NPM Tax Valid Under U.S. Constitution, Says Texas Appellate Court
On March 24, 2017, the Third Court of Appeals of Texas decided Hegar, et al. v. Texas Small Tobacco Coalition, et al., No. 03-13-00753-CV. The court held that a tax on nonparticipating or non-settling manufacturers (“NPMs”) did not violate either the Equal Protection or the Due Process Clause of the Fourteenth Amendment to the U.S. Constitution. The law at issue, Subchapter V to Chapter 161 of the Texas Health & Safety Code (“Subchapter V”), taxed NPMs remaining outside of the Master Settlement Agreement (“MSA”) at approximately $0.55 per cigarette pack and companies subsequently joining the MSA at approximately $0.15 per pack. The case was of particular interest because Texas is not a party to the MSA, yet the MSA’s distinctions were the bases for Subchapter V’s.
In light of the case’s appellate history, the recent decision was perhaps not surprising. On August 15, 2014, the Third Court of Appeals affirmed the trial court’s judgment that Subchapter V was unconstitutional. The trial court had ruled on the basis of the Texas Constitution’s Equal and Uniform Clause (requiring taxation to be “equal and uniform”) as well as the Equal Protection and Due Process Clauses of the Fourteenth Amendment to the U.S. Constitution. Finding a violation of Texas’s “more stringent” provision, the Third Court of Appeals considered further inquiry, under the U.S. Constitution, to be unnecessary. Another appeal followed, and on April 1, 2016, the Texas Supreme Court decided that Subchapter V was permissible under the Texas Constitution. According to the court, the Third Court of Appeals “had incorrectly focused on the identical nature of the products produced by settling and non-settling manufacturers” rather than the differing natures of the respective taxpayer-manufacturers. Because the Third Court of Appeals had not addressed the challenges under the U.S. Constitution, the Texas Supreme Court remanded the case for review of those issues.
Confronted with the challengers’ Equal Protection and Due Process arguments, the Third Court of Appeals found Subchapter V constitutional. Given that Subchapter V was permissible under the “more stringent” protections of Texas’s Equal and Uniform Clause, the conclusion under the Equal Protection Clause had, essentially, been foretold. The arguments of Subchapter V’s challengers largely overlapped those earlier made under the Equal and Uniform Clause and to no avail. Nor did the Due Process challenge succeed. Of primary concern, the Texas Legislature, in enacting Subchapter V, articulated the purposes of reducing underage smoking and of providing for future recovery of healthcare costs related to the use of the challengers’ tobacco products. This consideration, too, followed from the Texas Supreme Court’s reasoning under the Equal and Uniform Clause. With no remaining basis for the trial court’s judgment that Subchapter V was unconstitutional, the Third Court of Appeals reversed.
Very likely, the Texas Supreme Court’s analysis under the Equal and Uniform Clause foretells the fate of any appeal from the recent decision of the Third Court of Appeals. In the larger scheme, Texas’s courts have joined Minnesota’s—representing two of the four states that are not parties to the MSA—in holding that their respective NPM taxes are constitutionally valid.