An 'R.Y.O.' smokeshop in Auburn.
OLYMPIA, June 16.—It took 19 years, but someone finally has filed a lawsuit that could prompt the state Supreme Court to decide once and for all whether the state’s strict rules for tax increases are okay by the constitution. Forget the King County case that caused such a fuss two weeks ago — a new cigarette-tax lawsuit filed in Franklin County is the one to watch.
R.Y.O. Machine, LLC, an Ohio company, has filed suit in Franklin County Superior Court to overturn a law passed by the Washington Legislature this session. The law placed a steep tax on certain types of machine-made cigarettes, and it is a tricky case all by itself. Certainly the livelihood of 65 shopkeepers in this state and possibly the future of the machine-maker is at stake. But there is a bigger implication of the case to Washington state as a whole. For the first time since voters imposed the two-thirds-for-taxes rule on the Washington Legislature in 1993, the sun, the moon and the stars have lined up, and a lawsuit provides a perfect set of facts that could cause the court to decide a taxing issue it has managed to avoid for the last two decades.
There’s plenty at stake, for Washington businesses, individual taxpayers and for interests that are dependent on state spending. The supermajority rule is the strongest restraint on the Legislature at a time when many lawmakers would dearly love to raise taxes. Two-thirds of the House and Senate must say yes to any measure that increases taxes. In practice the rule has made tax hikes difficult, though not impossible, for at least two years after passage — after that point the constitution allows repeal with a majority vote, and eventually lawmakers always do. In the meantime, Democratic majorities are forced to negotiate with Republican minorities. New revenue has essentially been taken off the table during the last few years of recession whenever the rule has been in effect, despite the state’s dismal budget situation. The rule is popular with voters — it has passed four times so far, the last time by a whopping 64 percent, and a fifth such initiative, I-1185, may be headed for the ballot this fall.
Many think it is unconstitutional, an argument that hinges on a bit of convoluted phrasing in a document written in 1889, but they just haven’t been able to get the Supreme Court to rule. That’s why this new “roll-your-own” case is significant. So far the state Supreme Court has thrown out three legal challenges from lawmakers and special-interest groups without ever getting to the heart of the matter. A fourth such challenge is now working its way up through the courts – that’s the one that made headlines May 30, after a King County Superior Court judge ruled in its favor. The legal strategy is slightly different than previous cases, but no one knows if that will affect the outcome.
This new cigarette lawsuit, however, has none of the procedural flaws of those statehouse-based challenges. For years, legal observers have suggested that the best way to get the court to rule on the merits of the argument would be for the Legislature to pass a tax increase in violation of the two-thirds rule. That way the aggrieved party could sue to enforce the rule and have the tax thrown out. The court would then be able – if it chose – to throw the law out instead. So far this case fits the pattern perfectly. Thus for the first time in 19 years, a case that might force a ruling has been set in motion.
So hold on to your pocketbooks. The other suit got all the attention, but this one’s the sleeper.
High-Tech Machine
R.Y.O. Machine, LLC, manufactures the high-tech cigarette-stuffing machines that are installed in 65 stores across Washington state.
This lawsuit has to do with a high-tech cigarette-stuffing machine that has been installed in 65 tobacco shops statewide, including “1/2 Price Smokes,” the Kennewick store that has joined R.Y.O. Machine as a plaintiff in the case. The lead plaintiff is Dana Henne, an apparently satisfied smoker who lives in Franklin County – thus giving the company a venue in one of the most conservative jurisdictions in the state.
Customers pour loose tobacco into a slot at the top of the machine, load up a drawer with cigarette-paper “tubes,” hit a button, and out pop finished cigarettes. The key thing is that the customers pay the relatively low tax rate for loose tobacco, and not the high tax rate for finished cigarettes. When they buy a carton’s worth of tobacco and tubes, they are merely “renting” the use of the machine – or so the theory goes.
So they can get 200 cigs for as little as $19.99 – not the $70 and sometimes $80 they might pay at the local grocery store.
Lawmakers and competing retail groups say it’s hooey, a clever scheme to get around tobacco taxation. So this year they passed a bill that defined cigarettes produced by commercial cigarette-making machines as “cigarettes” for taxation purposes. That means that all the whopping taxes and fees that are imposed on cigarette manufacturers apply here as well. Even though the final fiscal note for the bill indicated that the state would gain about $12 million a year in additional revenue, there were few lawmakers on the House and Senate floors who appeared to believe that any money would actually materialize. Why go to an R.Y.O. store if a pack of Marlboros is the same price?
Some say they wouldn’t mind seeing the business snuffed. “We’re not curtailing people’s addiction to smoking by having a cheap alternative way with roll-your-owns,” Gov. Christine Gregoire said at an April news conference. “The health issue is my greatest concern.” And she signed the bill happily when it crossed her desk May 2.
Didn’t Get Two-Thirds
Gov. Christine Gregoire signs the R.Y.O. cigarette bill May 2.
