of tobacco that is smoked in hookahs) and non-tobacco products (such as hookahs, accessories to hookahs, and charcoal). (Id. at 1, 2, ¶¶ 2, 5.) Taxpayer does not repackage tobacco products; for example, if it buys a certain variety of shisha in 250-gram jars, it sells those jars of shisha to customers. (See id. at 4, ¶ 12; Def's Decl of Ennis, Ex A at 30-31 (filed under seal).)

A business wishing to order from Taxpayer first submits, through Taxpayer's website, an application containing business information and copies of the business's state tobacco license and sales tax license, if applicable. After Taxpayer approves the application, the business customer may place orders over email, phone, and fax. (Ptf's Decl of Appel at 6, ¶ 19.) Customers other than businesses typically create an account on Taxpayer's website, enabling them to place and track orders through the site. (Id. at 2, ¶ 6; id. at 6, ¶ 18.)

Taxpayer conducts all of its operations at warehouses in North Carolina and ships its goods via U.S. mail or common carrier from there to customers throughout the world. (Id. at 1-2, ¶¶ 3-4.) Taxpayer has a website and a presence on Facebook and Twitter that are accessible by anyone. (Id. at 6, ¶18.) Taxpayer sends newsletters by email a few times a year regarding new products or upcoming sales; newsletters go to customers who contact Taxpayer seeking to subscribe. (Ptf's Depo of Appel, Vol I at 92-93 (filed under seal).) None of Taxpayer's employees has entered Oregon on business. (Ptf's Decl of Appel at 6-7, ¶ 20.)

Taxpayer acknowledges that it is a "distributor" of "tobacco products" as defined by Oregon law. (Ptf's 1st Amend Compl at 1, ¶ 1.) See ORS 323.500(7) (defining "distributor"); 323.500(14) (defining "tobacco products"); 323.520(1) (imposing licensing requirement for distributors). Taxpayer obtained an Oregon distributor license after receiving a request around 2007 from an Oregon business customer who had been purchasing non-tobacco products from Taxpayer but who wanted to purchase tobacco products as well. (Ptf's Decl of Appel at 2, ¶ 7; Def's Depo of Appel, Vol 1 at 18-19.) See ORS 323.530. In the course of obtaining its license, Taxpayer was directed by a state employee to register with the Oregon Secretary of State as a foreign corporation, and Taxpayer did so. (Ptf's Decl of Appel at 2, ¶ 7.) Taxpayer has a registered agent in Oregon. (Def's Depo of Appel, Vol 1 at 41-42.) Taxpayer has filed a quarterly tobacco products tax return, and remitted all reported TPT, for each of the periods at issue. (See Def's Decl of Nichol at 3, ¶ 23; Ex B.)

Taxpayer's total sales to customers in Oregon during the calendar year 2008 amounted to less than $10, 000 in gross sales and fewer than 20 invoiced transactions, each including charges for shisha, charges for goods other than shisha, and other charges, all with two customers. (See Ptf's Decl of Appel, Ex 1 (copies of Taxpayer's sales invoices to Oregon businesses from 2008 to 2012).) Taxpayer had similar figures during the calendar year 2009: slightly more than $10, 000 in gross sales and fewer than 20 invoiced transactions, all with one of the customers to which it sold in 2008. (See id.) Taxpayer sent one or more invoices to the same customer each month from February 2008 through December 2009. The numbers increased for 2010 to less than $35, 000 in gross sales, fewer than 40 transactions, and four customers. (See id.) For 2011, Taxpayer had about $80, 000 in gross sales, around 60 transactions, and six customers. (See id.) For 2012, Taxpayer had around $180, 000 in gross sales, about 100 transactions, and nine customers. (See id.) As a percentage of Taxpayer's overall gross sales, Taxpayer's gross sales to Oregon customers ranged from 0.5 percent to 2.0 percent. (See Ptf's Decl of Appel at 3, ¶ 10.)

