Recently, Tennessee has joined a number of states that have passed legislation to allow for the assessment of an excise tax upon arrest for possession of controlled substances. Alabama, Colorado (repealed), Conneticut, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Minnesota, Montana (repealed), Nevada (repealed Check) North Carolina, Rhode Island, South Carolina, Texas, Utah COMPLETE THE LIST
Most of the "Controlled Substance Tax" (CST) statutes are structured as follows:
First the term, "dealer," is defined. A dealer is usually defined as a person who possesses more than a statutorily identified amount of particular controlled substances. States differ on the amount of controlled substances required for the possessor to be considered a dealer, but most states define a dealer as persons in possession of more than 42.5 grams of marijuana FILL IN REST OF DEFINITION
The statutes require dealers to purchase and affix stamps to the controlled substances in their possession. The stamp serves as evidence that the dealer has paid the required tax on the controlled substance.
When a person who meets the statutory criteria of a dealer is arrested in possession of controlled substances and no tax stamp is affixed, the statutes authorize the commissioner of the appropriate revenue department to assess a tax against the dealer. The amount of the tax usually correlates directly with the amount of the controlled substance.
States have varying miscellaneous requirements or constitutional safeguards. For example, several states' statutes impose criminal penalties on Department of Revenue employees who disclose taxpayer information. Several states' statutes specifically forbid the information obtained in acquiring a tax stamp to be used against the taxpayer in a subsequent criminal proceeding. Several states' statutes forbid the Revenue Commissioner from collecting information that could be used to identify the taxpayer.
As one might expect, the constitutionality of these statutes has been vehemently challenged with mixed results.
"As a general matter, the unlawfulness of an activity does not prevent its taxation." Department of Revenue of Montana v. Kurth Ranch, 511 U.S. 767, 114 S.Ct. 1937, 1941 (1994). Thus, it appears that a state can tax controlled substances even though the possessor has no legal property interest in the controlled substance. However, the author urges counsel to thoroughly research precedent within the state of the assessment because the Supreme Courts of some states have found their respective CST to be unconstitutional.
Among the successful constitutional challenges are violations of the Fifth Amendment pertaining to the double jeopardy clause and the privilege against self-incrimination.
Double Jeopardy
The Fifth Amendment provides that "[n]o person shall ... be subject for the same offence to be twice put in jeopardy of life or limb..." U.S. CONST. amend. V, § 2. "Although its text mentions only harms to 'life or limb,' it is well settled that the Amendment covers imprisonment and monetary penalties." Kurth Ranch, 114 S.Ct. 1937, 1941 (1994). "In Benton v. Maryland, 395 U.S. 784, 794 (1969), we held that this guarantee 'represents a fundamental ideal in our constitutional heritage, and that it should apply to the States through the Fourteenth Amendment.'" Id.
In Kurth Ranch, the Supreme Court held that Montana's CST was unconstitutional on the grounds that the CST violated the constitutional guarantee against double jeopardy.
In reaching its conclusion, the Court extensively cited its previous holding in United States v. Halper, 490 U.S 435, 109 S.Ct. (1989). In Halper the Court "rejected the Government's submission that the Double Jeopardy Clause only applied to punishment imposed in criminal proceedings, reasoning that its violation 'can be identified only by assessing the character of the actual sanctions imposed on the individual by the machinery of the state.'" Kurth Ranch, 114 S.Ct. at 1944-45 (quoting Halper, 490 U.S. at 447). Whether the State labels the sanctions as "civil" or "criminal" is "not of paramount importance." Id at 1945. "Halper thus decided that the legislature's description of a statute as civil does not foreclose the possibility that it has a punitive character." Id; See also Lipke v. Lederer, 259 U.S. 557 (1922); United States v. La Franca, 282 U.S. 568 (1931).
The Court "recognized in Halper that a so-called civil 'penalty' may be remedial in character if it merely reimburses the government for its actual costs arising from the defendant's criminal conduct." Kurth Ranch, 114 S.Ct. at 1945 (quoting Halper, 490 U.S. at 447). However, "[a] defendant convicted and punished for an offense may not have a nonremedial civil penalty imposed against him for the same offense in a separate proceeding." Kurth Ranch, 114 S.Ct. at 1945. Thus, the ultimate question is whether the CST is punitive or remedial in nature.
Notably, the Kurth Ranch opinion contains no clear definition of what is meant by a "remedial tax." In Kurth Ranch, the Court elaborated on the difference between a punitive civil penalty and a remedial civil penalty:
In Halper, we recognized that a civil penalty may be imposed as a remedy for actual costs to the State that are attributable to the defendant's conduct. Yet as The Chief Justice points out, tax statutes serve a purpose quite different from civil penalties, and Halper's method of determining whether the exaction was remedial or punitive 'simply does not work in the case of a tax statute.' Subjecting Montana's drug tax to Halper's test for civil penalties is therefore inappropriate. Even if it were proper to permit such a showing, Montana has not claimed that its assessment in this case even remotely approximates the cost of investigating, apprehending, and prosecuting the Kurths, or that it roughly relates to any actual damages that they caused the State. And in any event, the formula by which Montana computed the tax assessment would have been the same regardless of the amount of the State's damages and, indeed, regardless of whether it suffered any harm at all.
