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State Loses in Round One of Cigarette Tax Case – and Offers a Strange Argument About Legislature’s 2/3 Tax Rule

While State Defends Supermajority Initiative in One Lawsuit, it Argues in Franklin County That Legislature Can Ignore Initiatives – Constitution Says it’s Not So Simple

Lawmakers cast a vote during a House floor session.

OLYMPIA, June 26.—The state of Washington lost Round One Monday in a high-profile cigarette-tax case that has everything to do with the Legislature’s controversial two-thirds-for-taxes rule. But that’s not the part that has people scratching their heads. It’s a curious legal argument the state is making, one that contradicts everything it has been saying for years.

In fact, if the attorney general’s office were to take the argument all the way and win, it would be the practical end of a rule that has changed the way the Legislature does business and which has prevented big tax increases in the middle of a recession. It also might be the death knell for any initiative. The state appears to be arguing that the Legislature can pass a bill that overrides an initiative at any time, with a simple majority vote – even though the state constitution says otherwise.

What happened Monday was that Franklin County Judge Bruce Spanner granted an injunction to a manufacturer of “roll your own” cigarette-stuffing machines. That places on hold a new tax that was to have taken effect on Sunday, and which most likely would have caused 65 smokeshops across the state to close their doors.

What’s at stake here is the rule that allowed the judge to do it – the supermajority rule that requires a two-thirds vote of the House and Senate for the Legislature to pass a tax increase. Voters have imposed it four times since 1993. In the case of the cigarette tax, the Legislature this year passed the bill a few votes shy of a supermajority, yet declared it passed anyway. Spanner ruled that the tax violated Initiative 1053, the latest version of the rule. In all the years the rule has been effect, off and on, it is the first time a perfect set of facts has been established that might send the case to the highest level and prompt the Supreme Court to decide once and for all whether the rule is constitutional.

Three times the court has shot down challenges from lawmakers and special-interest groups for procedural reasons. A new such challenge is making its way through the courts right now, and there’s no telling whether that one will fare differently. But in every single one of those cases, the attorney general’s office has argued that not only is the rule constitutional, the Legislature actually has to follow it. In those cases the attorney general’s office has been defending the initiative. In the cigarette case, the state is defending the state Department of Revenue. Here the state is arguing that lawmakers can ignore the rule at any time.

The argument stuns Mike Reitz, among others, attorney for the right-leaning Freedom Foundation. “It is crazy,” he said. “We should all be afraid if the Legislature believes that it is not subject to the constitution and that it is not subject to properly enacted initatives. For them to say we are not violating it, we’re just ignoring it, is just astounding.”

A Smokin’ Lawsuit

From a promotional video for the "R.Y.O. Filling Station," the machine that has lawmakers fuming.

All of which goes to show, once again, that the cigarette-tax case is one to watch – and that it is one of the trickiest cases in some time. It has to do with a new leap in technology, a high-tech cigarette-making machine that has been installed in 65 stores statewide by Ohio-based RYO Machine LLC. Customers pour loose pipe tobacco into the machine, fill a drawer with cigarette-paper tubes, press a button – and out come finished cigarettes. It’s one way to beat the high cost of smoking. The machines use loose pipe tobacco, which is taxed at a much lower federal rate than loose cigarette tobacco. The shopkeepers don’t pay the state’s high cigarette taxes, either. So what it means is that a carton’s worth of smokes runs a little over $30 most places, sometimes as low as $19.99. And that beats the $70 or so that a carton of prepackaged cigarettes would cost at the supermarket.

Lawmakers looked askance this session and passed a bill that declared the shops to be cigarette manufacturers. Starting July 1, the shopkeepers were supposed to start paying an additional $30.25 in state tax for every 200 cigs. Though the bill supposedly increased tax revenue by $12 million a year, more likely it will shut down the stores – a point lawmakers said wouldn’t bother them deeply. Gov. Christine Gregoire, signing the bill, said she was more concerned with health issues than with making cigarettes available cheaply.

Here’s the hitch. The bill got a two-thirds vote in the House, 66-32, but not in the Senate, where it passed 27-19. Lt. Gov. Brad Owen ruled that the bill passed anyway. It wasn’t a new tax, he said, but the extension of an existing tax to a new technology.

And in Franklin County Superior Court Monday, Judge Spanner wasn’t buying. In his oral ruling, Spanner said the new tax really was a new tax. That made it a violation of I-1053. Spanner said the suit’s chances seemed good enough for him to issue an order blocking the tax from taking effect, while the case works its way through the courts. He didn’t issue a final ruling in the case – that comes later – though his sentiment appeared rather clear.

