Extras on Excise: The Future of Oklahoma’s New Smoking Cessation Fee is Hazy as Industry Actors File Suit

tobaccoThe Oklahoma Legislature passed S.B. 845, also known as the Smoking Cessation and Prevention Act of 2017, during its legislative session this year. The bill imposes a new smoking cessation fee on cigarette wholesalers of $1.50 per pack of 20 cigarettes, scheduled to take effect on Aug. 25, 2017. This fee will be in addition to the existing cigarette tax of $1.03 per pack of 20 cigarettes.

The stated intent of the legislation is to reduce smoking rates and protect children from the dangers of smoking. The bill names smoking as the most prevalent preventable cause of death in Oklahoma and asserts that increasing the price of cigarettes is the most effective way to reduce smoking rates.

However, in an action filed in the Supreme Court of Oklahoma, opponents of the new fee argue that the legislature circumvented constitutional requirements regarding legislation intended to raise revenue and ask the court to exercise original jurisdiction and invalidate the fee. The petitioners include major tobacco companies Phillip Morris USA and R.J. Reynolds Tobacco Co., Oklahoma-based cigarette wholesalers and retailers, and Oklahoma residents; the respondent is the state of Oklahoma, including the Oklahoma Tax Commission, Oklahoma Gov. Mary Fallin (R), the Oklahoma Speaker of the House, and the Oklahoma Senate President Pro Tempore.

Article V, § 33 of the Oklahoma Constitution stipulates that a revenue-raising bill must originate in the House of Representatives, be passed before the last five days of the legislative session, and be approved by either a three-fourths supermajority of legislators or a majority of voters in a referendum. Because S.B. 845 originated in the Senate, was passed during the last five days of the legislative session, and did not obtain 75 percent approval in either the House or Senate, the petitioners argue that its enactment violates the state Constitution.

In its response, the State of Oklahoma argues that S.B. 845 does not violate the state constitution because it is a regulatory bill, not a revenue bill, and the smoking cessation fee is part of a “comprehensive regulatory program designed to reduce and compensate for the health-related costs of permitting the sale of tobacco in Oklahoma.” The state argues that it is settled law that taxes and fees enacted for regulatory purposes and to provide compensation for public harm caused by a business enterprise are not revenue bills under the meaning of Article V, § 33.

The petitioners disagree with the state’s characterization and note that the House proposed bills that would have increased the tax on cigarettes by $1.50 per pack on four separate occasions during the legislative session, and that their purpose was to “fill a $200 million-plus hole in the [s]tate budget.” According to the petitioners, because these bills did not receive the supermajority support needed to pass, they were discarded and the Smoking Cessation and Prevention Act of 2017 was crafted.  It is expected that the fee will add almost $258 million in revenue to state coffers for fiscal year 2018, according to the bill’s fiscal impact report.

Oral arguments in the case have been set for Aug. 8, 2017, which is a little more than two weeks before the fee is scheduled to take effect.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Are the legislature’s attempts to increase the cigarette tax prior to enacting the regulatory smoking cessation fee sufficient proof of revenue-generating intent?

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