Global Successful Secures Partial Tobacco Tax Refund in Oregon

wooden pipe with tobacco

When a business receives a tax assessment from a state department of revenue, they are led to believe the only real option is to pay the assessment, even if they know the assessment is wrong. State agencies tend to threaten license revocation or other strong-arm collection tactics for unpaid assessments. However, one of the weapons available to taxpayers is to challenge the assessment through the agency appeal process and eventually in administrative, judicial, and/or tax court. Recently, Global Hookah Distributors (“Global”) was faced with a large tobacco tax assessment in Oregon and decided to fight back.

Global is a North Carolina based tobacco distributor, who sells various hookah tobacco products and accessories, and a licensed distributor in Oregon. Like most states, Oregon imposes a tobacco products tax, which is based on 65% of the wholesale price. And, like most states, the wholesale sales price is defined as “the price paid for untaxed tobacco products to or on behalf of a seller by a purchaser of the untaxed tobacco products.”

Based on Oregon’s tax definition, Global paid tobacco tax on the line-item unit price of the tobacco included on each invoice, but not on the total amount of the invoice. Other line-items included in the typical invoice included various other charges such as shipping, duties, transportation, palletizing, warehousing, customer services, advertisements, federal excise tax, shipping costs, and other charges. The Oregon Department of Revenue audited the taxpayer and determined Global should have paid tax on the total amount due on the bottom of the invoice. The DOR asserted that Global owed additional tax totaling almost $58,000, based on the various other charges.

Ultimately, the case ended up in Oregon Tax Court and the parties filed cross summary judgement motions. In short, Global advanced two primary arguments:

  1. Whether the Oregon’s wholesale sales price included the Other Charges in addition to the line item for tobacco
  2. Whether Global had substantial nexus which would allow Oregon to tax it under the Commerce Clause.

As the often-aggressive agencies tend to do, Oregon’s DOR argued the invoice price was to be used because the full invoice amount included the entire consideration for the tobacco, and it all had to be paid for Global to acquire the tobacco.

On the other hand, Global argued the price for the tobacco means the amount paid for a specified thing, which would mean only the tobacco is subject to tax.

On balance, the Court reached a peculiar conclusion. First, the Court held that based on the Uniform Commercial Code, shipping falls into a newly announced “safe harbor” and are not included as the taxable base for tobacco products in Oregon so long as:

  1. The charges are separately stated
  2. A third party of common carrier provides the shipping
  3. The shipping charges incurred separate from any other charges
  4. The supplier passes them on at no more than a reasonable markup

However, the court left open when the other charges were subject to tax. To determine their taxability an evidentiary hearing is required. At the hearing, Global must provide reasoning as to why the items should be excluded from tax and prove the amount of such charges. To determine their taxability the Court is looking for evidence on:

  1. charges for identifiable services are more likely to be excludible than charges not for services;
  2. service charges are more likely to be excludible if a third party performed the services than if the supplier performed the services;
  3. third-party service charges ordered by the supplier are more likely to be excluded if the seller passed on the charges at no more than a reasonable markup; and
  4. charges are more likely to be excludible if title to the shisha had passed to Taxpayer when the supplier incurred the charge.

In conclusion, the Court ruled for Global on the shipping issue, it left open the issue as to whether other charges are taxable. While some of the charges may be difficult to ascertain their excludability, some of the fixed charges like Federal Excise Tax, might be excludable under the judge’s new test. More importantly, it gives taxpayers a framework as how to challenge tobacco taxes or get money back through a refund claim. Such a conclusion is also consistent with various other state cases including the removal of federal excise tax and shipping from tax in Florida in Minnesota, an issue we have been fighting for years.

Equally important, the case highlights yet another great example as to the importance of challenging assessments and refund denials. If you or your client’s business receives a state tax assessment, it is critical to seek counsel of a competent state and local tax attorney, to evaluate and challenge questionable view and practices of states’ department of revenues.

For Oregon taxpayers, the case also provides a blueprint to adjust your tax strategies to avoid paying unnecessary TPT in Oregon. At the least, it is likely advisable to file a refund claim in Oregon until his gests sorted out.

If you have any questions about taxes imposed by Florida's Division of Alcohol, Beverages, and Tobacco or the Florida Department of Revenue, then please contact our office for a free initial consultation. If any agency in Florida threatens you or your business's Florida professional license or Florida business license, then please contact a competent Florida attorney to fight back. If you don't already have an attorney, then contact our offices today to help keep your business doors open.