HENRY C. BREITHAUPT, Judge.
Decision for Defendant rendered May 24, 2011.
This matter comes before the court for decision following a trial in the Regular Division. Plaintiff (taxpayer) argues that he is not liable for tobacco products taxes on "other tobacco products" (OTP) purchased from an unlicensed distributor during a period starting at the beginning of the third quarter of 2000 and running through the end of the fourth quarter of 2002. Taxpayer also argues that Defendant (the department) is equitably estopped from
On July 26, 2005, the department issued notices of tax assessment to taxpayer for unpaid tobacco products taxes arising from several hundred purchases of OTP taxpayer made from Lil Brown Smoke Shack (LBSS) between 1997 and 2004.
Taxpayer began purchasing OTP from LBSS in 1997 for use as inventory at The Tobacco Leaf, a store that taxpayer owned in Mill City.
The 2000 buyers were unable to establish credit with LBSS. They therefore were unable to purchase OTP from LBSS on their own account.
In July of 2003, law enforcement officials representing several federal agencies and the states of Oregon and Washington executed a search warrant on the premises of LBSS. Information from business records seized from LBSS led to the identification of several customers of LBSS located in Oregon, including taxpayer. Some time thereafter, the Oregon State Police (OSP) executed a search warrant at The Tobacco Leaf. The OSP seized numerous business records from taxpayer, including taxpayer's invoices from LBSS and an uncertain number of copies of inspection reports filled out by inspectors sent by the department to enforce compliance with Oregon's cigarette and tobacco product taxes. The department has entered into the record copies of some 470 invoices to taxpayer from LBSS.
Following the raid by the OSP, the department made assessments against taxpayer for the unpaid tobacco products taxes for each quarter from the beginning of 1997 through the end of the second quarter of 2004. The assessments were calculated using invoices from LBSS to taxpayer, some of which were seized from taxpayer's store and others from LBSS. All of these invoices are in the record. The department also sought interest on the unpaid taxes and penalties for late filing. Taxpayer appealed the assessments, with the associated interest and penalties, to the Magistrate Division. The Magistrate Division found against taxpayer and taxpayer then appealed to the Regular Division.
Is taxpayer liable for tobacco products tax, interest, and penalties for OTP that taxpayer purchased from LBSS from the beginning of the first quarter of 1997 through the end of the third quarter of 2004?
The Tobacco Products Tax Act — ORS 323.500 to 323.645 — imposes a tax on activities within the borders of Oregon relating to OTP.
"Distributors" become liable for the tax at the time the distributor engages in certain specified acts. ORS 323.505(1). At all times at issue in this case those acts included, among other things:
ORS 323.505(1)(a) (1995-2001); renumbered as ORS 323.500(6) (2003).
Taxpayer concedes that he purchased OTP from LBSS to use as inventory at The Tobacco Leaf on numerous occasions from the beginning of the first quarter of 1997 through the end of 1999 and from the first quarter of 2002 through the third quarter of 2004. Taxpayer further concedes that he paid for OTP from LBSS from the beginning of the first quarter of 2000 through the third quarter of 2002 on behalf of the 2000 buyers and the 2001 buyer. Finally, taxpayer concedes that neither he nor LBSS ever paid tobacco products tax for these purchases of OTP. By the terms of ORS 323.505, these admissions on their own would result in taxpayer being liable at a minimum for tobacco products tax on all of the OTP from LBSS that taxpayer purchased while actually operating The Tobacco Leaf. For reasons discussed below, these admissions also result in taxpayer being liable for tobacco products tax for the OTP taxpayer paid for on behalf of the 2000 buyers and the 2001 buyer.
Nevertheless, taxpayer posits three arguments to reduce or eliminate his tobacco products tax liability:
The court will address each of these arguments below.