Here’s the problem. The bill didn’t get a two-thirds vote. In the House it passed 66-32, precisely the margin required, but in the Senate it got 27-19. That’s a simple majority, but not a supermajority. Lt. Gov. Brad Owen, the presiding officer in the Senate, was asked for a ruling. He concluded that a simple majority was all that was needed, because the bill might be seen as an extension of an existing tax to a newly invented technology – sort of like a tax that was applied to digital goods in 2009. Said Owen, “Here, the Legislature has already enacted the tax, but is simply applying that tax to a cigarette process that did not exist until recently.”
Strikes some as a bit of hairsplitting. There was an old tax and now there’s a new one. If it looks like a new tax and walks like a new tax, then it’s a new tax. That’s certainly the way R.Y.O. Machine sees it.
The company has installed 1,900 machines in 42 states, and legislatures in a number of states have either considered or passed bills similar to the one in Washington. Elsewhere the company is battling on different legal grounds, but here a challenge based on the two-thirds rule seemed a no-brainer. “In Washington state, we think it is clear-cut that this is a tax increase and it needed a two-thirds vote,” said Cincinnati-based company spokeswoman Bea Gonzalez.
Gonzalez said a majority of the R.Y.O. smokeshops will close if the law is allowed to take effect July 1. So first things first – the company will seek an injunction.
She notes that the shops are paying precisely the taxes that are owed under existing law – for loose tobacco. Any change to that arrangement is something a reasonable person would consider a tax increase. “You tax certain things based on what they are,” she said.
It should be observed that Joe Baba, Washington-state distributor for RYO Machine, told Washington State Wire on April 28 that the company would file a lawsuit, but it would be on different grounds. He said the company’s lawsuit wouldn’t deal with I-1053. At that time a letter to the governor from a Snohomish County attorney representing Baba’s distributorship suggested that the company might argue that the state had improperly infringed on federal tobacco-taxation authority. Obviously Baba’s statement proved wrong. What happened? Gonzalez explained, “He doesn’t speak for the company.”
Why it Counts
State Rep. Jamie Pedersen, D-Seattle.
Just as obviously, R.Y.O. Machine isn’t trying to overturn the two-thirds rule. It wants the courts to enforce it. The Washington attorney general’s office will have to defend the state Department of Revenue. And since the attorney general’s office has taken the position in other challenges that the 2/3 rule is valid, it most likely will have to argue that the Senate vote was proper, and that Owen’s ruling was correct.
But that provides an opportunity for other interests to file friend-of-the court briefs challenging the state’s position and urging the court to consider their argument that the rule is unconstitutional.
It is the first time in the last 19 years that a case of a possibly “illegal” tax under the 2/3 rule has been the central subject of a lawsuit. There were a couple of suits that challenged an increase to oil bunker-fuel taxation in 2009, and at least initially, U.S. Oil and Tesoro claimed the taxes had been passed in violation of supermajority requirements. But the arguments concerning the 2/3 rule were dropped during the appeals. That doesn’t appear to be a likely path in this case. The R.Y.O. challenge does not cite any other causes of action.
What distinguishes the R.Y.O. case from all the challenges to the 2/3 rule that have been filed since 1993 is that R.Y.O. Machine can demonstrate a direct harm. The other challenges have been filed by legislators and interest groups. Their desires may have been thwarted by the 2/3 rule, but they clearly have other political means to overcome the requirement. Lawmakers in either chamber could take a majority vote to override any ruling by a presiding officer, and declare that a bill has been passed. Lawmakers also could take a 2/3 vote to suspend an initiative during its first two years after enactment. Or they could just take a 2/3 vote and pass a tax bill without fuss. They can never exhaust their options. In previous rulings, the Supreme Court has said lawmakers don’t need their help on what is essentially a political matter, and it has rejected challenges from the statehouse before it gets to the point of considering constitutionality.
Lawmakers on the opposition side have been struggling with that issue for years, state Rep. Jaime Pedersen, D-Seattle, told Washington State Wire two weeks ago. How do they place the issue before the Supreme Court in such a way that it is compelled to consider constitutionality? He is among a dozen Democratic lawmakers, interest groups and private citizens that signed on to the latest suit. It employs a slightly different strategy than previous ones. It asks for a “declaratory judgment,” a simple ruling on the question, rather than a “writ of mandamus,” essentially a ruling together with an order to legislative officers to take action. It might be easier to convince the court to take action if all that is involved is a simple legal ruling, he said.
Pedersen said he hopes the Supreme Court can be convinced to take up the issue, one way or another — and that the 2/3 rule can be bounced once and for all. During the last few years of recession, he said, “state government has had no ability to raise revenue, and we have seen the Legislature held hostage by a minority that is opposed to raising taxes. So we can’t even have a debate on this. I think it is hugely important to get this resolved, and resolved correctly, because it has a gigantic importance to state government.”
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