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Colorado Department of Revenue v. Creager Mercantile Co., Inc.

Supreme Court of Colorado, En Banc

May 15, 2017

Colorado Department of Revenue and Barbara J. Brohl, in her official capacity as Executive Director of the Colorado Department of Revenue, Petitioners
Creager Mercantile Co., Inc. Respondent

         Certiorari to the Colorado Court of Appeals Court of Appeals Case No. 13CA1580.

          Attorneys for Petitioners: Cynthia H. Coffman, Attorney General Frederick R. Yarger, Solicitor General Robert H. Dodd, Jr., Senior Assistant Attorney General Denver, Colorado

          Attorneys for Respondent: Edward Dale Parrish, LLC Edward Dale Parrish James W. Noland Golden, Colorado Blain Myhre LLC Blain D. Myhre Englewood, Colorado

          Attorneys for Amicus Curiae McLane/Western, Inc.: Morrison & Foerster LLP Scott F. Llewellyn Nicole K. Serfoss Denver, Colorado


         ¶1 Creager Mercantile Co., Inc., a wholesale distributor of groceries and tobacco products, sells Blunt Wraps, a type of cigar wrapper made of thirty to forty-eight percent tobacco. Blunt Wraps are designed to be filled with additional tobacco or marijuana and then smoked. We are asked to decide whether Blunt Wraps may be taxed as "tobacco products, " as that term is defined in section 39-28.5-101(5), C.R.S. (2016). Because Blunt Wraps are a "kind" or "form" of tobacco, and are "prepared in such manner as to be suitable . . . for smoking, " we hold that Blunt Wraps fall within the plain language of the definition of "tobacco products" under section 39-28.5-101(5) and are taxable accordingly. We therefore reverse the judgment of the court of appeals.

         I. Facts and Procedural History

         ¶2 The State of Colorado's tobacco products tax has two components. The first component is a statutory tax enacted in 1986 that levies a tax of "twenty percent of the manufacturer's list price" on the sale, use, consumption, handling, or distribution of "all tobacco products" in Colorado. § 39-28.5-102(1), C.R.S. (2016). This tax is imposed when a distributor brings or ships tobacco products into Colorado, or manufactures tobacco products in Colorado for sale in this state. Id. The second component is derived from Amendment 35, which voters adopted in 2004. Colo. Const. art. X, § 21. The statute implementing this constitutional amendment levies another tax of twenty percent on tobacco products "in addition to the tax levied pursuant to section 39-28.5-102." § 39-28.5-102.5, C.R.S. (2016).

         ¶3 Both components of the tax rely on the definition of "tobacco products" in section 39-28.5-101, which, with the exception of cigarettes, broadly includes various kinds and forms of tobacco that can be chewed or smoked "in a pipe or otherwise":

cigars, cheroots, stogies, periques, granulated, plug cut, crimp cut, ready rubbed, and other smoking tobacco, snuff, snuff flour, cavendish, plug and twist tobacco, fine-cut and other chewing tobaccos, shorts, refuse scraps, clippings, cuttings and sweepings of tobacco, and other kinds and forms of tobacco, prepared in such manner as to be suitable for chewing or for smoking in a pipe or otherwise, or both for chewing and smoking, but does not include cigarettes which are taxed separately.

§ 39-28.5-101(5) (emphasis added).

         ¶4 Blunt Wraps did not exist when section 39-28.5-101 was enacted in 1986. The product evolved from rolling papers used to make roll-your-own cigars and cigarettes. Traditional rolling papers are sold in a sheath of small, dry papers that are folded together in a pop-up packet and can be pulled out one-by-one. In contrast to traditional rolling papers, Blunt Wraps are made from pulverized, homogenized tobacco leaves mixed with vegetable gum, and contain between thirty and forty-eight percent tobacco.

         ¶5 Blunt Wraps are packaged moist and are individually wrapped around a plastic straw in a sealed container. Before use, the straw is removed from the Blunt Wrap, leaving a pre-formed, small, hollow cigar shell. Like traditional rolling papers, Blunt Wraps are designed to be filled with tobacco, marijuana, or other smoking material and smoked. See generally Redman, How to Roll A Blunt, on Whut? Thee Album (Columbia Records 1992). When smoked, the Blunt Wrap is consumed along with the additional tobacco or other smoking material.

         ¶6 Blunt Wraps are marketed to consumers as "all natural tobacco wraps" and are patented as a tobacco product; the patent description summarizes their production and intended use:

Wrapping moistened tobacco leaves around a cylindrical form casing forms the shell. The leaves are allowed to dry, and the shell is ready for sale to a consumer. After the form casing is removed, the consumer can fill the shell with a favorite blend of tobacco.
In one of the embodiments, a longitudinal slit is formed through a wall of the shell to allow prying open of the shell body and removal of the form casing. After crushed tobacco leaves are deposited into the central opening of the shell, the edges of the slit are moistened and brought together to seal the slit. A cigar is ready for smoking.

U.S. Patent No. 6, 321, 755 (filed Dec. 7, 1999).

         ¶7 Creager began distributing Blunt Wraps in 2003. The Colorado Department of Revenue ("the Department") audited Creager in early 2004 for the 2001-2003 tax period, but levied no tax assessment against Creager for selling Blunt Wraps.

         ¶8 In 2006, in response to several taxpayer inquiries, a unit at the Department construed section 39-28.5-101(5) to include products that contain any amount of tobacco. The Department issued a notice called an "FYI" to inform distributors of tobacco products of this interpretation of the statute.[1]

         ¶9 In 2007, the Department audited Creager for the 2004-2006 tax period and issued an assessment and notice of deficiency, asserting that Creager had failed to collect tobacco products tax on the sales of Blunt Wraps during that period. Creager protested the results of the Department's audit, arguing that Blunt Wraps do not meet the statutory definition of tobacco products.

         ¶10 Following a hearing, the Department issued a final determination concluding that Blunt Wraps are "tobacco products" under the definition in section 39-28.5-101(5). The Department's final determination imposed ...

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