Supreme Court says nearly $160,00 fine is proper for cigarette distributor

By Kyla Asbury | May 8, 2018

CHARLESTON – The West Virginia Supreme Court of Appeals has issued a ruling, agreeing that a fine of nearly $160,000 for a cigarette distributor who sold delisted cigarettes on multiple occasions was proper.

Ashland Specialty Company, Inc. unlawfully sold 12,230 packs of cigarettes in West Virginia in 2009 that were not approved for sale by the Tax Commissioner of the State of West Virginia, according to the May 1 opinion.

Justice Beth Walker authored the majority opinion. Justices Robin Jean Davis and Menis Ketchum dissented in part and concurred in part and authored a separate opinion.

“Acting pursuant to West Virginia Code § 16-9D-8(a) (2016), the Commissioner penalized Ashland $159,398 for selling those cigarettes unlawfully, a penalty equal to 500 percent of the cigarettes’ retail value,” Walker wrote. “The Office of Tax Appeals then ordered that penalty reduced by twenty-five percent. On review, the Circuit Court of Kanawha County reversed the OTA and reimposed the Commissioner’s original $159,398 penalty.”

Walker wrote that contrary to Ashland’s arguments on appeal, the court found that the commissioner’s original penalty was not an abuse of the discretion afforded the commissioner under West Virginia Code § 16-9D-8(a); and that the penalty should not be cancelled or reduced due to circumstances that Ashland argues mitigate their unlawful cigarette sales; and that it does not violate the Excessive Fines Clause of the West Virginia Constitution or the Eighth Amendment to the United States Constitution.

“For those reasons, and as discussed more fully below, we affirm the April 11, 2017 order of the Circuit Court of Kanawha County reversing the OTA and reinstating the Tax Commissioner’s original $159,398 penalty,” Walker wrote.

Ashland distributes cigarettes to convenience stores in West Virginia and other states. In 2009, Ashland sold 12,210 packs of delisted GP and GP Galaxy Pro brand cigarettes and 20 packs of delisted Berley brand cigarettes, in violation of West Virginia code.

The commissioner identified the illegal sales during a 2012 audit and assessed the $159,398 penalty upon Ashland in August 2012.

The commissioner had previously assessed a $3,808 penalty upon Ashland for selling 56 cartons of delisted cigarettes from 2001 to 2003 and a $5,127 penalty for selling 62 cartons of delisted cigarettes from 2005 to 2008.

“Like the penalty imposed by the commissioner in 2 of the retail value of the delisted cigarettes,” Walker wrote. “Ashland did not contest these smaller penalties.”

Ashland petitioned the OTA to review the commissioner’s August 2012 penalty assessment and the administrative law judge conducted a hearing in August 2013.

When asked to justify the 500 percent of retail value penalty imposed, the representative for the commissioner explained that Ashland had had two previous audits, that they had been forewarned and that they continued to do so.

In August 2014, the ALJ issued a written order finding the commissioner’s penalty to be erroneous, unlawful, void and otherwise invalid.

The ALJ reduced the penalty by 25 percent to $119,548.50 ad both the commissioner and Ashland appealed the reduction to Kanawha Circuit Court.

On April 11, 2017, the circuit court entered an order reversing the OTA and reinstating the original penalty. Ashland then appealed the circuit court’s order to the Supreme Court.

Prior to 2012, the commissioner had fined Ashland twice for selling delisted cigarettes in violation of West Virginia Code, Walker wrote.

“Obviously Ashland was aware of its obligation not to sell delisted cigarettes and its obligation to remain apprised of changes to the commissioner’s director of approved brands,” Walker wrote. “Moreover, it was aware of the potential civil penalties it could face for future violations. Federal courts have also affirmed administrative penalties similar in size to the $159,398 penalty imposed by the Commissioner, in this case.”

Walker wrote that the penalty was not grossly disproportionate to the severity of Ashland’s unlawful activity.

“Accordingly, the circuit court did not err in holding that the Commissioner’s original $159,398 penalty does not violate the Excessive Fines Clause of the West Virginia Constitution or the Eighth Amendment to the United States Constitution,” she wrote.

Ketchum authored the separate opinion, in which Davis joined.

“I agree with the result in this case,” Ketchum wrote. “A tobacco company unlawfully selling cigarettes is, without question, deserving of a hefty monetary penalty.”

However, he wrote, his dissent concerns the appearance that the Tax Commissioner abdicated the exercise of discretion when calculating that monetary penalty.

“West Virginia Code § 16-9D-8(a) says that the Tax Commissioner ‘may also impose a civil penalty in an amount not to exceed the greater of five hundred percent of the retail value of the cigarettes[.]’”

Ketchum wrote that the definition of the word “may” is pretty clear: As a general rule of statutory construction, the word “may” inherently connotes discretion and should be read as conferring both permission and power. The Legislature’s use of the word “may” usually renders the referenced act discretionary, rather than mandatory, in nature.

“The Legislature’s use of the word ‘may’ tells us the Tax Commissioner is obligated to use his (or her) noggin and exercise some guided judgment,” Ketchum wrote. “The law doesn’t require a 500% penalty; instead, it confers the power to set a penalty up to but not exceeding 500%. But the Tax Commissioner’s representative testified that auditors working for the Commissioner ‘have no discretion’ and always impose a penalty equal to 500% of the retail price of the cigarettes. That is unacceptable.”

Ketchum wrote that when a bureaucrat’s reason for doing something is “because we’ve always done it that way,” then discretion has gone by the wayside.

“If the Tax Commissioner’s reason for never imposing anything less than a 500% penalty is ‘because we’ve always done it that way,’ then the same reasoning prohibits the imposition of anything greater than 500% as well,” he wrote. “Even though West Virginia Code § 16-9D-8(a) authorizes a penalty of $5,000 per violation, the Tax Commissioner theoretically could not impose that penalty because it’s never been done that way before and, consequently, because such a high penalty might appear random, capricious and vindictive.”

Ketchum wrote that in the future, the Tax Commissioner should plainly articulate why a specific civil penalty was chosen, and should do so according to some specific rules of thumb.

“Doing so not only avoids arbitrary and capricious results, but also negates the mere appearance that a result was randomly punitive,” he wrote.

W.Va. Supreme Court of Appeals case number: 17-0437

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