In re Sandia Tobacco Mfrs., Inc.

• Decision Date: 12 October 2018
• Docket Number: Case No. 16-12335-j11
• Parties: In re: SANDIA TOBACCO MANUFACTURERS, INC. A New Mexico corporation. Debtor.
• Court: U.S. Bankruptcy Court — District of New Mexico

In re: SANDIA TOBACCO MANUFACTURERS, INC. A New Mexico corporation. Debtor.

Case No. 16-12335-j11

UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW MEXICO

October 12, 2018

MEMORANDUM OPINION

THIS MATTER is before the Court on cross motions for summary judgment on Debtor's objection to the United States Department of Agriculture's (the "USDA") proof of claim. See Docket Nos. 300 & 311. Debtor manufactured cigarettes, cigars, and other tobacco products. As a tobacco manufacturer, Debtor is subject to the federal Fair and Equitable Tobacco Reform Act of 2004 ("FETRA"). 7 U.S.C. § 518d. Under FETRA, the Debtor was subject to assessments starting in 2004 to fund the USDA's payments to stabilize the tobacco industry as tobacco farmers transitioned to the free market. If the assessments are "excise taxes" under FETRA the amount due is entitled to priority status under 11 U.S.C § 507(a)(8)(E).¹ The Debtor objects to the USDA's proof of claim on the basis that the FETRA assessments are not excise taxes and therefore give rise to a nonpriority unsecured claim under § 507(a)(8)(E). The USDA does not agree and asks the Court to find that the claim is entitled to priority status.

The issues presented in the cross motions for summary judgement can be distilled to the following: (1) whether the FETRA assessments are excise taxes or regulatory fees; (2) if the FETRA assessments are not regulatory fees, whether the assessments should be characterized as excise taxes or customs duties; and (3) if the FETRA assessments are excise taxes, when the taxed transactions occurred. As explained below, the Court will grant the USDA's motion for summary judgment in part. The FETRA assessments are excise taxes entitled to priority status tothe extent the tax was imposed on the removal of tobacco product for sale within the three years prior to the commencement of the Debtor's bankruptcy case.

FACTS AND BACKGROUND

Prior to FETRA's enactment, Depression era tobacco subsidies set quotas and allotments, provided price support and resulted in "an overly-bureaucratic, government-controlled system which [wa]s unable to respond to market pressures and opportunities." 150 Cong. Rec. H8718. Tobacco farmers were only able to market according to their quotas or allotments. See 7 U.S.C. §§ 1281 (repealed); see also Declaration of Darlene A. Soto, Tobacco Transition Program Manager of the Farm Service Agency, United States Department of Agriculture, at ¶ 6 (the "Soto Declaration"). The Depression era price support system enabled the federal government to purchase "tobacco through non-recourse loans issued through special price support associations at a particular price as tobacco farmers were unable to find buyers at the same or higher prices." Soto Declaration ¶ 2. The price support system artificially inflated the prices of domestic tobacco. Id.

Congress enacted FETRA in 2004 to end the Depression era tobacco subsidies, transition tobacco farmers to the free market by providing payments to the farmers, and recoup the cost of the payments by levying assessments on tobacco manufacturers and tobacco importers. In enacting FETRA, Congress responded to the effects diminishing tobacco use that resulted in diminished tobacco quotas. The diminished quotas devastated tobacco farmers who saw up to a fifty percent decrease in quotas, and therefore their income, over five years. 150 Cong. Rec. H8718 ("Since the late 1990s, burley tobacco quotas have been cut in half, causing significant financial loss for family farmers who currently earn less than half the amount they could have earned only 5 years ago."). With diminished quotas and price supports artificially inflating the domestic tobacco market the Depression era program "promise[d] little more than bankruptcyand foreclosure [for farmers] . . . [and] promise[d] economic collapse for their communities." 150 Cong. Rec. H8717. A congressman from North Carolina described the effect of the Depression era program on his district:

Mr. Speaker, there are 1,040 tobacco producers in my congressional district producing a crop of 35,147 acres of land. Every single one of these producers is in dire straits. They are cashing in their retirement to continue farming. They are mortgaging their houses to stay in business. They are going deeper and deeper into debt. A buyout is not a luxury payment, it is a desperately needed infusion into an economy that depends on a depression-era program that no longer works. Even farmers that would ordinarily be wealthy are instead being told by their bankers that their loan will have to be reevaluated in future years.

150 Cong. Rec. H8718-19. In addition, supporters of FETRA believed that "[e]liminating the current quota system will make American tobacco leaf . . . more competitive on the world market." 150 Cong. Rec. H8717.

