This is an article which examines the Illinois Tobacco Products Tax Act of 1995 and Micjo v. Department of Business and Regulation, 78 So. 3d 124 (FL. 2nd Dist. 2012). This is a situation where the Illinois Tobacco Products Tax Act and the Illinois Administrative Code interpretation conflict with each other as to the proper definition of “Wholesale Price”.
35 ILCS 143/10-10 dictates that 36% of the “wholesale price of tobacco products sold” is the proper taxation rate. “Wholesale Price” is defined according to 35 ILCS 143/10-5 as “[T]he established list price for which a manufacturer sells tobacco products to a distributor, before the allowance of any discount, trade allowance, rebate, or other reduction. In the absence of such an established list price, the manufacturer’s invoice price at which the manufacturer sells the tobacco product to unaffiliated distributors, before any discounts, trade allowances, rebates, or other reductions, shall be presumed to be the wholesale price.” However, such tax “[I]s not imposed upon any activity in that business in interstate commerce or otherwise, to the extent to which the activity may not, under the Constitution and the Statutes of the United States, be made the subject of taxation by this State.” 35 ILCS 143/10-5 (2014). (Emphasis added)
86 Il. Admin. Code 660.5 (a) states that “[T]he Tobacco Products Tax is imposed upon the last distributor [. . . ] at a rate of 18% of the wholesale price of Tobacco products sold or otherwise disposed of in this state. (eff. 2010). 18% is the previous statutory tax rate prior to the amount increasing in July of 2012 to 36%, and the reference represents a non-updated administrative code provision.
86 Il. Admin. Code 660.5 (d)(1) states that “[T]he Wholesale price for purposes of imposing the Tobacco Products Tax on the last distributor is the invoice price at which products are sold by the last distributor, before the allowance of any discounts, trade allowances, rebates, or other reductions. Surcharges added by distributors are considered part of the wholesale price subject to tax. (Emphasis added)
Under 86 Il. Admin. Code 660.5 (d)(1), the “Wholesale Price” is the invoice price, including any surcharges added by the distributor. However, under 35 ILCS 143/10-10, the “Wholesale Price” is the list price, and does not make reference to any surcharges added by distributors.
Although the Illinois Tobacco Products Tax act does not make any reference to any “surcharges” being included as part of the “Wholesale Price”, the Illinois Administrative Code purports to include all “surcharges added by the distributors.” A “surcharge” is defined as “to charge an extra fee.” (Webster 2014). The Federal Tax appears to be a “surcharge” that has been added by a distributor on behalf of the Federal government.
“List Price” is defined by Webster as “The basic price of an item as published in a catalog, price list, or advertisement before any discounts are taken.”
Therefore, under the definition of “wholesale price” as provided for under the Illinois Administrative Code, the Wholesale Price is the total invoice price which includes the surcharge of Federal taxation. Under the definition of “wholesale price” as provided for under the Illinois Tobacco Products Tax Act, the wholesale price is the established list price, prior to the addition of any surcharges.
There do not appear to be any decisions or rulings from the Illinois Department of Revenue that explicitly answer what the proper calculation of “wholesale price” should be. Although not directly on point, a supportive previous Illinois Department of Revenue private letter ruling on March 11, 2009 indicates that the proper tax base for the Tobacco Products Tax should be the “established list price” equal to the actual invoice price.
I believe the Florida Micjo decision is the correct structural analysis framework for interpreting the different definition of “wholesale price”. In addition to the administrative code contravening the express statement of the statute, the administrative code interpretation includes as part of the “cost of pipe tobacco” federal taxation, resulting in a state tax levied upon a federal tax which bears no actual relation to the actual cost of the good sold.
The proper interpretation of “wholesale price” by the Illinois Department of Revenue should be as provided for by statute: “The established list price.” The Administrative Code provision defaulting “wholesale price” to the “invoice price” should be overruled.
*Note – Article written in 2014. This is the response from the Illinois Department of Revenue.