Taxpayer argues that he is not liable for the tobacco products tax on the OTP from LBSS that he paid for on behalf of the 2000 buyers and the 2001 buyer because he was not a "distributor" for purposes of the tobacco products tax. Taxpayer makes two arguments on this point. First, taxpayer contends that because he did not own The Tobacco Leaf during this period he was not "in the business" of selling tobacco products. Second, taxpayer contends that because he was only paying for OTP on behalf of the 2000 buyers and the 2001 buyer, taxpayer did not "bring" OTP into the state or "cause [OTP] to be brought" into the state.
The court disagrees with taxpayer's first argument. For purposes of the tobacco products tax, "business" is defined as:
ORS 323.500(1) (1995-2003). The question, then, is not whether taxpayer owned a business that sold OTP at the time taxpayer caused OTP to be brought within the borders of Oregon. Rather, the question is whether taxpayer engaged in "any * * * activity" for the purpose of selling or otherwise distributing OTP in Oregon during the time in question.
ORS 323.500(7) (1995-99); renumbered as ORS 323.500(8) (2001); renumbered as ORS 323.500(11) (2003). Assuming that taxpayer's actions were primarily motivated by his desire to have the parties that purchased The Tobacco Leaf successfully continue to operate the store, "success" in this context necessarily meant selling the OTP paid for by taxpayer to customers of The Tobacco Leaf. For the buyers to sell the OTP to retail customers, they first had to acquire the right to possess and dispose of OTP that they did not themselves pay for. Those rights could only have come to the 2000 buyers and the 2001 buyer through a "transfer" by some "manner or means" from taxpayer. Moreover, it appears that taxpayer received "a consideration" for such transfers: at trial, taxpayer testified that one of the reasons that he agreed to pay for the OTP was that he was "in a much better position to collect [his] money" than was LBSS. The court therefore finds that taxpayer paid for the OTP from LBSS with the intention of "selling" that OTP within the state of Oregon.
Taxpayer's argument that even though he was the one paying for the OTP, it was the 2000 buyers and the 2001 buyer who actually "caused" the OTP to be brought within the borders of Oregon likewise fails. In interpreting statutory text, the court must "pursue the intention of the legislature if possible." ORS 174.020. To achieve this goal, Oregon courts first consider the text and context of the statute, giving words of common usage their "plain, natural and ordinary meaning." PGE v. Bureau of Labor and Industries, 317 Or. 606,
Webster's Third New Int'l Dictionary 356 (unabridged ed 2002). Taxpayer testified that he agreed to pay for the OTP because LBSS would not sell to the parties to whom taxpayer had sold The Tobacco Leaf. That is to say, the "fact" of taxpayer's agreeing to pay for the OTP "produce[d] or called forth" the continued shipment of OTP from LBSS on the Yakama reservation to The Tobacco Leaf in Mill City, Oregon. The court therefore finds that taxpayer did in fact "cause" the OTP purchased from LBSS to be brought within the boundaries of this state.
Taxpayer remained "in the business" of selling tobacco products after selling The Tobacco Leaf to the 2000 buyers and then subsequently to the 2001 buyer. In the course of that business taxpayer "caused" OTP to be brought within the borders of this state. Consequently, taxpayer was a "distributor" of OTP during this period and is liable for the tax owed on the OTP that taxpayer purchased from LBSS during this period.
Taxpayer argues that the department is estopped from assessing tobacco products tax against taxpayer because taxpayer was supposedly misled regarding his responsibility for the tax on OTP purchased from LBSS by statements contained in educational literature distributed by the department and by the conduct and representations of inspectors the department used to enforce the tobacco products tax and the cigarette tax.
Under normal circumstances, equitable estoppel requires each of the following:
Welch v. Washington County, 314 Or. 707, 715, 842 P.2d 793 (1992) (quoting Coos County v. State of Oregon, 303 Or. 173, 180-81, 734 P.2d 1348 (1987)). However, additional limits on equitable estoppel apply in tax cases. Thus, in addition to the factors laid out above, to merit estoppel in this case taxpayer must also show the following:
Welch, 314 Or at 716 (quoting Johnson v. Tax Commission, 248 Or. 460, 435 P.2d 302 (1967)). For the reasons discussed below, none of the statements cited by taxpayer, whether taken alone or together, satisfy the elements of a claim for equitable estoppel.
