Court Declares New Tax on Small Tobacco Manufacturers Unconstitutional

A Travis County District Court judge recently found that a new tax on small tobacco manufacturers violates the Equal and Uniform Taxation Clause of the Texas Constitution in Texas Small Tobacco Coalition v. Combs, Cause No. D-1-GN-13-002414.  The Texas Comptroller has appealed the judge’s decision.

The Tax on Small Tobacco Manufacturers

The Texas Legislature passed the new tax during the last legislative session in House Bill 3536.  The bill levies a 2.75 cent tax on each cigarette produced by certain small tobacco manufacturers if the cigarettes are used, sold, or distributed in Texas.  The tax applies only to tobacco manufacturers who did not enter into a 1998 lawsuit settlement with the State of Texas.

In 1998, the State of Texas sued the Big Four tobacco manufacturers – Phillip Morris, R.J. Reynolds, Brown & Williamson, and Lorillard – alleging that the Big Four engaged in misleading practices.  The state and the Big Four settled the lawsuit.  As a result of the settlement, the Big Four must pay the State of Texas over half a billion dollars each year.  Smaller tobacco manufacturers, who were not parties to the lawsuit, do not have to make these settlement payments.  Only tobacco manufacturers who were not parties to the lawsuit and settlement are subject to the new tax.

The Court’s Decision: The Tax is Not Equal and Uniform

In his letter ruling, issued November 1, 2013, Travis County District Court Judge Stephen Yelenosky wrote that the new tax violated the Equal and Uniform Taxation Clause of the Texas Constitution because taxing tobacco manufacturers who were not party to a settlement differently than those who were “is not reasonable with respect to the nature of the business classified because it does not relate at all to the nature of the businesses.”  He noted that the products sold by all of the tobacco manufacturers were identical.

The Court also rejected the state’s argument that the Court did not have jurisdiction to hear the case.  The state argued that only those who directly paid the tax could file a suit challenging it – a trade association for small tobacco distributors and manufacturers filed the suit, not the manufacturers who the new statute actually requires to pay the tax, and no tax had been paid under protest in connection with the suit.  The state based its argument on a statute that states that a taxpayer must pay a tax or file a bond before challenging a tax assessment in court, unless the taxpayer can prove that it cannot pay the tax.  The Third Court of Appeals has held that this statute is unconstitutional.  Judge Yelenosky relied on this Third Court of Appeals decision in finding that the Court had jurisdiction to hear the case.


This decision is a definite win for the small tobacco manufacturers on whom the state imposed the new tax.  It is also another rejection of the state’s position that a taxpayer must pay a tax before challenging it in court.  However, it remains to be see whether the Third Court of Appeals will completely uphold Judge Yelenosky’s ruling.  Further, regardless of what the Third Court of Appeals rules, it’s likely that the Texas Supreme Court will hear this case as well.  A decision by the Texas Supreme Court may provide a much-needed clarification of the extent of the Equal and Uniform Taxation clause as well and whether taxpayers may challenge a tax in court without paying it.

We will keep you updated on further developments in this case on this blog.




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