Global Hookah Distributors, Inc. v. Dept. of Rev.

562 August 6, 2021 No. 25

IN THE OREGON TAX COURT

REGULAR DIVISION

GLOBAL HOOKAH DISTRIBUTORS, INC.,

a North Carolina corporation,

Plaintiff,

v.

DEPARTMENT OF REVENUE,

Defendant.

(TC 5272)

On cross-motions for summary judgment, Plaintiff raised two issues regard-

ing Oregon’s Tobacco Products Tax (TPT), one statutory and one constitutional.

Plaintiff argued that the “wholesale sales price” used to determine tax liability

under the TPT should not include certain shipping and handling charges. The

court held that the exclusion of charges from the “wholesale sales price” will be

based on consideration of four factors: (1) charges for identifiable services are

more likely excludable; (2) charges for services performed by a third party are

more likely excludable; (3) third-party service charges are more likely excludable

if passed on at no more than a reasonable markup; and (4) charges incurred after

title to the tobacco product passed to the taxpayer are more likely excludable.

The court concluded that there was insufficient evidence in the record to rule on

the statutory issue in this case. Plaintiff also argued that the TPT violated the

US Constitution’s Commerce Clause. The court concluded that Plaintiff’s sales

of tobacco products to Oregon customers established a substantial nexus with

Oregon, the measure of the TPT is fairly related to the activity of selling tobacco

products, and that imposing the TPT does not unduly burden interstate com-

merce. Therefore, the imposition of the TPT did not violate the Commerce Clause.

Oral argument on cross-motions for summary judgment

was held by telephone on May 27, 2020.

Amber A. Beyer, Cosgrave Vergeer Kester LLP, filed the

motion and Julie A. Smith, Cosgrave Vergeer Kester LLP,

Portland, argued the cause for Plaintiff.

Kristen M. Gallino, Assistant Attorney General, Depart-

ment of Justice, Salem, filed the motion and argued the

cause for Defendant.

Decision rendered August 6, 2021.

ROBERT T. MANICKE, Judge.

Plaintiff (taxpayer) brings statutory and constitu-

tional challenges to Defendant’s (the department’s) assess-

ments of Oregon’s Tobacco Products Tax (the TPT) on tobacco

Cite as 24 OTR 562 (2021) 563

products other than cigarettes, codified at ORS 323.500 to

323.645 (the TPT Act or Act).1 The tax periods at issue are

the 16 quarters ending December 31, 2008, and June 30,

2009 through December 31, 2012.

I. INTRODUCTION & FACTS

A. Overview of Taxpayer’s Business

Unless noted otherwise, the facts are uncontested

for the periods at issue. Taxpayer is a North Carolina corpo-

ration whose commercial domicile and sole place of business

are in Charlotte, North Carolina. Taxpayer buys and sells

“shisha” (a form of tobacco that is smoked in hookahs) and

nontobacco products (such as hookahs, accessories to hoo-

kahs, and charcoal). Taxpayer does not repackage tobacco

products; for example, if it buys a certain variety of shisha

in 250-gram jars, it sells those jars of shisha to customers.

A business wishing to order from taxpayer first sub-

mits, through taxpayer’s website, an application contain-

ing business information and copies of the business’s state

tobacco license and sales tax license, if applicable. After tax-

payer approves the application, the business customer may

place orders over email, phone, and fax. Customers other

than businesses typically create an account on taxpayer’s

website, enabling them to place and track orders through

the site.

Taxpayer conducts all of its operations at ware-

houses in North Carolina and ships its goods via U.S. mail

or common carrier from there to customers throughout the

world. Taxpayer has a website and a presence on Facebook

and Twitter that are accessible by anyone. Taxpayer sends

newsletters by email a few times a year regarding new prod-

ucts or upcoming sales; newsletters go to customers who

1

Unless otherwise noted, all references to the Oregon Revised Statutes

(ORS) are to the 2009 edition. Although the 2009 edition was published after the

first period at issue, the TPT Act was, for purposes of this case, materially the

same as the 2007 version of the Act. Cf. Or Laws 2009, ch 717 (adding definition

of “moist snuff,” imposing tax on “moist snuff,” and imposing various adminis-

trative requirements on manufacturers of smokeless tobacco products). Except

for two amendments not relevant to this case, the Act was not amended between

2009 and 2012. See Or Laws 2011, ch 389, § 5 (pertaining to warrants); Or Laws

2011, ch 661, § 8 (same).

564 Global Hookah Distributors, Inc. v. Dept. of Rev.

contact taxpayer seeking to subscribe. None of taxpayer’s

employees has entered Oregon on business.

Taxpayer acknowledges that it is a “distributor”

of “tobacco products” as defined by Oregon law. See ORS

323.500(7) (defining “distributor”); ORS 323.500(14) (defin-

ing “tobacco products”); ORS 323.520(1) (imposing licensing

requirement for distributors). Taxpayer obtained an Oregon

distributor license after receiving a request around 2007

from an Oregon business customer who had been purchas-

ing nontobacco products from taxpayer but who wanted to

purchase tobacco products as well. See ORS 323.530. In the

course of obtaining its license, taxpayer was directed by a

state employee to register with the Oregon Secretary of State

as a foreign corporation, and taxpayer did so. Taxpayer has

a registered agent in Oregon. Taxpayer has filed a quarterly

tobacco products tax return, and remitted all reported TPT,

for each of the periods at issue.

Taxpayer’s total sales to customers in Oregon during

the calendar year 2008 amounted to less than $10,000 in

gross sales and fewer than 20 invoiced transactions, each

including charges for shisha, charges for goods other than

shisha, and other charges, all with two customers. Taxpayer

had similar figures during the calendar year 2009: slightly

more than $10,000 in gross sales and fewer than 20 invoiced

transactions, all with one of the customers to which it sold

in 2008. Taxpayer sent one or more invoices to the same cus-

tomer each month from February 2008 through December

2009. The numbers increased for 2010 to less than $35,000

in gross sales, fewer than 40 transactions, and four custom-

ers. For 2011, taxpayer had about $80,000 in gross sales,

around 60 transactions, and six customers. For 2012, tax-

payer had around $180,000 in gross sales, about 100 trans-

actions, and nine customers. As a percentage of taxpayer’s

overall gross sales, taxpayer’s gross sales to Oregon custom-

ers ranged from 0.5 percent to 2.0 percent.

B. Taxpayer’s Suppliers’ Invoices

The invoices taxpayer receives from its suppliers for

tobacco products ordinarily have a line item for each type

of product. That line item shows the unit of that product

Cite as 24 OTR 562 (2021) 565

that taxpayer has ordered (for example, a jar of a certain

weight of a certain type of shisha), the number of such units

ordered, the price per unit, and the total price for the quan-

tity of units ordered. Similar line items for nontobacco prod-

ucts, such as charcoal, hookahs, or other smoking-related

equipment, sometimes are included on the same invoice

with tobacco products. Supplier invoices also often show one

or more of the following charges that the court will refer

to as the “Charges at Issue” in taxpayer’s statutory claim:

federal tax, shipping fees, custom fees, duties, transporta-

tion, palletizing, warehousing, customer service, advertis-

ing, documentation and other charges. An invoice typically

groups all Charges at Issue into a single line item, although

some invoices list shipping or other discrete types of Charges

at Issue as separate line items. Most of the invoices do not

show a breakdown of the Charges at Issue by product; for

example, an invoice that shows shipping as a Charge at

Issue will show only one shipping charge for all items on the

invoice, not separate charges for shipping of each product

type or each unit shown on the invoice. In summary, each

invoice clearly shows a stated price for each item of tobacco

products and a stated price for each item of nontobacco prod-

ucts. However, the stated amounts for Charges at Issue are,

on most invoices, “bundled,” both in the sense that multiple

types of Charges at Issue are included in a single amount,

and in the sense that the Charges at Issue are not allocated

among the various products on the invoices.

C. The Department’s Audit of Taxpayer’s TPT Returns

For shisha, the TPT rate is “sixty-five percent of the

wholesale sales price,” which is defined as “the price paid for

untaxed tobacco products to or on behalf of a seller by a pur-

chaser of the untaxed tobacco products.” See ORS 323.505

(1)(c); ORS 323.500(16). On its TPT returns for the periods

at issue, taxpayer calculated its “wholesale sales price” for

tobacco products sold into Oregon using the line-item price

for those products as shown on the invoices from suppliers.

Taxpayer’s calculation did not take into account any of the

Charges at Issue. In an audit in 2013, the department recal-

culated taxpayer’s reported tax liability by including the

Charges at Issue in the “wholesale sales price.”

566 Global Hookah Distributors, Inc. v. Dept. of Rev.

The department issued notices of deficiency, which,

for all periods at issue, impose total additional TPT liability

of $57,501.92, plus interest, as of October 25, 2013. Taxpayer

appealed to the Magistrate Division and now appeals from

an adverse decision there. The parties have filed cross-

motions for summary judgment.2

II. STANDARDS OF REVIEW

This division of the court reviews a magistrate’s

decision de novo based on the record developed in this divi-

sion. ORS 305.425(1); see also ORS 305.501(6). The court

grants a motion for summary judgment only if “the plead-

ings * * * declarations, and admissions on file show that

there is no genuine issue as to any material fact and that the

moving party is entitled to prevail as a matter of law.” Tax

Court Rule (TCR) 47 C. See Christensen II v. Dept. of Rev., 23

OTR 155, 162-63 (2018) (citing Two Two v. Fujitech America,

Inc., 355 Or 319, 331, 325 P3d 707 (2014)). “No genuine issue

as to a material fact exists if, based upon the record before

the court viewed in a manner most favorable to the adverse

party, no objectively reasonable [factfinder] could [find] for

the adverse party on the matter that is the subject of the

motion for summary judgment.” TCR 47 C. “A material fact

is ‘one that, under applicable law, might affect the outcome

of a case.’ ” Ghiglieri v. Tomalak, 304 Or App 717, 718, 469

P3d 262 (2020) (quoting Zygar v. Johnson, 169 Or App 638,

646, 10 P3d 326 (2000), rev den, 331 Or 584 (2001)). As to

each party’s motion, the adverse party has the burden of

producing evidence on any issue raised in the motions as to

which the adverse party would have the burden of persua-

sion at trial. Id.

III. ISSUES

(1) Statutory issue: Does the “wholesale sales price” of the

tobacco products taxpayer sold to Oregon customers

include the Charges at Issue?

2

Taxpayer argues that the department has moved for only partial summary

judgment because it did not argue in its Motion for Summary Judgment that the

TPT meets the “fairly related” prong of the Complete Auto test (see 24 OTR at 583).

The court does not treat the department’s motion as a motion for partial summary

judgment. The department argued that taxpayer’s “constitutional objections to

taxation in Oregon are without merit.” The department specifically addressed the

“fairly related” prong in its response, and taxpayer responded on reply.

Cite as 24 OTR 562 (2021) 567

(2) Constitutional issue: Does the Commerce Clause of the

United States Constitution prevent the department

from subjecting taxpayer to the Tobacco Products Tax

for some, if not all, of the periods at issue?

IV. ANALYSIS

Taxpayer makes two claims, one statutory and

one under the United States Constitution. First, taxpayer

asserts that the statutory definition of the “wholesale sales

price” of tobacco products refers to the per-unit price of a

tobacco product and excludes all of the Charges at Issue.

The department argues that all of the Charges at Issue are

included in the wholesale sales price because a seller would

not have sold the shisha to taxpayer if taxpayer had not paid

those charges. Taxpayer’s statutory claim would eliminate

the deficiencies because all of the department’s assessments

are based on increasing the tax base by the amount of the

Charges at Issue. Taxpayer’s second claim is that, as applied

to taxpayer, the TPT violates the Commerce Clause of the

United States Constitution for at least some of the periods

at issue. See generally US Const, Art I, § 8, cl 3. Taxpayer’s

second claim would both eliminate the assessed deficiencies

and result in a refund of tax that taxpayer paid when it filed

its returns.

The court begins with taxpayer’s statutory claim.

Health Net, Inc. v. Dept. of Rev., 22 OTR 128, 134 (2015), aff’d,

362 Or 700, 415 P3d 1034 (2018) (“Under the ‘first things

first’ doctrine, Oregon courts first examine state statutory

issues and state constitutional claims before addressing any

federal statutory or federal constitutional claims.”). When

construing statutes, the court applies the analytical steps

set forth in State v. Gaines, starting with the text and con-

text, proceeding to the legislative history to the extent use-

ful, and, if the legislature’s intent remains unclear, consult-

ing general maxims of statutory construction. 346 Or 160,

171-72, 206 P3d 1042 (2009).

A. Statutory Issue

The TPT Act governs the taxation of tobacco prod-

ucts other than cigarettes. ORS 323.505 imposes the tax and

specifies the tax base and rates for various tobacco products:

568 Global Hookah Distributors, Inc. v. Dept. of Rev.

“(1) A tax is hereby imposed upon the distribution of

all tobacco products in this state. The tax imposed by this

section is intended to be a direct tax on the consumer, for

which payment upon distribution is required to achieve

convenience and facility in the collection and administra-

tion of the tax. The tax shall be imposed on a distributor at

the time the distributor distributes tobacco products.

“(2) The tax imposed under this section shall be

imposed at the rate of:

“(a) Sixty-five percent of the wholesale sales price of

cigars, but not to exceed 50 cents per cigar;

“(b) One dollar and seventy-eight cents per ounce

based on the net weight determined by the manufacturer,

in the case of moist snuff, except that the minimum tax

under this paragraph is $2.14 per retail container; or

“(c) Sixty-five percent of the wholesale sales price of all

tobacco products that are not cigars or moist snuff.

“* * * * *

“(5) No tobacco product shall be subject to the tax if

the base product or other intermediate form thereof has

previously been taxed under this section.”

Key terms are defined in ORS 323.500:

“(3) ‘Consumer’ means any person who purchases

tobacco products in this state for the person′s use or con-

sumption or for any purpose other than for reselling the

tobacco products to another person.

