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Ashland Specialty Co. Inc. v. Steager

Supreme Court of West Virginia

May 1, 2018

ASHLAND SPECIALTY CO. INC., Petitioner Below, Petitioner
v.
DALE W. STEAGER, STATE TAX COMMISSIONER OF WEST VIRGINIA, Respondent Below, Respondent

          Submitted: April 11, 2018

          Appeal from the Circuit Court of Kanawha County The Honorable Carrie L. Webster Civil Action No. 14-AA-102.

          Floyd M. Sayre, III, Esq. Bowles Rice LLP Martinsburg, West Virginia Mark A. Lloyd, Esq. (admitted pro hac vice) Bingham Greenbaum Doll LLP Louisville, Kentucky Counsel for the Petitioner

          Patrick Morrisey, Esq. Attorney General Katherine A. Schultz, Esq. Senior Deputy Attorney General Cassandra L. Means, Esq. Assistant Attorney General Charleston, West Virginia Counsel for the Respondent

          JUSTICE DAVIS and JUSTICE KETCHUM dissent in part and concur in part and reserve the right to file separate opinions dissenting in part and concurring in part.

         SYLLABUS

         1. "In an administrative appeal from the decision of the West Virginia Office of Tax Appeals, this Court will review the final order of the circuit court pursuant to the standards of review in the State Administrative Procedures Act set forth in W.Va. Code, 29A-5-4(g) [1988]. Findings of fact of the administrative law judge will not be set aside or vacated unless clearly wrong, and, although administrative interpretation of State tax provisions will be afforded sound consideration, this Court will review questions of law de novo" Syllabus Point 1, Griffith v. ConAgra Brands, Inc., 229 W.Va. 190');">229 W.Va. 190, 728 S.E.2d 74 (2012).

         2. "The 'clearly wrong' and the 'arbitrary and capricious' standards of review are deferential ones which presume an agency's actions are valid as long as the decision is supported by substantial evidence or by a rational basis." Syllabus Point 3, In re Queen, 196 W.Va. 442');">196 W.Va. 442, 473 S.E.2d 483 (1996).

         3. "A review of a proportionality determination made pursuant to the Excessive Fines Clause of the West Virginia Constitution is de novo." Syllabus Point 8, Dean v. State, 230 W.Va. 40');">230 W.Va. 40, 736 S.E.2d 40 (2012).

          WALKER JUSTICE

         Ashland Specialty Company, Inc. (Ashland) unlawfully sold 12, 230 packs of cigarettes in West Virginia in 2009 that were not approved for sale by the Tax Commissioner of the State of West Virginia (Commissioner).[1] Acting pursuant to West Virginia Code § 16-9D-8(a) (2016), the Commissioner penalized Ashland $159, 398 for selling those cigarettes unlawfully, a penalty equal to 500% of the cigarettes' retail value. The Office of Tax Appeals (OTA) then ordered that penalty reduced by twenty-five percent. On review, the Circuit Court of Kanawha County reversed the OTA and reimposed the Commissioner's original $159, 398 penalty.

         Contrary to Ashland's arguments on appeal, we find that the Commissioner's original penalty (1) is not an abuse of the discretion afforded the Commissioner under West Virginia Code § 16-9D-8(a); (2) should not be cancelled or reduced due to circumstances that Ashland argues mitigate their unlawful cigarette sales; and (3) does not violate the Excessive Fines Clause of the West Virginia Constitution or the Eighth Amendment to the United States Constitution. For those reasons, and as discussed more fully below, we affirm the April 11, 2017 order of the Circuit Court of Kanawha County reversing the OTA and reinstating the Tax Commissioner's original $159, 398 penalty.

         I. FACTUAL AND PROCEDURAL BACKGROUND

         Before addressing the facts specific to Ashland's appeal, we first briefly review the statutes implicated by their arguments. These include West Virginia Code §§ 16-9B-1 through 4 (2016) ("Implementing Tobacco Master Settlement Agreement") and §§ 16-9D-1 through 10 (2016) ("Enforcement of Statute Implementing Tobacco Master Settlement Agreement"), related to the Tobacco Master Settlement Agreement (MSA) and subsequent efforts by the Legislature to ensure the MSA and its related requirements are enforced.

