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By Joseph C. Bright
A declaratory judgment attack on the recently enacted tax on e-cigarettes succeeded in part in East Coast Vapor, LLC v. Pennsylvania Dep’t of Revenue, No. 515 M.D. 2017 (Pa. Commw. Ct. Apr. 11, 2018) (en banc). The Act of July 13, 2016, No. 84, P.L. 526 included electronic cigarettes (e-cigarettes) in the category of tobacco products taxable under the Tobacco Products Tax Act. 72 P.S. Sections 8201-A–8234-A. The Act imposes a 40 percent tax on tobacco products, which includes electronic cigarettes. An e-cigarette includes an electronic oral device such as one composed of a heating element and battery or electronic circuit which provides a vapor of nicotine or any other substance, the use or inhalation of which simulates smoking. 72 P.S. Section 8201-A. The court en banc held that the taxpayers did not need to bring their claims first before an administrative board because they were direct attacks on the language of the statute, and some of the claims were beyond the competence of the administrative boards. Therefore, the taxpayers could proceed by a request for declaratory judgment directly in court. The court held that it was not a denial of due process to include e-cigarettes as tobacco products, even though in some cases e-cigarettes may not contain nicotine. The court held that the propensity of e‑cigarettes to encourage the use of regular cigarettes with their addictive qualities was sufficient for treating them as tobacco products. However, the court agreed with the taxpayers that the department had gone beyond the language of the statute in imposing the tax on items that the department categorized as integral parts of an e-cigarette, even though the items may be purchased separately. The integral items included replacement coils used in a tank; a regulated mod, which is a power supply for an attached tank; and an atomizer, which is a tank that holds a volume of e-liquid and contains a coil or heating element. The court held that the General Assembly could have included integral parts within the tax base but did not do so, in comparison to a related federal act. Therefore, the department had no authority to add the category to the statute.
The decision reinforces the principle that tax statutes are strictly construed against the government. If a tax does not clearly cover an item, the item is not taxable and cannot be added to the list of taxables by administrative action.
Joseph C. Bright is a member of Cozen O’Connor.
Copyright © 2018 Tax Management Inc. All Rights Reserved.
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