“* * * * *

“(6) ‘Distribute’ means:

“(a) Bringing, or causing to be brought, into this state

from without this state tobacco products for sale, storage,

use or consumption;

“(b) Making, manufacturing or fabricating tobacco

products in this state for sale, storage, use or consumption

in this state;

“(c) Shipping or transporting tobacco products to retail

dealers in this state, to be sold, stored, used or consumed

by those retail dealers;

Cite as 24 OTR 562 (2021) 569

“(d) Storing untaxed tobacco products in this state

that are intended to be for sale, use or consumption in this

state;

“(e) Selling untaxed tobacco products in this state; or

“(f) As a consumer, being in possession of untaxed

tobacco products in this state.

“(7) ‘Distributor’ means:

“(a) Any person engaged in the business of selling

tobacco products in this state who brings, or causes to be

brought, into this state from without the state any tobacco

products for sale;

“(b) Any person who makes, manufactures or fabri-

cates tobacco products in this state for sale in this state;

“(c) Any person engaged in the business of selling

tobacco products without this state who ships or transports

tobacco products to retail dealers in this state, to be sold by

those retail dealers;

“(d) Any person, including a retail dealer, who sells

untaxed tobacco products in this state; or

“(e) A consumer in possession of untaxed tobacco prod-

ucts in this state.

“* * * * *

“(12) ‘Sale’ means any transfer, exchange or bar-

ter, in any manner or by any means, for a consideration,

and includes and means all sales made by any person. It

includes a gift by a person engaged in the business of sell-

ing tobacco products, for advertising, as a means of evading

the provisions of ORS 323.500 to 323.645, or for any other

purpose.

“* * * * *

“(14) ‘Tobacco products’ means cigars, cheroots, sto-

gies, periques, granulated, plug cut, crimp cut, ready rubbed

and other smoking tobacco, snuff, snuff flour, moist snuff,

cavendish, plug and twist tobacco, fine-cut and other chew-

ing 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

smoking in a pipe or otherwise, or both for chewing and

570 Global Hookah Distributors, Inc. v. Dept. of Rev.

smoking, but shall not include cigarettes as defined in ORS

323.010.

“(15) ‘Untaxed tobacco products’ means tobacco prod-

ucts for which the tax required under ORS 323.500 to

323.645 has not been paid.

“(16) ‘Wholesale sales price’ means the price paid for

untaxed tobacco products to or on behalf of a seller by a

purchaser of the untaxed tobacco products.”

The TPT Act thus imposes the TPT on any “distrib-

utor” at the time the distributor “distributes” tobacco prod-

ucts, except that no TPT applies if the “base product or other

intermediate form thereof has previously been taxed under

this section.” ORS 323.505(5). The tax base is the “wholesale

sales price,” defined as the “price paid for untaxed tobacco

products,” except that for cigars the tax base is capped at

50 cents per cigar, and for moist snuff the tax is not measured

by wholesale sales price at all, but by the ounce with a min-

imum tax per retail container. ORS 323.505(2). For shisha,

the TPT applies at 65 percent of the wholesale sales price, i.e.,

the price paid for untaxed shisha. ORS 323.505(2)(c).

The parties dispute whether “the price paid for

untaxed tobacco products” includes the Charges at Issue.

The court begins with the statute’s text. See Gaines, 346 Or

at 171-72.

1. Text

Each party claims support for its position in the

plain meaning of “price.” The contemporaneous dictionary

definition of “price” is, in relevant part:3

“2a : the quantity of one thing that is exchanged or

demanded in barter or sale for another : a ratio at which

commodities and services are exchanged b : the amount of

3

The TPT was enacted in 1985. See Or Laws 1985, ch 816. As noted below

in the analysis of statutory context, the 1985 act defined “wholesale sales price”

as “the established price for which a manufacturer sells a tobacco product to a

distributor, after any discount or other reduction for quantity or cash.” Id. at

§ 15 (emphasis added). In 2003, the legislature replaced that definition with the

current text, which does not include an adjective modifying “price.” See Or Laws

2003, ch 804, § 31. For its text analysis, the court refers to the 2002 edition of

Webster’s Third as contemporaneous with the 2003 amendment. In any event, the

definition of “price” available in 1985 was identical. See Webster’s Third New Int’l

Dictionary at 1798 (unabridged ed 1976).

Cite as 24 OTR 562 (2021) 571

money given or set as the amount to be given as a consider-

ation for the sale of a specified thing <the [price] of wheat

is expected to rise> 3 : the terms or consideration for the

sake of which something is done or undertaken * * * 4 : the

cost at which something is obtained <the [price] of liberty is

eternal vigilance> or offered <the [price] of peace was more

than their spirit could stomach * * *[.]”

Webster’s Third New Int’l Dictionary 1798 (unabridged ed

2002) (emphasis added); see Comcast Corp. v. Dept. of Rev.,

356 Or 282, 296 n 7, 337 P3d 768 (2014) (stressing impor-

tance of consulting dictionary definitions contemporaneous

with a statute’s enactment). A contemporaneous legal dic-

tionary contains a definition of “price” that the court finds

substantially similar to definition 2b above: “The amount of

money or other consideration asked for or given in exchange

for something else; the cost at which something is bought or

sold.” Black’s Law Dictionary 1207 (7th ed 1999).

Taxpayer argues that the reference to consideration

for “the sale of a specified thing” (or for “something else”

as stated in Black’s) confirms that only the amount stated

on an invoice as an itemized charge for shisha is the “price

paid for untaxed tobacco products.” On the other hand, the

department argues that the price of the shisha must include

the Charges at Issue because taxpayer’s suppliers would not

have sold the shisha to taxpayer unless taxpayer paid those

amounts as part of its consideration. The court concludes

that the plain meaning of “price” does not compel either

party’s position. Although an amount shown on an invoice

as attributable to an item is evidence of the amount paid

for that item, nothing in the plain meaning of “price” deter-

mines as a matter of law whether other charges on the same

invoice, or portions of those charges, also constitute “consid-

eration for” the item at issue.

2. Context and legislative history

The court turns to statutory context.4 Both parties

direct the court to provisions of the TPT Act. See Unger

v. Rosenblum, 362 Or 210, 221, 407 P3d 817 (2017) (“[W]e

4

Because the court has found little on point in the legislative history, the

court notes relevant references to legislative history as part of the discussion of

context.

572 Global Hookah Distributors, Inc. v. Dept. of Rev.

consider all relevant statutes together, so that they may

be interpreted as a coherent, workable whole.”). Taxpayer

argues that the “price” of shisha must be determined on

a “per-unit” or “per-item” basis because (1) cigarettes and

moist snuff are taxed by the unit (the number of cigarettes

or ounces of moist snuff net of container weight) and the tax

on cigars is capped at a per-cigar maximum amount; and

(2) the statutory scheme excludes markups and other addi-

tional charges in later transactions once shisha has been

subjected to tax at any stage in the chain of transactions.

a. Parties’ arguments

In its first argument based on context, taxpayer

invokes the maxim noscitur a sociis, pointing out that for

cigarettes, cigars and moist snuff, charges for shipping, fed-

eral taxes, warehousing, and other charges like the Charges

at Issue are irrelevant. For moist snuff, even packaging is

expressly excluded from the measure of the weight of the

taxable tobacco product. Therefore, taxpayer argues, the

legislature also intended to exclude those items from the tax

base in the case of shisha and other tobacco products. The

court, however, finds comparisons to the taxation of ciga-

rettes, cigars, and moist snuff inapposite. At least as applied

to the tax imposed by ORS 323.505(2)(c), the court sees no

common thread that links tax bases measured by a unit of

product or a unit of weight with a tax base measured by the

price paid. And even if the court accepts taxpayer’s conclu-

sion that the legislature had a common concern of defining

each tax base narrowly to include only the unit of product,

the court still could not thereby deduce whether a particular

stated price on a multi-item invoice accurately reflected the

“consideration paid” for that unit.5

5

The statutory development and legislative history provide no evidence of a

common thread. Sales of cigarettes have been subject to an Oregon tax measured

in mills per cigarette since 1965, comparable to the federal tax measured in dollars

per one thousand cigarettes. See Or Laws 1965, ch 525, § 18 (tax on distribution);

ORS 323.030 (tax on distribution); cf. IRC § 5701(c) (1965) (imposing federal excise

tax on cigarettes based on dollar amount per thousand cigarettes within each of

two weight classes). By contrast, when Oregon began to tax other tobacco products,

pursuant to the TPT Act in 1985, the “wholesale sales price” was the sole tax base

for all tobacco products other than cigarettes. See Or Laws 1985, ch 816, §§ 15 - 16

(codified at ORS 323.500 and ORS 323.505 (1985 ed)) (imposing tax on all tobacco

products at “35 percent of the wholesale sales price”). The shift to an essentially

per-unit tax base for cigars occurred in 2001, but the legislative history of the

Cite as 24 OTR 562 (2021) 573

Taxpayer’s second argument is based on the legisla-

ture’s decision to not subject a product to tax if the product,

or its “base product or other intermediate form,” has been

taxed. Here, taxpayer has a point. See ORS 323.505(5). As

the department acknowledges, at each transaction in the

chain of distribution the “price paid” for the tobacco product

is likely to increase, if only by each successive seller’s markup

to gain a profit from the sale. Yet the statutes require the

state to forgo taxing these increased amounts whenever an

earlier transaction has been taxed. The court agrees that

this statutory structure suggests that the legislature was

less concerned about maximizing the size of the tax base

and more concerned about ensuring that tobacco products

do not go “untaxed” altogether.6 It does not follow, however,

that, at whatever stage the tax is imposed, the legislature

intended to define “price” entirely by resort to the amount

shown on an invoice containing numerous additional items.7

2001 act makes clear that the purpose of that change was to lower the tax on

cigars in order to encourage purchases from compliant in-state retailers and to

discourage purchases over the Internet from sellers that did not pay the tax. See

Or Laws 2001, ch 982, § 3; Minutes, Senate Committee on Revenue, May 17, 2001,

8-9 (statement of Sen Witt) (explaining that local cigar stores have been going out

of business due to the high tax rate). As for moist snuff, the change to a tax based

on weight occurred after the 2003 redefinition of “wholesale sales price” and thus

does not provide relevant context in this case. See Or Laws 2009, ch 717, § 2.

6

The legislative history of House Bill (HB) 2368 (2003) supports this view,

revealing that the legislature was primarily concerned with the lack of voluntary

compliance with, and the department’s inability to enforce, the TPT, which led

to the widespread consumption of untaxed tobacco products. Audio Recording,

House Committee on Revenue, HB 2368, Apr 24, 2003, at 38:35 (statement of Matt

McCauley, Assistant Attorney General), https://olis.oregonlegislature.gov/liz/

mediaplayer?clientID=4879615486&eventID=2003041418 (explaining that the

department could not enforce the TPT due to the lack of a licensing require-

ment for distributors); Audio Recording, Senate Committee on Judiciary, HB

2368, June 11, 2003, at 29:25-29:45 (statement of Matt McCauley, Assistant

Attorney General), https://olis.oregonlegislature.gov/liz/mediaplayer?clientID=

4879615486&eventID=2003061039 (“We estimate that we’re only receiving 20-30

percent of the revenue we ought to be receiving on [tobacco] products.”). To solve

that problem, the legislature imposed licensing requirements, granted the

department the authority to suspend and revoke licenses, increased recordkeep-

ing and filing requirements for distributors, and increased the number of people

who are responsible for remitting the TPT by including consumers in possession of

untaxed tobacco products in the definition of “distributor” and “distribution.” See

generally Or Laws 2003, ch 804, § 31 (definitions); id. § 34 (licensing); id. § 35 (sus-

pending and revoking licenses); id. § 38 (record keeping); id. § 39 (record keeping).

7

Taxpayer also argues that the statutory definition of “wholesale sales price”

in effect from adoption of the TPT in 1985 until changed by the 2003 amendments

supports its position that the current tax base, “price paid for untaxed tobacco

574 Global Hookah Distributors, Inc. v. Dept. of Rev.

The department’s contextual argument is that the

legislature’s declared intention that the TPT is “a direct tax

on the consumer” resolves the issue. The complete text of the

provision on which the department relies consists of three

sentences:

“A tax is hereby imposed upon the distribution of all

tobacco products in this state. The tax imposed by this

section is intended to be a direct tax on the consumer, for

which payment upon distribution is required to achieve con-

venience and facility in the collection and administration of

products,” excludes all of the Charges at Issue. The pre-2003 statute provided:

“ ‘Wholesale sales price’ means the established price for which a manufacturer

sells a tobacco product to a distributor, after any discount or other reduction for

quantity or cash.” ORS 323.500(11) (1985). Taxpayer points initially to a Florida

case construing similar language, in which the court concluded that “estab-

lished price” excludes “various other * * * invoice costs for reimbursement of fed-

eral excise tax, shipping costs, and other charges” because those charges “vary”

depending on the buyer. Micjo, Inc. v. Dep’t of Business & Prof. Regulation, 78 So

3d 124, 126-27 (Fla 2d Dist Ct App 2012). Second, taxpayer points to statements

in the legislative history of the 2003 amendments to the TPT Act suggesting that

the work group drafting the amendments did not intend to make “substantive”

changes to the definition of “wholesale sales price”:

“Essentially these were changes that as we got back in our workgroup with

the tobacco manufacturers, the Department of Revenue, the Department of

Justice, we realized that our initial drafting of the bill had left unclear a few

things and essentially that’s what the -2 amendments are, are these clarify-

ing, adding a few words here and there that we thought were stronger or were

more clear. I don’t really believe that there’s much that is substantive that

appears in the -2 amendment.”

