Mclane Western, Inc. v. Department of Rev.

CourtCourt of Appeals of Colorado
Citation199 P.3d 752
Docket NumberNo. 07CA2497.,07CA2497.
PartiesMcLANE WESTERN, INC., Plaintiff-Appellant, v. DEPARTMENT OF REVENUE, State of Colorado; and Roxy Huber, Executive Director of the Department of Revenue, State of Colorado, Defendants-Appellees.
Decision Date26 November 2008

Morrison & Foerster LLP, Thomas H. Steele, J. Eric Elliff, Mark E. Medina, Denver, Colorado, for Plaintiff-Appellant.

John W. Suthers, Attorney General, Carolyn Lievers, First Assistant Attorney General, Robert H. Dodd, Jr., Assistant Attorney General, Denver, Colorado, for Defendants-Appellees.

Opinion by Judge GRAHAM.

Plaintiff, McLane Western, Inc., appeals the trial court's order dismissing its complaint against defendants, Department of Revenue of the State of Colorado and Roxy Huber, its Executive Director (collectively, the Department). We reverse and remand with directions.

I. Factual and Procedural Background

A division of this court previously considered an appeal involving a dispute between these parties concerning the same tobacco tax statute, section 39-28.5-102, C.R.S.2008. See McLane W., Inc. v. Dep't of Revenue, 126 P.3d 211 (Colo.App.2005) (McLane I). However, McLane I dealt with different tax years and different constitutional challenges. In McLane I, the sole issue was whether the excise tax imposed by Colorado on "the sale, use, consumption, handling, or distribution" of "other tobacco products" (OTP) in the state, pursuant to section 39-28.5-102, violates the Commerce Clause of the United States Constitution, U.S. Const. art. I, § 8, cl. 3. In this appeal, McLane challenges section 39-28.5-102 on due process and equal protection grounds.

The relevant statutory scheme prescribed in section 39-28.5-102 provides:

(1) There is levied and shall be collected a tax upon the sale, use, consumption, handling, or distribution of all tobacco products in this state at the rate of twenty percent of the manufacturer's list price of such tobacco products. Such tax shall be imposed at the time the distributor:

(a) Brings, or causes to be brought, into this state from without the state tobacco products for sale;

(b) Makes, manufactures, or fabricates tobacco products in this state for sale in this state; or

(c) Ships or transports tobacco products to retailers in this state to be sold by those retailers.

Section 39-28.5-101(2), C.R.S.2008, defines "distributor" as

every person who first receives tobacco products in this state, every person who sells tobacco products in this state who is primarily liable for the tobacco products tax on such products, and every person who first sells or offers for sale in this state tobacco products imported into this state from any other state or country.

Section 39-28.5-101(3), C.R.S.2008, defines "manufacturer's list price" as "the invoice price for which a manufacturer or supplier sells a tobacco product to a distributor exclusive of any discount or other reduction."

For ease of reference, we now repeat the relevant underlying facts, which are set forth in McLane I.

McLane buys, resells, and ships grocery products throughout the State of Colorado and other western states from its headquarters in Longmont, Colorado. As part of its operations, McLane buys OTP from manufacturers and suppliers and then resells them to its customers, primarily grocery and small convenience stores.

Prior to 1990, as relevant here, McLane purchased OTP directly from the United States Tobacco Company (U.S.T.Co.). U.S.T. Co. manufactured, marketed, and sold its products to unaffiliated distributors.

In 1990, U.S.T. Co. reorganized and formed two wholly-owned subsidiaries, United States Smokeless Tobacco Manufacturing, L.P. (Manufacturing) and United States Smokeless Tobacco Brands, Inc. (Sales). U.S.T. Co. also changed its name to United States Smokeless Tobacco Company (Smokeless Tobacco). After the reorganization, Manufacturing was responsible for manufacturing and packaging the products and Sales was responsible for marketing and sales.

After Smokeless Tobacco reorganized and renamed itself, McLane purchased OTP from Sales. Sales purchased the OTP from Manufacturing at an invoice price that did not include any discounts or other reductions. Sales then resold the OTP at a higher price to McLane. According to Sales, this higher price reflected its own operating costs, profit margin, and the added value that came from its sales, marketing, distribution, and advertising efforts.

