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East Coast Vapor, LLC v. Pennsylvania Department of Revenue

Commonwealth Court of Pennsylvania

June 22, 2018

East Coast Vapor, LLC, Petitioner
v.
Pennsylvania Department of Revenue, Respondent

          Argued: April 11, 2018

          BEFORE: HONORABLE MARY HANNAH LEAVITT, President Judge, HONORABLE RENÉE COHN JUBELIRER, Judge, HONORABLE ROBERT SIMPSON, Judge, HONORABLE PATRICIA A. McCULLOUGH, Judge HONORABLE MICHAEL H. WOJCIK, Judge, HONORABLE CHRISTINE FIZZANO CANNON, Judge, HONORABLE ELLEN CEISLER, Judge

          OPINION

          RENÉE COHN JUBELIRER, Judge

         We are asked to decide whether including in the definition of "tobacco products" under the Tobacco Products Tax Act (TPTA), [1] "electronic cigarettes" (e-cigarettes), when they do not deliver tobacco, as well as "e-liquids" that do not contain nicotine or contain nicotine derived from a source other than tobacco, violates the Due Process Clauses of the United States and Pennsylvania Constitutions. East Coast Vapor, LLC (Petitioner), has filed a Petition for Review (Petition) in this Court's original jurisdiction and an Application for Summary Relief (Application) on its Petition seeking a declaratory judgment that the General Assembly's inclusion of these items under the definition of "tobacco products" violates the Constitutions. Petitioner similarly claims that Pennsylvania Department of Revenue's (DOR) imposition of the TPTA tax on separately packaged component parts of an e-cigarette that DOR considers "integral" to the e-cigarette device violates due process because the "integral" component parts do not deliver tobacco. Petitioner also argues that DOR's interpretation of the TPTA as separately taxing the "integral" component parts of an e-cigarette is unsupported by the TPTA's plain language and violates the Uniformity Clause of the Pennsylvania Constitution.[2]DOR counters that Petitioner prematurely invoked this Court's jurisdiction and should have first exhausted its available administrative remedies by presenting its claims to the Board of Finance and Revenue (Board). DOR contends that Petitioner may not bypass the Board because Petitioner has not raised a substantial constitutional challenge to the TPTA and the Board's review is an available and adequate remedy.

         Petitioner's claim in this case, that the definition of "tobacco products" in the TPTA, on its face, violates the right to substantive due process under the United States and Pennsylvania Constitutions by including items that contain or deliver nicotine even though those products are neither derived from, nor use tobacco, constitutes a direct attack on the validity of the TPTA. Petitioner, therefore, did not need to raise this issue first before the Board. We therefore reach the merits, and hold that there is a rational basis for the General Assembly to define the e-cigarette device and e-liquid that contains nicotine as "tobacco products." However, the plain language of the TPTA does not support authorizing DOR to tax separately packaged component parts of an e-cigarette that DOR considers "integral" to the e-cigarette.

         I. The TPTA and Petitioner's Substantive Due Process Claim

         In considering the applicability of the TPTA to e-cigarettes and e-liquids, it is helpful to understand how an e-cigarette operates. An "electronic oral device" is generally composed of a mouthpiece, a tank, a heating element, and a battery. (Hr'g Tr., Jan. 10, 2018, at 24, 49.)[3] An "e-liquid"[4] is placed into the tank, and when the device is turned on, the battery powers the heating element, which heats the e-liquid into a vapor. A person inhales the vapor through the mouthpiece. (Id. at 24-25, 51-52.) This process is sometimes referred to as vaping. E-liquid can contain nicotine in varying concentrations, up to 24 milligrams. (Id. at 52-53.)

         The TPTA imposes a 40 percent tax on "tobacco products," which includes "electronic cigarettes." Sections 1201-A, 1202-A(a.1) of the TPTA, 72 P.S. §§ 8201-A, 8202-A(a.1).[5] The TPTA defines "electronic cigarettes" as follows:

(1) An electronic oral device, such as one composed of a heating element and battery or electronic circuit, or both, which provides a vapor of nicotine or any other substance and the use or inhalation of which simulates smoking.
(2) The term includes:
(i) A device as described in paragraph (1), notwithstanding whether the device is manufactured, distributed, marketed or sold as an e-cigarette, e-cigar and e-pipe or under any other product, name or description.
(ii) A liquid or substance placed in or sold for use in an electronic cigarette.