Audio Recording, House Committee on Business and Consumer Affairs, HB

2368, Apr 11, 2003, at 55:22-57:00, available at https://olis.oregonlegislature.gov/

liz/mediaplayer?clientID=4879615486&eventID=2003041313; Exhibit H, House

Committee on Business, Labor, and Consumer Affairs, HB 2368, Apr 11, 2003,

at 5 (accompanying statement by Matt McCauley, Assistant Attorney General).

The court assigns no weight to McCauley’s description of the amendments as

“clarifying” and not “substantive.” His statement may have been a fair response

to what the committee chair asked of him—namely, to “hit the highlights” of

the -2 amendments—but given the small amount of attention that the TPT Act

changes received in relation to the rest of the bill, the court will not rely on

McCauley’s cursory summary of the -2 amendments to conclude that the legis-

lature intended to preserve any part of the 1985 definition of “wholesale sales

price.” Those amendments were only some of the changes to the TPT Act, and

the overall bill involved numerous additional changes involving the cigarette

tax, which was the focus of the great bulk of the time in the hearings. See HB

2368 (2003) -2 amendments at 4-5 (proposing amendments to ORS 323.500); see

also HB 2368 (2003) -3 amendments (proposing amendments pertaining to the

cigarette tax); see generally Minutes, House Committee on Business, Labor, and

Consumer Affairs, HB 2368, Apr 11, 2003. Without relevant legislative history

connecting “price paid for untaxed tobacco products” to a concept of “established

price,” the court finds other courts’ interpretation of the latter phrase irrelevant.

Cite as 24 OTR 562 (2021) 575

the tax. The tax shall be imposed on a distributor at the

time the distributor distributes tobacco products.”

ORS 323.505(1). The department reasons that each seller

in the chain of transactions, starting with taxpayer, will

charge a price sufficient to recover the Charges at Issue in

order to make a profit, and the consumer therefore will end

up bearing the economic cost of the Charges at Issue. From

there, the department argues for an expansive reading of

“price paid for untaxed tobacco products” that includes the

Charges at Issue. However, the court simply finds no link

between the phrase “direct tax on the consumer” and the

term “price paid for untaxed tobacco products.”8 The analysis

above shows that the TPT base is frozen at the first taxable

transaction in the chain. Consumers ultimately may bear

any number of costs that the distributor and later sellers

incur, but the TPT applies to costs only if they are part of the

“price paid for untaxed tobacco products.”

The court does not read the “direct tax” statement of

legislative intent in the second sentence of ORS 323.505(1) as

overriding the declaration in the first sentence that “[a] tax

is hereby imposed upon the distribution of all tobacco prod-

ucts in this state”; nor does it override the third sentence,

which states that “[t]he tax shall be imposed on a distribu-

tor at the time the distributor distributes tobacco products.”

The first and third sentences, and the special definitions

they incorporate, make it plain that the tax operates as a

“direct tax on the consumer” only in those instances when

the consumer receives tobacco products that have escaped

taxation at all prior transactions in the chain.

Rather than view the second sentence as a guide to

interpreting “price,” the court finds it more plausible to read

the second sentence as a signal or warning that the terms

“distributor” and “distribution” are defined sweepingly—

even to a counterintuitive extent—to include not only all

manner of sellers and sales but also buyers, possessors, and

users, including end users. The legislature’s stated intention

8

The phrase “direct tax on the consumer” appears also in the cigarette tax

statutes. See ORS 323.085(2). However, neither party has proffered an explana-

tion of its meaning or purpose, and the court has found no basis to conclude that

the phrase has any connection with the measure of any tax base.

576 Global Hookah Distributors, Inc. v. Dept. of Rev.

to treat the TPT as a “direct tax on the consumer” does not

answer the question whether a particular Charge at Issue

in this case is within or without the price taxpayer paid a

supplier for untaxed tobacco products.

b. Court’s interpretation: Charges at Issue are

excludible to the extent they are consideration

for something other than tobacco products, and

to the extent amounts are accurately allocated.

In sum, the court concludes that the parties’ argu-

ments based on context do not resolve whether the “price

paid for untaxed tobacco products” includes or excludes the

Charges at Issue. On a closer examination of the facts, the

court distinguishes two issues in dispute. The first issue is

whether any of the Charges at Issue should be separated

from the price paid “for untaxed tobacco products.” Taxpayer

particularly emphasizes shipping charges, perhaps because

shipping charges are commonly shown separately on the

invoices from taxpayer’s suppliers—as well as on invoices

for goods generally. For example, some of taxpayer’s invoices

from suppliers list only line-item amounts for shisha and a

line-item amount for shipping; taxpayer asks the court to

exclude the line-item shipping amounts from the tax base.

In addition to shipping charges, taxpayer seeks to exclude

other Charges at Issue, such as warehousing or customs

charges, that perhaps are not commonly shown separately

on invoices.

The second issue is how to correctly allocate the

total amount of a Charge at Issue among the items shown

on an invoice. Taxpayer challenges the department’s alloca-

tion of Charges at Issue among tobacco products and non-

tobacco products. For example, taxpayer complains that,

when heavy nontaxable items such as hookahs or charcoal

are shipped together with lighter-weight shisha, it is wrong

to assign the total shipping charges to the shisha.

To resolve both of these statutory issues, the court

returns to the plain and technical meaning of the “price

paid for untaxed tobacco products,” namely, the “consider-

ation” given “for” untaxed tobacco products. Use of the term

“consideration” in both the Webster’s and Black’s definitions

suggests that the contract between seller and buyer is the

Cite as 24 OTR 562 (2021) 577

starting point. In this case, the contracts at issue involve

the sale of goods, namely shisha that taxpayer buys from its

suppliers. Therefore, for additional context, the court turns

to the Uniform Commercial Code (UCC), as adopted by the

Oregon legislature.9 Several provisions of the UCC deal

with shipping charges, one of the Charges at Issue. Unless

the parties to a contract agree otherwise, the UCC provides

that the seller’s location is the place for delivery. See ORS

72.3080(1) (2003). When the contract requires delivery to

occur elsewhere, other UCC provisions codify certain terms

commonly used to assign the expense and other obligations

of shipping by common carrier. See ORS 72.3190 - 72.3240

(2003) (describing F.O.B. and other arrangements when par-

ties use a “carrier” to deliver goods). These provisions rec-

ognize that parties may bargain specifically as to the ser-

vice of shipping the goods. The premise for this treatment

appears to be the commercial reality that buyers and sellers

of goods often entrust shipping to a common carrier rather

than use their own vehicles. The UCC does not resolve

either of the issues discussed in this section. However, as

to the first issue—whether any Charges at Issue should be

separated from the price for shisha—the UCC is statutory

context that suggests the possibility that buyer and seller

may reasonably view consideration for shipping as separate

from consideration for the goods.

The court continues its focus on context relevant

to the first issue. The court has not found other contempo-

raneous Oregon authority addressing whether a tax base

measured by the consideration paid for goods can or should

include charges for shipping services or other charges for

which buyer and seller may bargain separately.10 This is

perhaps not surprising given the state’s lack of a general

9

Tobacco products appear to be well within the definition of “goods” under

the UCC. See ORS 72.1050(1) (2003) (generally defining “goods” as “things * * *

movable at the time of identification to the contract * * *”).

10

For example, although as of 2003, Oregon’s statewide transient lodging

tax long was imposed on the “consideration rendered for the sale, service or fur-

nishing of transient lodging,” the court has found no contemporaneous authority

further defining the tax base. ORS 320.305(1) (2003); cf. ORS 320.305(1) (2019)

(adding requirement that tax be “computed on the total retail price, including

all charges other than taxes, paid by a person for occupancy of the transient

lodging”).

578 Global Hookah Distributors, Inc. v. Dept. of Rev.

sales tax. Other jurisdictions imposing price-based taxes as

of 2003 often addressed the issue by statute or by a legisla-

tive regulation with the force of law.11 See, e.g., IRC § 4216(a)

(2006 ed) (for purposes of various federal manufacturing

excise taxes, “[a] transportation, delivery, insurance, instal-

lation, or other charge * * * shall be excluded from the price

only if the amount thereof is established to the satisfaction of

the Secretary in accordance with the regulations”);12 Treas

Reg § 48.4216(a)-2(b) (2003 ed) (“Charges for transportation,

delivery, insurance, installation, and other expenses actu-

ally incurred in connection with the delivery of an article to

a purchaser pursuant to a bona fide sale shall be excluded

from the sale price in computing the tax.”); see also Jerome

R. Hellerstein & Walter Hellerstein, 2 State Taxation

¶ 15.06[1][b] (3d ed 2021) (in sales tax state, subject to sig-

nificant exceptions, “the general rule is as follows: Trans-

portation and delivery charges, if quoted separately to the

buyer, are not included in the taxable price. If they are not

separately stated, however, they are included in the taxable

figure” (footnote omitted)).

In those sales tax states that lacked a specific stat-

utory requirement to include or exclude shipping charges as

of 2003, courts applied different tests to resolve the issue,

including whether buyer and seller could contract for ship-

ping separately from the sale of the goods, whether title

or the risk of loss had passed to the buyer when shipping

occurred, and whether providing shipping was “inciden-

tal” to, or “inseparable” from, the seller’s business. See, e.g.,

11

The court notes that, at one point in its briefing on constitutional issues,

the department cites three current tobacco tax statutes of neighboring states, all

of which use the price paid by the distributor as the tax base. Two of those stat-

utes expressly define amounts like the Charges at Issue as part of the tax base.

See Nev Rev Stat 370.440.7 (defining “wholesale price” as “price for which other

tobacco products are sold to a wholesale dealer * * * without any discount * * * on

account of * * * cost of materials used, labor * * *; cost of transportation * * *; ship-

ping, freight, warehousing, customer service, advertising or any other service

related to the sale; or [federal excise taxes]” (emphasis added)); Rev Code Wash

82.26.010(1) (defining “actual price” as “including any charges by the seller nec-

essary to complete the sale such as charges for delivery, freight, transportation,

or handling”). The third state does not use the general term “price,” but instead

uses the term “established price,” which also appeared in Oregon’s pre-2003 law.

Compare Idaho Code 63-2551(7) with ORS 323.500(11) (1985).

12

IRC section 4216(a) was not amended between 1984 and 2006. See ORS

323.500(10) (1985); see also IRC § 4216(a) (2000 ed) (same language).

Cite as 24 OTR 562 (2021) 579

Southern Red-E-Mix Co. v. Director of Rev., 894 SW2d 164

(Mo 1995) (when considering whether delivery charges are

included in the sales-tax base, the parties’ intent is the most

important factor; whether the parties intend for delivery

charges to be part of the sale depends on when title passes,

whether the charges are stated separately, who controls the

means of delivery, who assumes risk of loss, and whether the

seller benefits financially); Material Service Corp. v. Dept. of

Rev., 98 Ill 2d 382, 457 NE2d 9 (1983) (considering whether

a fixed “minimum load charge” on deliveries of fewer than

five cubic yards of concrete was indispensable or inciden-

tal to the sale); Comptroller of Treasury v. John C. Louis

Co., Inc., 285 Md 527 (1979) (concluding that, under certain

conditions, separately stated shipping charges are exclud-

able from the sales-tax base because they are not intended

to be profitable for the seller); see also Hellerstein, 2 State

Taxation at ¶ 15.06[3] (discussing cases).

Although this court does not discern in other

states’ cases a single or prevailing legal test, those cases,

along with the context supplied by the UCC, persuade the

court that, as of 2003, shipping by common carrier was suf-

ficiently widely recognized as a service separate from the

sale of goods that the Oregon legislature would not neces-

sarily have considered shipping charges as part of the price

paid for the goods, as the department asserts. The court has

rejected above the parties’ legal theories that would render

the Charges at Issue either entirely taxable or entirely non-

taxable as a matter of law. The court concludes instead, with

respect to the first statutory issue, that Charges at Issue

may be excludible from the price of tobacco products to the

extent that they are consideration for something other than

tobacco products. In this case of first impression, the court

is left to develop its own test for that determination, and

it does so below. Understandably, neither party has sub-

mitted evidence sufficient to apply the test,13 and the court

13

As to taxpayer’s motion, after substituting the court’s legal test in place of

the test taxpayer advances, taxpayer could prevail only if no objectively reason-

able juror could conclude that any amount of the Charges at Issue is includible in

the “consideration for” shisha. See TCR 47 C. However, viewing the evidence in

the light most favorable to the department, the court finds that a juror reasonably

could conclude that some or all of the Charges at Issue are includible because

neither party has submitted any evidence of what the Charges at Issue consist of,

580 Global Hookah Distributors, Inc. v. Dept. of Rev.

therefore will deny each party’s motion, enabling each party

to present evidence, either at trial or by new motion, as to

whether particular Charges at Issue are or are not part of

the consideration paid for tobacco products.

The court adopts a “safe harbor,” as well as a gen-

eral rule, for purposes of resolving the first issue under tax-

payer’s statutory claim. Under the safe harbor, charges for

shipping are excluded from the price for untaxed tobacco

products to the extent that taxpayer’s invoices from sup-

pliers or other adequate evidence shows (1) that a supplier

charged for shipping separately from the stated charge for

shisha; (2) that a common carrier or other third party actu-

ally provided the shipping services; (3) the amount of ship-

ping charges the supplier incurred separate from any other

Charges at Issue; and (4) that the supplier passed on the

shipping charges to taxpayer at no more than a reasonable

markup.

To the extent that taxpayer seeks to exclude ship-

ping charges that do not fit within the safe harbor, or to the

extent that taxpayer seeks to exclude any other Charges at

Issue, the court adopts the general rule that taxpayer must

beyond the mere labels appearing on the invoices. (For example, as to shipping

charges, even those invoices that list shipping as a Charge at Issue, or as the sole

Charge at Issue, generally do not show whether taxpayer’s supplier used a third

party or what markup the supplier added to the third party’s charges.) As to

Charges at Issue related to other types of services, none of the evidence reveals

whether the services were performed by a third party, what markup the supplier

charged, if any, or whether taxpayer held title to the shisha when the services

were performed. As to charges other than for services, the mere labels do not

inform the court of the nature of the charge, nor does the evidence show whether

taxpayer held title to the shisha when the charges were incurred.