Kurth Ranch, 114 S.Ct. at 1948. In light of the fact that the Halper analysis is not instructive when a tax is at issue, the Court offers very little guidance as to the meaning of a "remedial" tax. Perhaps the most accurate definition is if the four features (discussed below) of the Montana CST are present, then the tax is punitive. If the features are absent (especially the last two features discussed below), the punitive nature of the tax is at least questionable.
The first two features of the Montana CST discussed by the Court are the "high rate of taxation" and the "obvious deterrent purpose" of the CST. Kurth Ranch, 114 S.Ct. at 1946. "[N]either a high rate of taxation nor an obvious deterrent purpose automatically mark [CST's] as a form of punishment." Id. "[M]any taxes that are presumed valid, such as taxes on cigarettes and alcohol, are also both high and motivated to some extent by an interest in deterrence." Id. While "these factors are not dispositive, they are at least consistent with a punitive character." Id.
The difference between a tax on cigarettes and a CST is that cigarettes are possessed legally:
Taxes imposed upon illegal activities are fundamentally different from taxes with a pure revenue-raising purpose that are imposed despite their adverse effect on the taxed activity. But they differ as well from mixed-motive taxes that governments impose both to deter a disfavored activity and to raise money. By imposing cigarette taxes, for example, a government wants to discourage smoking. But because the product's benefits - such as creating employment, satisfying consumer demand, and providing tax revenues are regarded as outweighing the harm, that government will allow the manufacture, sale, and use of cigarettes as long as the manufacturers, sellers, and smokers pay high taxes that reduce consumption and increase government revenue. These justifications vanish when the taxed activity is completely forbidden, for the legitimate revenue-raising purpose that might support such a tax could be equally well served by increasing the fine imposed upon conviction.
Kurth Ranch, 114 S.Ct. at 1947.
"Other unusual features, however, set the Montana statute apart from most taxes. First, this so-called tax is conditioned on the commission of a crime." Id. at 1947. "The tax is exacted only after the taxpayer has been arrested for the precise conduct that gives rise to the tax obligation in the first place." Id. "Persons who have been arrested for possessing marijuana constitute the entire class of taxpayers subject to the Montana tax." Id.
The Massachusetts Supreme Court has expounded on this feature of the prior Massachusetts CST. See Commissioner of Revenue v. Mullins, 702 N.E.2d 1 (Mass. 1998). Specifically, the Massachusetts Supreme Court clarified that the tax does not have to assess upon arrest, but the mere fact that the tax is contingent upon illegal conduct is indicative of the punitive nature of the CST.
While assessment of the [Massachusetts] CST does not specifically depend on arrest, criminal activity is required before the tax is imposed as the statute makes the tax exclusively applicable to illegal activity. In particular, only acquisitions or possession over threshold quantities 'in violation of Massachusetts law' result in 'dealer' status under the act, and thus subject the individual to the CST. Moreover, lawful possession of marihuana and controlled substance is outside the scope of taxability by operation of two statutory provisions: the definition of 'dealer' in § 1, and the specific exclusion in § 6, This nexus between the CST and criminal conduct is emphasized by the provision precluding construction of the CST to give dealers immunity from prosecution.
Id. at 6.
As the Massachusetts Supreme Court observes in Mullins, many other courts "have distinguished Kurth Ranch on the basis that the Montana statute specifically imposed the tax after the taxpayer was arrested for possession of the contraband, rather than 'immediately upon ... possession' as provided [in the Massachusetts statute]." Id. at 6 (citations omitted). However, many other courts have agreed with the Massachussets Supreme Court's view:
This attempt to distinguish Kurth Ranch is unpersuasive, and we agree with the broader interpretation given Kurth Ranch by those courts concluding that taxes similar to [the Massachussets statute] are punitive, by relying on the express limitation of the tax to unlawful activitiy. . . In our view, the similarity between the two tax schemes is more compelling than the difference. . .
Id. at 6-7. (citing Lynn v. West, 134 F.3d. 582 (4th Cir. 1998), cert. denied, 525 U.S. 813; Wilson v. Department of Revenue, 662 N.E.2d. 415 (Ill. 1996); Bryant v. State, 660 N.E.2d 290, 294 (Ind. 1995), cert. denied, 519 U.S. 926 (1996)).
