RJR Vapor Co. v. Hegar

681 S.W.3d 867

RJR VAPOR CO., LLC, Appellant, Glenn Hegar, Comptroller of Public Accounts of the State of Texas; the Office of the Comptroller of Public Accounts of the State of Texas; and Ken Paxton, Attorney General of the State of Texas, Cross-Appellants,

v.Glenn HEGAR, Comptroller of Public Accounts of the State of Texas; the Office of the Comptroller of Public Accounts of the State of Texas; and Ken Paxton, Attorney General of the State of Texas, Appellees, RJR Vapor Co., LLC, Cross-Appellee

NO. 03-22-00188-CV

Court of Appeals of Texas, Austin.

Filed: December 14, 2023

West Codenotes

Negative Treatment Vacated

Tex. Tax Code Ann. § 155.001(15)(E)

FROM THE 250TH DISTRICT COURT OF TRAVIS COUNTY, NO. D-1-GN-20-004023, THE HONORABLE AMY CLARK MEACHUM, JUDGE PRESIDING

Doug Sigel, Joshua Vieth, Ryan Law Firm PLLC, Terrace I, 2600 Via Fortuna Dr., Suite 150, Austin, TX 78746, for Appellant.

Thales Smith, Assistant Attorney General, Alison Andrews, Office of the Attorney General, Tax Litigation Division, P.O. Box 12548 (MC 029), Austin, TX 78711, for Appellee.

Before Justices Baker, Triana, and Kelly

OPINION

Gisela D. Triana, Justice

The statutory-construction dispute in this tax-refund case requires us to determine the meaning of the words "tobacco" and "tobacco substitute" and to resolve a dispute over the difference between "made of" and "made from." The Tax Code defines "tobacco product" as, among other things, "an article or product that is made of tobacco or a tobacco substitute and that is not a cigarette or an e-cigarette as defined by Section 161.081, Health and Safety Code." Tex. Tax Code § 155.001(15)(E). The parties join issue over whether oral nicotine products that contain nicotine isolate manufactured from tobacco are "tobacco products" as defined by the statute.

Appellant and cross-appellee RJR Vapor Co., LLC sells oral nicotine products in the form of nicotine pouches and nicotine lozenges under the brand name VELO throughout Texas. When RJR Vapor introduced the products to Texas, it had concluded that the VELO products are not subject to the Cigars and Tobacco Products Tax. See generally id, §§ 155.001- .2415 (Cigars and Tobacco Products Tax). RJR Vapor believed this conclusion was supported by guidance on the Comptroller’s website stating "[e]ven though nicotine is a component of tobacco, it does not meet the definition of tobacco." However, RJR Vapor later received guidance in a general information letter from the Comptroller that the VELO products are "tobacco products" under Section 155.001(15) because they contain "nicotine, which is an extract from the tobacco leaf." RJR Vapor then began paying the Cigars and Tobacco Products Tax under protest.

Soon thereafter, RJR Vapor sued appellees and cross-appellants Glenn Hegar, Comptroller of Public Accounts of the State of Texas; the Office of the Comptroller of Public Accounts of the State of Texas; and Ken Paxton, Attorney General of the State of Texas (collectively, "Comptroller") to recover the payments that it made under protest. See id: §§ 112.051-.060. In its suit, RJR Vapor also sought (1) a declaration that the language "made of tobacco or a tobacco substitute" within Texas Tax Code Section 155.001(15)(E) was unconstitutional and (2) a permanent injunction prohibiting the Comptroller from relying on that language to assess or collect the Cigars and Tobacco Products Tax.

On cross-motions for summary judgment, the trial court held that the products at issue are not "tobacco products" as defined by Tax Code Section 155.001(15). The trial court subsequently conducted a bench trial to resolve the refund amount owed to RJR Vapor and whether RJR Vapor was entitled to declaratory or injunctive relief. The trial court rendered judgment granting RJR Vapor a refund in the amount of $16,071.68. The trial court also declared in its judgment that the phrase "made of tobacco or a tobacco substitute" is unconstitutional both facially and as applied, but it denied RJR Vapor’s request for a permanent injunction.

For the reasons discussed below, we affirm in part and vacate in part the trial court’s judgment and dismiss RJR Vapor’s declaratory and injunctive claims for lack of jurisdiction.

