'Crack Tax' takes a hit in appellate ruling

Department of Revenue says it has no plans to stop collecting tax that another court now says is unconstitutional

Email | Print By Milt Capps

The state's controversial 'crack tax', which is designed to hit suspected felons in the pocketbook, has been dealt a blow from the Court of Appeals.

Today the court issued a ruling declaring the Tennessee Unauthorized Substance Tax Act to be constitutionally invalid.

Judge Sharon Lee of the Court's eastern section delivered the court's opinion against the Tennessee Department of Revenue, which had attempted to enforce a state law that requires payment of "an excise tax on cocaine and other specified unauthorized substances possessed by a 'dealer,'" defined as someone who possesses seven or more grams of cocaine.

In the case cited today, Steven Waters was arrested in Knoxville on drug-related charges more than two years ago, after allegedly paying $12,000 to an informant for 1,000 grams of cocaine. He subsequently received a crack-tax bill of more than $55,000. State agents also placed a lien against his Lenoir City property and confiscated $4,000 from his checking account.

This week's judgment affirms Waters' complaint and affirms an earlier judgment in Loudon County Chancery Court regarding the unconstitutionality of the law.

Nonetheless, a state department of revenue spokesperson told NashvillePost.com this afternoon  that the department "has no plans to suspend collection activity," and the ruling is under review by the state's attorney general.

Lee explained in her ruling that the state could not justify levying an excise privilege tax on sale of drugs the legislature has declared illegal, because the fact that the behavior is not authorized by law means that it cannot be a "privilege" and therefore cannot be taxable on that basis. Attempts to enforce the law are therefore "arbitrary, capricious, and unreasonable, and therefore, invalid under the Constitution of this state."

The ruling will weigh heavily in other disputed Drug Tax cases. A recent Davidson County Chancery Court ruling led to a court order protecting the accused person's assets until the constitutionality of the law is resolved.

In a third instance, a taxpayer is suing the Department of Revenue for improperly including in the calculation of his tax bill the weight of a Rice Krispies-like substance that was mixed into in a marijuana-laced dessert.

As Knoxville News Sentinel Reporter Jamie Satterfield recently wrote, the illegal-drug tax "was passed in 2005 and largely painted as a sin tax akin to those levied against cigarettes and alcohol. The revenue department has collected more than $4 million from the tax so far. Revenue agents collect it by showing up on the heels of drug investigators and handing out tax bills to accused dope dealers long before their cases go to court and without hearings typically afforded alleged criminals whose property is seized by law enforcement."

The tax and penalties for nonpayment can, theoretically, be averted by anonymously purchasing tax stamps from the state for certain illegal drugs. The tax has also been challenged on grounds that the manner of its enforcement undermines constitutional protections against self-incrimination.