Manufacturing and Sales are located outside of Colorado, and the sale of OTP between them occurred outside of Colorado. McLane orders OTP from Sales, which ships McLane's product into the state by common carrier. Upon the arrival of the product at McLane's warehouse, McLane inspects and accepts or rejects it.

A. McLane I

McLane sought refunds pursuant to sections 39-28.5-101 to-111, C.R.S.2008, of what it asserted were excess OTP excise taxes paid during various periods between 1990 and 2001. The OTP excise tax rate was twenty percent, which the Department had assessed based on the manufacturer's or supplier's price paid by McLane to Sales.

McLane filed claims with the Department seeking a refund after computing the tax based on the price paid by Sales to Manufacturing, not on the higher price it paid to Sales. Using this recalculation, McLane claimed a tax refund in the amount of $10,163,024.33 plus statutory interest. The Department denied the claims, and McLane commenced two actions, which were consolidated. After agreeing to the material facts, the parties submitted cross-motions for summary judgment. The trial court granted the Department's motion.

On appeal, McLane argued that the OTP tax statute discriminated against interstate commerce. McLane asserted that, because each layer in the distribution network marks up the price, the tax imposed on the product will be higher the later in that distribution network that one or more of the triggering events listed in section 39-28.5-102 occurs. McLane I, 126 P.3d at 215. Thus, the tax-liable distributor must pay the tax on the larger "tax base" created by the collective price mark-ups. For example, if the manufacturer and all the distributors were located within Colorado, the tax base would be at its lowest level. Accordingly, the location of the manufacturers, suppliers, or distributors involved in the product's distribution network and the price mark-up of each impacts the tax base or the price upon which the constant twenty percent tax rate is imposed. Consequently, McLane asserted that the OTP tax scheme discriminates against interstate commerce by creating an "inexorable pressure" on out-of-state businesses to move into the state to "take advantage of the overall OTP tax benefit." Id.

Although the division agreed with McLane's assertions that the tax base will be higher the later in the distribution network the product is taxed, it disagreed with McLane's conclusion that this fact rendered the tax unconstitutional under the Commerce Clause. Id. The division explained,

[W]hile the tax here is imposed based on the price paid by the taxable distributor, neither Manufacturing [n]or Sales is encouraged to move into the state because they might well become the taxable distributor. The tax is imposed on an activity within the state, the sale and distribution of OTP, not on the product or the distribution network. The fact that the tax base calculated on the price paid by the taxable distributor may place the product at a competitive disadvantage in the marketplace because the higher tax is added to the price does not, in our view, render the tax unconstitutional under the Commerce Clause. All taxable distributors of OTP are taxed at the same rate and on a tax base determined in the same fashion.

Id. at 216.

The division also concluded that the price that McLane paid to Sales (and not the invoice price Sales paid to Manufacturing) is the "manufacturer's list price" for purposes of the statute, noting that McLane purchased the OTP from a supplier, not a manufacturer, of the product. Id. at 218. In so holding, the division rejected McLane's argument that the trial court did not need "to reach the term `supplier' because the facts established an earlier qualifying sale between a manufacturer and a distributor" and, therefore, there was no reason to move to the second transaction when the first transaction fixed the tax base. Id. at 217-18.

The Colorado Supreme Court and the United States Supreme Court denied McLane's petitions for writs of certiorari.

B. Current Litigation

Before McLane I was announced, McLane filed this claim for a refund amount of $5,001,253.94 plus statutory interest for excess OTP excise taxes paid during various periods between January 1, 2002 and December 31, 2004, on the same basis asserted in its requests for refunds in McLane I. The Department denied McLane's refund claim based on the holding in McLane I, and McLane filed this action in the trial court.

The complaint alleged that the OTP tax statutes, as construed by the McLane I division, are unconstitutionally vague and violate McLane's rights under the Due Process Clauses of the Fourteenth Amendment to the United States Constitution and article II, section 25, of the Colorado Constitution, as well as under the Equal Protection Clauses of the United States and Colorado Constitutions. McLane alleged that the McLane I division's construction of the OTP tax statutes provides no guidance as to which party in the distribution chain is subject to the OTP tax and that the Department may tax similarly situated tax-liable distributors at different points in similar distribution chains, resulting in a nonuniform application of the tax.

Specifically, the complaint averred that, because Sales "performed activities within the State that result in the imposition of the tax" under section 39-28.5-102, like McLane, Sales was also a "tax-liable distributor" with respect to the sales to McLane, based upon the ...

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