Santa FE Natural Tobacco Co. v. Department of Revenue, TC 5372

CourtOregon Tax Court
PartiesSANTA FE NATURAL TOBACCO COMPANY, Plaintiff, v. DEPARTMENT OF REVENUE, State of Oregon, Defendant.
Docket NumberTC 5372
Decision Date03 May 2021


DEPARTMENT OF REVENUE, State of Oregon, Defendant.

No. TC 5372

Tax Court of Oregon, Regular Division, Corporation Excise Tax

May 3, 2021




The substantive issue in this case is whether 15 USC § 381 ("PL 86-272") [1] protected Plaintiff ("Taxpayer") from Oregon's net income tax for tax years 2010 through 2013. During those years, Taxpayer was an out-of-state manufacturer, marketer, and distributor of cigarettes and other tobacco products. (Stip Facts at 1 -2, ¶¶ 1 -3.) The Department contends that Taxpayer engaged in two activities that exceeded the protection of PL 86-272:

"1. Oregon wholesalers' acceptance of returns from Oregon retailers of [Taxpayer's] products covered by [Taxpayer's] '100% Guarantee 'to Oregon retailers, pursuant to agreements between [Taxpayer] and Oregon wholesalers
"2. [Taxpayer's] Oregon employees' activity directly placing with Oregon wholesalers so-called 'pre-book' orders by Oregon retailers, which orders Oregon wholesalers were required to accept pursuant to agreements between [Taxpayer] and the wholesalers."

(Def's Pre-Trial Memo at 1.) In response to the Department's first allegation Taxpayer asserts, alternatively, that Oregon wholesalers either did not act on Taxpayer's behalf when accepting returns or were independent contractors engaging in an activity that is not considered a business activity of Taxpayer under PL 86-272. (Ptf's Pre-Trial Memo at 1.) In response to the second allegation, Taxpayer asserts that the placing of pre-book orders with Oregon wholesalers was a "missionary" activity that PL 86-272 protects. (Id. at 2.) The parties have stipulated to all relevant facts and have agreed that the factual record is closed. (See Stip Facts at 16, ¶ 57 (agreeing that "at trial neither party may introduce witness testimony or exhibits that are not contained in this Joint Stipulation of Facts."). Accordingly, the parties' arguments are based entirely on their respective legal positions as to whether the activities at issue subjected Taxpayer to Oregon tax or were within the protection of PL 86-272.

As part of the parties' stipulations, Taxpayer reserved the right to call one expert witness at trial, and the Department reserved the right to present expert witness testimony in rebuttal. (Stip Facts at 16-17, ¶ 57.) The court set a one-day trial on October 15, 2020, solely for the purpose of hearing testimony from the two witnesses. The parties were not required to, and did not, exchange the identity of the witnesses they expected to qualify as experts. As part of pretrial submissions, the Department filed a motion in limine setting forth grounds for objections it anticipated raising to Taxpayer's proffered expert testimony. At trial, the Department made its objections to the admission of the testimony of Taxpayer's witness. (Trans at 8, Oct 15, 2020.) The court took the objections under advisement, allowed the testimony of both witnesses to proceed, and directed the parties to submit arguments in writing after trial for the court to address in this order, to be followed by post-trial briefing on the substantive issues. (Id. at 18-22.) Taxpayer then offered testimony of Professor Richard D. Pomp as an "expert in tax policy and Public Law 86-272." (See id. at 28; 43-44.) On rebuttal, the Department offered testimony of Benjamin F. Miller, also as "an expert in tax policy." (Id. at 150.) Taxpayer's counsel objected and asked the court to exclude Miller's testimony if the court excludes the testimony of Taxpayer's proffered expert Pomp. (Id. at 152; Ptf's Br In Oppos at 12 n 3.) Because Taxpayer's objections are conditional, and the Department's objections are more extensive, the court frames this order by reference principally to the Department's objections.

