Naifeh v. State ex rel. Oklahoma Tax Commission, 081017 OKSC, 116102

Court:Supreme Court of Oklahoma
Attorney:Robert G. McCampbell, Jay P. Walters, and Justin Lollman, GableGotwals, Oklahoma City, Oklahoma; Lisa S. Blatt, Sarah Harris, and Rosemary Szanyi, Arnold & Porter Kaye Scholer LLP, Washington, DC, for Petitioners James P. Naifeh, Standard Distributing Company, Brian Hutchinson, Hutchinson Oil Com...
Judge Panel:Combs, C.J., Gurich, V.C.J., Kauger, Winchester, Edmondson, Reif, and Wyrick, JJ., concur. Watt and Colbert, JJ., concur in part and dissent in part. Watt, J., with whom Colbert, J.
Opinion Judge:Wyrick, J.
Party Name:JAMES P. NAIFEH, STANDARD DISTRIBUTING COMPANY, BRIAN HUTCHINSON, HUTCHINSON OIL COMPANY, LLC, PHILIP MORRIS USA INC., R.J. REYNOLDS TOBACCO CO., ROGERS OIL CO., INC., COREY L. COOPER, STEPHENSON WHOLESALE COMPANY, INC., Petitioners, v. STATE OF OKLAHOMA, ex rel. OKLAHOMA TAX COMMISSION, THE HONORABLE MARY FALLIN, GOVERNOR, in her official...
Case Date:August 10, 2017
Docket Nº:116102
 
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2017 OK 63

JAMES P. NAIFEH, STANDARD DISTRIBUTING COMPANY, BRIAN HUTCHINSON, HUTCHINSON OIL COMPANY, LLC, PHILIP MORRIS USA INC., R.J. REYNOLDS TOBACCO CO., ROGERS OIL CO., INC., COREY L. COOPER, STEPHENSON WHOLESALE COMPANY, INC., Petitioners,

v.

STATE OF OKLAHOMA, ex rel. OKLAHOMA TAX COMMISSION, THE HONORABLE MARY FALLIN, GOVERNOR, in her official capacity, THE HONORABLE SENATOR MIKE SCHULZ, SENATE PRESIDENT PRO TEMPORE, in his official capacity, THE HONORABLE REPRESENTATIVE CHARLES MCCALL, SPEAKER OF THE HOUSE, in his official capacity, Respondents.

No. 116102

Supreme Court of Oklahoma

August 10, 2017

         UNPUBLISHED OPINION

         APPLICATION TO ASSUME ORIGINAL JURISDICTION AND PETITION FOR DECLARATORY RELIEF AND WRITS OF PROHIBITION AND/OR MANDAMUS

         ORIGINAL JURISDICTION ASSUMED. DECLARATORY RELIEF GRANTED.

          Robert G. McCampbell, Jay P. Walters, and Justin Lollman, GableGotwals, Oklahoma City, Oklahoma; Lisa S. Blatt, Sarah Harris, and Rosemary Szanyi, Arnold & Porter Kaye Scholer LLP, Washington, DC, for Petitioners James P. Naifeh, Standard Distributing Company, Brian Hutchinson, Hutchinson Oil Company, Philip Morris USA Inc., Corey L. Cooper, and Stephenson Wholesale Company, Inc.

          Robert A. Nance, Riggs, Abney, Neal, Turpen, Orbison & Lewis, P.C., Oklahoma City, Oklahoma, for Petitioners R.J. Reynolds Tobacco Company and Rogers Oil Co.

          Mithun S. Mansinghani and Michael K. Velchik, Office of the Attorney General, State of Oklahoma, Oklahoma City, Oklahoma, for Respondents.

          Wyrick, J.

         ¶0 Petitioners, who are manufacturers, wholesalers, and consumers of cigarettes, challenged Senate Bill 845, alleging that it is a revenue bill enacted outside of the procedure mandated in Article V, Section 33 of the Oklahoma Constitution. The parties agree that the passage of SB 845 did not comply with Article V, Section 33; so the case turns on whether SB 845 is the kind of "revenue bill" that Article V, Section 33 governs. Applying the test we have utilized since 1908, we conclude that the primary purpose of Sections 2, 7, 8, and 9 of SB 845 is to raise new revenue for the support of state government through the assessment of a new $1.50 excise tax on cigarettes and that, in doing so, SB 845 levies a tax in the strict sense. As such, Sections 2, 7, 8, and 9 of SB 845 comprise a revenue bill enacted in violation of Article V, Section 33 and are unconstitutional.

         ¶1 Article V, Section 33 of our Constitution restricts the Legislature's ability to enact "revenue raising" measures. It does so by requiring that such measures (1) originate in the House of Representatives, (2) be enacted prior to the last five days of the legislative session, and (3) be approved either by the people or by a three-fourths majority in each legislative chamber. 1

         ¶2 Senate Bill 845, the "Smoking Cessation and Prevention Act of 2017, " 2 will generate approximately $225 million per year in new revenue for the State through a new $1.50 assessment on each pack of cigarettes. The measure originated in the Senate, was passed on the last day of the legislative session, and garnered only a bare majority of votes in each legislative chamber.