The same reasoning applies to the department’s motion: Because the court

concludes that Charges at Issue may be excludible based on the test stated

below, and because neither party has proffered evidence on the factors in that

test beyond the labels appearing on the invoices, a juror viewing the record in

the manner most favorable to taxpayer could reasonably conclude that some or

all of the Charges at Issue are excludible. Of the Charges at Issue, the record

shows that some invoices had only “shipping” as a line item while other invoices

do not have a line item for any of the charges. The fact that some of taxpayer’s

suppliers charged for shipping and others did not raises the possibility that these

are separable charges, but the department has not provided any evidence that

the shipping charges were inseparable from taxpayer’s purchases of shisha. In

addition, the invoices show that taxpayer purchased nontobacco products that

were shipped along with shisha and to which some of the shipping costs may be

appropriately allocated and, therefore, excluded from the tax base.

Cite as 24 OTR 562 (2021) 581

persuade the court that the 2003 legislature intended that

those charges were not consideration paid for shisha. As

with shipping, taxpayer’s invoices from suppliers or other

adequate evidence must at a minimum show that a supplier

charged for the shipping or other Charge at Issue separately

from the stated charge for shisha. The court will consider

the following evidentiary factors: (1) charges for identifiable

services are more likely to be excludible than charges not

for services; (2) service charges are more likely to be exclu-

dible if a third party performed the services than if the sup-

plier performed the services; (3) third-party service charges

ordered by the supplier are more likely to be excluded if the

seller passed on the charges at no more than a reasonable

markup; and (4) charges are more likely to be excludible if

title to the shisha had passed to taxpayer when the supplier

incurred the charge.

The court proceeds to the second statutory issue—

allocation of Charges at Issue as between tobacco products

and nontobacco products. The court anticipates that the

factual analysis necessary to determine whether particu-

lar Charges at Issue are excludible from the price paid for

untaxed tobacco products will also resolve many, if not all,

allocation issues. For example, once a third-party shipper

has been associated with a particular invoice, it may be

possible to use that shipper’s pricing protocols to determine

a price for shipping 24 two-ounce jars of shisha separately

from the shipping charge for six metal hookahs included on

the same invoice. As a further means to verify the accu-

racy of an allocation on an invoice, the parties may present

market evidence of the price or value of charges itemized

on contract documents. A market-based approach would

have been familiar to the Oregon legislature as of 2003, as

income tax case law has long recognized a market-price-

based approach to resolve disputes over the tax treatment

of assets where buyer and seller have bargained at arm’s

length with respect to the overall contract price but lacked

conflicting interests as to the allocation of the price among

items in the contract.14 See, e.g., Particelli v. Comm’r, 212 F2d

14

The problem of determining the price paid for one asset in a multi-

asset transaction arises in income tax law because the price paid for the assets is

used to establish both the buyer’s “basis” in the assets and the seller’s “gain” or

582 Global Hookah Distributors, Inc. v. Dept. of Rev.

498, 501 (9th Cir 1954) (reallocating total purchase price as

between winery assets and wine) (“The total purchase price

was arrived at through arms length negotiation but the

allocation of the selling price to the two pieces of property

involved was not. Once the parties had agreed upon the pur-

chase price it was a matter of indifference to the buyer as to

how the seller allocated it.”); ORS 316.007 (1985) (declaring

intention to make Oregon personal income tax law identi-

cal in effect to Internal Revenue Code provisions relating to

measurement of taxable income); see also Sleiman v. Comm’r,

187 F3d 1352, 1361 & n 21 (11th Cir 1999) (reallocating buy-

er’s basis as between nondepreciable land and depreciable

improvements included in single transaction).

As with the first statutory issue, the court will

allow the parties to present evidence, either at trial or by

new motion, as to whether amounts taxpayer paid to its

suppliers are accurately allocated to the price for untaxed

tobacco products, as opposed to other, nontaxable items.

B. Constitutional Issue

Taxpayer argues that the Commerce Clause prohib-

its Oregon from imposing the TPT on taxpayer for “at least

some” of the periods at issue. See US Const, Art I, § 8, cl 3.

Taxpayer asserts that its activities lack a substantial nexus

with Oregon, based on taxpayer’s lack of physical presence

and low level of activity in the state; that the TPT is not

fairly related to the services Oregon provides to taxpayer;

and that the TPT unduly burdens interstate commerce. The

department disputes each of taxpayer’s arguments.

Under the “dormant” Commerce Clause, “state reg-

ulations may not discriminate against interstate commerce;

and * * * States may not impose undue burdens on interstate

commerce.” South Dakota v. Wayfair, Inc., 585 US ___, 138 S

Ct 2080, 2091, 201 L Ed 2d 403 (2018). On the other hand,

“State laws that ‘regulat[e] even-handedly to effectuate a

“loss” from the sale. See generally Bittker & Lokken, Federal Taxation of Income,

Estates and Gifts ¶ 41.6.8 (Mar 2021) (“Many sellers want to allocate as much

of the purchase price as possible to assets that generate capital gain, such as

goodwill. Buyers seek larger allocations to items to which the quickest cost recov-

ery rules apply, such as inventory and equipment, which typically yield ordinary

income for the seller.”).

Cite as 24 OTR 562 (2021) 583

legitimate local public interest * * * will be upheld unless

the burden imposed on such commerce is clearly exces-

sive in relation to the putative local benefits.’ ’’ Id. (quoting

Pike v. Bruce Church, Inc., 397 US 137, 142, 90 S Ct 844,

25 L Ed 2d 174 (1970)). These principles “also animate the

Court’s Commerce Clause precedents addressing the valid-

ity of state taxes.” Id. One such precedent, Complete Auto

Transit, Inc. v. Brady, 430 US 274, 279, 97 S Ct 1076, 51 L

Ed 2d 326 (1977), provides the “now-accepted framework for

state taxation.” Wayfair, 138 S Ct at 2091. Under the four-

part test in Complete Auto, a state tax will be sustained so

long as it “applie[s] to an activity with a substantial nexus

with the taxing State, is fairly apportioned, does not dis-

criminate against interstate commerce, and is fairly related

to the services provided by the State.” Complete Auto, 430

US at 279. Taxpayer challenges the TPT under the first

part (“substantial nexus”) and the fourth part (“fairly

related”).

1. Substantial nexus

In Wayfair, the Supreme Court both restated the

substantial nexus requirement generally and, in the context

of sales and use taxes, declared “unsound and incorrect” a

“physical presence” requirement that the Court had imposed

in two prior opinions. See 138 S Ct at 2099; overruling Quill

Corp. v. North Dakota, 504 US 298, 317, 112 S Ct 1904, 119 L

Ed 2d 91 (1992) and National Bellas Hess, Inc. v. Ill. Dept. of

Rev., 386 US 753, 758, 87 S Ct 1389, 18 L Ed 2d 505 (1967).

In Quill and Bellas Hess, the Court had held that the sub-

stantial nexus requirement prohibited a state from requir-

ing an out-of-state seller to collect a use tax from the seller’s

in-state customers, if the seller lacked a physical presence in

the state. See Quill, 504 US at 309-19; Bellas Hess, 386 US

at 758. Taxpayer argues that a physical-presence require-

ment applies to its activities, either for the reasons artic-

ulated in Quill and Bellas Hess, or because those decisions

apply not only to sales and use tax, but also to the TPT;

moreover, taxpayer argues that Wayfair’s overturning of the

physical-presence requirement does not apply to this case

because taxpayer’s facts arose before Wayfair was decided in

2018. Because Wayfair is the Supreme Court’s most recent

584 Global Hookah Distributors, Inc. v. Dept. of Rev.

pronouncement on the Commerce Clause limitations on

state taxation, this court first analyzes the Court’s retroac-

tivity case law, concluding that Wayfair’s holding does apply

retroactively to this case. The court then considers whether

the physical-presence requirement that Wayfair rejected

for sales and use tax purposes nevertheless applies to the

TPT, concluding that it does not. Finally, the court returns

to Wayfair to determine how that case informs the analysis

of substantial nexus for purposes of the TPT, a nonsales or

use tax.

a. Wayfair applies retroactively

Taxpayer argues that, under the three-part test for

civil actions pursuant to Chevron Oil Co. v. Huson, it would be

inequitable for this court to apply Wayfair retroactively. 404

US 97, 106-07, 92 S Ct 349, 30 L Ed 2d 296 (1971) (Supreme

Court opinion may be applied nonretroactively if (1) opin-

ion announces “a new principle of law”; (2) nonretroactivity

would avoid “injustice or hardship”; and (3) nonretroactivity

would not unduly undermine the “purpose and effect” of the

new rule). However, without expressly overruling Chevron

Oil Co. v. Huson, the Court’s more recent opinion in Harper

v. Virginia Dept. of Taxation announced that “this Court’s

application of a rule of federal law to the parties before the

Court requires every court to give retroactive effect to that

decision.” 509 US 86, 90, 113 S Ct 2510, 125 L Ed 2d 74

(1993). The Court further declared:

“When this Court applies a rule of federal law to the parties

before it, that rule is the controlling interpretation of fed-

eral law and must be given full retroactive effect in all cases

still open on direct review and as to all events, regardless

of whether such events predate or postdate our announce-

ment of the rule.”

Id. at 97 (emphasis added). In its reply taxpayer argues that

Harper is distinguishable:

“Harper addressed whether a decision should be given

retroactive effect by courts in other cases when the United

States Supreme Court has decided to give the decision ret-

roactive effect in the case before it. The Court held that

when it chooses to apply a rule of federal law to the par-

ties that are before the Court, then ‘every court’ has an

Cite as 24 OTR 562 (2021) 585

obligation ‘to give retroactive effect to that decision.’ 509

US at 90.

“That is not what happened in Wayfair. When the Court

decided to do away with Quill’s physical-presence require-

ment in Wayfair, it did not have occasion to decide whether

the new substantial-nexus rule should be applied retroac-

tively to the parties before it because the statutory scheme

at issue in Wayfair provided that the enforcement of the

tax would be ‘stayed until the constitutionality of the law

has been clearly established.’ Wayfair, 138 S Ct at 2089. As

a result, the question whether Wayfair should be applied

retroactively is still an open question.”

(Emphasis in original.)

Taxpayer correctly points out that provisions in

the South Dakota law prohibiting retroactive assessments

if Quill were overturned meant that the Court could not

reach the question whether to apply its new substantial

nexus rule retroactively to the taxpayers in Wayfair. But

taxpayer’s contention that Wayfair’s procedural posture cre-

ates an opening to apply a Chevron Oil test in this case is

based on a misreading of Harper. Harper does not hold that

a new rule may be applied on a prospective-only basis if

the Court does not determine, in the case in which the rule

is announced, that the rule applies retroactively. Rather,

both in the passages quoted above and elsewhere, Harper

repeatedly declares a general rule that the Court’s holdings

apply with retroactive effect in other cases. See 509 US at 96

(Court’s decisions in civil cases are “presumptively retroac-

tive”; “a rule of federal law, once announced and applied to

the parties to the controversy, must be given full retroactive

effect by all courts adjudicating federal law”). Nothing in

the Court’s pronouncements limits this general rule to cases

in which the Court has applied the new rule to the parties

retroactively.

To be sure, the Court in Harper took pains to explain

that it had, in fact, applied a newly-announced rule to the

parties retroactively in Davis v. Michigan Dept. of Treasury,

489 US 803, 109 S Ct 1500, 103 L Ed 2d 891 (1989). See id.

at 97-99. However, the Court did so to explain its rejection of

the Virginia Supreme Court’s rationale for not applying the

Davis rule retroactively in the decision from which Harper

586 Global Hookah Distributors, Inc. v. Dept. of Rev.

was appealed. The Court in Harper did not appear to con-

template that a future case, such as Wayfair, might arise

in which the Court would both announce a new rule and

find it unnecessary to decide whether to apply that new rule

retroactively to the parties. However, this court finds noth-

ing in Harper that would justify an exception to the general

rule. Harper traces the evolution of the Court’s decisions

on retroactivity and outlines many competing concerns,

including the risk that retroactive application could create

harsh results for litigants who have relied on a prior judicial

rule; the problem of disparate treatment of litigants whose

claims arise on one side or the other of the date a new rule is

announced; and the role of the courts as interpreters, rather

than creators, of the law. James B. Beam Distilling Co. v.

Georgia, 501 US 529, 534-38, 111 S Ct 2439, 115 L Ed 2d

481 (1991). The weight of that analysis, and the absence of

any exception on all fours with this case,15 move this court to

conclude that Wayfair must apply retroactively to the facts

in this case.

15

Harper does arguably recognize an exception to its general rule of retro-

activity, grounded in its earlier decisions in James B. Beam Distilling Co. and

Bacchus Imports, Ltd. v. Dias, 468 US 263, 104 S Ct 3049, 82 L Ed 2d 200 (1984):

“When this Court does not ‘reserve the question whether its holding should

be applied to the parties before it,’ however, an opinion announcing a rule of

federal law ‘is properly understood to have followed the normal rule of ret-

roactive application’ and must be ‘read to hold . . . that its rule should apply

retroactively to the litigants then before the Court.’ ”

Harper, 509 US at 97-98 (quoting Beam, 501 US at 539) (ellipsis in original;

emphasis added). However, any exception based on “ ‘reserv[ing] the question’ ”

does not apply in this case. As used in Harper and Beam, the phrase refers to a

decision to remand the case to the state court for the often complex task of deter-

mining whether the taxpayer before the Court is entitled to a remedy for over-

payment of tax that the Court has determined was unconstitutionally imposed.

