Indiana Eby-Brown Co. v. Indiana Dept. of State Revenue

• Decision Date: 21 March 1995
• Docket Number: No. 45T10-9309-TA-00073,EBY-BROWN,45T10-9309-TA-00073
• Citation: 648 N.E.2d 401
• Parties: INDIANACO., Petitioner, v. INDIANA DEPARTMENT OF STATE REVENUE, Respondent.
• Court: Indiana Tax Court

Page 401

648 N.E.2d 401

INDIANA EBY-BROWN CO., Petitioner, v. INDIANA DEPARTMENT OF STATE REVENUE, Respondent.

No. 45T10-9309-TA-00073.

Tax Court of Indiana.

March 21, 1995.

Transfer Denied July 25, 1995.

Maurice P. Raizes, Cohon, Raizes & Regal, Chicago, IL, David J. Brandewie, Merrillville, for petitioner.

Pamela Carter, Atty. Gen., Kathryn Symmes Kirk, Deputy Atty. Gen., Indianapolis, for respondent.

FISHER, Judge.

Indiana Eby-Brown Co. (Eby-Brown) appeals a final determination of the Indiana Department of State Revenue (the Department), assessing a cigarette tax liability for the period of August 28, 1989, through May 1, 1992 (the audit period).

ISSUE

Whether a cigarette distributor is liable for cigarette tax on cigarettes lost, stolen, or otherwise missing, from its possession.

FACTS AND PROCEDURAL POSTURE

Eby-Brown, an Indiana corporation with its principal place of business in Indianapolis, is a cigarette distributor as defined in IND.CODE 6-7-1-6. Joint Stipulation at p 3. Eby-Brown distributes cigarettes, tobacco products, and sundry items throughout Indiana, Kentucky, Ohio, and West Virginia.

During the audit period, the Department inspected Eby-Brown's monthly cigarette tax returns. These returns reflected: (1) Eby-Brown's inventory of unstamped cigarettes and cigarette stamps at both the beginning and end of the audit period; (2) Eby-Brown's purchases of unstamped cigarettes and cigarette stamps during the audit period; and (3) the number of cigarettes Eby-Brown sold during the audit period in interstate commerce and to Indiana distributors. See Joint Stipulation at p 5. Based on the returns, the Department issued an assessment against Eby-Brown for $302,629.20 in outstanding cigarette tax liability, plus penalties and interest.

Eby-Brown protested the Department's assessment, asserting that it was erroneous because it gave no consideration to shrinkage factors such as cigarette inventory theft and cigarette stamp mutilation. ¹ The Department held a hearing on May 26, 1993, and, in its subsequent Letter of Finding, denied Eby-Brown's protest. Eby-Brown now appeals to this court. Additional facts will be supplied as necessary.

STANDARD OF REVIEW

The court reviews appeals from the Department de novo. Maurer v. Indiana Dep't of State Revenue (1993), Ind.Tax, 607 N.E.2d 985, 986. Therefore, the court is bound by neither the issues nor the evidence presented at the administrative level. Id.

DISCUSSION AND ANALYSIS

A. THE CIGARETTE TAX ACT

The Indiana Cigarette Tax Act (the Act), IND.CODE 6-7-1, imposes an excise tax on cigarettes (the tax). While the tax is conclusively presumed to be on the ultimate consumer, the State is assured payment by precollecting the tax from cigarette distributors. See I.C. 6-7-1-1. See also I.C. 6-7-1-17. As evidence that the tax has been paid, cigarette distributors purchase cigarette stamps from the Department to place on individual cigarette packages. I.C. 6-7-1-14. Cigarette distributors can then recover the tax they pay from the ultimate consumer through the purchase price of the cigarettes. I.C. 6-7-1-1.

B. THE DISPUTE

But what about cigarettes that never witness a retail transaction because they have been lost, stolen, or are otherwise missing from the cigarette distributor's possession? Does a cigarette distributor recover the tax it prepays on those cigarettes? Eby-Brown asserts that the legislature intended to tax cigarettes that 1) exit the stream of interstate commerce for final distribution in Indiana and 2) are disposed of voluntarily. In other words, only those cigarettes relinquished with the distributor's consent, whether they are sold or voluntarily given away, are taxable. Consequently, Eby-Brown maintains that cigarettes lost, stolen, or otherwise missing, from its possession are not taxable.

The Department, however, contends that the intent of the Act is to tax all cigarettes that are to be sold, used, consumed, handled, or distributed within the state. The Department further maintains that because the tax is collected from the first person to either sell, use, consume, handle, or distribute the cigarettes, it makes no difference whether the cigarettes are disposed of voluntarily or involuntarily. The Department maintains that because Eby-Brown was the first to take one of these actions, it is liable for the tax on all cigarettes, including those that have been lost or stolen.

