For years, there has been litigation surrounding the taxability of blunt wraps, primarily at the state level. In many states, taxpayers have claimed victories on convincing courts that blunt wraps were not within the somewhat dated taxable bases. Recently, in New Image Global, a taxpayer took the challenge to the federal courts.
At issue, the taxpayer imported rolling tobacco wraps which have been classified as tobacco products by US Customs. For assessment purposes, the Plaintiff declared the tobacco wraps as weighing 0.75 grams per wrap. The initial investigation by US Customs used the ‘direct weighing’ method. Pursuant to this method, products were removed from packaging and dried for 24 hours and then weighed. Using this direct method, the weight of the tobacco wraps was recorded at 0.71 grams per wrap. US Customs subsequently changed to the ‘indirect method’ and recorded a weight of 0.915 grams per wrap. For the indirect method, the entire package is weighed. The contents are then removed from the packaging and the packaging is weighed.
As a result, US Customs issued a Notice of Action in November 2014 against New Image assessing Federal Excise Tax (“FET”) based on the Indirect Method. New Image responded by filing a complaint against the Government on July 1, 2015. Primarily at issue was whether:
- the tobacco wraps imported by the New Image Global Inc (“New Image’ or “Plaintiff”) were properly classified as tobacco products for the purposes of assessing the FET payable; and
- the weighing procedures adopted by US Customs and Border Protection (“US Customs”) were scientifically sound.
- US Customs acted beyond their powers when changing the weighing method used for the assessment of tax payable.
As a preliminary matter addressed by the court, it was advanced that the taxpayer failed to align its summary judgment arguments to those stated in its complaint. The Government argued that by failing to raise the complaint issues in its motion and raising other issues in their stead, the Plaintiff was deemed to have waived the issues raised in the complaint which were not in the motion for summary judgment. The Court found that the claims made by the Plaintiff in its motion for summary judgment deviated materially from those stated in its complaint. The court noted “that when a party fails to respond to an opposing party’s motion for summary judgment, a court can enter judgment against the non-responsive party if the moving party is otherwise entitled as matter of law” (See Fed. R. Civ. P. 56(e); Saab Cars USA, Inc. v. United States, 434 F.3d 1359, 1369 (Fed. Cir. 2006)) .
On the merits, the court granted the Governments’ motion for summary judgment and the Plaintiff’s motion was denied. Specifically, The Plaintiff argued that the scientific basis of using the indirect method was questionable and that US Customs had failed to conform to the standards of scientific reliability established in Supreme Court case Daubert v. Merrell Dow Pharmaceuticals. The Plaintiff further argued that US Customs did not have the authority to change to the indirect method and had done so for the specific purpose of increasing the Plaintiff’s tax liability.
On the question of authority to use the indirect method, the Court found that US Customs was right in using the indirect method as the elements that would have been removed by drying out the tobacco wraps using the direct method were an integral part of the tobacco product. In addition, Customs had a policy of assessing tax liability on products in their imported state and not in dried out state as required by the direct method. The Court also noted that products should be weighed in the same condition as they would leave customs custody.
The Court found that Customs had acted properly in following the guidance of Alcohol and Tobacco Tax and Trade Bureau (“ATTTB”) . Not to have done so would have produced the unintended situation of inconsistent treatment of imported products (direct method) and domestic product (indirect method). It also stated the Court had previously noted that US Customs may consider ATTTB determinations (See Shah Bros. v. United States, 770 F. Supp. 2d 1367, 1369 (CIT 2011)).
Unfortunately for the taxpayer, this case marks an important victory for customs on the taxability of wraps. Not only did it determine that the wraps are taxable, but it also ruled that the finished product is taxable as opposed only to the tobacco content.
About the Author: In his law practice Mr. Donnini's primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini obtained his LL.M. in Taxation at NYU. Mr. Donnini is licensed to practice law in Florida. If you have any questions, please do not hesitate to contact him via email [email protected] or phone at 954-639-4496
Resources
Saab Cars USA, Inc. v. United States, 434 F.3d 1359, 1369 (Fed. Cir. 2006)
Rule 15(b)(2) of the Rules of the USCIT
Federal Rule of Civil Procedure 15(b)(2)
NSK Corp. v. United States, 593 F. Supp. 2d 1355, 1362 n.6 (CIT 2008)
Timken Co. v. United States, 630 F. Supp. 1327, 1332, n.1 (CIT 1986)
Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579
Shah Bros. v. United States, 770 F. Supp. 2d 1367, 1369 (CIT 2011)