Taxpayer first argues that supposedly ambiguous statements made in a document distributed by the department, titled Oregon Cigarette & Other Tobacco Products Tax, led taxpayer to conclude that he would not be liable for tobacco products tax on OTP purchased from LBSS. Taxpayer cites several passages in this document that taxpayer asserts are ambiguous because they draw a distinction between "retailers" and "distributors." These include the following:
Taxpayer argues that he understood himself to be a "retailer" as that term is commonly understood, and did not realize
Taxpayer rightly asserts that an ambiguous statement by a government agency can form the basis of a claim for equitable estoppel. See Pilgrim Turkey Packers v. Dept. of Rev., 261 Or. 305, 308-10, 493 P.2d 1372 (1972). However, even assuming some ambiguity in the passages cited by taxpayer, to prevail in his claim for equitable estoppel taxpayer must establish the existence of all of the elements of that claim. This he has not done. Specifically, taxpayer has failed to show that he relied on the supposedly ambiguous statements discussed above.
As an initial matter, the revision date on the first page of the copy of Oregon Cigarette & Other Tobacco Products Tax that taxpayer entered in evidence indicates that the department promulgated Oregon Cigarette & Other Tobacco Products Tax in December 2002, roughly five years after taxpayer began purchasing OTP from LBSS. Therefore, with respect to the years 1997 through 2002, taxpayer cannot reasonably claim to have been relying on statements contained in that document. It is, of course, possible that tax payer relied on the distinction between "retailers" and "distributors" in that document when he continued purchasing OTP from LBSS after receiving that document, but based on taxpayer's conduct and testimony this seems unlikely.
Taxpayer's argument that he relied on supposedly ambiguous statements in Oregon Cigarette & Other Tobacco Products Tax is particularly belied by the fact that taxpayer, by his own admission, ignored that document's clear instruction to retailers "to purchase tobacco products from a licensed distributor." Indeed, taxpayer testified that he never inquired into whether LBSS was licensed to distribute OTP in Oregon or paid tax on OTP sold in Oregon. The magnitude of this oversight by taxpayer, if it was indeed an oversight, is highlighted by the fact that many of the LBSS invoices in the record clearly state that LBSS did not pay state or local taxes.
The court finds that even if the passages in the Tobacco Products Tax section of Oregon Cigarette & Other
Taxpayer next argues that the conduct of and representations made by the department's inspectors misled taxpayer into believing that his business practices were in compliance with the Tobacco Products Tax Act. Specifically, taxpayer argues that — with minor exceptions — the department's inspectors only ever found taxpayer to be in compliance with Oregon law and that the department's inspectors never raised any objections to purchasing OTP from LBSS.
The court's analysis of this argument is complicated by the fact that "one or more" of the reports from the department's inspections of taxpayer's business are not now available. However, the inspection reports that have been entered in evidence do indicate that the department's inspectors found taxpayer to be in general compliance with Oregon law.
However, on the record before the court there is no evidence that the department's inspectors made these statements with knowledge of the fact that taxpayer had purchased OTP from LBSS. Taxpayer presented testimony that the inspectors had access to the invoices from LBSS. However, none of the inspection reports in evidence indicate that inspectors ever actually saw invoices from LBSS in the course of their inspections. This is true even with respect to reports documenting inspections that took place shortly after the shipping dates recorded on invoices for OTP from LBSS. For example, one of the inspection reports in the record documents an inspection occurring on March 18,
Taxpayer presented testimony that taxpayer's invoices for OTP were kept in chronological order in a binder behind his counter. If that is true, then on each of the occasions discussed above the LBSS invoices should have been among the first that the department's inspectors would have come across. The fact that they are not listed is not in and of itself proof that the department's inspectors did not know of the purchases of OTP from LBSS. However, for taxpayer to succeed on his theory of estoppel, he must show by at least a preponderance of the evidence that the inspectors knew of these purchases. Despite the absence of some of the inspection reports, the fact that LBSS invoices were not documented on inspection reports that logically should have documented the presence of LBSS invoices weighs heavily on this question.