As such, Subtitle A of FETRA repealed in full the marketing quotas, tobacco controls, parity payments, acreage allotments, and price support systems that had previously subsidized tobacco farmers. American Jobs Creation Act of 2004, sec. 611. Termination of Tobacco Quota Program and Related Provisions, PL 108-357, October 22, 2004, 118 Stat 1418. FETRA did not phase out the subsidies but instead repealed them on the effective date of the statute. Id.

Because the then existing subsidies supported tobacco farmers' livelihoods and artificially inflated domestic tobacco prices, under Subtitle B of FETRA Congress created the Tobacco Transition Payment Program (the "TTPP") to enable the tobacco farmers to transition to and be competitive in the free market. Id. Tobacco farming's history of regulation led to a fear that "when tobacco quotas are eliminated, U.S. production of tobacco leaf will skyrocket, and the prices will plummet." 150 Cong. Rec. H8723.

Under FETRA, the USDA paid eligible tobacco farmers transition payments for 10 years. These payments, sometimes known as TTPP payments, were enacted to "give many debt-riddentobacco growers a chance to either retire with some dignity, invest in production of a different crop or restructure their current tobacco production." 150 Cong. Rec. H8717. To be eligible for the TTPP payments, tobacco farmers had to prove that they had previously been subject to the tobacco subsidy system. Those eligible tobacco farmers received TTPP payments based on the pounds of tobacco produced, the old marketing quota under the Agriculture Adjustment Act of 1938, or by multiplying the acreage allotment by the average production yield for the county. 7 U.S.C. § 518a(c). As set out in the statute, these payments represented full and fair consideration for the termination of the prior tobacco subsidies. 7 U.S.C § 518a(a). Congress authorized the Secretary of Agriculture to make payments totaling $10,140,000,000 under the TTPP. 7 U.S.C. § 518f.

FETRA also established a Tobacco Trust Fund within the Commodity Credit Corporation and backed by the United States Treasury. 7 U.S.C. § 518e; 15 U.S.C. § 714. TTPP payments to tobacco farmers where made from the Tobacco Trust Fund. 7 U.S.C. § 518e. To defray the costs of the TTPP to the general public, Congress imposed assessments on tobacco manufacturers and tobacco importers. 7 U.S.C. § 518d; See also 150 Cong. Rec. H8710, ("The tobacco companies now have to step up and put the money up to do this so that the growers and farmers are not penalized anymore in the tobacco business."). Congress delegated the authority to collect the assessments to the Secretary of Agriculture, and the funds collected as a result of the assessments were placed into the Tobacco Trust Fund. 7 U.S.C. § 518d(b) ("The Secretary . . . shall impose quarterly assessments during each of fiscal years 2005 through 2014 . . . on each tobacco product manufacturer and tobacco product importer that sells tobacco products in domestic commerce in the United States during that fiscal year."); 7 U.S.C. § 518e.

The FETRA assessments ran from fiscal year 2005 through fiscal year 2014. 7 U.S.C. § 518d(b). Each tobacco manufacturer or importer's share was based on a two-step calculation set out in the statute. 7 U.S.C. § 518d. Step A of the calculation divided the types of tobacco manufacturers and importers into six product classes: cigarettes, cigars, snuff, roll-your-own tobacco, chewing tobacco, and pipe tobacco. 7 U.S.C. § 518d(c)(1). Step B of the calculation allocated the assessment based on the share of gross domestic product sold by each class of products. 7 U.S.C. § 518d(c)(2). As set forth in the statute,

The amount of the assessment for each class of tobacco product specified in subsection [Step B] to be paid by each manufacturer or importer of that class of tobacco product shall be determined for each quarterly payment period by multiplying-- (1) the market share of the manufacturer or importer, as calculated with respect to that payment period, of the class of tobacco product; by (2) the total amount of the assessment for that quarterly payment period under subsection (c), for the class of tobacco product.

7 U.S.C. § 518d(f). Therefore, once the class allocations were calculated, each individual tobacco manufacturer's assessment was based on its pro rata share of gross domestic volume within that class. 7 U.S.C. § 518d(e)(1).² The USDA based the Step B calculation on the volume "removed" from a tobacco manufacturer's inventory and entered into the domestic commercial market. As such, FETRA required that tobacco manufacturers report the volume of tobacco products "removed" and the taxes paid on those cigarettes.³ 7 U.S.C. § 518d(h). If a tobaccomanufacturer failed to provide the information to the USDA, the assessment was based on the annual excise tax data on that manufacturer.

The statute provides that the FETRA assessments were "collected at the end of each calendar year quarter."⁴ 7 U.S.C. § 518d(d)(3). The collection dates for the assessments were March 30, June 30, September 30, and December 30. See also Soto Declaration at ¶7. At least...