Because the legislative intent embodied in a statute constitutes the law, Shoup Buses, Inc. v. Indiana Department of State Revenue (1994), Ind.Tax, 635 N.E.2d 1165, 1168, the court must give statutory words and phrases their plain, ordinary, and usual meaning. 3551 Lafayette Road Corp. v. Indiana Dep't of State Revenue (1994), Ind.Tax, 644 N.E.2d 199, 201. Moreover, statutes must be read "within the context of the entire act of which they are a part." Miller v. Gibson County Solid Waste Management Dist. (1993), Ind.Tax, 622 N.E.2d 248, 252. In this case, Eby-Brown cites five statutes to support its position: I.C. 6-7-1-1; I.C. 6-7-1-12; I.C. 6-7-1-17; I.C. 6-7-1-27; and I.C. 6-7-1-13.5. Accordingly, the court will examine Eby-Brown's argument under each statute.

1. I.C. 6-7-1-1

I.C. 6-7-1-1 provides:

It is the intent and purpose of this chapter to levy a tax on all cigarettes sold, used, consumed, handled, or distributed within this state, and to collect the tax from the person who first sells, uses, consumes, handles, or distributes the cigarettes. It is further the intent and purpose of this chapter that whenever any cigarettes are given for advertising or any purpose whatsoever, they shall be taxed in the same manner as if they were sold, used, consumed, handled, or distributed within this state. Notwithstanding any other provisions contained in this chapter, the liability for the excise taxes imposed by this chapter shall be conclusively presumed to be on the retail purchaser or ultimate consumer, precollected for convenience and facility only. When such taxes are paid by any other person, such payment shall be considered as an advance payment and shall be added to the price of the cigarettes and recovered from the ultimate consumer or user.

I.C. 6-7-1-1 (emphasis added). Eby-Brown argues that the emphasized language indicates that only those cigarettes that reach the retail purchaser or ultimate consumer are taxable because the tax "is conclusively presumed to be on the retail purchaser or ultimate consumer." Furthermore, Eby-Brown asserts that the effect of holding a distributor liable for the tax on all cigarettes it receives renders the second sentence of I.C. 6-7-1-1 meaningless, and it cannot be presumed that the legislature intended to enact a nullity. See USAir, Inc. v. Indiana Dep't of State Revenue (1993), Ind.Tax, 623 N.E.2d 466, 470. More specifically, Eby-Brown claims that when cigarettes have been given away, they have already been "handled" under the statute's first sentence, and the tax is therefore already due--thereby rendering the second sentence superfluous. The court disagrees.

The words "sold, used, consumed, handled, or distributed" are significant because they embrace a wide range of activities. "Consume" is defined as "the possession for use or the use of ... cigarettes for the purpose of smoking." I.C. 6-7-1-8. "Handle" is defined as "to trade in: engage in the buying, selling, or distributing of (a commodity)." Webster's Third New International Dictionary 1027 (1981). "Distribute" is defined as "to divide among several or many." Id. at 660. ² Consequently, by using words that encompass a broad range of activities, the legislature intended that all cigarettes be subject to the tax from the time they are brought into the state for distribution until the ultimate consumer purchases the product.

Typically, however, the ultimate consumer does not purchase cigarettes directly from a distributor. Rather, cigarettes often pass through the hands of various intermediaries--other distributors, common carriers, and retailers--before reaching the ultimate consumer. Accordingly, the Act insures that the tax is imposed once and only once during the overall distribution process. Mathis v. Cooperative Vendors, Inc. (1976), 170 Ind.App. 659, 671, 354 N.E.2d 269, 276. Indeed, I.C. 6-7-1-1 explains that the tax is collected from the person who first "sells, uses, consumes, handles or distributes" the cigarettes. In addition, I.C. 6-7-1-18 provides that a "distributor, upon the receipt of cigarettes taxed under this chapter, shall cause each individual package to have the requisite denomination and amount of stamps firmly affixed." Thus, as the first person to handle or distribute the cigarettes within the state, Eby-Brown has the duty to pay the tax on, and affix the cigarette stamps to, all cigarettes it receives from a manufacturer that are to be "sold, used, consumed, handled or distributed" within this state. ³

While the court must strive to avoid an interpretation that would render any part of I.C. 6-7-1-1 meaningless, see USAir, Inc. v. Indiana Department of State Revenue, 623 N.E.2d at 470, it cannot view the statute's words on a selective basis out of context from the remainder of the statute. See Miller, 622 N.E.2d at 252. Accordingly, I.C. 6-7-1-1's second sentence cannot be read in isolation but rather in conjunction with the sentences that follow it:

Notwithstanding any other provisions contained in this chapter, the liability for the excise taxes imposed by this chapter shall be conclusively presumed to be on the retail purchaser or ultimate consumer, precollected for convenience and facility only. When such taxes are paid by any other person, such payment shall be considered as an advance payment and shall be added to the price of the cigarettes and recovered from the ultimate consumer or user.

I.C. 6-7-1-1. Thus, these sentences explain that the tax may be passed from intermediary to intermediary to ultimate consumer. Id. In...