B. Taxpayer's Suppliers' Invoices

The invoices Taxpayer receives from its suppliers for tobacco products ordinarily have a line item for each type of product. That line item shows the unit of that product that Taxpayer has ordered (for example, a jar of a certain weight of a certain type of shisha), the number of such units ordered, the price per unit, and the total price for the quantity of units ordered. (See, e.g., Ptf's Decl of Appel, Ex 2 at 15.) Similar line items for non-tobacco products, such as charcoal, hookahs, or other smoking-related equipment, sometimes are included on the same invoice with tobacco products. (See, e.g., id.; id. at 19.) Supplier invoices also often show one or more of the following charges that the court will refer to as the "Charges at Issue" in Taxpayer's statutory claim: federal tax, shipping fees, custom fees, duties, transportation, palletizing, warehousing, customer service, advertising, documentation and other charges. (See id. at 15; see generally id. (copies of invoices); Ptf's Amend Compl at 2, ¶ 5 (listing Charges at Issue); Def's Ans at 1, ¶ 5.) An invoice typically groups all Charges at Issue into a single line item, although some invoices list shipping or other discrete types of Charges at Issue as separate line items. (Ptf's Decl of Appel, Ex 2 at 54 (one line item for all Charges at Issue); id. at 5, 17 (separate charges for "shipping"); id. at 21, 44, 62 (separate charge for "freight"); id. at 68 (separate line items for "Starbuzz Tobacco 250 Gram Trademark and handling Fee" and "Starbuzz Tobacco 1000 Gram Trademark and handling Fee.").) Most of the invoices do not show a breakdown of the Charges at Issue by product; for example, an invoice that shows shipping as a Charge at Issue will show only one shipping charge for all items on the invoice, not separate charges for shipping of each product type or each unit shown on the invoice. (See, e.g., id. at 54; see also id. at 22, 23, 39, 42 (multi-product invoices from one supplier showing a single line item for "Custom & Brokers Fees & shipping"); but see id. at 5 (shipping charge of $2.50 for 492 units of shisha for a total shipping charge of $1230.00); id. at 17 (similar); id. at 68 ("Starbuzz Tobacco 250 Gram Trademark and handling Fee" and "Starbuzz Tobacco 1000 Gram Trademark and handling Fee.").) In summary, each invoice clearly shows a stated price for each item of tobacco products and a stated price for each item of non-tobacco products. However, the stated amounts for Charges at Issue are, on most invoices, "bundled," both in the sense that multiple types of Charges at Issue are included in a single amount, and in the sense that the Charges at Issue are not allocated among the various products on the invoices.

C. The Department's Audit of Taxpayer's TPT Returns

For shisha, the TPT rate is "sixty-five percent of the wholesale sales price," which is defined as "the price paid for untaxed tobacco products to or on behalf of a seller by a purchaser of the untaxed tobacco products." See ORS 323.505(1)(c); 323.500(16). On its TPT returns for the periods at issue, Taxpayer calculated its "wholesale sales price" for tobacco products sold into Oregon using the line-item price for those products as shown on the invoices from suppliers. Taxpayer's calculation did not take into account any of the Charges at Issue. (Ptf's Decl of Appel at 3-4, ¶¶ 11-13.) In an audit in 2013, the Department recalculated Taxpayer's reported tax liability by including the Charges at Issue in the "wholesale sales price." (Ptf's 1st Amend Compl at 2, ¶ 5; Def's Ans at 1, ¶ 5); see, e.g., Ptf's Compl, Ex 2 at 2-3 (correspondence from the Department to Taxpayer explaining inclusion of shipping costs in tax base); Ptf's Decl of Appel, Ex 2 at 6 (invoice from one of Taxpayer's suppliers listing as "other charges" "Shipping, Duties, Transportation, Palletizing, Warehousing, Customer Service, Advertisement, Documentation & Other Charges.").)

The Department issued notices of deficiency, which, for all periods at issue, impose total additional TPT liability of $57, 501.92, plus interest, as of October 25, 2013. (See Ptf's 1st Amend Compl, Ex 2 at 1-20; 43-74.) Taxpayer appealed to the Magistrate Division and now appeals from an adverse decision there. The parties have filed cross-motions for summary judgment.^[2]

II. STANDARDS OF REVIEW

This division of the court reviews a magistrate's decision de novo based on the record developed in this division. ORS 305.425(1); see also ORS 305.501(6). The court grants a motion for summary judgment only if "the pleadings * * * declarations, and admissions on file show that there is no genuine issue as to any material fact and that the moving party is entitled to prevail as a matter of law." Tax Court Rule ("TCR") 47 C See Christensen v. Dept....