McCann v. Rosenblum

256 April 24, 2014 No. 23

IN THE SUPREME COURT OF THE

STATE OF OREGON

Elspeth McCANN,

Petitioner,

v.

Ellen ROSENBLUM,

Attorney General, State of Oregon,

Respondent.

Paul ROMAIN

and Ronald R. Dodge,

Petitioners,

v.

Ellen ROSENBLUM,

Attorney General, State of Oregon,

Respondent.

Lauren G. R. JOHNSON

and Lynn T. Gust,

Petitioners,

v.

Ellen ROSENBLUM,

Attorney General, State of Oregon,

Respondent.

(SC S062082 (Control), S062083, S062084)

En Banc

On petitions to review ballot title filed March 3, 2014;

considered and under advisement on April 8, 2014.

Steven C. Berman, Stoll Stoll Berne Lokting & Shlachter,

PC, Portland, filed the petition for review on behalf of peti-

tioner McCann.

Paul R. Romain, The Romain Group, LLC, Portland, filed

the petition for review on behalf of petitioners Romain and

Dodge. With him on the petition was Margaret E. Schroeder,

Black Helterline, LLP, Portland.

Cite as 355 Or 256 (2014) 257

John A. DiLorenzo, Jr., Davis Wright Tremaine LLP,

Portland, filed the petition for review on behalf of petitioners

Johnson and Gust.

Matthew J. Lysne, Senior Assistant Attorney General,

Salem, filed the answering memorandum. With him on the

memorandum were Ellen F. Rosenblum, Attorney General,

and Anna M. Joyce, Solicitor General.

KISTLER, J.

Ballot title referred to the Attorney General for modi-

fication.

Initiative Petition IP (2014) would change the way that liquor is sold in

Oregon by allowing wholesalers to distribute liquor to “qualified retailers” who

would, in turn, sell the liquor to the public. The measure would also change the

way that the state raises revenue from liquor sales by instituting a new “revenue

replacement fee” in place of the current markup system. Petitioners challenged

the caption, the “yes” and “no” result statements, and the summary in the certi-

fied ballot title. Held: (1) the Attorney General did not fail to substantially comply

with statutory requirements where she used the word “taxes” to describe the

revenue replacement fee; (2) the word “taxes,” without any modification, could

be misleading because it failed to identify that wholesalers would be initially

responsible for paying the tax; and (3) the words “similarly to” in the caption and

“roughly comparable to” in the “yes” vote result statement were misleading in

describing the relationship between the proposed “revenue replacement fee” and

the old markup system and therefore must be modified.

The ballot title is referred to the Attorney General for modification.

258 McCann v. Rosenblum

KISTLER, J.

In this consolidated ballot title case, three sets

of petitioners have asked us to review the ballot title for

Initiative Petition 47 (2014). See ORS 250.085(2) (specify-

ing who may petition for review of certified ballot titles).1

We review ballot titles for substantial compliance with ORS

250.035(2). See ORS 250.085(5) (stating standard of review).

For the reasons explained below, we refer the ballot title to

the Attorney General for modification.

Initiative Petition 47 (IP 47), if enacted, would change

the way that liquor is sold in Oregon. Currently, the Oregon

Liquor Control Commission (OLCC) governs the retail sale

of liquor for off-premises consumption. ORS 471.730; ORS

471.750. The OLCC appoints private business owners as

agents to operate state-licensed retail liquor stores. ORS

471.750. The OLCC essentially acts as a middleman between

wholesale liquor distributors and retail OLCC liquor stores;

specifically, the OLCC purchases liquor from wholesale dis-

tributors, marks up the wholesale price, and then sells the

liquor at the marked-up price to the OLCC retail stores. ORS

471.730; ORS 471.745; ORS 471.750. The revenue that the

OLCC collects as a result of that markup, less administra-

tive costs, is distributed to the state general fund and also to

counties and cities. ORS 471.805; ORS 471.810.

