Tax Lawyer's Blog

The Tennessean.com reports that the Tennessee Supreme Court found that a state law imposing a tax on certain illegal drugs is unconstitutional: 

The court found in a 3-2 decision that the law exceeds the state’s taxing power because it isn’t a tax on “merchants, peddlers and privileges.”

But the court also ruled that the law didn’t violate constitutional protections against self-incrimination, leaving open the possibility that the General Assembly could develop a new tax on drugs that would be constitutional.

The article says the case arose from a 2005 arrest of a Loudon County carpenter named Steven Waters:

Waters, a first-time offender who was then 51, was arrested for possession of 1,000 grams of cocaine he bought for $12,000 in a reverse sting undercover investigation by the Knox County Sheriff’s Office.

Eleven days after his arrest, Waters received a tax bill of more than $50,000, plus late fees, for failing to voluntarily buy an excise stamp for his narcotics. The state filed a lien on his Lenoir City home and confiscated $4,000 from his bank account before his criminal case went to trial.

Here is an excerpt from the lower Court opinion courtesy of Paul Caron:

The trial court entered judgment in favor of plaintiff, decreeing that the tax constitutes a violation of constitutional rights of due process and protections against self incrimination. We affirm the trial court’s conclusion upon the alternate ground that the statute is arbitrary, capricious, and unreasonable and, therefore, invalid under the Tennessee Constitution, in that it seeks to tax as a privilege, activity that prior legislation has designated as criminal activity.

And here is part of Judge William C. Koch, Jr.’s opinion in which he concurred in part and dissented in part with the Supreme Court:  

Even though I concur with the Court’s conclusions that the Unauthorized Substances Tax does not run afoul of the state and federal constitutional prohibitions against double jeopardy and self-incrimination and that it is consistent with the requirements of due process, I cannot concur with its decision that this tax cannot be imposed in a constitutional manner on persons who possess significant quantities of illegal drugs for the purpose of resale.

Judge Koch leaves open the possibility that the Tennessee legislature might rewrite the law so that it passes constitutional muster.

This case  seems to be based solely on Tennessee’s constitutional law and I don’t expect it to have implications beyond Tennessee’s borders. However, it is intriguing that a state Supreme Court found a tax imposed on the possession of illegal substances unconstitutional.

It is clearly constitutional for a state to pass laws making the possession of certain substances illegal and to provide for stiff  prison terms for those who violate those laws. So how can it be that mere taxation, a penalty of less severity than the deprivation of one’s freedom, is unconstitutional?

In short, must the same level of due process be provided to citizens against whom the crack tax is imposed as to citizens against whom criminal charges are made?

And consider that if the reasoning of the lower Courts were to be adopted by other taxing authorities (other states, the federal government), we may never see the day when sin taxes are imposed on the truly corruptive forces in our lives like bad foods, tummy tucks and Adam Sandler movies.

Related Posts (on sin taxes):

• Botax?
• Tax on Bad Foods: Regressivity is Good
• N.Y Governor Patterson Proposes Sin Tax on Sweet Drinks
• Sin Taxes are a Hate Crime, Congressman Says
• San Francisco to Tax Cigarettes to Fund Anti-Litter Program

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