         A. The MSA.

         In 1998, leading tobacco product manufacturers entered into the MSA with the State of West Virginia.[2] In pertinent part, "[t]he master settlement agreement obligates these manufacturers, in return for a release of past, present and certain future claims against them . . . to pay substantial sums to the State (tied in part to their volume of sales) . . . ."[3]The following year, the Legislature enacted Article 9B of Chapter 16. In part, Article 9B requires cigarette manufacturers who are not part of the MSA, but whose cigarettes are sold in West Virginia, to make annual deposits into escrow accounts intended to pay a judgment or settlement resulting from a claim brought against the manufacturer by the State or a West Virginia resident.[4]

         In 2003, the West Virginia Legislature enacted model legislation to prevent violations and aid enforcement of the obligations imposed by Article 9B of Chapter 16 of the West Virginia Code.[5] This legislation, codified at Article 9D of Chapter 16 of the West Virginia Code, directs the Commissioner to create and maintain a directory of cigarette brands approved for sale in West Virginia.[6] Chapter 16, Article 9D also charges the Commissioner with adding or removing manufacturers from the list as appropriate, [7] but not without first notifying the manufacturer and distributors of the manufacturer's affected brand or brands.[8] However, a manufacturer or distributor's failure to receive notice from the Commissioner of changes to the directory, or even the Commissioner's failure to provide such notice, does not excuse a party from their obligations under Article 9D of Chapter 16 of the West Virginia Code. [9]

         It is unlawful to sell, offer, or possess for sale in West Virginia a brand of cigarettes that is not included in the Commissioner's list.[10] Pursuant to West Virginia Code § 16-9D-8(a), the Commissioner may impose a wide range of penalties upon a party that sells a brand of cigarettes in West Virginia when that brand does not appear on the Commissioner's list-that is, when the brand is "delisted."

         B. Ashland's Violations of § 16-9D-3(c).

         Ashland is a Kentucky corporation that distributes cigarettes to convenience stores in West Virginia and other states. It is undisputed that between June and September 2009, Ashland sold 12, 210 packs of delisted GP and GP Galaxy Pro brand cigarettes and 20 packs of delisted Berley brand cigarettes in violation of West Virginia Code § 16-9D-3(c). The Commissioner identified these illegal sales during a 2012 audit. In August 2012, pursuant to his authority under § 16-9D-8(a), the Commissioner assessed a $159, 398 penalty upon Ashland, a penalty equal to 500% of the retail value of the 12, 230 packs of delisted cigarettes.

         The Commissioner previously assessed a $3, 808 penalty upon Ashland for selling 56 cartons of delisted cigarettes from 2001 to 2003. Ashland had also paid a $5, 127 penalty for selling 62 cartons of delisted cigarettes from 2005 to 2008. Like the penalty imposed by the Commissioner in 2012, these penalties equated to 500% of the retail value of the delisted cigarettes. Ashland did not contest these smaller penalties.

         C. Review before the OTA.

         Ashland timely petitioned the OTA to review the Commissioner's August 2012 penalty assessment. The administrative law judge (ALJ) conducted an evidentiary hearing in August 2013. Testimony offered at the hearing by a representative of the West Virginia State Tax Department indicated that the Commissioner consistently imposes a 500%-of-retail-value penalty for violations of West Virginia Code § 16-9D-3(c). Specifically, the Commissioner's representative testified:

Yes. My auditors have no discretion. I mean they have the ability to come to me. I have the ability to go to my director and get anything-to request something less. It's never happened. I mean we-in my recollection, they've all been 500 percent that we've done. And these are rare. There's not many of them. . . .
I've never gone up the food chain for any-. I've never heard a good explanation to go up the food chain. Our audit program is locked in at 500 percent. I mean I don't-. Like I said, these were rare. I don't recall any reason to ask for a reduced rate.