BACKGROUND

Statute and Products at Issue

Texas imposes the Cigars arid Tobacco Products Tax on tobacco products. The tax rates on cigars are different from the tax rates on other tobacco products. Compare Tex. Tax Code § 155.021 (tax imposed on cigars), with id, § 155.0211 (tax imposed on tobacco products other than cigars). The tax on tobacco products other than cigars is imposed "when a permit holder receives tobacco products other than cigars, for the , purpose of making a first sale in this state."¹ Id. § 155.0211(a). As defined by the Tax Code,

"[t]obacco product" means:

(A) a cigar;

(B) smoking tobacco, including granulated, plug-cut, crimp-cut, ready-rubbed, and any form of tobaccosuitable for smoking in a pipe or as a cigarette;

(C) chewing tobacco, including Cavendish, Twist, plug, scrap, and any kind of tobacco suitable for chewing;

(D) snuff or other preparations of pulverized tobacco; or

(E) an article or product that is made of tobacco or a tobacco substitute and that is not a cigarette or an e-cigarette as defined by Section 161.081, Health and Safety Code.²

Id. § 155.001(15) (emphasis added). At issue here is whether the VELO oral nicotine pouches and lozenges distributed by RJR Vapor in Texas are taxable "tobacco products" under Section 155.001(15).

RJR Vapor presented evidence with its summary-judgment motion that the VELO pouches and lozenges contain many ingredients, including nicotine isolate.³ The pouches use porous fleece material to portion the powdered mixture of water, nicotine isolate, sucralose, citric acid, and flavoring ingredients. They are available in mint or citrus flavors containing two different amounts of nicotine isolate (2 mg or 4 mg). The lozenges come in hard or soft form, and their ingredients include isomalt, water, nicotine isolate, flavoring, and sodium chloride. They are available in four flavors (crema, berry, dark mint, and mint), and all contain a nicotine isolate content of approximately 1.7 mg. Product users place the products in their mouths and orally absorb the nicotine isolate and flavors over time (one to two hours for pouches; 15 minutes for lozenges).

According to the affidavit of Dr. Charles Garner, an RJR Vapor employee and expert, "[t]he manufacturer of [the VELO products] purchases nicotine isolate (which is derived from tobacco) from third party vendors."⁴ Garner attested that neither RJR Vapor nor the manufacturer of the VELO products "processes tobacco to make the nicotine isolate incorporated into [the VELO products]."⁵ He attested that RJR Vapor "does not purchase, process, or handle tobacco at any point in the distribution" of the VELO products.

Gamer attested that the general process employed by RJR Vapor’s vendors to create nicotine isolate is as follows:

a. A tobacco mixture is extracted with water in a batch process. The raw water extract is subsequently extracted with an organic solvent. The resulting organic phase containing nicotine is separated and diluted, and sulfuric acid is added. The nicotine partitions in the water phase forming a 40% nicotine sulfate solution. The tobacco waste mixture is disposed of, most often given to farmers free of charge to be used as a soil enhancer. The nicotine sulfate solution is sold to another vendor for processing to make nicotine isolate.

b. Purchased nicotine sulfate solution is acidified with sulfuric acid. Some water is distilled off from the resulting solution and the residue is filtered. The filtrate is extracted with cyclohexane. The aqueous product layer, i.e., aqueous nicotine sulfate solution, is treated with a sodium hydroxide solution under heating. The mixture is again extracted with cyclohexane. The aqueous layer is then discarded. From the organic layer, cyclohexane is distilled off. The remaining product is distilled under vacuum, then filtered producing nicotine isolate (with a purity of greater than 99%). The nicotine isolate is placed in drums or other containers for shipment to [RJR] Vapor LLC.

RJR Vapor’s other two experts confirmed that after the process for making nicotine isolate is complete, the final product contains no part or traces of the tobacco leaf. Steve Terrell, the director of product development at Swedish Match, an RJR Vapor competitor, similarly described the steps of the chemical process used to extract nicotine isolate from tobacco. He attested, "[o]nce the chemical is extracted from the tobacco, the final product (nicotine isolate) contains no traces or matter from the tobacco leaf except for the purified nicotine." Mark Triplett, partner and founder since 1986 of a tobacco-products consulting firm "that advises tobacco industry and government leaders on how to establish viable strategies for uniform application of state tobacco laws," who has assisted state legislatures in drafting tobacco-products taxation laws, attested that "[o]nce the nicotine is extracted from tobacco, the final product contains no tobacco leaf." Triplett further attested, "Nicotine is not ‘tobacco’—nicotine is merely a chemical that can be found in tobacco."

The Comptroller’s Guidance

When RJR Vapor introduced the VELO products to Texas in 2015, its representatives researched whether the products would be subject to the Cigars and Tobacco Products Tax and concluded that the products should not be subject to the tax. However, to confirm that the products were not subject to the tax, RJR Vapor requested a General Information Letter from the Comptroller in 2018. In January 2019, the Comptroller sent RJR Vapor a General Information Letter stating that because the products contain nicotine, "which is an extract from the tobacco leaf," they meet the statutory definition of a tobacco product. RJR Vapor representa- tives subsequently met with the Comptroller’s...