The Court explained in Beam that a decision on retroactive relief to the taxpayer

litigant may be “intertwined with, or obviated by, matters of state law,” as in

Bacchus, where the taxpayer’s overpayment claim may have been mitigated to

the extent the taxpayer was able to pass the tax through to its customers. Beam,

501 US at 538-39 (“Although the taxpaying appellants [in Bacchus] prevailed on

the merits of their Commerce Clause claim, * * * the Bacchus Court did not grant

outright their request for a refund of taxes paid under the law found unconstitu-

tional. Instead, we remanded the case for consideration of the State’s arguments

that appellants were ‘not entitled to refunds since they did not bear the economic

incidence of the tax but passed it on as a separate addition to the price that their

customers were legally obligated to pay.’ ”). In Wayfair, by contrast, the Court had

no reason to “reserve” the question of retroactive application so as to let the state

court determine the facts and sort the equities of retroactive relief. Accordingly,

this court does not view Wayfair as fitting within a Bacchus exception.

Cite as 24 OTR 562 (2021) 587

b. Even in the absence of Wayfair, the Quill/Bellas

Hess physical-presence rule does not apply for

purposes of the TPT.

Even assuming that Wayfair does not eliminate the

Quill/Bellas Hess physical-presence requirement retroac-

tively, the court cannot conclude that any such requirement

ever applied for purposes of the TPT. Both Quill and Bellas

Hess involved use taxes, and the Court has not extended the

physical-presence requirement to other types of taxes. See

Quill, 504 US at 314, 317 (so stating as of 1992); KFC Corp.

v. Iowa Dept. of Rev., 792 NW2d 308, 320 (Sup Ct Iowa 2010)

(“After Quill, the Supreme Court has generally avoided

Commerce Clause cases involving the authority of states

to impose taxes other than sales and use taxes on out-of-

state entities with or without ‘physical presence.’ While

there have been a number of cases in which the question

has been squarely posed, the Supreme Court has repeatedly

denied certiorari on them.”); cf. Hellerstein, 2 State Taxation

¶ 19.02[2][b][vi] (following Quill, “it was by no means clear

that the ‘bright-line’ physical-presence standard the Court

reaffirmed * * * in the context of sales and use taxes applied

equally to other taxpayers under other taxes. In the years

following the Quill decision, however, the overwhelming

majority of state courts that addressed the issue refused to

extend Quill’s physical-presence test to income, franchise,

and other taxes on business activity, and the Court’s sub-

sequent decision in Wayfair effectively put the question to

rest.” (Internal footnotes omitted.)). In considering whether

to apply a physical-presence requirement to other types of

tax assessments predating Wayfair, this court and others

have considered two factors derived from Quill and Bellas

Hess: whether assessing the tax against an out-of-state tax-

payer lacking a physical presence in Oregon would impose

an undue burden, and whether doing so would upend “settled

expectations” on which out-of-state taxpayers have relied.

See Ooma, Inc. v. Dept. of Rev., 24 OTR 48 (2020), aff’d, 369 Or

95, 501 P3d 520 (2021) (E911 Tax); Capital One Auto Finance

Inc. v. Dept. of Rev., 22 OTR 326, 344-46 (2016), aff’d on other

grounds, 363 Or 441, 423 P3d 80 (2018) (corporate excise tax

and corporate income tax); KFC Corp. v. Iowa Dept. of Rev.,

792 NW2d 308, 324-35 (2010) (Sup Ct Iowa) (considering

588 Global Hookah Distributors, Inc. v. Dept. of Rev.

reliance interests and potential burdens when deciding

whether to apply the Quill/Bellas Hess rule to Iowa’s income

tax); A & F Trademark, Inc. v. Tolson, 167 NC App 150, 160-

62, 605 SE2d 187 (2004), cert den 546 US 821, 126 S Ct 353,

163 L Ed 2d 62 (2005) (similar for North Carolina’s corporate

franchise and income taxes); Tax Comm’r of State v. MBNA

America Bank NA, 220 W Va 163, 169-71, 640 SE2d 226

(2006) (similar for West Virginia’s business franchise and

net income taxes); MBNA America Bank, N.A. & Affiliates v.

Indiana Dept. of Rev., 895 NE2d 140, 144 (Tax Ct Ind 2008)

(adopting the reasoning of MBNA, 220 W Va 163); Lanco,

Inc. v. Director, Div. of Taxation, 379 NJ Super 562, 879 A2d

1234 (2005), aff’d by 188 NJ 380, 908 A 2d 176 (2006) (cit-

ing with approval A & F Trademark’s reasons for declining

to extend the physical-presence rule); see also Hellerstein,

1 State Taxation ¶ 6.03[2][a] (“[T]he principal reasons for

distinguishing sales and use taxes from other types of taxes

are * * * [t]he administrative difficulties for remote vendors

in complying with tax collection obligations * * *[;] [p]rinci-

ples of stare decisis—specifically, the * * * Bellas Hess [deci-

sion] establishing the physical-presence rule for use tax col-

lection obligations for mail-order sellers * * *[; and r]eliance

interests that the physical-presence rule had engendered

in the mail-order industry[.]” (Internal bullets, numbering,

and italics omitted.)).

The burden analysis in use tax cases focuses on the

requirement to collect the tax from customers and on the

numerosity and variety of potential state and local taxing

authorities nationwide to which the seller is required to

report. See Bellas Hess, 386 US at 755 (detailing Illinois’s

requirements to collect tax, furnish receipts, remit tax, and

maintain records); Quill, 504 US at 313 n 6 (6,000 report-

ing jurisdictions nationwide); Capital One, 22 OTR at 339

(collection burden “looms large” because “a taxpayer must

ensure that the appropriate amount (and not more or less)

is collected from the customer and directed to the appro-

priate taxing authority within the appropriate time”; tax-

payer must be prepared to do so before making first sale into

state). This court and others have rejected taxpayer argu-

ments to extend a physical-presence requirement to income

taxes because income tax laws do not require the taxpayer to

Cite as 24 OTR 562 (2021) 589

collect the tax from third parties and generally involve less

time-sensitive reporting and remittance. See Capital One,

22 OTR at 338-40; see also KFC Corp. v. Iowa Dept. of Rev.,

792 NW2d 308, 325 (Iowa 2010), cert den, 556 US 817, 132 S

Ct 97, 181 L Ed 2d 26 (2011) (declining to apply Quill/Bellas

Hess rule to Iowa’s income tax because “far fewer jurisdic-

tions” are involved, taxpayer does not become “virtual agent

of the state in collecting taxes from thousands of individual

customers,” and “tax assessments are only made periodi-

cally”); Tax Com’r of State v. MBNA America Bank, N.A., 220

W Va 163, 170-71, 640 SE2d 226 (2006), cert den sub nom

FIA Card Services, N.A. v. Tax Com’r of West Virginia, 551

US 1141, 127 S Ct 2997, 168 L Ed 2d 719 (2007) (declining

to apply Quill/Bellas Hess rule to West Virginia’s franchise

and income taxes); A & F Trademark, 167 NC App at 161-62

(similar); MBNA America Bank, N.A. & Affiliates v. Indiana

Dept. of State Rev., 895 NE2d 140 (Tax Ct Indiana 2008)

(similar).

Like an income tax law, and in contrast to a use tax

law, the TPT Act does not impose an obligation to collect

the tax from customers at the time of sale, hold the tax in

trust, and remit it to the state within a short time. A tax-

payer need only pay and file on a quarterly basis. See ORS

323.510.16 Nor does the TPT Act ensnare taxpayers in mul-

tiple local tax regimes with varying rates or administrative,

filing, or record-keeping obligations within the state. See

ORS 323.640(1) (preempting local Oregon taxes). Taxpayer

does assert that the totality of all states’ tobacco products

taxes, including Oregon’s, poses an undue burden, but tax-

payer refers only generally to the potentially 50 states, far

fewer jurisdictions than at issue in Quill and Bellas Hess.

See Quill, 504 US at 313 n 6 (referring to 6,000-plus sales

and use tax jurisdictions). At oral argument, taxpayer’s

counsel responded to the question as to whether taxpayer

16

The court notes that the TPT Act, like many sales tax laws, allows the

taxpayer to retain 1.5 percent of the tax liability. See ORS 323.505(3); cf. Bellas

Hess, 386 US at 764 n 7 (Fortas, J., dissenting) (“The Illinois statute provides for

a ‘discount of 2% or $5 per calendar year, whichever is greater * * * to reimburse

the retailer for expenses incurred in collecting the tax, keeping records, prepar-

ing and filing returns, remitting the tax and supplying data * * *.’ ” (Quoting Ill

Rev Stat C120, s 439.9 (1965) (ellipses in original).)). The department’s Auditor

Reports refer to the amount retained as “Distributor Compensation.”

590 Global Hookah Distributors, Inc. v. Dept. of Rev.

is making a “welter” argument similar to Quill, “we don’t

have the localities that were at issue; * * *—here we are

talking about * * * different state laws.” Taxpayer points

to no authority suggesting that compliance with varying

state-level taxes on the same or similar transactions consti-

tutes a burden justifying extension of the Quill/Bellas Hess

physical-presence rule, assuming Wayfair does not apply.17

Taxpayer complains—with some justification—of the “idio-

syncrasies” of the TPT, which to the court’s mind would

include defining the tax base by the amount the taxpayer

pays to its supplier without specifying whether shipping and

other charges are included. However, taxpayer presents no

evidence that these features create anything approaching

the burdens described in Quill and Bellas Hess.

Turning to the “settled expectations” factor, this

court has questioned whether case law ever supported a

reasonable expectation of a physical-presence requirement

for taxes other than sales or use taxes. See Ooma, 24 OTR

at 64; Capital One, 22 OTR at 343-44; see also Quill, 504 US

at 314 (stating, as of 1992, “we have not, in our review of

other types of taxes, articulated the same physical-presence

requirement that Bellas Hess established for sales and use

taxes”). However, even if a legal basis existed, taxpayer

offers no evidence that it or other distributors have built

their business around an expectation that the TPT would

apply to them only if they established a physical presence

in Oregon. Cf. Quill, 504 US at 316 (finding it “not unlikely

that the mail-order industry’s dramatic growth over the last

quarter century is due in part to the bright-line exemption

17

Even Wayfair allows for the possibility of varying taxes at the state

level. The Court cited with approval the fact that the Streamlined Sales and

Use Tax Agreement (SSUTA) had been adopted by “20-plus” states as of 2018.

138 S Ct at 2099-100. However, that number represents only about one-half

the number of states imposing a general sales and use tax, meaning that some

20 other states had not pledged to conform to the SSUTA’s agreed standards,

including intrastate uniformity. Streamlined Sales Tax Governing Board, Inc.,

State Information, available at https://www.streamlinedsalestax.org/Shared-

Pages/State-Detail (last visited July 21, 2021) (listing 23 full-member states, one

associate-member state, and 28 nonmember states (including Washington D.C.

and Puerto Rico)); Rute Pinho, Streamlined Sales and Use Tax Agreement, Office

of Legislative Research (Connecticut) (July 13, 2018), available at https://www.

cga.ct.gov/2018/rpt/pdf/2018-R-0182.pdf (listing 23 full-member states, one

associate-member state, and 19 advisor states “that do not comply with the agree-

ment but are non-voting members of its governing board”).

Cite as 24 OTR 562 (2021) 591

from state taxation created in Bellas Hess”); Capital One,

22 OTR at 340-44 (considering taxpayer’s argument citing

eight instances in which Oregon acted, or failed to act, in

ways that out-of-state banks could have relied on to con-

clude that physical presence was required for imposition of

income-based taxes; finding no evidence of actual reliance

by any taxpayer or industry generally). Rather, the evidence

indicates that taxpayer, which has never had a physical pres-

ence in Oregon, has nevertheless complied with the TPT Act

from the time it first began selling shisha to Oregon custom-

ers, and that taxpayer has successfully grown its Oregon

sales significantly. Taxpayer has not demonstrated a “set-

tled expectation” justifying extension of the Quill/Bellas

Hess rule to the TPT.

The foregoing analysis suffices to persuade the

court that pre-Wayfair law did not require a taxpayer to

have a physical presence in Oregon as a prerequisite to

imposition of the TPT. The court adds a final comment,

relating to market distortion. The Court in Wayfair ana-

lyzed in detail the distortive effects that the Court’s ear-

lier decisions in Quill and Bellas Hess had had on the retail

sales business. 138 S Ct at 2093-94. The Court found that

the distortion caused by the physical-presence requirement

was a major reason justifying abandonment of the require-

ment notwithstanding the doctrine of stare decisis. Id. at

2094 (“Rejecting the physical presence rule is necessary to

ensure that artificial competitive advantages are not cre-

ated by this Court’s precedents.”). The ability of out-of-state

sellers to “offer de facto lower prices” by not collecting tax

from their customers put locally based businesses at a dis-

advantage, among other problems. Id. In this case, adopt-

ing taxpayer’s position would pose a particularly significant

risk of market distortion because of the TPT’s high rate.

At 65 percent of the wholesale sales price, the TPT rate is

approximately 10 times the rate of the South Dakota tax

at issue in Wayfair, and around five times the highest sales

and use tax rates nationwide. See SD Cod Law 10-45-2

(2021 ed; last amended in 2016) (combined state and local

rates ranged from 4.5 percent to 6.5 percent); Jared Walczak

& Scott Drenkard, State and Local Sales Tax Rates, Midyear

2016, Tax Foundation (July 5, 2016), available at https://

592 Global Hookah Distributors, Inc. v. Dept. of Rev.

taxfoundation.org/state-and-local-sales-tax-rates-mid-

year-2016/ (combined state and local rates nationally were

below 10 percent). The result for which taxpayer contends

in its constitutional argument—that no tax be imposed on

taxpayer—would give taxpayer a cost advantage of up to 65

percent, compared to its taxpaying competitors. Therefore,

even if other factors would suggest that a physical-presence

requirement was needed in order to protect out-of-state sell-

ers from an undue burden, imposing such a requirement

might well amount to a judicially created market distortion

of the type Wayfair rejected. See 138 S Ct at 2094.

c.  Did taxpayer have substantial nexus with Oregon

during the Periods at Issue?

