In determining whether the commerce clause of the U.S. Constitution prohibits a state’s taxation of a remote seller, the U.S. Supreme Court for decades has upheld a tax if (1) there is a substantial nexus between the taxing state and the taxpayer; (2) the tax is fairly apportioned; (3) the tax does not discriminate against interstate commerce; and (4) the tax is fairly related to the taxing state’s provision of services to the taxpayer.[1]

What kind of nexus is substantial enough to allow a state to tax a business’s sales in interstate commerce? In its 2018 decision in South Dakota v. Wayfair, Inc., the U.S. Supreme Court held that a business’s physical presence in the taxing state is not required.[2] Describing the remote-seller litigants as “large, national companies that undoubtedly maintain an extensive virtual presence,” the Court held that substantial nexus was clear in view of “both the economic and virtual contacts” that the remote-seller litigants had with South Dakota.[3] The U.S. Supreme Court recited the general rule that substantial nexus exists when a taxpayer has availed itself of the substantial privilege of carrying on business in the taxing state, and it appeared to describe “virtual contacts” and “virtual presence” as follows: “Between targeted advertising and instant access to most consumers via any internet-enabled device, ‘a business may be present in a State in a meaningful way without’ that presence ‘being physical in the traditional sense of the term.'”[4] Wayfair left many questions unanswered, including whether (and, if so, how) “virtual contacts” and “virtual presence” may be required for a substantial nexus to tax in compliance with the commerce clause.
Continue Reading State Taxation of Remote Sellers: US Supreme Court Declines Review of First Post-Wayfair Decision from a State Supreme Court

The Department has issued updated guidance addressing remote sellers’ cigarette and tobacco tax responsibilities after the Minnesota Legislature’s mid-2021 amendments to the State’s cigarette and tobacco tax and tobacco product delivery sales statutes, Congress’ late-2020 amendment of the Jenkins Act, and a 2018 decision of the U.S. Supreme Court on permissible state taxation of remote sales.

On May 9, 2022, the Minnesota Department of Revenue (the “Department”) issued Revenue Notice # 22‑02 on remote sellers’ tax payment responsibilities under the State’s cigarette and tobacco tax and tobacco product delivery sales statutes. The notice applies to all delivery sales after December 31, 2021, and it revokes and replaces the Department’s earlier notice on these subjects. Continue Reading Minnesota Department of Revenue Revokes and Replaces Guidance on Remote Sellers’ Tobacco Tax Responsibilities

On July 28, the Iowa attorney general’s office filed suit against Philip Morris, USA, R.J. Reynolds Tobacco Co., and 16 other tobacco companies, accusing them of defrauding Iowa of over $133 million by allegedly engaging in bad faith disputes over amounts due under the Master Settlement Agreement (MSA).

Tobacco company signatories to the MSA, also known as participating manufacturers (PMs), must pay the settling states their portion of $9 billion dollars on an annual basis. These payments are subject to a handful of various upward and downward adjustments, one of which is known as the “Non-Participating Manufacturer Adjustment” or “NPM Adjustment.” The NPM Adjustment may reduce the amount of money a state is due from the PMs in a given year if the state did not enact and “diligently enforce” an “escrow statute,” requiring non-participating manufacturers (NPMs) to place money in proportion to their sales made into that state into an escrow account. Continue Reading Iowa Attorney General Brings Suit Against Participating Manufacturers to the Master Settlement Agreement

FDA reports that the progress of its review of popular vapor products’ pending PMTAs remains in line with its first report.

On July 28, 2022, FDA filed a status report in American Academy of Pediatrics, et al. v. FDA, et al., No. 8:18-cv-00883 (D. Md.), addressing its review of pending premarket tobacco applications (“PMTAs”) for certain popular vapor products.  FDA filed the status report pursuant to a court order previously covered on this blog.  This is FDA’s second status report filed pursuant to that order, the first having been filed on May 13. Continue Reading Deeming Regulations Litigation Update – FDA Files Second Status Report on Pending Vapor Products PMTAs

On July 5, the U.S. District Court for the District of Columbia ruled that the decision of the Food and Drug Administration (FDA) to “deem” premium cigars subject to the same federal law as other tobacco products like cigarettes was “arbitrary and capricious.” In reaching this conclusion, Judge Amit Mehta relied heavily on industry comments regarding the relative public health risks and negligible youth use of premium cigars, as well as related studies — which the court said FDA either ignored or glossed over. The opinion underscores the importance of the role of public comments in agency rulemaking. Continue Reading Industry Comments Loom Large in DC Court, Finding FDA Regulation of Premium Cigars “Arbitrary and Capricious”

Bryan Haynes of Troutman Pepper’s Tobacco Team was quoted in a recent article in Bloomberg Law discussing FDA’s recent proposals to ban menthol in cigarettes and “characterizing flavors” in cigars.

Haynes noted that FDA “has authority to implement tobacco product standards,” but that this authority is “not without limits.”  Haynes also noted that bans on menthol and flavored cigars could “penalize responsible companies and drive this activity into the black market.  This is particular concern where there is “already a whole host of unauthorized products on the market that FDA is doing very little to nothing to take enforcement action against.”

Bryan Haynes of Troutman Pepper’s Tobacco Team was quoted in a recent article by Emily Field of Law360 discussing FDA’s recently-announced proposal that would limit nicotine levels in combusted tobacco products.

Haynes noted that this proposal, along with FDA’s other recent proposals to ban menthol in cigarettes and flavors in cigars can be summed up in one word – Prohibitionist.  Haynes noted that the proposed rule could be subject to challenge, including based on whether the rule would promote contraband trade, whether the rule is appropriate for the protection of public health and whether the costs outweigh the benefits.

The US Food and Drug Administration (FDA) recently announced plans to publish a proposed rule that would establish a maximum nicotine level in cigarettes and certain “other combusted tobacco products.” At the moment, it is not clear what “other combusted products” FDA might have in mind. According to the Spring 2022 Unified Agenda of Regulatory and Deregulatory Actions, FDA is targeting May 2023 to issue the proposed rule, but that could always change. Continue Reading FDA Set to Propose Maximum Nicotine Level in Cigarettes

On June 10, a bipartisan coalition of 31 state attorneys general, led by Idaho, Illinois, Nebraska, and Pennsylvania, sent a letter to Food and Drug Administration (FDA) Commissioner Dr. Robert M. Califf, asking the agency to reject premarket tobacco product applications (PMTAs) for all products that contain nicotine not derived from tobacco, also known as non-tobacco nicotine (NTN) or synthetic nicotine. Continue Reading Bipartisan Coalition of 31 State AGs Urge FDA to Deny Marketing Authorization for Non-Tobacco Nicotine Products

Status report concerns FDA’s review of 240 PMTAs submitted on or before September 9, 2020, for vapor products with larger market shares.  FDA estimates that it will resolve most of these in the periods before July 2022 and from April through June 2023.

Pursuant to an order entered by Judge Paul W. Grimm in American Academy of Pediatrics, et al. v. FDA, et al., No. 8:18-cv-00883 (D. Md.), on May 13, 2022, FDA filed its first status report regarding its review of pending premarket tobacco applications (“PMTAs”) for certain popular vapor products. Continue Reading Deeming Regulations Litigation Update – FDA Files Status Report on Pending PMTAs for Popular Vapor Products