Opinion ID: 794457
Heading Depth: 2
Heading Rank: 2

Heading: CCTA Application to Cigarettes Stored for Out-of-State Sale

Text: 61 Intrigue also argues that even if the California cigarette tax is an excise tax, by its terms, it does not reach the storage of cigarettes to be sold in another state. Because the district court found that the California tax was an ad valorem tax, it did not reach this question. We reject Intrigue's argument and hold that California law requires unlicensed distributors like Intrigue to pay cigarette taxes on cigarettes stored in California for out-of-state sale. 62 The plain language of the statute compels this reasoning. See United States v. Daas, 198 F.3d 1167, 1174 (9th Cir.1999) (The first step in ascertaining congressional intent is to look to the plain language of the statute.). We follow the plain meaning of a statute unless it is ambiguous or its application would lead to unreasonable results. Id. 63 California taxes distributions of cigarettes, requiring distributors to either affix a pre-paid stamp on the pack of cigarettes or make direct payment to the state. Cal. Rev. & Tax.Code §§ 30101, 30161. Distribution is defined as either the sale of [previously] untaxed cigarettes or tobacco products in this state, or [t]he use or consumption of untaxed cigarettes or tobacco products in this state. Id. § 30008. In turn, use or consumption is defined as 64 the exercise of any right or power over cigarettes or tobacco products incident to the ownership thereof, other than the sale of the cigarettes or tobacco products or the keeping or retention thereof by a licensed distributor for the purpose of sale. 65 Id. § 30009. 66 We agree with the United States that California's use of the term the exercise of any right or power over cigarettes . . . incident to [ ] ownership is intended to include the act of storage. A number of courts and statutes have recognized or approved this interpretation. For example, in D.H. Holmes Co. v. McNamara, the United States Supreme Court upheld against a Commerce Clause challenge a Louisiana use tax that defined use as the exercise of any right or power over tangible personal property incident to ownership, and includes consumption, distribution, and storage. 486 U.S. 24, 27, 108 S.Ct. 1619, 100 L.Ed.2d 21 (1988). Similarly, in Mount Tivy Winery, we held that the activity of holding wine intended for sale could be taxed under a statute that imposed taxes on the exercise of a single power over property incidental to ownership. 134 F.2d at 124 (internal quotation marks omitted). See also Dept. of Revenue of State of N.M. v. United States, 408 F.2d 574, 576-77 (10th Cir.1969) (describing New Mexico excise tax which defined use as exercise of any right or power over tangible personal property incident to . . . ownership and laid the tax on personal property stored, used or consumed in state); Texas Co. v. Siefried, 60 Wyo. 142, 147 P.2d 837, 844 (Wyo.1944) (holding that a tax on use reached the storage and withdrawal from storage of gasoline). 67 Given the definition of distribution in § 30008, we cannot accept Intrigue's argument that the California statute is intended to tax only sales of cigarettes. Because California explicitly defined the term in the statute, we need not resort to dictionary definitions of distribution. See Konop v. Hawaiian Airlines, Inc., 302 F.3d 868, 880 (9th Cir.2002). California's definition of distribution includes not only the sale of untaxed cigarettes in this state but also the use and consumption of cigarettes. All other exercises of right or power over cigarettes, including storage, fall within this second definition of distribution. Cal. Rev. & Tax.Code § 30009. Intrigue's proposed interpretation would write out of the statute the second basis for § 30008 tax liability, something we must seek to avoid. See Miller v. United States, 363 F.3d 999, 1008 (9th Cir.2004) (Courts must aspire to give meaning to every word of a legislative enactment.). 68 Our interpretation of the California statute is reinforced by the exception built into § 30009. California explicitly exempts from its definition of use or consumption the keeping or retention [of cigarettes] by a licensed distributor for the purpose of sale. Cal. Rev. & Tax.Code § 30009 (emphasis added). Thus, use or consumption would have to include the keeping or retention for sale of cigarettes by an unlicensed distributor. Intrigue concedes it was not a licensed distributor within the state of California at the time of seizure; therefore, it would not qualify for the exception. 69 The legislative history of the use or consumption definition in § 30009 further confirms our conclusion that the California cigarette tax reaches Intrigue's cigarettes. The California legislature, in 1998, amended the exception to § 30009 for the keeping or retention thereof for the purpose of sale to add the words by a licensed distributor. Act of Aug. 28, 1998, ch. 420, § 4, 1998 Cal. Legis Serv. 420 (S.B.2230) (West). The legislative history of Senate Bill 2230, which enacted this amendment, indicates that California intended to make unlicensed distributors liable for taxes on any unstamped cigarettes found in their possession. It reads: This bill . . . revises the definition of `use and consumption' to allow for the imposition of the tax on inventory seized while in the possession of an unlicensed distributor . . . . California Bill Analysis, Assembly Committee, 1997-1998 Regular Session, Senate Bill 2230 (Aug. 5, 1998). Elsewhere, the legislative history offers a more thorough explanation, envisioning the precise scenario presented in this case: 70 Unlicensed distributors have been known to obtain cigarettes and sell them directly to consumers without the cigarette tax having been paid. However, under current law, unlicensed distributors cannot be held liable for the cigarette tax on unstamped cigarettes that are seized because they can claim that a large portion of their inventory is being held for purposes of resale, rather than for direct sale to consumers. 71 This bill would draw a distinction between licensed and unlicensed distributors. Unlicensed distributors would be liable for tax on all unstamped cigarette or tobacco products found in their possession. The presumption would be that the unlicensed distributor is really in the business of selling cigarettes to consumers. Licensed distributors would not be liable for unstamped products in their possession. 72 California Bill Analysis, Senate Floor, 1997-1998 Regular Session, Senate Bill 2230 (May 6, 1998). 