The court now returns to Wayfair to consider

whether taxpayer’s activities had a “substantial nexus”

with Oregon. The Court in Wayfair discusses three levels of

“nexus”—connection between an out-of-state seller’s activi-

ties and the taxing state—that are relevant for Commerce

Clause purposes.

(1) Levels of connection discussed in Wayfair

At the lowest level, an activity must have a “suffi-

cient” nexus with the state to allow that state to treat the

activity in the same manner as if the seller were an in-state

taxpayer. See Wayfair, 138 S Ct at 2092. Establishing this

level of nexus is necessary, but not sufficient, for a tax to

survive Commerce Clause scrutiny. Classic examples of

activities with sufficient nexus are sales of goods or services

that are delivered within the state. Oklahoma Tax Com’n v.

Jefferson Lines, Inc., 514 US 175, 184, 115 S Ct 1331, 131 L

Ed 2d 261 (1995). In this case, taxpayer’s activities fit pre-

cisely within this level of “sufficient” nexus, making further

discussion of this requirement unnecessary.

A second relevant level of nexus is the “minimum

connection” that the Due Process Clause requires in order

to subject the taxpayer to the state’s jurisdiction. The Court

in Quill suggested that the Commerce Clause test under

Complete Auto “encompasses” Due Process requirements,

such that every tax that survives Commerce Clause scrutiny

also is valid under the Due Process Clause. 504 US at 313

Cite as 24 OTR 562 (2021) 593

n 7.18 In Wayfair, the Court did not describe satisfaction of the

Due Process standard as a prerequisite to survival of a tax

under the Commerce Clause. However, the Court so strongly

emphasized the close relationship and “significant paral-

lels” between the Due Process and Commerce Clause stan-

dards that this court finds it appropriate to undertake a Due

Process analysis as a check, after analyzing the third level

of connection under the Commerce Clause. Wayfair, 138 S Ct

at 2093; see also Hellerstein, 2 State Taxation ¶ 19.02[2][c][ii]

(“By emphasizing the close affinity between the Due Process

Clause and Commerce Clause nexus standards, the [Wayfair]

Court effectively brought an end to the view, first introduced

by Quill, that there are significant practical differences

between the two.”). At a minimum, if the Commerce Clause

analysis indicates that imposition of the tax is permissible,

but the Due Process Clause analysis indicates otherwise,

then the court should reevaluate both analyses.

The third level of connection under the Commerce

Clause is “substantial” nexus. The Court in Wayfair

describes “substantial nexus” as requiring an “additional

connection” beyond the level that is “sufficient” to justify

taxation generally. See 138 S Ct at 2092-93. Wayfair notes

that Quill “grounded the physical presence rule in Complete

Auto’s requirement that a tax have a substantial nexus with

the activity being taxed.” Id. at 2092. Quill’s rationale for

retaining a physical-presence requirement was to avoid

imposing an “undue burden” on interstate commerce. 504

US at 314-18. Wayfair squarely repudiates the physical-

presence requirement on its merits, declaring it “an incor-

rect interpretation of the Commerce Clause * * * both as first

formulated and as applied today.” 138 S Ct at 2092. More

importantly for this case, Wayfair also appears to reject

Quill’s linkage of the concepts of “substantial nexus” and

“undue burden.” The Quill approach seemed to imply that

18

The converse is not necessarily true, however, as the Court in Quill rejected

the taxpayer’s Due Process challenge while invalidating the tax on Commerce

Clause grounds. See id. at 305; see also Comptroller of Treasury of Maryland v.

Wynne, 575 US 542, 556-57, 135 S Ct 1787, 191 L Ed 2d 813 (2015) (reiterating

that states have jurisdiction under Due Process Clause to tax entire income of

residents, but invalidating on Commerce Clause grounds state income tax whose

partial credit for tax paid to other states failed to adequately protect against

double taxation of same income).

594 Global Hookah Distributors, Inc. v. Dept. of Rev.

a tax that more heavily burdens interstate commerce can

survive Commerce Clause scrutiny only if coupled with a

correspondingly more substantial connection with the state.

By contrast, Wayfair states that, in the absence of Quill and

Bellas Hess, “substantial nexus * * * is established when the

taxpayer [or collector] avails itself of the substantial privi-

lege of carrying on business in that jurisdiction.” Id. at 2099

(citations and internal quotation marks omitted). To be sure,

Wayfair discusses the burdens of sales and use tax collec-

tion requirements extensively, but it does so in the context

of doctrines other than the substantial nexus requirement

under Complete Auto. See id. at 2093 (explaining why post-

Quill technological developments justify an exception to

stare decisis); id. at 2099 (retroactivity); id. (Pike balancing

test);19 see also Hellerstein, 2 State Taxation ¶ 19.02[2][c][ii]

(“The Wayfair Court also terminated Quill’s awkward mar-

riage of the ‘substantial nexus’ prong of the Complete Auto

Commerce Clause test with Commerce Clause undue bur-

dens analysis.”).

(2) Wayfair’s substantial nexus test

As to the meaning of “substantial nexus” without the

counterweight of a burdens analysis, the Court in Wayfair

offers few clues, holding only that the annual in-state sales

thresholds set in the statute at issue ($100,000 in sales or 200

“separate” transactions) represent a “considerable” amount

of business in the state, and that none of the taxpayers could

have achieved that quantity of business without “avail[ing]

itself of the substantial privilege of carrying on business”

in the state. 138 S Ct at 2098-99.20 The Court’s language

19

As discussed above, the TPT does not impose the same burdens on dis-

tributers as use taxes impose on sellers because of the fewer number of taxing

jurisdictions, the lack of an up-front collection obligation, and the quarterly filing

requirement.

20

The Court’s holding included references to the taxpayers’ “virtual” con-

tacts with the state:

“Here, the nexus is clearly sufficient based on both the economic and vir-

tual contacts respondents have with the State. The Act applies only to sellers

that deliver more than $100,000 of goods or services into South Dakota or

engage in 200 or more separate transactions for the delivery of goods and ser-

vices into the State on an annual basis. S.B. 106, § 1. This quantity of busi-

ness could not have occurred unless the seller availed itself of the substantial

privilege of carrying on business in South Dakota. And respondents are large,

Cite as 24 OTR 562 (2021) 595

suggests that lower levels of sales may suffice for substan-

tial nexus,21 but Wayfair does not specify any minimum

level. Supreme Court cases preceding Wayfair are of little

help in identifying a dollar- or transaction-based threshold,

as those cases generally either focus on whether particular

facts satisfy the former physical-presence standard,22 or dis-

national companies that undoubtedly maintain an extensive virtual presence.

Thus, the substantial nexus requirement of Complete Auto is satisfied in this

case.”

Id. at 2099 (emphases added). This court does not, however, read Wayfair as requir-

ing that an out-of-state taxpayer without physical presence have any sort of vir-

tual presence as a necessary condition of “substantial nexus.” By declaring that

sales in excess of the South Dakota thresholds “could not have occurred unless

the seller availed itself of the substantial privilege of carrying on business” in the

state, the Court found the sales alone sufficient. Id. Moreover, the factual record

in Wayfair contains no evidence about the taxpayers’ online activity, in contrast

to their sales activity, which the taxpayers expressly acknowledged exceeded one

or both of the statutory thresholds. See Brief in Support of Defendants’ Motion

for Summary Judgment, South Dakota v. Wayfair, No. 3:16-V-03019-RA L (D SD

July 22, 2016), 2016 WL 4709017 (“The facts confirm[ ] that each of the Defendants

has no physical presence in South Dakota, does not report South Dakota sales

tax, and had either $100,000 in gross revenues and/or 200 sales transactions for

products delivered to customers in the State of South Dakota in 2015. No other

facts are required to support the Defendants’ right to judgment as a matter of

law that the State’s attempt to require them to collect South Dakota sales tax

under S.B. 106 violates the Commerce Clause.”). The Supreme Court’s statement

about the taxpayers’ level of virtual presence simply reflects the Court’s assump-

tion, as the Court implicitly acknowledges with the word “undoubtedly.” Wayfair,

138 S Ct at 2099; see also Hellerstein, 2 State Taxation ¶ 19.02 n 142 (“Clearly,

a virtual presence (in the modern sense of having a website) is not required to

establish substantial nexus. For example, a traditional mail-order company like

National Bellas Hess, Inc. or Quill Corporation would have substantial nexus

with South Dakota if its in-state sales or transactions exceeded the minimum

thresholds prescribed by the South Dakota statute. In our view, the existence of

a ‘virtual presence’ is simply a fact that supports a finding of substantial nexus,

just as, in a simpler time, the Quill Court observed for due process purposes

that there is little difference between a ‘deluge of catalogs’ and a ‘phalanx of

drummers.’ ”).

Based on this reading of Wayfair, the court rejects taxpayer’s argument that

it lacks substantial nexus with Oregon because its virtual contacts with Oregon

are minimal.

21

See id. at 2098 (statutory thresholds represent a “considerable” amount of

business in the state). For this reason, the court rejects taxpayer’s argument that

its activities lacked substantial nexus with Oregon because, at least in the early

periods at issue, the dollar amounts of its sales and the numbers of its separate

transactions fell below the thresholds at issue in Wayfair. The Wayfair thresholds

are statutory and thus represent South Dakota’s self-imposed limitations, not

constitutionally required minimum numbers.

22

See, e.g., Quill, 514 US 298; National Geographic Society v. California Bd.

Of Equalization, 430 US 551, 97 S Ct 1386, 51 L Ed 2d 631 (1977) (holding that

California could impose a use-tax-collection obligation on a taxpayer with office

596 Global Hookah Distributors, Inc. v. Dept. of Rev.

cuss nexus only as part of a Due Process inquiry or without

clearly distinguishing between the Commerce Clause and

Due Process Clause tests.23 State-level decisions that might

offer persuasive authority are similarly few in number, as

those involving taxes other than sales or use taxes gener-

ally involve sales or transactions exceeding the statutory

thresholds at issue in Wayfair24 or were decided under dif-

ferent legal theories.25

buildings and employees in the state, even though the buildings or employees

were not engaged in the activity California sought to tax); Bellas Hess, 386 US

753.

23

See, e.g., Mobil Oil Corp. v. Commissioner of Taxes of Vermont, 445 US 425,

100 S Ct 1223, 63 L Ed 2d 510 (1980); National Geographic Society, 430 US 551;

Standard Pressed Steel Co. v. Washington Rev. Dept., 419 US 560, 95 S Ct 706,

42 L Ed 2d 719 (1975); General Motors Corp. v. Washington, 377 US 436, 84 S Ct

1564, 12 L Ed 2d 430 (1964); Portland Cement Co. v. Minnesota, 358 US 450, 79 S

Ct 357, 3 L Ed 2d 421 (1959); Memphis Natural Gas Co. v. Stone, 335 US 80, 68 S

Ct 1475, 92 L Ed 1932 (1948); Illinois Cent. R. Co. v. Minnesota, 309 US 157, 60 S

Ct 419, 84 L Ed 670 (1940); see also Richard D. Pomp, Revisiting Miller Brothers,

Bellas Hess, and Quill, 65 Am U L Rev 1115, 1131 (2016) (“At the time of Miller

Brothers, the Court and commentators did not think that nexus had a different

meaning under the Due Process Clause than under the Commerce Clause—Quill

would later invent that bifurcation.”).

24

See Capital One, 22 OTR 326 (holding that the taxpayer, who charged

Oregon customers “nearly $150,000,000” and “sent approximately 24,600,000

solicitations to Oregon customers” in each year at issue, had a substantial

nexus with Oregon); Hellerstein, 2 State Taxation ¶ 6.03[2][a][ii] (Ohio imposes a

Corporate Activity Tax on taxpayers who lack a physical presence in the state if

they have at least $500,000 in annual sales sourced to Ohio); id. ¶ 6.03[2][a][iii]

(Michigan imposed its former business tax on taxpayers lacking a physical

presence in Michigan if they had $350,000 in annual gross receipts sourced to

Michigan); Hellerstein, 2 State Taxation ¶ 6.11[1] n 287 (listing economic nexus

thresholds for Alabama, California, Connecticut, Michigan, Ohio, and Tennessee);

but see Multistate Tax Commission, Factor Presence Nexus Standard for Busi-

ness Activity Taxes (Oct 17, 2002), available at https://www.mtc.gov/uploaded

Files/Multistate_Tax_Commission/ Uniformity/ Uniformity_Projects/A_-_Z/

FactorPresenceNexusStandardBusinessActTaxes.pdf (proposing uniform factor-

presence nexus standards “for the collection of business activity taxes” if during

the relevant tax period a business has $50,000 of property, payroll, or sales, or

“twenty-five percent of total property, total payroll, or total sales,” are sourced to

the taxing state).

25

See, e.g., Geoffrey, Inc. v. South Carolina Tax Comm’n, 313 SC 15, 437 SE2d

13 (1993) (income tax; presence of intangibles within the taxing state created

“substantial nexus”); KFC Corp., 792 NW2d 308 (same); A & F Trademark, 167

NC App 150, (similar); Joe E. Lanzi, III, Taxpayer v. State of Alabama Dept. of

Rev., 2003 WL 22535609 (Ala Dept Rev) (holding that a nonresident taxpayer,

whose only connection to the taxing state is a limited partnership interest in a

resident limited partnership, does not have “substantial nexus” with taxing state

based on entity theory of partnerships).

Cite as 24 OTR 562 (2021) 597

This court is left to apply the words of the Supreme

Court to the facts of this case. A taxpayer’s “avail[ing] itself”

of the substantial privilege of “carrying on” business in a

state implies intentionality and continuity. Webster’s Third

New Int’l Dictionary 150 (unabridged ed 2002) (defining

“avail” in relevant part as “to take advantage: make use –

used with of”); id. at 344 (defining “carry on” in relevant part

as “conduct, manage <carry on the new enterprise>”) (italics

in original). This court finds both of those elements present

on these facts. Taxpayer knew from its customers’ shipping

addresses that it was selling shisha into Oregon. Cf. Asahi

Metal Industry., Ltd. v. Superior Court of California, Solano

County, 480 US 102, 111-12, 107 S Ct 1026, 94 L Ed 2d 92

(1987) (plurality opinion of Justice O’Connor; concluding

that “placement of a product into the stream of commerce,

without more, is not an act * * * purposefully directed toward

the forum State”). As soon as taxpayer began making sales

into Oregon, it did so regularly, generally monthly, during

all tax periods at issue.

