Texas tobacco tax was unconstitutional, Appeals Court rules

In the case of Combs v. Texas Small Tobacco Coalition, the Third District Court of Appeals of Texas upheld a ruling by the District Court of Travis County, Texas, which determined that a cigarette tax of 55 cents per pack levied on smaller tobacco companies violated the Equal and Uniform Clause of the Texas Constitution.

Background and procedural history

In 1996, Texas filed a federal antitrust lawsuit against the nation's four largest tobacco companies, which controlled 97 percent of the cigarette market, seeking billions of dollars in damages, asserting that these companies promoted their products using unconscionable and deceptive advertising tactics. Other states brought similar suits. In 1998, the large tobacco companies signed comprehensive settlements of the various suits that included 46 states, the District of Columbia and six territories.

The companies also entered into individual settlements with the remaining four states, including Texas. Under the Texas settlement the companies agreed to pay billions of dollars to the state and to Texas counties and hospital districts.

In 2013, the state revised the Texas Health and Safety Code to create a tax on small, independent manufacturers of certain cigarettes and cigarette tobacco products, such as roll-your-own tobacco, that are sold, used, consumed or distributed in the state. Only cigarettes and cigarette tobacco products manufactured by non-settling manufacturers are subject to the tax.

The small, independent manufacturers subsequently filed suit in the District Court seeking a court injunction barring enforcement of the tax and a court ruling declaring that the tax violated the Equal and Uniform Clause of the Texas Constitution and the Equal Protection and the Due Process clauses of the U.S. Constitution.

The District Court determined that the tax was unconstitutional and issued a permanent injunction prohibiting the State from assessing, collecting, or enforcing the tax.

The decision by the Third District

The Third District Court of Appeals agreed and upheld the District Court's ruling, stating that taxation must be equal and uniform under the Texas Constitution. The legislature may establish certain classifications when levying sales and occupation taxes, but there must be uniformity within the classes.

In this case the tax was enacted in part to protect the market share of the large tobacco manufacturers that entered into the 1998 settlement agreement. The legislature's goal of protecting the market share of the large tobacco companies over the market share of the smaller, independent companies that did not participate in the settlement does not justify the unequal tax treatment of identical products, the Appeals Court said. The taxed subject matter, cigarettes and other cigarette tobacco products, was identical, whether manufactured by the settling tobacco companies or the non-settling companies. A tax on only one class of identical products is not equal and uniform is therefore invalid and unenforceable under the Texas Constitution.


Contact an attorney

Individuals and businesses desiring assistance in the tax matters should consult with an experienced attorney or other tax professional that is current in this field in order to ensure that it is done correctly.