         ¶3 All parties agree that if Article V, Section 33's requirements apply to SB 845, the measure must be invalidated for failure to comply with those requirements. The question presented by this case is thus whether SB 845 is a "revenue raising" measure. We conclude that it is and was thus enacted in violation of Article V, Section 33.

         I.

         ¶4 After years of declining revenues forced the Legislature to repeatedly make use of non-recurring revenue sources to balance the budget, both the Legislature and the Governor recognized that balancing the budget in 2018 would be impossible without either significant reductions in government spending, the creation of new revenue streams, or perhaps both. 3

         ¶5 In her 2017 State of the State address, Governor Mary Fallin pleaded with the Legislature to "focus on the REALITY of our state budget deficit, " arguing that the Legislature could not "afford to pass another budget using a large amount of non-recurring revenue" because "[i]t is important to provide sufficient revenues to meet the basic responsibilities that our government owes to its citizens." 4 To accomplish this goal, the Governor urged the Legislature "to raise our cigarette tax" so that "[t]he revenue raised can be spent on current health care needs." 5

         ¶6 The Legislature heard the Governor's call. Four proposals originated in the House of Representatives, [6] each of which proposed to levy a new $1.50-per-pack excise tax that would be assessed against cigarette wholesalers by the Oklahoma Tax Commission, who would then transmit the collected revenue to the State Treasury for deposit in certain health-agency operating funds. The Tax Commission would enforce collection of the tax through its Cigarette Excise Tax Stamps regime. Each of the proposals also allowed for Indian tribes to receive portions of the new tax revenues pursuant to their Tobacco Tax Compacts with the State. Two of the four proposals received a floor vote in the House and garnered majority support, but none of the proposals advanced, due to their failure to receive the three-fourths support required by Article V, Section 33. By May 20, 2017, six days prior to the end of the legislative session, the House proposals were abandoned.

         ¶7 On May 24th, however, SB 845, a shell appropriation bill relating to funding for the State Department of Health, was rewritten in the Senate as a measure to impose a new $1.50-per-pack assessment on cigarettes. Like the House proposals, SB 845 proposed that the $1.50-per-pack assessment would be imposed upon the cigarette wholesaler, collected by the Oklahoma Tax Commission, and enforced by the Tax Commission through its Cigarette Excise Tax Stamps regime. Likewise, the revenues collected would be transmitted to the State Treasurer to fund state health agencies, [7] and Indian tribes would be entitled to a portion of the revenues pursuant to their Tobacco Tax Compacts. Unlike the failed House proposals, though, SB 845 described the $1.50-per-pack assessment as a "smoking cessation fee" rather than a tax, said that the purpose of the assessment was to reduce the incidence of smoking by increasing its cost, earmarked $1 million of the expected $257 million in new revenues for enforcement of prohibitions on underage tobacco use, 8 and created several new sections of law that expressed in various forms the State's policy against smoking. The Senate passed SB 845 the same day it was introduced, by a 28-18 vote.

         ¶8 The failed House measures did not indicate that the purpose of the $1.50 assessment was to reduce the incidence of smoking, nor did they mention any non-revenue-raising regulatory purpose. Three of the four explicitly stated that their purpose was to "provid[e] revenue for the support of the functions of state government, " [9] while the fourth described itself as "[a]n Act... imposing additional tax levy upon cigarettes." [10] There is nothing in the legislative record demonstrating why, in the handful of days between May 20th (the date of last amendment to the last House proposal, HB 2414) and May 24th (the date the newly amended SB 845 was introduced), the Legislature's stated purpose shifted from raising revenue to reducing the incidence of smoking. There were no committee hearings held, no testimony taken, and no evidence received by the Legislature in that timeframe that would explain the sudden shift in purpose.

         ¶9 What is apparent is that by May 26th, with the end of the legislative session looming, the Legislature had not yet fulfilled its constitutionally-mandated duty to enact a balanced budget. 11 The House had just passed SB 860, the General Appropriations Bill, but that budget was predicated on SB 845's creation of over $200 million in new revenues. 12 This meant that the House was confronted with a constitutional conundrum: either pass SB 845, which was essential to balancing the budget but would perhaps require violating Article V, Section 33, or don't, and violate Article X, Section 23 by failing to balance the budget. As one legislator put it, this was "a decision between bad or worse." [13] The House ultimately passed the measure that day, by a vote of 51-43. The measure was set to take effect ninety days after it became law.

         ¶10 This original action was commenced shortly thereafter by individuals who purchase cigarettes and retailers, wholesalers, and manufacturers of cigarettes, each claiming they will suffer economic harm if SB 845 becomes effective. These Petitioners seek a declaration that SB 845 was enacted in violation of Article V, Section 33, and a writ prohibiting the various State Respondents from enforcing the measure. Petitioners also sought a stay of the enforcement of SB 845 should we not render our...

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