73 Unlicensed distributors, like Intrigue, were precisely the target of the 1998 amendment. Indeed, Intrigue's owner Andy Lee testified that Intrigue kept the cigarettes in an FTZ because he believed that, by doing so, Intrigue could avoid paying California taxes. The clear implication of the statute, as amended in 1998, is that an unlicensed distributor like Intrigue owes taxes when it stores cigarettes within the state of California. 74 The distinction between licensed and unlicensed cigarette distributors also has practical merit. As the United States, and amicus California Board of Equalization (BOE), contend, the statutory scheme intentionally creates an either/or system that balances fairness to distributors with the government interest in combating cigarette smuggling. A distributor may choose to obtain a license, in which case it must report the cigarettes it brings into or ships out of state; or it may remain unlicensed but face liability for taxes on any cigarettes found in its possession, even if it intends to ship the cigarettes elsewhere. Contrary to Intrigue's representations at oral argument, licensed distributors are required to file regular reports with the California BOE detailing their inventories (both tax-stamped and unstamped), any distributions or sales, and the tax they believe is due. See Cal. Rev. & Tax.Code §§ 30182(a), 30183(a); Cal.Code Regs. tit. 18, §§ 4022, 4031. Licensed distributors must also keep a record of all cigarettes stored on a particular site, a record which must be made available to the BOE upon request. See Cal. Rev. & Tax.Code § 30454; Cal.Code Regs. tit. 18, § 4026. Taxing the cigarettes of unlicensed distributors is a precautionary measure to limit the state's financial risk that a distributor will claim cigarettes are destined for export, only to sell them at the lower, pre-tax price within California. 75 Intrigue argues that our reading of the statute would enable a system of double taxation, because it would be taxed for storing cigarettes in California and then taxed again when it sells the cigarettes in another state. We find this argument unavailing. First, any risk of double taxation would apply only to the small number of distributors who neglect to obtain a California license. Second, section 30008 makes clear that the use or consumption tax is due not for the sale, but rather for the privilege of storing the cigarettes within the state, a right that imposes on the state the reciprocal burdens of protecting and monitoring the cigarettes stored there. Third, California provides a legal procedure for companies like Intrigue, when they actually sell the cigarettes in another state, to petition the California BOE for a credit or refund of taxes on those cigarettes sold out of state. See Cal. Rev. & Tax.Code §§ 30176.1, 30178.1-2. In that way, the specter of double taxation can be avoided altogether. 76 Intrigue also asserts that, because the legislative history of the CCTA indicates that its purpose was to combat organized crime and bootlegging, Intrigue, as a legitimate business, should not be subject to the law. Even assuming, as we do, that Intrigue is a legitimate business, this argument lacks merit. The explicit language of the statute does not limit the CCTA to organized crime or bootlegging operations; any knowing possession, sale, or receipt of contraband cigarettes exposes one to liability under the statute. See 18 U.S.C. § 2342(a). Furthermore, it defies logic that, under a penal statute, a defendant who violated clear statutory provisions could escape punishment merely because his particular class of criminal offenders was unmentioned in the authorizing statute's legislative history. 77 For similar reasons, we reject Intrigue's argument that the CCTA is inapplicable to Intrigue because its operations were closely monitored by state and federal officials and because the United States offered no proof that it evaded tax laws. The CCTA does not require an intentional evasion of the law to prompt forfeiture of cigarettes. Compare 18 U.S.C. § 2344(a), (b) (requiring knowing violations to trigger criminal punishments), with id. § 2344(c) (Any contraband cigarettes involved in any violation of the provisions of this chapter shall be subject to seizure and forfeiture.). We have previously held that the federal government may seize and forfeit cigarettes whenever they are found in a state in violation of that state's tax laws, regardless of the possessor's intent to evade state tax laws or its intent to distribute the cigarettes in another state. Grey Poplars, Inc. v. 1,371,100 Assorted Brands of Cigarettes, 282 F.3d 1175, 1178 (9th Cir.2002). This case is no exception. 78 Finally, we reject as factually unfounded Intrigue's argument that it owed no taxes because the cigarettes were in joint possession with NTI, Intrigue's sister corporation that was licensed to distribute cigarettes in California. Even Intrigue's CEO Andy Lee conceded during his deposition that, Well, legally . . . Intrigue Trading, Inc. owned the product, agreeing that Intrigue always had possession of the cigarettes once they entered the FTZ. Intrigue offered no evidence indicating that it conveyed joint ownership rights over the cigarettes to NTI in a written document, as California law requires to establish joint ownership. See Donovan v. Donovan, 223 Cal.App.2d 691, 697, 36 Cal.Rptr. 225 (1964) (citing California Trust Co. v. Bennett, 33 Cal.2d 694, 697, 204 P.2d 324 (1949)). Nor did NTI demonstrate possession by exerting any control over or taking any action with regard to the 4,432 mastercases, other than paying the rent on the storage space where they were located. See Black's Law Dictionary 1201 (8th ed.2004) (defining possession as the exercise of dominion over property or [t]he right under which one may exercise control over something to the exclusion of all others). Furthermore, there is no indication in the record that NTI reported the acquisition of the cigarettes to the California BOE, as it would have been required to do as a licensed distributor that believed itself to be a rightful owner. See Cal.Code Regs. tit. 18, §§ 4022, 4031. NTI does not cite to, and we cannot find, any authority suggesting that shared storage space creates this form of joint ownership or allows a company like Intrigue to piggyback on the license of a separate and independent corporation. Because there was no joint possession of the cigarettes, we need not decide whether joint possession by a licensed distributor could exempt a co-possessing unlicensed distributor from the California tax.