IP 47 would eliminate the current system of state-

licensed liquor stores and allow “holders of distilled liquor

self-distribution permits” (essentially wholesalers) to dis-

tribute liquor to “qualified retailers,” who would, in turn,

sell the liquor to the public. Those retailers would include

private stores with at least 10,000 square feet of store space

as well as smaller private stores that meet certain other

requirements. Among other changes, IP 47 would create

a new administrative agency, the Oregon Distilled Liquor

Board (ODLB), establish regulatory requirements for whole-

salers and qualified retailers, dispose of OLCC property,

and wind down contracts and agreements between OLCC-

licensed liquor stores and the OLCC.

1

McCann filed the petition in S062082; Romain and Dodge, the petition in

S062083; and Johnson and Gust, the petition in S062084. We refer to each set of

petitioners respectively as McCann, Romain, and Johnson.

Cite as 355 Or 256 (2014) 259

IP 47 also would replace the current markup system

with a “revenue replacement fee” on wholesalers. IP 47, § 16.

As noted, the OLCC sells liquor it purchases from wholesalers

to state-licensed liquor stores at a marked-up price. See ORS

471.745; ORS 471.750(2). Currently, the marked-up price is

roughly 180 percent of the wholesale cost plus certain admin-

istrative costs. See ORS 471.730; OAR 845-015-0138.2 If

IP 47 became law, wholesalers would sell directly to retailers,

eliminating the OLCC markup. To replace the revenue from

the markup, wholesalers would pay the OLCC a “revenue

replacement fee” equal to 71.7% of the wholesale price of the

liquor, plus a small fee per container. IP 47, § 16(1). Those

fees would not be imposed directly on the retailer or the

consumer, although the wholesaler could pass some or all of

those fees on to the retailer who, in turn, could pass them on

to the consumer.

The goal of IP 47’s “revenue replacement fee” is to

maintain roughly the same level of revenue for the state’s

general fund, counties, and cities that the current markup

system provides.3 IP 47 implicitly recognizes, however, that

it may be difficult to predict whether the revenue generated

by the new “revenue replacement fee” will match the reve-

nue generated by the current markup system. Specifically,

IP 47 provides for a one-time adjustment to the 71.7% fee.

See IP 47, §§ 73, 80. IP 47 provides that, if the proposed

measure becomes law, a “Legislative Revenue Officer” will

determine in 2016 whether the amount of revenue generated

by the revenue replacement fee between July 1, 2015 and

June 30, 2016 (the “2015 tax year”) falls within an accept-

able range. Id. § 73. If the amount of revenue generated

by the revenue replacement fee during the 2015 tax year

2

According to OLCC documentation that McCann attached to her petition,

the marked-up price for a bottle of liquor is calculated as follows: If a case of

liquor costs more than $78, the OLCC adds $14.45 to the wholesale cost of the

case, multiplies the sum by 1.798, adds an outbound freight cost of $1.40 to that

product, and divides the total by the number of bottles in the container, rounding

up to the nearest nickel.

3

Most of the revenue generated by the revenue replacement fee would be

available for the same general government uses that revenue from the current

markup is; IP 47, however, dedicates small amounts of revenue from the sale

of each container to a few specified funds, such as funds to pay the costs of the

ODLB and to support law enforcement. See IP 47, §§ 26-28.

260 McCann v. Rosenblum

is less than $190,791,582 or more than $194,645,958, then

IP 47 directs the legislative revenue officer to determine

in 2016 the rate that, if applied to wholesale sales in the

2015 tax year, would have generated a revenue replacement

fee of $192,718,770. Id. That adjusted rate will apply to all

future wholesale sales; the section of IP 47 that authorizes

a rate adjustment in 2016 will be automatically repealed on

January 1, 2017. Id. § 80.

The Attorney General certified the following ballot

title:

“Allows qualified retail stores to sell liquor; imposes

taxes similar to current state price markup

“Result of ‘Yes’ Vote:  ‘Yes’ vote expands retail sales of

liquor by qualified retailers; imposes taxes roughly com-

parable to current state markup; establishes regulatory

requirements for sales and distribution.

“Result of ‘No’ Vote:  ‘No’ vote retains the current sys-

tem of retail sales of liquor exclusively through Oregon

Liquor Control Commission agents, retains state markup

for costs and taxes.

