Florida Court Case in Favor of State on Taxing Out-of-State Tobacco Distributors

A factory now affected by the new law taxing out-of-state tobacco distributors.

On April 12, 2021, Florida precedent was established that potentially impacts out-of-state tobacco distributors. The case in point is the Global Hookah Distributors, Inc. vs the State of Florida, No. 1D20-822 that came down from the First District Court of Appeal of Florida. In the case, Global Hookah Distributors, Inc., a tobacco business, filed suit against the Florida Department of Business and Professional Regulation seeking a refund of $1.2 million of Florida tobacco taxes. However, the court ruled in favor of Florida for taxing out-of-state tobacco distributors.

Specifically, Global was filed a refund of tobacco excise taxes in Florida. The distributor's key argument was that it was subjected to tobacco taxes despite not meeting the nexus requirement. Because the North Carolina corporation was not physically in Florida, it argued it lacked substantial nexus with the state under the Commerce Clause. Accordingly, the state was not entitled to collect Tax on Tobacco Products Other Than Cigarettes or Cigars (OTP) charged on Global's tobacco sales.

However, the court denied this claim ruling that excise taxes are not classified as sales taxes. The court concluded that the corporation was liable to pay excise taxes as a regulatory measure imposed on tobacco distributors lacking a physical presence in Florida.

Subjecting Out-of-State Distributors to Excise Taxes

This case comes at the heels of the Wayfair bill, enacted in 2018, which seeks to impose sales and use tax on sales by out-of-state retailers. So far, 45 states have adopted the bill in a collective fight against online businesses. The state of Florida recently joined in implementing the economic nexus law which was enforced on July 1, 2021, requiring out-of-state retailers and marketplace facilitators to collect and remit sales taxes on annual sales from $100,000 and above.

Florida, like most states, imposes excise taxes as a deterrent for tobacco use. This implies that when a tobacco distributor supplies to a retailer, the taxes already factor in the price. This includes out-of-state tobacco distributors. The customer then has to pay extra for tobacco products, like hookah tobacco. The expected outcome created a decline in sales since the customer seeks cheaper alternatives. Similarly, the state showcased its constitutional power to impose excise tobacco taxes and defend its stand on Global for lacking a physical presence in Florida. This could set the ball rolling for other state governments to execute the same.

Despite this, Florida earned a substantial $1.534 billion from tobacco settlement cases and taxes in 2020. This implies other factors also affect the smoking habits of Floridians apart from taxes, like income levels. In addition, vapes and e-cigarettes not taxed in Florida attributes to an increase in consumption of other tobacco products. However, the state still imposes an exorbitant 85% on the wholesale price on other tobacco products.

Promoting Public Health Needs

Unfortunately, this victory for the state promotes its agenda to heavily tax tobacco and fund the Healthcare Trust Fund entrusted with protecting the health of Florida citizens. About 2/3 of the OTP funds collected by the state act as sources of revenue for the state while subjecting an economic burden on distributors. Following the case, Global and other out-of-state tobacco distributors have to comply with the set taxation rules.

The Bottom Line

This case offers a snapshot of the kind of pushback tobacco businesses face from the state and national government on tobacco sales. Laws and policies raise, revise, and defend to allow both sides of the divide a voice. Now, out-of-state tobacco distributors selling tobacco in Florida have to continually brace themselves while complying with excise taxes going forward. Will it prompt other states to follow suit?

If you are an out-of-state tobacco distributor doing business in Florida, this court ruling may affect your business. At Tobacco Tax Refund, Inc., we offer valuable consulting services on Florida tobacco laws. Feel free to contact us.