         When asked to justify the 500%-of-retail-value penalty imposed by the Commissioner in this case, the representative explained that Ashland had "two previous audits, that they've been forewarned, and-they're still continuing to do so, I don't really see any need to reduce it. I mean, they've had plenty of warning and they keep making the same error."

         In August 2014, the ALJ issued a written order finding the Commissioner's $159, 398 penalty to be "erroneous, unlawful, void, or otherwise invalid[.]" The ALJ reasoned that "the Tax Commissioner exercised no discretion at all in issuing the penalty" to Ashland because the evidence demonstrated that the Commissioner invariably assessed the 500%-of-retail-value penalty for the sale of delisted cigarettes. Additionally, the ALJ concluded that the $159, 398 penalty was too harsh because "[c]ommon sense tells us that the maximum penalty should be reserved for the worst offenders, for example, a seller who deliberately sells delisted brands or who engages in some criminal activity in connection with cigarette sales." Consequently, the ALJ reduced the penalty by 25% to $119, 548.50.

         D. Review before the Circuit Court of Kanawha County.

         Both the Commissioner and Ashland appealed the OTA's reduction of the Commissioner's original penalty, and briefing on the matter proceeded before the Circuit Court of Kanawha County.[11] On April 11, 2017, the circuit court entered an order reversing the order of the OTA and reinstating the Commissioner's original penalty. The circuit court found, among other things, that: (1) the OTA erred in concluding that the Commissioner exercised no judgment, when the $159, 398 penalty imposed was not the maximum permitted by West Virginia Code § 16-9D-8(a); (2) the OTA erred in concluding that the Commissioner abused his discretion by imposing the same, proportional penalty on all violators of § 16-9D-3(c); and (3) the $159, 398 penalty did not violate the Excessive Fines Clause of the West Virginia Constitution or the Eighth Amendment to the United States Constitution. Ashland now appeals from that order.

         II. Standard of Review

         Ashland's arguments implicate several standards of review. We set out each below within the analysis of the corresponding assignment of error.

         III. Analysis

         Ashland attacks the circuit court's order on several fronts. First, it argues that the circuit court erred by reinstating the Commissioner's original $159, 398 penalty. Ashland contends that the OTA correctly concluded that the Commissioner's consistent application of a 500%-of-retail-value penalty is, itself, an abuse of discretion, and that by reinstating the Commissioner's original judgment, the circuit court substituted its judgment for that of the OTA. Ashland also argues that the circuit court should have further reduced, or completely forgiven, the reduced penalty ordered by the OTA due to circumstances that Ashland contends mitigate its violation of West Virginia Code § 16-9D-3(c). Ashland next argues that the Commissioner's original penalty violates the Excessive Fines Clause of the West Virginia Constitution and the Eighth Amendment to the United States Constitution. It also challenges the Circuit Court of Kanawha County as the appropriate venue for the proceedings below. We address each of Ashland's arguments in turn.

         A. Reinstatement of the Commissioner's original penalty.

         Ashland first argues that the circuit court abused its discretion by reversing the decision of the OTA and reinstating the Commissioner's original $159, 398 penalty. In Syllabus Point 1 of Griffith v. ConAgra Brands, Inc., [12] this Court confirmed the standard of review applicable to appeals such as Ashland's:

In an administrative appeal from the decision of the West Virginia Office of Tax Appeals, this Court will review the final order of the circuit court pursuant to the standards of review in the State Administrative Procedures Act set forth in W.Va. Code, 29A-5-4(g) [1988]. Findings of fact of the administrative law judge will not be set aside or vacated unless clearly wrong, and, although administrative interpretation of State tax provisions will be afforded sound consideration, this Court will review questions of law de novo.[13]
West Virginia Code § 29A-5-4(g) (2015) provides:
The court may affirm the order or decision of the agency or remand the case for further proceedings. It shall reverse, vacate or modify the order or decision of the agency if the substantial rights of the petitioner or petitioners have been prejudiced because the ...

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