The question has been raised in a complaint filed on September 24, 2019, by Swisher International, Cheyanne International, and the Cigar Association of America (“Plaintiffs”) for declaratory and injunctive relief against Nebraska’s Attorney General, Department of Revenue, and Tax Commissioner (the “State”).

The case arises over a Department of Revenue notice declaring that “certain little cigars, certain filtered and non-filtered little cigars, and certain flavored little cigars may be reclassified as cigarettes effective September 1, 2019.” The notice purports to pull these cigars under the State’s cigarette excise tax regime and its cigarette MSA escrow and directory requirements. The notice affects not only manufacturers but also retailers and stamping agents .

Plaintiffs’ complaint challenged the State on the basis that the reclassification was tantamount to an invalid rule or regulation that had not gone through rulemaking required under the Nebraska Administrative Procedure Act and also on constitutional bases. Plaintiffs moved for a temporary restraining order. The State moved to dismiss.

The court overruled the State’s motion to dismiss on largely procedural grounds, given that certain necessary documents were not made a part of the record. The court also overruled Plaintiffs’ motion for temporary restraining order. As for the claim that rulemaking (including notice and comment) was required, at this stage the court held that the reclassification “d[id] not bind the public” and the State was free to interpret its statutes, even though those interpretations would not be binding if challenged. The court held that the constitutional claims did not justify the temporary restraining order, either.

The competing motions were preliminary in nature, and time will tell how (or if) the court rules on the merits. State enforcement clearly will be a concern in the meantime.

The position reflected in the State’s notice raises substantial questions for those who manufacture, distribute, or retail affected cigars. Certain cigar manufacturers who have had no concern with the MSA thus far could be newly subjected to the full gamut of tax, escrow and complementary requirements that have been (until now) applied only to cigarette and roll-your-own nonparticipating manufacturers. If such cigars are deemed noncompliant, there are statutory consequences for distributors and retailers carrying them.

We will monitor for further developments.