The remaining term is “substantial.” In Wayfair,

that word is part of the term being defined (“substantial

nexus”), as well as part of the definition (“substantial priv-

ilege”). The court views “privilege” as a binary concept: a

state either grants the privilege of carrying on business,

or it does not. There are, therefore, no minor, midrange,

or maximum gradations of the privilege itself. There are,

however, many gradations of business activity. This court

interprets the Wayfair test to mean that a taxpayer whose

activity rises to the level of “carrying on business” neces-

sarily exercises a privilege that is substantial in character.

Conversely, to avoid substantial nexus, the taxpayer’s activ-

ities either must avoid the intentional connection with the

state that is implicit in the term “avail,” or the activities

must lack the continuity implicit in “carrying on” business.26

26

The phrase “substantial privilege of carrying on business” derives from

cases decided on other constitutional grounds. The Court in Wayfair quotes the

phrase as used in Polar Tankers, Inc. v. City of Valdez, 557 US 1, 8, 129 S Ct

2277, 174 L Ed 2d 1 (2009). Polar Tankers was decided exclusively under the

Tonnage Clause, US Const, Art I, § 10, cl 3, and the Court in that case used the

quoted phrase as a reference in passing to the Due Process test as articulated

in Mobil Oil Corp. v. Commissioner of Taxes of Vt., 445 US 425, 428, 100 S Ct

1223, 63 L Ed 2d 510 (1980) (income tax apportionment case). Polar Tankers, 557

598 Global Hookah Distributors, Inc. v. Dept. of Rev.

The court concludes that, under Wayfair’s Commerce Clause

analysis, taxpayer availed itself of the substantial privilege

of carrying on business in Oregon in all of the periods at

issue.

(3) Applying Due Process test as a check

Finally, the court applies a Due Process analysis

to the facts of this case in order to test for a different result

that might indicate a flaw in the Commerce Clause reason-

ing. Under the Due Process Clause, a court has specific, as

opposed to general, jurisdiction over nonresident persons

who have “certain minimum contacts with [the state] such

that the maintenance of the suit does not offend traditional

notions of fair play and substantial justice.” International

Shoe Co. v. State of Wash, Office of Unemployment Compen-

sation and Placement, 326 US 310, 316, 66 S Ct 154, 90 L

Ed 95 (1945) (internal quotation marks omitted). “Minimum

contacts” exist when a nonresident person “purposefully

avails itself of the privilege of conducting activities within

the forum State, thus invoking the benefits and protections of

its laws.” Hanson v. Denckla, 357 US 235, 253, 78 S Ct 1228,

2 L Ed 2d 1283 (1958). “Purposeful availment” refers to the

nonresident person’s deliberate actions, as opposed to “ran-

dom, fortuitous, or attenuated contacts.” Burger King Corp.

v. Rudzewicz, 471 US 462, 475, 105 S Ct 2174, 85 L Ed 2d 528

(1985) (internal quotation marks omitted). A nonresident

person fulfills the purposeful availment requirement when it

has “deliberately * * * engaged in significant activities within a

State or has created continuing obligations between himself

and residents of the forum.” Id. at 475-76 (internal citations

and quotation marks omitted); cf. World-Wide Volkswagen

Corp. v. Woodson, 444 US 286, 295, 100 S Ct 559, 62 L Ed 2d

490 (1980) (out-of-state automobile retailer and wholesaler

did not have “minimum contacts” with forum state because

they did not carry on any activity, make sales, perform ser-

vices, solicit business, or advertise in the forum state, nor did

they “avail themselves of [any] of the privileges and benefits

US at 11. Mobil, in turn, quotes the phrase as used in the Due Process Clause

analysis in Wisconsin v. J.C. Penney Co., 311 US 435, 444-45, 61 S Ct 246, 85 L

Ed 267 (1940) (referring to the “substantial privilege of carrying on business in

Wisconsin”).

Cite as 24 OTR 562 (2021) 599

of Oklahoma law.”).27 By deliberately engaging in signif-

icant activities or creating ongoing obligations in a state,

a nonresident person “should reasonably anticipate being

haled into court there.” See World-Wide Volkswagen Corp.

v. Woodson, 444 US 286, 297, 100 S Ct 559, 62 L Ed 2d 490

(1980).

This is not a case in which taxpayer’s products

entered Oregon because of a “random” or “fortuitous” event.

See Burger King, 471 US at 474-75. Nor is this a case in

which taxpayer made “a single isolated sale” of shisha into

Oregon. See J. McIntyre Machinery, Ltd. v. Nicastro, 564 US

873, 888-89, 131 S Ct 2780, 180 L Ed 2d 765 (2011) (Breyer,

J., concurring in the judgment) (“[A] single sale of a prod-

uct in a State does not constitute an adequate basis for

asserting jurisdiction over an out-of-state defendant, even

if that defendant places his goods in the stream of com-

merce, fully aware (and hoping) that such a sale will take

place.”).28 As discussed, even in 2008, taxpayer regularly

sold and shipped shisha to Oregon retailers. Cf. Volkswagen,

444 US at 295 (no regular sales to in-state customers). The

invoices for taxpayer’s sales to Oregon retailers for 2008

show that taxpayer sold shisha to one Oregon retailer

monthly from February 2008 to December 2008. Over time,

taxpayer added more Oregon customers and made greater

dollar amounts of Oregon sales. The court finds these activ-

ities sufficient to satisfy the “purposeful availment” and

“minimum contacts” required for Due Process purposes.

Taxpayer does not argue otherwise. It stated in its motion

that “[taxpayer] certainly does have a nexus with Oregon

in the sense that it does avail itself of the privilege of doing

business in Oregon”; arguing its economic and virtual

27

See also Cox v. HP Inc., 368 Or 477, 506-09, 492 P3d 1245 (2021) (applying

Ford Motor Co. v. Montana Eighth Judicial Dist. Court, 592 US ___, 141 S Ct

1017, 209 L Ed 2d 225 (2021), in concluding that out-of-state party’s “nontargeted

internet postings” did not suffice to “create the relationship that due process

demands” for specific jurisdiction over party).

28

This case also does not involve sales to an intermediary in one location that

distributes the goods to a state asserting jurisdiction. Cf. Asahi Metal Industry.,

Ltd. v. Superior Court of California, Solano County, 480 US 102, 107 S Ct 1026,

94 L Ed 2d 92 (1987) (differing opinions); Willemsen v. Invacare Corp., 352 Or 191,

282 P3d 867 (2012) (sale of 1,102 wheelchairs including defendant’s battery char-

gers established regular flow or regular course of sales justifying court’s exercise

of specific jurisdiction over defendant).

600 Global Hookah Distributors, Inc. v. Dept. of Rev.

contacts with Oregon not “substantial” for Commerce Clause

purposes.

(4) The department’s waiver argument

The department points to taxpayer’s decisions,

before making its first sales of shisha into Oregon, to regis-

ter with the department as a “distributor” of tobacco prod-

ucts and with the Secretary of State as a foreign business

entity qualified to do business in Oregon, and to engage

an Oregon registered agent to accept service on its behalf.

The department argues that, by registering as a distribu-

tor, taxpayer “waived” any defense based on lack of nexus.

The court rejects this argument, which is based on a line of

sales tax cases from other states that involve so-called “vol-

untary” registration provisions in statutes or regulations.

Those provisions provide a mechanism for unregistered

remote sellers that claim immunity from tax to neverthe-

less start filing returns, thereby limiting their exposure to

that state’s tax, interest, and penalties. Such a provision

preserves the taxpayer’s argument that its contact with the

taxing state is insufficient to subject the taxpayer to tax,

which might be important if the taxpayer anticipates a dis-

pute with another state with which it has a similar level

of contact. Unsurprisingly, a taxpayer that registers pursu-

ant to such a provision is required to follow through and

actually collect and remit that state’s tax; it generally will

not be heard to argue that the tax does not apply to it. See

Hellerstein, 2 State Taxation ¶ 19.11[3][a] (discussing cases).

For purposes of this case, however, it is significant that a

“voluntary registration” statute or regulation describes

the registrant as “not engaged in business in [the taxing]

state,” or otherwise assumes that the registrant is immune

from tax. 18 Cal Code Regs § 1684(b) (2001) (cited in In Re

B&D Litho, Inc. 2001 WL 1034733, at *1 (Cal St Bd Equaliz

May 31, 2001); see 18 Cal Code Regs § 1684(e)(2) (2021) (same);

see also Ohio Rev Code § 5741.17(B) (1994) (“A seller who

does not have nexus with this state may voluntarily register

with the Commissioner.” (Cited in Dunhall Pharms., Inc. v.

Tracy, No. 94-T-1340, 1995 WL 640699, at *4 (Ohio Bd Tax

App Oct 27, 1995).)). No comparable provision exists in the

TPT Act.

Cite as 24 OTR 562 (2021) 601

The court concludes that taxpayer’s activities sat-

isfy all requirements for “substantial nexus” with Oregon

under Wayfair.

2. “Fairly related” test under Complete Auto

Taxpayer argues that the TPT is not fairly related

to the services taxpayer receives from Oregon because the

burden imposed on distributors “who conduct[ ] a relatively

small amount of business in Oregon is disproportionately

high compared to the benefits the distributor would ever gain

from Oregon services.” Taxpayer also argues that the TPT

is “overly complex and idiosyncratic and thus increases [tax-

payer]’s compliance costs disproportionately.” As a result, tax-

payer argues, it “is being asked to shoulder more than its fair

share of the state’s services.” Moreover, “because [taxpayer]

operates entirely outside of * * * Oregon, it does not have the

opportunity to avail itself of any of the services the tobacco tax

revenues might fund.” The department argues that the TPT

is fairly related to taxpayer’s activities in Oregon because it

is measured “as a percentage of the ‘wholesale sales price’ of

only that tobacco that enters Oregon.”

The department is correct. Under the “fairly related”

component of the Complete Auto test, the state need not pro-

vide a

“detailed accounting of the services provided to the tax-

payer on account of the activity being taxed, nor, indeed, is

a State limited to offsetting the public costs created by the

taxed activity. If the event is taxable, the proceeds from the

tax may ordinarily be used for purposes unrelated to the

taxable event. Interstate commerce may thus be made to

pay its fair share of state expenses and ‘contribute to the

cost of providing all government services, including those

services from which it arguably receives no direct benefit.’ ”

Oklahoma Tax Com’n v. Jefferson Lines, Inc., 514 US 175,

199-200, 115 S Ct 1331, 131 L Ed 2d 261 (1995) (quoting

Goldberg v. Sweet, 488 US 252, 267, 109 S Ct 582, 102 L Ed

2d 607 (1989)) (emphasis in original). Rather, as explained

in Commonwealth Edison Co. v. Montana,

“the fourth prong of the Complete Auto Transit test imposes

the additional limitation that the measure of the tax must

602 Global Hookah Distributors, Inc. v. Dept. of Rev.

be reasonably related to the extent of the contact, since it

is the activities or presence of the taxpayer in the State

that may properly be made to bear a just share of state tax

burden.”

453 US 609, 626, 101 S Ct 2946, 69 L Ed 2d 884 (1981)

(emphasis in original). The tax at issue in Commonwealth

Edison was a severance tax on the mining of coal, measured

as a percentage of the “contract sale price.” The Court had

“little difficulty concluding that the Montana tax satis-

fies the fourth prong of the Complete Auto Transit test.

The operating incidence of the tax is on the mining of coal

within Montana. Because it is measured as a percentage

of the value of the coal taken, the Montana tax is in proper

proportion to appellants’ activities within the State and,

therefore, to their consequent enjoyment of the opportuni-

ties and protections which the State has afforded in con-

nection with those activities. When a tax is assessed in

proportion to a taxpayer’s activities or presence in a State,

the taxpayer is shouldering its fair share of supporting the

State’s provision of police and fire protection, the benefit

of a trained work force, and the advantages of a civilized

society.”

Id. at 625-27 (internal footnotes, quotation marks, and

citations omitted). Similarly, the TPT is fairly related to

the extent of taxpayer’s activities in Oregon because it is

imposed only on the tobacco products that taxpayer distrib-

utes in Oregon. It is irrelevant whether taxpayer believes

that it does not “avail itself of any of the services the tobacco

tax revenues might fund” because “interstate commerce

may * * * be made to pay its fair share of state expenses

and ‘contribute to the cost of providing all government ser-

vices, including those services from which it arguably receives

no direct benefit.’ ” Jefferson Lines, Inc., 514 US at 199-200

(quoting Goldberg, 488 US at 267) (emphasis added). The

court concludes that the “fairly related” component of the

Complete Auto test is satisfied in this case.

3. Balancing test under Pike v. Bruce Church, Inc.

The Court in Wayfair suggested that the “balancing

framework” of Pike v. Bruce Church, Inc., 397 US 137, 90 S

Ct 844, 25 L Ed 2d 174 (1970), may be relevant in determin-

ing whether the Commerce Clause forbids imposition of a

Cite as 24 OTR 562 (2021) 603

particular state tax. Wayfair, 138 S Ct at 2099; see also id. at

2091 (“undue burden” analysis under Pike and other cases,

one of two principles that “animate” state tax precedents

under Commerce Clause); Dept. of Rev. of Ky. v. Davis, 553

US 328, 333, 128 S Ct 1801, 170 L Ed 2d 685 (2008) (refer-

ring to Pike, but deciding case on other grounds). Taxpayer

in this case raises that issue, asserting that the TPT fails

the Pike balancing test.29

Under Pike, a state law may violate the Commerce

Clause if

“the burden imposed on [interstate] commerce is clearly

excessive in relation to the putative local benefits. * * * [T]he

extent of the burden that will be tolerated * * * depend[s]

on the nature of the local interest involved, and on whether

it could be promoted as well with a lesser impact on inter-

state activities.”