72 P.S. § 8201-A (emphasis added). The 40 percent tax is imposed on the manufacture and wholesale of "electronic cigarettes," which includes both the device and e-liquid. 72 P.S. § 8202-A(a.1).

         A. Petitioner's Argument

         Petitioner argues that the TPTA's definition of an e-cigarette as a type of "tobacco product" violates the Due Process Clauses of the United States and Pennsylvania Constitutions.[6] According to Petitioner, the TPTA's definition includes items that are neither used to deliver tobacco, nor are actually derived from tobacco. These items include: the "electronic oral device," i.e., the e-cigarette; the separately packaged component parts of the e-cigarette that DOR considers "integral" to it; "e-liquid that contains no nicotine"; and "e-liquid that contains nicotine that is not derived from tobacco" but from another source, such as eggplants, potatoes, or tomatoes. (Petition ¶¶ 27, 58-59, 67, 143, 180; Petitioner's Brief (Br.) at 28.) Therefore, according to Petitioner, these items "are both logically and scientifically not a tobacco product." (Petitioner's Br. at 31.) The General Assembly, Petitioner argues, sought to justify its taxation of these items on the basis that they contain or deliver nicotine, but the General Assembly has not made the required showing that e-cigarettes are harmful to one's health. Moreover, according to Petitioner, "there is no rational basis for including e-liquid . . . without nicotine in the definition of 'tobacco products, '" while "not taxing nicotine products sold by pharmaceutical companies and pharmacies as 'tobacco products.'" (Id.) Therefore, Petitioner seeks a judgment declaring that the definition of "tobacco products" as including items not derived or related to tobacco violates its substantive due process rights under the United States and Pennsylvania Constitutions.

         B. DOR's Response - Failure to Exhaust Administrative Remedies

         1. DOR's Argument

         In response, DOR first argues that the Court should dismiss the Petition because Petitioner has not exhausted its administrative remedies. DOR notes that Petitioner claims it is aggrieved by the unlawful collection of taxes, which, DOR argues, Petitioner may contest by petitioning the Board pursuant to Section 503(e) of the Fiscal Code, 72 P.S. § 503(e).[7] DOR claims "a cursory review of the Petition" shows that Petitioner has not raised a substantial constitutional challenge, so it may not bypass the administrative review process. (DOR's Br. at 9.) Instead, Petitioner merely alleges unconstitutionality and challenges DOR's interpretation of the TPTA. Petitioner has not shown, DOR argues, that it has suffered any harm because Petitioner has paid little in taxes. DOR further argues that "'all that [Petitioner] is complaining about is money[, ]'" that is, the amount of tax Petitioner is required to pay based on what items are covered by the TPTA, which, if Petitioner's interpretation of the TPTA is correct, can be refunded to it through the administrative process. (Id. at 11-12 (quoting Sands Bethworks Gaming, LLC v. Pa. Dep't of Revenue, 958 A.2d 125, 131 (Pa. Cmwlth. 2008)).)

         2. Petitioner's Argument

         In response, Petitioner argues that it is not required to exhaust its administrative remedies by going before the Board because it has brought a facial constitutional challenge to a statute. Therefore, the administrative agency is not competent to rule on the merits and, thus, the agency cannot provide complete and adequate relief.