The company and its attorneys could celebrate at least a temporary victory. “It is gratifying to see the Washington courts have stepped in to protect the constitutional rights of small business owners and consumers,” said RYO attorney Chris Weiss of the Seattle law firm Stoel Rives. “This case, while it is important to those involved in the R.Y.O. tobacco industry, has far-reaching effects on all Washingtonians. Judge Spanner made a hard decision, but I believe the right decision.”

The case was filed in Franklin County, one of the more conservative areas of the state, with Franklin County smoker Dana Henne as lead plaintiff; also named in the suit is ½ Price Smokes of Kennewick, an RYO store. The attorney general’s office has not yet announced whether it will appeal the decision.

A Curious Argument

The state’s central argument is a new one – not a mention was made of it when the bill was being considered by the Legislature this year. It contends that the new tax isn’t a new tax because cigarette buyers should have been paying it all along. Every time they bought a carton’s worth of smokes, the brief says they were supposed to send a check to the Department of Revenue for $30.25, the same way that Washington residents who buy big-screen TVs in Oregon to beat the sales tax are supposed to send a check to the state for an equivalent amount. So all the bill really did, the state says, is to collect the money in a different way, by making shopkeepers pay. The brief says the “ongoing evasion of taxes” costs the state $150,000 a day.

If the argument ended there, it probably wouldn’t raise an eyebrow. But the brief goes on to make several more, including the biggie – the idea that the Legislature can simply pass bills that override initiatives at any time. “Even if this court were to conclude that the cigarette machine legislation raises taxes, the statutory two-thirds requirement cannot, by itself, invalidate the cigarette machine legislation,” it says. “The Washington Supreme Court has explained that one enactment, even an enactment by an initiative, cannot bind future legislatures.”

Here’s the problem. The state constitution gives initiatives the same status as laws passed by the Legislature, meaning that they certainly can be repealed. After two years have elapsed, all it takes a simple majority vote. But the constitution also gives initiatives a special status during the first two years after passage. During the first two years, it takes a two-thirds vote to amend or repeal a law passed by initiative. That certainly didn’t happen here, and I-1053 had only been on the books for 16 months.

To back up its argument, the state refers to a 2007 decision in a case brought by the Washington State Farm Bureau, in which the Supreme Court allowed a law to stand even though it countered an initiative. But in that case, the initiative had been on the books for 12 years. The brief doesn’t mention that. All matters of law aside, the argument here does appear to flout every other argument the state has made in four successive challenges to the supermajority rule. In those cases, the state has argued that Legislature has to follow the rule.

A Puzzling Contradiction

It’s a strange case indeed, and you might say it hearkens back to the fact that the state attorney general’s office is obliged to defend state agencies at the same time that it defends initiatives. Sometimes it finds itself representing both sides of a case, as in Grays Harbor County, in a suit involving judges who contend the state has provided inadequate security at the county courthouse. And in one notable case from 2010, the state Supreme Court ruled that the attorney general’s office had to provide legal support to Lands Commissioner Peter Goldmark, even though its attorneys maintained Goldmark’s legal arguments were absurd and put the state at serious jeopardy in other cases.

“We are obligated to defend laws passed by the Legislature and by the people, and to provide every possible defense,” said spokesman Dan Sytman. “So we are doing it in the roll-your-own case and we’re doing that in our defense of Initiative 1053 as well.”

Yet the argument in the cigarette case is wild beyond belief, Reitz says – doubly so when you consider that it is one of the most closely watched tax cases of recent years. The state may not be contradicting itself by arguing that the supermajority rule is unconstitutional. But it is saying any initiative can be overridden by the Legislature simply by passing a bill with a simple majority. So that means the Legislature is free to ignore any initiative at any time, and the two-thirds-for-taxes rule has no teeth. “It is so bizarre,” he said. “While one side of the agency is defending the constitutionality of the law, the other side of the agency is basically arguing to invalidate it, without actually coming out and saying that.”

You have to wonder where the legal argument got started, he says. Did it originate with a state agency? That’s a matter of attorney-client privilege, and we may never know, but it does remind one of the Goldmark case.

“I don’t know where this turns into a sort of larger criticism of agency representation, but at what point does the attorney general’s office say to the client, you don’t have a case and we’re not going to make ridiculous arguments and embarrass ourselves before the court simply to defend you? If you want to go out and hire private representation, go forward, but we are not going to defend an indefensible position.”


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