Texas Supreme Court Upholds Tax on "Small Tobacco"

A state tax that imposes a 55-cent fee on each pack of cigarettes produced by small tobacco manufacturers is constitutional, even though larger tobacco manufacturers do not pay the tax, the Texas Supreme Court ruled Friday.

In a ruling that overturned the 3rd Court of Appeals in Austin, the justices said that the tax law, written by State Rep. John Otto, R-Dayton, and passed in 2013, was sound.

In December, lawyers for a coalition of companies known as "Small Tobacco" had argued that the tax, introduced by House Bill 3536, violated Texas’ “Equal and Uniform Clause,” which they interpreted to mean that taxes must be uniform on all items similar to each other. In other words, they claimed it was unfair to tax producers of certain cigarettes without also taxing the producers of essentially identical cigarettes from other companies.

The ruling Friday, written by Justice Don Willett, concluded the clause pertains to the entities being taxed, not the products themselves – and therefore, it was legitimate for the Legislature to draw a distinction between various classes of cigarette manufacturers.

“No reasonable person would dispute that an ice cream manufacturer could be classified differently than a computer manufacturer,” Willett wrote. In the same way, he explained, it is legitimate for the Legislature to make different “rational” classifications based on methods of conducting business, among other distinctions.

The opinion focused heavily on the history of tobacco litigation. In 1998, 46 states sued Big Tobacco companies, alleging the companies had engaged in a range of fraudulent practices, such as knowingly misrepresenting the safety of cigarettes and targeting minors in their advertising, and violated state conspiracy laws. Ultimately, the Big Tobacco companies agreed to pay more than half a billion dollars to Texas each year, in part to cover the health care costs Texas incurred as a result of the tobacco companies’ practices.

The fact that the Big Tobacco companies pay a “perpetual” burden of more than $500 million annually is sufficient to distinguish them from Small Tobacco companies, Willett said, and the state doesn’t need to create additional taxes on Big Tobacco just to legitimize the Small Tobacco taxes.

“We have time and again underscored that it is the province of the Legislature to ‘attempt to group similar things and differentiate dissimilar things,’” he wrote, adding that lawmakers are not required to turn a “blind eye” to the real-world consequences of litigation.

“The State is already recovering from settling manufacturers the health care costs that flow from the settling manufacturers’ products,” the ruling said, referring to Big Tobacco. “It would be nigh irrational to demand these costs two times over. Our Constitution does not require the Legislature to err on the side of taxation.”

The goals of recovering health care costs and reducing underage smoking are “laudable,” Willett wrote, and the state is within its rights to recover those costs through a tax on manufacturers.

The case will now return to the 3rd Court of Appeals, where judges will be charged with considering Small Tobacco’s other challenges to HB 3536.