         3. Analysis

         Whether Petitioner must exhaust its administrative remedies before invoking this Court's original equity jurisdiction is a threshold question.[8] Under the doctrine of exhaustion of administrative remedies, "a party must first exhaust its administrative remedies before invoking this Court's jurisdiction in challenging a final agency adjudication. The courts must refrain from exercising equity jurisdiction when there exists an adequate statutory remedy." Keystone ReLeaf LLC v. Pa. Dep't of Health, ___ A.3d ___, ___ (Pa. Cmwlth., No. 399 M.D. 2017, filed Apr. 20, 2018), slip op. at 10 (citation omitted). The doctrine of exhaustion is codified in the Declaratory Judgments Act, [9] which sets forth that declaratory relief is not available "with respect to any . . . [p]roceeding within the exclusive jurisdiction of a tribunal other than a court." Section 7541(c)(2) of the Declaratory Judgments Act, 42 Pa. C.S. § 7541(c)(2); see Section 1504 of the Statutory Construction Act of 1972, 1 Pa. C.S. § 1504 ("In all cases where a remedy is provided . . . by any statute, the directions of the statute shall be strictly pursued, and no penalty shall be inflicted, or anything done agreeably to the common law, in such cases, further than shall be necessary for carrying such statute into effect."). The Declaratory Judgments Act reflects "that the Legislature retains the power to channel all issues, including constitutional ones, into a specified route of appeal, such as an administrative appeal before a state or local agency." Beattie v. Allegheny Cty., 907 A.2d 519, 526 (Pa. 2006); see Borough of Green Tree v. Bd. of Prop. Assessments, Appeals & Review of Allegheny Cty., 328 A.2d 819, 823 (Pa. 1974) (stating that the equitable jurisdiction of a trial court is subject to statutory limitations); First Fed. Sav. & Loan Ass'n of Lancaster v. Swift, 321 A.2d 895, 898 (Pa. 1974) (noting that equity must follow the law). In other words, equitable relief, as in the case of a declaratory judgment action, "cannot be granted to a party [that] has an adequate remedy at law" but has not exhausted that remedy. Cherry v. City of Phila., 692 A.2d 1082, 1084 (Pa. 1997).

         The rationale behind the doctrine of exhaustion of administrative remedies "not only reflects a recognition of the [G]eneral [A]ssembly's directive of strict compliance with statutorily-prescribed remedies, it also acknowledges that an unjustified failure to follow the administrative scheme undercuts the foundation upon which the administrative process was founded." Shenango Valley Osteopathic Hosp. v. Dep't of Health, 451 A.2d 434, 438 (Pa. 1982). If judicial intervention is premature, occurring before the administrative remedies have been exhausted, "the agency's opportunity to develop an adequate factual record" is restricted, the exercise of the agency's expertise is limited, and "the development of a cohesive body of law in that area" is impeded. Id. In addition, administrative review allows "the agency . . . to correct its own mistakes and to moot judicial controversies." St. Clair v. Pa. Bd. of Prob. & Parole, 493 A.2d 146, 152 (Pa. Cmwlth. 1985); see Rochester & Pittsburgh Coal Co. v. Bd. of Assessment & Revision of Taxes of Indiana Cty., 266 A.2d 78, 79 (Pa. 1970) ("It may well be that all problems will be worked out at [the administrative] stage, and neither party will be required to resort to the judicial system.").

         There are, however, exceptions to the general rule that obviate the requirement of exhaustion. One "narrow" exception arises where a substantial question of constitutionality is raised. Parsowith v. Dep't of Revenue, 723 A.2d 659, 662 (Pa. 1999). A substantial question of constitutionality is one that challenges "the validity of the statute as a whole and not simply a challenge to the application of the statute to a particular party." Cherry, 692 A.2d at 1084. In other words, there must be a facial or direct challenge to the statute, as opposed to an as-applied challenge.[10] "A facial attack tests a law's constitutionality based on its text alone and does not consider the facts or circumstances of a particular case." Johnson v. Allegheny Intermediate Unit, 59 A.3d 10, 16 (Pa. Cmwlth. 2012) (quotation omitted). In contrast, an as-applied challenge "does not contend that a law is unconstitutional as written but that its application to a particular person under particular circumstances deprived that person of a constitutional right." Id. (quotation omitted). An administrative agency cannot find its enabling legislation to be unconstitutional - only a court can do so. However, an agency can alter its interpretation of the statute to conform to constitutional principles. Lehman v. Pa. State Police, 839 A.2d 265, 276 (Pa. 2003). Thus, where a facial challenge to a statute is raised, the agency cannot provide an adequate remedy, unlike an as-applied challenge. Borough of Green Tree, 328 A.2d at 825.