The Department's general objection is that Taxpayer's proffered testimony about tax policy is indistinguishable from legal opinion that intrudes on the province of the court and does not assist the court as trier of fact to "understand the evidence or to determine a fact in issue * * *" as required by Oregon Evidence Code ("OEC") 702 (ORS 40.410). (Trans at 10 (statement of Weirnick); Def s Br Supp Obj at 2 ("Testimony on 'tax policy and Public Law 86-272' is nothing more than testimony on a federal law and Congress' purpose and intent in adopting it.").) Taxpayer argues that the Department bases its objection on the erroneous premise that "there is no such thing as tax policy that exists apart from black letter law," and Taxpayer argues that Pomp's testimony did not "cross the line into an opinion of law." (Ptf's Br In Oppos at 2, 5.) Taxpayer also asserts that this court, as a court without a jury, is authorized and required to admit the testimony. (Id. at 3-4.)


Is the proffered expert witness testimony admissible?


The court considers the proffered testimony and objections in two parts, consistent with the order of presentation: the origin and development of PL 86-272 and cases applying that statute, and the application of tax policy to the facts of this case. All of the testimony fits into one of these categories, except testimony related to the witnesses' qualifications, which the court addresses in the first part.

A. Testimony on Origin and Development of PL 86-272

After addressing qualifying questions, discussed below, each witness testified generally about state taxation of interstate commerce under PL 86-272 and constitutional restrictions. Pomp testified about growth in interstate commerce after the Great Depression and about court decisions and concerns within the business community that led up to the passage of PL 86-272, as well as subsequent efforts to develop uniformity in state taxation through the period preceding Wisconsin Dept. of Rev. v. William Wrigley, Jr. Co., 505 US 214, 112 SCt 2447, 120 L.Ed.2d 174 (1992). (Trans at 50-68:18.) Miller briefly discussed the age of PL 86-272 and referred to Wrigley and South Dakota v. Wayfair, Inc., 585 US __, 138 S Ct 2080, 201 L.Ed.2d 403 (2018). (Trans at 153:11-155:19.)

The court considers whether this testimony constitutes legal analysis that is the province of the court and is not a proper subject for expert testimony. See Jackson v. Franke, 304 Or.App. 503, 512467 P3d 779 (2020), rev allowed' 367 Or. 220 (reviewing trial court's denial of criminal defendant's claim for post-conviction relief based on ineffective assistance of counsel; approving trial court's exclusion of criminal defense lawyer's testimony on "correct interpretation of case law"), see generally Stobie Creek Investments, LLC v. U.S., 81 Fed Cl. 358, 360 (2008) (in taxpayer's challenge to income tax adjustments, declining to admit taxpayer's proffered expert testimony of tax professor and tax attorney that 'testifies about what the law is or directs the finder of fact how to apply law to facts"); Laird C. Kirkpatrick, Oregon Evidence 648 (7th ed 2020) ("In general, questions of law are for the court and are not a proper subject for expert testimony to the jury.").

The court starts by considering whether a field of tax policy may exist separate from the field of tax law. The parties have not attempted to define "tax policy." The court generally understands tax policy to focus on the choices that governmental leaders make in response to, or in anticipation of, economic, social, and other concerns related to taxation. See generally Webster's Third New International Dictionary 1754 (unabridged ed 2002) (defining "policy" as "a definite course or method of action selected (as by a government, institution, group, or individual) from among alternatives and in the light of given conditions to guide and usually determine present and future decisions"). Because taxation is an inherently governmental function, the court focuses on policymaking by government actors. See id. at 2345 (defining "tax" as a "charge imposed by legislative or other public authority * * * for public purposes''). Based on this broad understanding, the legislative branch has a primary role in tax policymaking, which it exercises by hearing the concerns of the public and of interested persons, choosing which concerns to address and how to do so, and writing laws that reflect those choices. The legislative branch also may make policy less formally and without writing laws, for example, by convening or encouraging work groups that result in negotiated solutions without legislation, or by engaging in budgetary and other oversight of the executive branch. Even holding hearings and conducting other public factfinding efforts might constitute a definite course of action intended to influence public opinion and change the course of events. [2]

The court concludes that a field of tax policy exists that includes, but is broader than, the field of tax law. The study of tax policy may, for example, encompass historical evidence of the forces leading to policymakers' choices, alternatives they could have pursued, and social and economic consequences of enacted tax laws. The court does not doubt that policymakers and scholars in a range of disciplines such as law, but also history, economics and other social sciences, may achieve a high level of understanding of tax policy, thus defined, and may help the court by adding context to the text of the law. This seems to have...

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