“Summary:  Under current law, retail sales of liquor by

the bottle are made exclusively by retail sale agents of the

Oregon Liquor Control Commission (OLCC). Price deter-

mined by multiplying cost/case by 1.798, adding opera-

tion and other costs. Measure would expand the number

of retailers; current agreements with retail sales agents

would be terminated, subject to a right to continue to oper-

ate. Current beer/wine retailers over 10,000 square feet

would qualify as liquor retailers, provided they are in com-

pliance with all liquor laws and have successfully completed

the responsible vendor program. Current markup of prices

replaced by 71.7% tax, plus per bottle tax; taxes adjusted in

2017; establishes minimum price. Creates Oregon Distilled

Liquor Board to encourage industry; OLCC retains regula-

tory functions. Other provisions.”

Petitioners McCann, Romain, and Johnson have

raised various challenges to the caption, results statements,

and summary. We write to address two of those challenges,

both of which concern the ballot title’s description of the

“revenue replacement fee.” The first challenge concerns the

use of the word “tax” rather than “fee” throughout the ballot

Cite as 355 Or 256 (2014) 261

title to describe the revenue replacement fee. The second

challenge concerns the use of the phrases “similar to” and

“roughly comparable to” in, respectively, the caption and the

“yes” vote result statement.

We begin with the Attorney General’s decision to

use the word “tax” rather than the word “fee” to describe

the “revenue replacement fee” that IP 47 would impose on

wholesalers. Relying on Bernard v. Keisling, 317 Or 591, 858

P2d 1309 (1993), petitioner Johnson argues that the ballot

title should use the same term that the ballot measure does,

unless compelling reasons exist to use a different term. In

Bernard, the court upheld the Attorney General’s use of the

term “fee” rather than “tax” because the ballot measure had

used that term and because the Attorney General’s use of

that term “substantially complied” with his obligation to

describe the subject matter and major effect of the proposed

measure. Id. at 596-97. The court explained, however, that

the Attorney General could use a different term than the

measure did if doing so were necessary to describe the mea-

sure accurately. Id. at 597. Since Bernard, we have consid-

ered on more than one occasion when the Attorney General

may or must go beyond the words of a measure to describe

either its subject matter or its effects. See, e.g., Caruthers

v. Myers, 344 Or 596, 602-03, 189 P3d 1 (2008) (consider-

ing the appropriate ballot title when federal law clearly pre-

empted part of the measure but did not clearly preempt the

remainder); Wolf v. Myers, 343 Or 494, 500-01, 173 P3d 812

(2007) (recognizing that drafting a ballot title can require

some level of interpretation of the measure).

In this case, if the Attorney General had used the

word “fee” to describe the “revenue replacement fee,” her

use of that word would have raised substantial questions.

The money that wholesalers must remit to the OLCC has

more attributes of a tax than a fee. A tax is “any contribu-

tion imposed by government upon individuals, for the use

and service of the state.” Automobile Club v. State of Oregon,

314 Or 479, 485-86, 840 P2d 674 (1992). A fee, by contrast,

is imposed on persons who apply for or receive a government

service that directly benefits them. Id.; see Qwest Corp. v.

City of Surprise, 434 F3d 1176, 1182 (9th Cir 2006) (explain-

ing that the distinction between a tax and a fee is whether

262 McCann v. Rosenblum

the “charge is expended for general public purposes, or used

for the regulation or benefit of the parties upon whom the

assessment is imposed”).

It does not appear that much, if any, of the “rev-

enue replacement fee” that wholesalers would pay under

IP 47 would be used to provide services that directly ben-

efit wholesalers. See id. Rather, under IP 47, much of the

money that wholesalers would pay the state would be dis-

tributed, as it currently is, to the state’s general fund, cities,

and counties and would be available for general government

use. That distribution scheme has more attributes of a tax

than a fee. See Automobile Club, 314 Or at 485-86 (defining

the attributes of a tax). Indeed, describing the money paid to

the state by wholesalers as a “fee” would imply inaccurately

that the uses to which that money could be put are far more

limited than IP 47 contemplates.

We recognize that a ballot title challenge ordinarily

is not the appropriate forum for deciding legal issues that

require interpretation of a proposed measure. See Bernard,

317 Or at 595 (stating rule). For that reason, we need not

determine conclusively the character of the revenue at issue

here. Rather, the question is whether the Attorney General’s

use of the word “taxes” to describe the charge that whole-

salers would pay under IP 47 “substantially complies” with

her obligation to describe the measure accurately. It does.

