FL TOBACCO DISTRIBUTOR UPDATE – ANOTHER REFUND OPPORTUNITY
Just over two years ago, the well-known Micjo decision came down from the 2nd District Court of Appeal. In Micjo, the court ruled that Florida's other tobacco products tax ("OTP") should only apply to the tobacco product itself and not on other charges such as shipping and federal excise tax. Despite the ruling, our friends at Florida's Department of Business and Profession Regulation, Division of Alcoholic Beverages and Tobacco ("ABT") have essentially disregarded this court case. Since then, I have led the charge to claim refunds from ABT on overpaid tax that belongs to the tobacco distributors in this state. Further, ABT has creativity interpreted and disregarded Florida's taxing laws and made up the rules as they go on audits. We have battled ABT on numerous audit issues and other refund issues over the past several years. Recently, it has come to light that another much larger refund opportunity is likely out there for Florida's tobacco distributors that ABT has not made you aware of.
By way of background, Florida has taxed OTP since 1985 and essentially imposes an 85% tax on OTP (25% excise tax and 60% surcharge). Pursuant to Micjo, the tax is imposed on the "wholesale sales price" of the tobacco product and the tax should not be calculated on non-tobacco charges such as shipping and federal excise tax. Further, the "wholesale sales price" is the "established price for which a manufacturer sells a tobacco product to a distributor." (Emphasis added).
As most distributors in the industry are aware, the supply chain of tobacco is somewhat complex. The product, like most other products, is produced by a manufacturer. The manufacturer then sells its product to a branded marketer. The branded marketer marks up the product and sells it to a distributor. The distributor presumably makes a profit as well by marking up the product and selling it to the end retailer, who ultimately sells to the consumer. Many of our clients are the Florida distributor and many pay tax on the price at which they purchase the tobacco from the branded marketer. However, shouldn't the tax be imposed at the price the manufacturer sells it to the branded marketer? Again, the tax is imposed on the wholesale sales price which is the price the manufacturer sells to a distributor.
For those who need an example, consider the following:
ABC Manufacturing produces tobacco and sells it to Branded Marketing Co for $100/lb. Branded Marketing Co sells it to Florida Distributor for $150/lb. Florida Distributor then sells to Retailer Inc for $200/lb.
ABC Manufacturing ($100) à Branded Marketing Co. ($150)à Florida Distributor ($200) àRetailer
In this simple example distributor likely pays tax on $150. However it is my contention that the tax should apply to the $100.
In 2002, a well-known company called McLane Suneast Inc. read the law the same way I am reading it, which shows I am not completely in left field. Specifically they filed a refund claim based on this theory, which was "shockingly" denied by our friends at ABT. McClane took the denial to court and the case was ultimately settled. Since then, McClane has been paying tax on the reduced amount based on a formula. Through 2011, about $16 million in refund claims have been granted on this theory, but many distributors are unaware of this quirk in the law. In fact, according to Florida Senate's financial impact statement only about $89,000 in refunds were obtained in 2012 down from about $11 million in 2006.
The other possible explanation is that the distributor often does not know what the manufacturer sells to the branded marketer for. However, in my experience, the manufacturers and/or branded marketer are willing to divulge this information. In other situations, we have seen the branded marketer actually disclose the price it paid to the manufacturer right on the invoices to the distributor. At the very least, this is often well worth looking into from the distributor's perspective. We have found that the branded marketer's mark-up can be anywhere from about 20 – 40%. Therefore, from the distributors' perspective, they may be over-paying OTP tax at a rate of 85% on 40% of their cost for a three year period. For many distributors this can be a large number.
Like many refund opportunities, making a claim presents little to no risk to the taxpayer. It is an opportunity to recoup taxes that have already been paid so there really is not much downside and the reward is substantial. It is critical that if you or your client is interested in pursuing a refund on this issue to contact a competent state and local tax attorney as the agency will almost certainly deny the refund and there are important deadlines that must be met to continue pursuing your refund claim. Further, if you have any questions about taxes or questionable audit tactics applied by Florida's Division of Alcohol, Beverages, and Tobacco or the Florida Department of Revenue, then please contact our office for a free initial consultation. If any agency in Florida threatens you or your business's Florida professional license or Florida business license, then please contact a competent Florida attorney to fight back. If you don't already have an attorney, then feel free to call me at 954-642-9390 or email me at JerryDonnini@FloridaSalesTax.com.
About the author: Mr. Donnini is a Florida Attorney and an associate in the law firm the Law Offices of Moffa, Sutton, & Donnini, P.A., in Fort Lauderdale, Florida. Mr. Donnini's primary practice is Florida tax controversy, with a growing emphasis on wholesale alcohol and tobacco taxes. Mr. Donnini worked as an accountant for a public REIT prior going to law school and has since earned an LL.M. in Taxation from NYU. If you have any questions please do not hesitate to contact the firm by phone or email via the links at the top of the page.
ADDITIONAL RESOURCES
FL WHOLESALE TOBACCO TAX UPDATE – MIAMI HOOKAH SUES FL DBPR: dated January 31, 2014, by Jerry Donnini, Esq.
FL BEVERAGE AND TOBACCO TAXES UPDATE – GET YOUR REFUNDS!, dated November 2, 2013, by Jerry Donnini, Esq.
FLORIDA TOBACCO TAX AUDIT COMPANY CONTESTS $1 MILLION ASSESSMENT, posted July 10, 2013, by Jerry Donnini, Esq.