397 US at 142. At issue in Pike was an Arizona law that

prohibited the transportation of Arizona-grown cantaloupes

that were not packed for shipment in the manner required

by the Arizona Fruit and Vegetable Standardization Act.

Id. at 138. A company that grew cantaloupes in Arizona chal-

lenged the constitutionality of the law under the Commerce

Clause after Arizona ordered the company to cease shipping

its cantaloupes from Arizona to its California packing facil-

ity, which was 31 miles away from where the cantaloupes

were grown, because the company’s California facility lacked

“packing sheds” as required under the Act. Id. at 138-40. No

compliant facilities were available in Arizona, and the cost

29

Although it is appropriate to apply Pike balancing given the Supreme

Court’s statements in Wayfair and Davis, the court does so with little guidance

specifically regarding state taxes. See Michael T. Fatale, Wayfair, What’s Fair,

and Undue Burden, 22 Chap L Rev 19, 49 (2019) (“What an undue burden liti-

gation claim [under Pike] might look like [in a post-Wayfair tax case] * * * is an

open question.”); Jared Walczak and Janelle Cammenga, State Sales Taxes in the

Post-Wayfair Era, Tax Foundation Fiscal Fact No. 680 32 (Dec 2019) (“That Pike

has traditionally applied to regulatory analysis is not necessarily a barrier; the

Supreme Court said in Wayfair that either the Pike balancing test or something

similar to it may be an avenue for challenging overly burdensome remote sales

tax regimes, and while the contours of those limitations remain unknown, the

Court should be taken at its word.” (Emphasis added.)); Walter Hellerstein and

Andrew Appleby, Substantive and Enforcement Jurisdiction In a Post-Wayfair

World, State Tax Notes 292 (Oct 22, 2018) (“Few courts have applied the Pike bal-

ancing test to analyze state tax laws, but it has been used frequently to analyze

other types of state laws.”).

604 Global Hookah Distributors, Inc. v. Dept. of Rev.

to construct one would have amounted to approximately

$200,000, while the gross value of the Arizona-grown crop

was $700,000. Id. at 140.

The Court concluded that the law violated the

Commerce Clause because the burden imposed on the

company was clearly excessive in relation to the benefits

to Arizona. Id. at 146. The Court described the benefits to

Arizona:

“The impetus for the Act was the fear that some growers

were shipping inferior or deceptively packaged produce,

with the result that the reputation of Arizona growers

generally was being tarnished and their financial return

concomitantly reduced. It was to prevent this that the Act

was passed in 1929. The State has stipulated that its pri-

mary purpose is to promote and preserve the reputation of

Arizona growers by prohibiting deceptive packaging.”

Id. at 142-43. As for the burden imposed on the company:

“The cantaloupes grown by the company [in Arizona] are

of exceptionally high quality. The company does not pack

them in Arizona and cannot do so without making a capi-

tal expenditure of approximately $200,000. * * * [Arizona’s]

order would forbid the company to pack its cantaloupes out-

side Arizona, not for the purpose of keeping the reputation

of its growers unsullied, but to enhance their reputation

through the reflected good will of the company’s superior

produce.”

Id. at 144. The Court concluded that “the State’s tenu-

ous interest in having the company’s cantaloupes identi-

fied as originating in Arizona cannot constitutionally jus-

tify the requirement that the company build and operate

an unneeded $200,000 packing plant in the State.” Id. at

145; see also id. at 146 (“[T]he State’s interest is minimal at

best[.]”).

Applying Pike to this case, the court starts with the

benefits to Oregon from imposing the TPT. As with any tax,

revenue generation is an obvious benefit to the state.30 The

court takes judicial notice that the TPT (including on cigars

30

In Wayfair, the Court observed that the South Dakota tax at issue provided

over 60 percent of the state’s general fund, as the state had not adopted an income

tax. Wayfair, 138 S Ct at 2088.

Cite as 24 OTR 562 (2021) 605

and moist snuff) in recent years has been budgeted to raise

more than $30 million annually.31

Slightly less than one-half the TPT revenue is ded-

icated to programs to improve health. A 1997 law raised

the TPT rate from 35 percent of the wholesale sales price

to the present 65 percent and added a provision dedicating

41.5 percent of the revenue to the Oregon Health Plan and

4.62 percent to a “Tobacco Use Reduction Account” created

in the same act. See Or Laws 1997, ch 2, §§ 9 - 15. Funds in

that account are continuously appropriated for “prevention

and education programs designed to reduce cigarette and

tobacco use,” including grants to educate children on the

health hazards of tobacco use and grants to fund programs

to prevent smoking-related diseases. Or Laws 1997, ch 2,

§§ 13 - 14.

A distinctive feature of the TPT, as amended in

2003, is its application to virtually any transaction in the

chain leading from manufacturer to consumer. The depart-

ment argues, based on the legislative history of the 2003

amendments, that this feature reduces the number of sales

that avoid tax altogether by allowing the department to

enforce the tax as soon as products enter the state, and

taxpayer does not refute this. The department stated in its

response brief that “The purpose of the [2003] legislation

was to strengthen and enhance taxpayer compliance with

the cigarette and tobacco products tax laws, especially in

the wake of increased online sales to Oregon customers.

To that end, the legislature amended ORS 323.505(1) to

provide that it intended the tobacco product tax to be * * *

collected by the distributor as a matter of administrative

convenience.” (Footnote citing portion of legislative history

omitted.)

The court compares these benefits to the state

with the burdens the TPT places on tobacco product dis-

tributors. The court finds it significant that the Supreme

Court in Wayfair, which twice mentioned Pike’s balancing

test, apparently saw no need to apply that test to the South

31

Oregon Economic and Revenue Forecast, Vol XXXIX, No. 1, Office of

Economic Analysis 43-44 (Feb 27, 2019), available at https://www.oregon.gov/das/

OEA/Documents/forecast0319.pdf.

606 Global Hookah Distributors, Inc. v. Dept. of Rev.

Dakota tax before it. However, the Court commented favor-

ably on South Dakota’s annual thresholds of $100,000 in

sales of goods or 200 “separate transactions” before the tax

could apply, characterizing those amounts as “considerable,”

and “clearly sufficient” to establish a substantial nexus with

the state. Wayfair, 138 S Ct at 2098, 2099. The Court also

noted that South Dakota’s tax (1) is administered solely at

the state level; (2) has a simplified structure for accommo-

dating varying local rates; (3) operates on state-provided

compliance software that immunizes taxpayer users from

audit liability; and (4) is uniform in important respects with

the taxes imposed by the other 20-plus states joining in the

SSUTA. Id. at 2099-100.

Comparing the burdens of the two taxes, the court

first finds that both the TPT and the South Dakota sales

tax are administered solely at the state level. As to the sec-

ond factor above, the TPT outperforms the South Dakota

tax by preempting all similar local Oregon taxes. See ORS

323.640(1). This is a marked simplification compared to the

usual sales tax regime that allows cities, counties, and other

local taxing districts to adopt local add-on rates that typi-

cally require software to determine the total rate to apply

based on the buyer’s shipping address. See, e.g., Streamlined

Sales and Use Tax Agreement (as amended through May 20,

2021) § 305(F) (“Each member state that has local juris-

dictions that levy a sales or use tax shall[ ] [p]rovide and

maintain a database that assigns the proper tax rates and

jurisdictions to each five digit and nine digit zip code within

a member state. * * * For the purposes of this section, there

is a rebuttable presumption that a seller or CSP [(Certified

Service Provider)] has exercised due diligence if the seller

or CSP has attempted to determine the tax rate and juris-

diction by utilizing [state-provided] software * * *.”). As to

the third and fourth factors, the South Dakota tax appears

comparatively less burdensome, as the department has not

rebutted taxpayer’s assertions that the department makes

no software available, and that the TPT is “idiosyncratic”

compared to other tobacco taxes. Furthermore, taxpayer

complains of a general lack of published guidance as to how

to determine the “price paid for untaxed tobacco products,”

at least at the time taxpayer was preparing its returns,

Cite as 24 OTR 562 (2021) 607

and the department has pointed to no publications or

return instructions that would have addressed the question

proactively.

The foregoing does not fully address the comparison,

however. The South Dakota tax statutes at issue in Wayfair,

like the use taxes at issue in Quill and Bellas Hess, required

the taxpayer seller to determine the tax on each transaction

“up front” and to promptly remit the collected tax to the state.

South Dakota Codified Laws 10-45-27.3 (2021 ed) (absent an

exception, requiring monthly remittance);32 State v. Wayfair

Inc., 2017 SD 56, 901 NW2d 754, 756 (2017), rev’d, 138 S Ct

2080 (2018) (“Pursuant to state statute, sales tax is generally

collected by sellers selling merchandise in this state at the

point of sale * * *.”); 1991 North Dakota Laws, ch 681, § 2 (“If

total sales and purchases subject to sales and use taxes for

the preceding calendar year equal or exceed three hundred

thirty-three thousand dollars, the tax levied by this chap-

ter shall be payable monthly * * *.”); Illinois Laws 1955, at

2027-2037 (Illinois Use Tax Act), §§ 3, 9 (requiring retailers

to collect tax from purchasers at time of sale and remit tax

monthly); see Quill, 504 US at 302 (“North Dakota requires

every retailer maintaining a place of business in the State

to collect the tax from the consumer * * *.” (Internal quota-

tion marks omitted.)); Dept. of Rev. v. National Bellas Hess,

Inc., 34 Ill 2d 164, 167, 214 NE2d 755 (1966), rev’d, 386 US

753, 87 S Ct 1389, 18 L Ed 2d 505 (1967) (citing 1955 Illinois

Use Tax Act). Wayfair does not describe to what extent the

state-provided software may have simplified these duties,

but the fact remains that the South Dakota tax retained the

standard use tax feature of deputizing sellers as collection

agents. 138 S Ct at 2088; see Capital One, 22 OTR at 339-40

(juxtaposing sellers’ collection burden associated with sales-

and-use taxes and corporate excise and income taxes that

have no such collection burden). The TPT Act does not do

this.

On balance, the court finds the burdens imposed by

the TPT Act no heavier than those in the South Dakota tax

at issue in Wayfair. The benefits to Oregon from the TPT are

manifest and are qualitatively at least as significant as the

32

This statute was last amended in 2017.

608 Global Hookah Distributors, Inc. v. Dept. of Rev.

benefits to South Dakota from its tax. The court concludes

that the burdens imposed on out-of-state distributors are

not “clearly excessive” in relation to the benefits to Oregon

of supporting the General Fund programs that support most

of the state’s operations, as well the state’s Medicaid plan

and programs specifically related to the health hazards of

tobacco use.

4. Department’s “regulatory measure” argument

After oral argument in this case, the Florida Court

of Appeal issued an opinion in a case brought by taxpayer

contesting imposition of Florida’s “Tax on Tobacco Products

Other Than Cigarettes or Cigars” on Commerce Clause

grounds. Glob. Hookah Distributors, Inc. v. Dep’t of Bus. &

Pro. Regul., 318 So 3d 613, No. 1D20-822, 2021 WL 1345233

(Fla Dist Ct App Apr 12, 2021), reh’g denied (June 8, 2021).

The Florida court concluded that the tax at issue was a “regu-

latory measure enacted pursuant to this state’s police power

to protect the health of its citizens,” citing statutes requir-

ing proceeds of the tax to be used for certain health-related

purposes. Id. at *3. The court relied on the Florida Supreme

Court’s statement that “[g]enerally speaking, statutes that

represent the exercise of a state’s police power are given less

scrutiny under the Commerce Clause than those statutes

enacted to raise revenue for the state.” Dep’t of Banking &

Fin., State of Fla. v. Credicorp, Inc., 684 So 2d 746, 750 (Fla

1996); see 2021 WL 1345233 at *4. Applying a more permis-

sive Commerce Clause standard for regulatory measures, as

set forth in Credicorp, the Court of Appeal in Global Hookah

concluded that no physical-presence requirement applied.

The court found it unnecessary to consider whether Quill or

Wayfair applied. See id. at *2. Accordingly, the court upheld

the tax assessment. See id. at *2.

Citing Camps Newfound / Owatonna, Inc. v. Town

of Harrison, Me., 520 US 564, 607, 117 S Ct 1590, 1613, 137 L

Ed 2d 852 (1997), the department brought the Florida Court

of Appeal case to this court’s attention, arguing that the

TPT Act is a regulatory measure comparable to the Florida

tax and that a more permissive standard applies than

addressed in the parties’ earlier briefings. However, this

court concludes that its holdings under the more stringent

Cite as 24 OTR 562 (2021) 609

standard for taxes under Wayfair make it unnecessary to

address the department’s argument.

V. CONCLUSIONS

The Charges at Issue are excluded from the “whole-

sale sales price” to the extent that they are consideration

for something other than tobacco products and to the extent

the amounts are accurately allocated. Taxpayer’s activi-

ties of selling tobacco products to Oregon customers had a

substantial nexus with Oregon during the periods at issue,

and the measure of the TPT is fairly related to taxpayer’s

activity in Oregon. Imposing the TPT on taxpayer does not

unduly burden interstate commerce. Therefore, imposing

the TPT on taxpayer does not violate the Commerce Clause.

For those reasons, now, therefore,

IT IS ORDERED that Plaintiff’s Motion for

Summary Judgment is granted in part and denied in part

with respect to the statutory issue and denied with respect

to the constitutional issue; and

IT IS FURTHER ORDERED that Defendant’s

Motion for Summary Judgment is granted in part and denied

in part with respect to the statutory issue and granted with

respect to the constitutional issue.