Indeed, the use of the word “taxes” is more defensible than

the use of the word “fees” to describe that aspect of IP 47.

Johnson raises a related but separate concern. She

reasons that the use of the word “taxes” in the caption is

confusing because it may cause voters to think that consum-

ers will have to pay a sales tax on liquor when, in fact, the

tax will fall on wholesalers. Johnson’s point is an interest-

ing one. We agree with Johnson that the tax (or fee) that

IP 47 imposes is not a “sales tax,” as that term is ordinarily

understood. It is not a tax that consumers are responsible

for paying. We recognize, however, that a tax on wholesalers

may be passed on, in whole or in part, to retailers who, in

turn, may pass it on to consumers. In that respect, although

responsibility for paying the tax falls on wholesalers, the tax

burden ultimately may fall on consumers.

Cite as 355 Or 256 (2014) 263

Although one might question, as an economic mat-

ter, who will ultimately bear the tax burden, we agree with

Johnson that the word “taxes,” without more, is misleading

because it does not identify who is responsible initially for

paying the tax. See McCann / Harmon v. Rosenblum, 354 Or

701, 706-07, 320 P3d 548 (2014) (holding that a caption may

be misleading where its description of a tax is unnecessar-

ily generalized). Because wholesalers are required to pay

IP 47’s “revenue replacement” tax initially, the word “taxes”

should be modified to indicate that fact. One way of doing so

would be to describe it as a “wholesale tax.”4

We turn now to the second objection, which petition-

ers McCann and Romain raise to the caption and the “yes”

vote result statement. They argue that the taxes that IP 47

would impose are not “similar to” or “roughly comparable to”

the current state price markup. We begin with the caption,

which states: “Allows qualified retail stores to sell liquor;

imposes taxes similar to current state price markup.”

Petitioner McCann argues that the phrase “similar

to” promises too much. She reasons that, even if the drafters

of IP 47 sought to generate an amount of revenue similar

to the amount the current markup system generates, the

proposed tax will not necessarily accomplish that goal. She

reasons that whether a tax (or fee) on wholesale sales will

generate equivalent revenue will depend on the volume of

wholesale sales and the wholesale sale prices in a particular

year. Although the measure provides for a one-time adjust-

ment to the wholesale tax rate, and thus seeks to achieve

equivalent revenue that way, she contends that a one-time

rate adjustment based on wholesale sales in the 2015 tax

year does not ensure that the revenue generated in later

years will be the same. McCann reasons that, if wholesale

liquor sales and prices in later tax years vary substantially

from those in the 2015 tax year, then the adjusted rate will

produce substantially more or substantially less revenue

than the adjusted rate would have produced in the 2015 tax

year (and than the markup system currently produces).

4

We note that a pending ballot title for Initiative Petition 58 (2014) uses sim-

ilar wording to indicate that wholesalers will pay the tax. Care should be taken,

however, to avoid suggesting that the wholesale tax is a sales tax that would fall

initially on consumers.

264 McCann v. Rosenblum

Petitioner Romain argues that “similar to” is inac-

curate for a different reason. He contends that the sections

of IP 47 permitting a “legislative revenue officer” to adjust

the tax rate and exempting in-state liquor distillers from

taxes imposed on out-of-state distillers are unconstitutional

and not severable. It follows, he argues, that the “revenue

replacement fee” will generate no revenue for the state. For

that reason, he contends, the revenue generated by the new

system will not be “similar to” the revenue generated by the

current markup system.

The Attorney General responds that the caption

does not state that IP 47 will be revenue neutral, as the pro-

ponents of the measure have argued. Rather, the caption

states only that IP 47 “imposes taxes similar to current state

price markup.” The Attorney General reasons that “similar

to” is close enough, given the rate adjustment mechanism

that IP 47 provides. She also argues that a ballot title should

not speculate on whether a proposed measure will be held

unconstitutional, if the measure passes.