         Our Supreme Court's decision in Parsowith provides an example of a facial constitutional challenge. There, Mrs. Parsowith attacked the disparity in tax treatment of property passing to or for use of a surviving spouse "as between widows whose husbands died after January 1, 1995, . . . and widows whose husbands died before the effective dates for the reduced tax rates . . . ." Parsowith, 723 A.2d at 661. This Court dismissed Mrs. Parsowith's petition for review, concluding that she had to exhaust her statutorily-prescribed remedies with the Board. Our Supreme Court disagreed, holding that Mrs. Parsowith's claim "constitutes an attack upon the statutory scheme of taxation, rather than upon administrative interpretation alone." Id. The Supreme Court pointed out that all that had to be examined were the "express provisions" of Section 2116 of the Inheritance and Estate Tax Act, [11] such as making the date the tax was due and payable as the decedent's date of death. Id. at 662 (emphasis added). Indeed, the Court commented, "it would be impossible to construe the statute in any other manner than as tying the tax, including the applicable rate and the ultimate amount of the tax, to the date of the decedent's death." Id. Therefore, Mrs. Parsowith was making a "direct attack upon a legislative scheme of taxation," which was appropriate for judicial, not administrative, review. Id. The Court, thus, went on to reach the merits.

         As in Parsowith, Petitioner here has brought a facial constitutional challenge to the TPTA. Claiming that the TPTA violates substantive due process by defining products that contain or deliver nicotine, but are not derived from or use tobacco, as "tobacco products" subject to a 40 percent tax, is a direct attack on the TPTA. We need not go beyond the "express provisions" of the TPTA, or engage in any additional fact finding in order to resolve Petitioner's claim. See id. at 662. We simply need to decide whether it is a violation of substantive due process for the General Assembly to define "tobacco products" as items that have or deliver nicotine, even when these items are not derived from or use tobacco.

         Therefore, because Petitioner has raised a substantial constitutional challenge, it does not have to exhaust its administrative remedies. Accordingly, we will address the merits of Petitioner's substantive due process claim.

         C. DOR's Response to the Merits of Petitioner's Substantive Due Process Claim

         1. Petitioner's Argument Summarized

         Although set forth more in depth previously, Petitioner's merits' argument may be summarized as it is a violation of substantive due process for the TPTA to tax items that do not contain or deliver tobacco as "tobacco products." Since these items have no relation to tobacco, Petitioner argues it is irrational to call them "tobacco products."

         2. DOR's Argument

         DOR responds that there is a rational basis for taxing the "electronic oral device" and e-liquid containing nicotine as "tobacco products." DOR asserts that it is rational because nicotine is common to both tobacco and some e-liquids, nicotine is addictive, and users of e-cigarettes, particularly younger users, once addicted, may turn to smoking cigarettes. DOR points to the General Assembly's passage of Section 2 of the Tobacco Settlement Agreement Act, [12] 35 P.S. § 5672, as proof of the General Assembly's recognition of the dangers and costs associated with using cigarettes. DOR argues that the tax helps bear the costs of harm resulting from the use of "tobacco products," such as e-cigarettes, while deterring younger people from using these products because of their increased cost. These are rational bases for taxing e-cigarettes, DOR claims. As for e-liquid allegedly containing no nicotine, citing to a study contained in a Food and Drug Administration (FDA) Final Rule, DOR counters that e-liquid claiming to have no nicotine, in fact, often contains nicotine. (DOR's Br. at 22 (citing Deeming Tobacco Prods. To Be Subject to the Fed. Food, Drug, and Cosmetic Act, 81 Fed. Reg. 28974, 29034 (May 10, 2016) (to be codified at 21 C.F.R. pt. 1100, 1140, 1143)).)[13] Discovery of the facts is needed on this issue, DOR argues. In any event, DOR contends, this may be a de minimis issue because vaping devices are intended to deliver nicotine to persons addicted to it.

         3.Analy ...


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