Moreover, even if the inspectors indicated taxpayer's general compliance with the tobacco products tax despite knowledge of taxpayer's purchases from LBSS, taxpayer must also show that he had "a particularly valid reason" for relying on the judgment of these inspectors. Welch, 314 Or at 716. Taxpayer's testimony does him more harm than good on this question. Taxpayer testified that in his opinion the inspectors he interacted with were "not very knowledgeable" and "didn't know what [they] were doing." While it might seem odd to place the onus on taxpayer to look beyond the judgment of the department's inspectors once told he was in compliance with the law, taxpayer's testimony tends to establish that taxpayer had positive reasons not to rely on the judgments of the inspectors.
There is no evidence in the record that taxpayer relied on the supposedly ambiguous statements contained
Finally, taxpayer argues that the court should strike the assessments of tobacco product tax against taxpayer as a sanction for causing or permitting the spoliation of evidence. Taxpayer argues that the OSP seized no fewer than 30, and as many as 60, inspection reports and that only five were ever returned to taxpayer. These reports, taxpayer contends, would have buttressed taxpayer's argument for equitable estoppel. Taxpayer further argues that the reports contain unspecified "additional material facts" that would have relieved taxpayer of his liability for the tobacco products tax on the OTP that taxpayer purchased from LBSS.
The department concedes that "one or more" of the inspection reports were lost by either the department or the OSP. However, the department disputes the number of inspection reports that were seized and subsequently lost. The department's witness Fred Nichol testified that the department's records indicated that taxpayer had been inspected only "eight or nine" times between 2000, when the department began inspecting retailers to ensure compliance with the tobacco products tax, and the end of 2004. However, Nichol also testified that the five inspection reports provided to taxpayer are all that the department was able to locate.
Regardless of whether the number lost was four or 55, the court is concerned by the fact that documents seized by the OSP for potential use in the criminal prosecution of taxpayer were not made available to taxpayer when requested for this proceeding. Given the uncontested facts in
Taxpayer has admitted to engaging in conduct that, for reasons discussed above, subjects him to tax liability under ORS 323.505. Taxpayer argues, however, that the missing reports would have bolstered his argument for estoppel because they provide further evidence that the department's inspectors misled taxpayer by wrongly indicating that taxpayer was in "general compliance" with tobacco products tax requirements. The court has already held in section IV(A)(2)(b) above that the mere failure by the department's inspectors to recognize noncompliance with ORS 323.505, without satisfying the other elements of a claim for equitable estoppel, does not merit estoppel on the record before the court.
Because the court finds that taxpayer was most likely not materially prejudiced in this proceeding by the department's failure to produce all of the inspection reports, the court declines to strike the assessments against taxpayer as a sanction for the loss or destruction of the copies of the inspection reports seized from taxpayer's store.
ORS 305.992 permits the department to levy a penalty equal to 100 percent of the tax owed when "any returns required to be filed under ORS Chapter * * * 323 * * * are not filed for three consecutive years by the due date (including extensions) of the return required for the third consecutive year."
From the first quarter of 1997 through the second quarter of 2004 taxpayer engaged in multiple purchases of untaxed OTP from LBSS. Taxpayer caused said OTP to be brought within the boundaries of Oregon for the purposes of selling it at The Tobacco Leaf. Now, therefore,
IT IS DECIDED that taxpayer is liable for the tobacco products tax on all of the OTP taxpayer purchased from LBSS, with interest and penalties.