We agree with the Attorney General that it would

not be appropriate for her to opine, at this stage of the pro-

cess, whether the two sections of the ballot measure that

Romain identifies are unconstitutional and, if so, whether

they are severable. To be sure, a tax exemption for in-state

distillers might be difficult to defend against a Commerce

Clause challenge. See Bacchus Imports, LTD. v. Dias, 468

US 263, 104 S Ct 3049, 82 L Ed 2d 200 (1984). However, the

other constitutional issue that Romain raises is less certain,

and Romain’s argument ultimately depends not only on

whether the two provisions would be held unconstitutional

but also on whether they would be severable. In this pos-

ture, we cannot fault the Attorney General for declining to

factor those complex legal determinations into her descrip-

tion of the measure’s effects. Compare Sizemore v. Myers,

326 Or 220, 231, 953 P2d 360 (1997) (declining to engage in

“extensive legal interpretation” of the relationship between

the proposed ballot measure and other constitutional pro-

visions), with Caruthers, 344 Or at 601 (referring the ballot

title for modification when the legal effect of the measure

was undisputed).

Cite as 355 Or 256 (2014) 265

The issue that McCann raises is more problematic.

The phrase “imposes taxes similar to current state price

markup” implies that the revenue generated by IP 47 will

be “similar to” the revenue generated by the current system.

We assume that the revenue identified in section 73 of IP 47

reflects the annual revenue produced under the current sys-

tem; that is, we assume that the current system generates

revenue ranging from $190,791,582 to $194,645,958 per

year. See IP 47, § 73 (stating that range as the “target” that

the revenue generated by IP 47 should meet).5 The difficulty,

however, lies in predicting whether the new system will

generate similar amounts of revenue annually. As McCann

notes, the prediction that it will do so rests on an assumption

about the volume of wholesale sales that will occur under

the new system as well as the wholesale prices that will be

charged under that system. However, unless and until IP 47

goes into effect, those assumptions are just that.

It is true, as the Attorney General notes, that IP 47

provides for a one-time adjustment to the wholesale tax rate.

If the voters approve IP 47 and if the revenue produced by the

measure during the 2015 tax year falls below $190,791,582

or exceeds $194,645,958, IP 47 provides that the legislative

revenue officer will determine in 2016 the wholesale tax

rate that would have generated $192,718,770 in revenue for

the 2015 tax year. That adjusted tax rate will then apply

to all future tax years. However, whether that adjusted tax

rate will generate similar revenue in future years turns on

whether wholesale sales and wholesale prices remain con-

stant. If wholesale sales or wholesale prices for the 2015 tax

year are atypical, then the one-time adjustment that IP 47

provides could result in greater discrepancies between the

revenue generated by the “revenue replacement fee” and the

current markup system.

A hypothetical will illustrate the problem. Suppose

that IP 47 passes and that wholesale liquor sales increase

exponentially during the 2015 tax year as new retail sales

outlets stock their shelves for the first time. Suppose also

5

Petitioner Johnson represents that those figures reflect the “approximate

total current revenues raised by the Oregon Liquor Control Commission from the

sale of alcohol under the status quo.” No party disputes that representation.

266 McCann v. Rosenblum

that wholesale prices remain constant, even though expe-

rience teaches that prices often rise as demand increases.

Substantially increased wholesale sales could lead to reve-

nue for the 2015 tax year that greatly exceeds $194,645,958

and thus could lead to a corresponding reduction in the

wholesale tax rate. Even though wholesale sales for the

2015 tax year might be atypically high, the reduced tax rate

would continue to apply to wholesale sales in all future tax

years, thereby reducing the revenue the state receives below

that generated by the current markup system. Instead of

correcting any discrepancy in the revenue generated by the

two systems, the one-time adjustment that IP 47 provides

could instead exacerbate it.

For that reason, we agree with McCann that the

phrase “similar to” in the caption is not accurate. The phrase

“similar to” promises more than IP 47 may be able to deliver.

For the same reason, we agree with McCann that the phrase

“roughly comparable to” in the “yes” vote result statement is

not accurate. We accordingly refer the caption and the “yes”

vote result statement to the Attorney General for modifica-

tion. We have considered the other challenges that McCann,

Romain, and Johnson raise to the certified ballot title. In

light of the difficulties that the Attorney General faced in

trying to describe accurately and succinctly the extensive

changes that IP 47 would effect, we cannot say that the

remainder of the ballot title does not substantially comply

with her statutory obligations.

Ballot title referred to Attorney General for modi-

fication.