On April 4, 2013, the Supreme Court of Mississippi declared unconstitutional the imposition of a nonsettling-manufacturer (“NSM”) fee on cigarettes that are distributed through Mississippi for sale to a retailer outside of the state. In 2009, the Mississippi Legislature enacted a law imposing a fee for nonparticipating manufacturers on the sale, purchase, and distribution in Mississippi of cigarettes “including cigarettes sold, purchased or otherwise distributed in [Mississippi] for sale outside of this state.” Miss. Code Ann. § 27-70-5 (Rev. 2010) (emphasis added).
In 2009, a nonsettling manufacturer and a distributor sued the Commissioner of the Mississippi Department of Revenue (“Commissioner”) in the chancery court. In the complaint, the manufacturer and distributor alleged that the Mississippi law, which imposed the fee on cigarettes ultimately sold to consumers outside of Mississippi, violated the Commerce Clause as well as the Due Process Clause of the United States Constitution. The manufacturer and distributor sought the following relief: (1) a declaration that the NSM fee for cigarettes sold outside of Mississippi is unconstitutional; (2) an injunction to prohibit the Commissioner from collecting the fee for those sales; and (3) damages, including expenses and attorney fees pursuant to 42 U.S.C. §§ 1983 & 1988.
Although the chancery court initially entered a temporary restraining order barring the Commissioner from collecting the fee on cigarettes sold outside of Mississippi, the chancery court denied the tobacco companies’ request for a permanent injunction and declaratory relief. Specifically, the chancery court found that the NSM fee did not violate either the Commerce Clause or the Due Process Clause because: (1) there was “a substantial nexus between the tax and the transaction within Mississippi”; (2) even if other states had identical statutes, the fee was fairly apportioned because it would not tax the manufacturer for the “same purpose” – i.e. – distribution through Mississippi; (3) even if other states had identical statutes, the fee did not discriminate against interstate commerce because it would not tax the manufacturer for the same transaction – i.e. – distribution through Mississippi; and (4) it was related to distribution activities as well as services in Mississippi.
On appeal, the tobacco companies raised multiple issues, but the companies’ Commerce Clause challenge ultimately prevailed. The Supreme Court discussed the various requirements of a tax in order to comply with the Commerce Clause, one of which is that a tax is “internally consistent.” A tax is “internally consistent” when the imposition of a tax identical to the tax being challenged does not impose a burden on interstate commerce that intrastate commerce would not also bear. That means, a tax is internally consistent if every state were to impose it and without resulting in multiple taxation. The Supreme Court stated that:
The distribution of cigarettes in Mississippi for ultimate sale outside the state involves separate transactions: (1) the Mississippi distributor’s acquisition of products from Commonwealth and (2) the sale of those products in another state – say, Louisiana. If Louisiana enacted a statute identical to the Mississippi NSM law, then Mississippi would impose a fee on transaction (1) and Louisiana would impose a fee on transaction (2).
Commonwealth Brands v. Morgan, 110 So. 3d 752, 759 (2013). Therefore, if any other state adopted a law identical to the NPM fee then two fees would be imposed on the same cigarettes. Put simply, “this interstate application involves two fees on the same cigarettes. In contrast, if the cigarettes acquired by the Mississippi distributor were sold intrastate, they would be subject to only one fee – under the Mississippi NSM law.” Id. at 760.
As a result, the Supreme Court of Mississippi concluded that the chancery court erred in finding that the Mississippi law did not violate the Commerce Clause. The Court reversed and remanded the case for the chancery court to enter judgment consistent with its opinion.