Most states have stipulated that a dealer may voluntarily pay the tax before the arrest, i.e. purchase a tax stamp. However, this statutory provision should not save the statute from unconstitutionality on double jeopardy grounds. Enforcement of most of the states' taxes is
invariably limited to individuals who have been arrested for drug crimes. No dealers have voluntarily paid the tax, nor does the commissioner otherwise enforce the statute. 'The existence of the voluntary payment option is at best illusory and does not . . . make the post-arrest imposition of the Tax any less a penalty for double jeopardy purposes.'
Id. at 7 (quoting People v. Maurello, 932 P.2d 851, 853 (Colo.App. 1997). "As Chief Justice Rehnquist wrote in his dissent in Kurth Ranch: 'because the activity sought to be taxed is illegal, individuals cannot be expected to voluntarily identify themselves as subject to the tax.'" Id. at 7, n. 13 (quoting Kurth Ranch, 114 S.Ct. 1937, n. 2 (Rehnquist, C.J., dissenting)).
Despite this language, several states have held that their respective CST's are constitutional because the "dealer" could have paid the tax voluntarily. String Cite
In every state, the CST assessment, by definition, is contingent upon illegal conduct by the taxpayer. GIVE EXAMPLES Further, every state imposing a CST also illegalized the possession of controlled substances. "[I]t is significant that the same sovereign that criminalized the activity also imposed the tax. Contrarily, most of our cases confirming that the unlawfulness of an activity does not prevent its taxation involve taxes on acts prohibited by other sovereigns." Kurth Ranch, 114 S.Ct. at 1947, n. 22.
QUOTE LANGUAGE WHERE STATES HAVE IGNORED THIS
There is another feature of the Montana CST that the Court in Kurth Ranch found demonstrative of the punitive nature of the CST. The Court found that the Montana CST "purport[ed] to be a species of property tax - that is, a 'tax on the possession and storage of dangerous drugs.'" Kurth Ranch, 114 S.Ct. at 1948 (quoting Mont.Code Ann. § 15-25-111 (1987)). However:
it is levied on goods that the taxpayer neither owns nor possesses when the tax is imposed. If a statute that amounts to a confiscation of property is unconstitutional (omitted citations), a tax on previously confiscated goods is at least questionable. A tax on 'possession' of goods that no longer exist and that the taxpayer never lawfully possessed has an unmistakable punitive character. This tax, imposed on criminals and no others, departs so far from normal revenue laws as to become a form of punishment."
Id.
In other words, "the tax has no logical relationship to lawful possession. No 'dealer' has any ownership interest the law recognizes in goods the mere possession of which is criminal. . . Thus, the CST is levied on the possession of goods that the taxpayer never lawfully possessed in the first place." Mullins, 702 N.E.2d at 7 (also finding it significant that the goods were confiscated at the time the tax was assessed).
Many states characterize their respective CST as an excise and/or privilege tax. String Cite Include T.C.A. Presumably, this characterization is an attempt to avoid the fallacy of taxing property in which the owner has no legal interest. However, most states levy the tax on "possession" of controlled substances. String Cite. Further, most states structure CST's in a manner in which the tax rate is directly proportionate to the amount of the controlled substance possessed. String Cite Thus, there is a strong argument that the CST is a property tax .
Even if courts find that the CST is a privilege tax rather than a property tax, the argument that the possession of controlled substances is a "privilege" and therefore taxable as such, is at best strained. Again, "it is significant that the same sovereign that criminalized the activity also imposed the tax." Kurth Ranch, 114 S.Ct. at 1947, n. 22. Obviously, the distinction between a state granted privilege, such as a license to operate a motor vehicle, and an activity in which the state has completely forbidden, and in fact criminalized, is irreconcilable.
Once it is established that the possession of controlled substances is in fact a crime rather than a privilege, the inescapable argument follows that the criminal possession of the controlled substance cannot be taxed as a privilege. "If payment of the Drug Tax conferred ownership, then the tax would amount to nothing more than an expensive licensing or excise fee. The fact that it does not is another strong indication that the tax is a criminal penalty." Lynn, 134 F.3d at 592. "[T]he legislature cannot name something to be a taxable privilege unless it is first a privilege." Jack Cole Company v. McFarland, 337 S.W.2d 453, 455 (Tenn. 1960); See United States v. Doremas, 249 U.S. 86 (distinguishing license tax on lawful possession of firearms and taxes where the subject the of tax is criminal) .
In conclusion, the key to convincing courts that CST's violate constitutional prohibitions against double jeopardy is clearly establishing that the CST is punitive rather than remedial.
Most CST's share the four features of the Montana CST that the Supreme Court found to demonstrate the punitive nature of the Montana CST. Once it is established that the CST is punitive rather than remedial in nature, an analysis pursuant to Blockburger v. United States should conclusively establish that the constitutional guarantee against double jeopardy has been violated. See Blockburger v. United States, 284 U.S. 299 (1932).
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