ANALYSIS OF FEBRUARY 10, 2022 SUPREME COURT OPINION
(Posted February 10, 2022) Many years ago, when I was a brand-new baby lawyer, I touched base with one of my law-school pals. We chatted and described our respective practices. I told him that I was in a very small firm that handled a varied civil and occasional criminal docket. He replied that he was handling rate cases before the Federal Energy Commission.
I blurted out that that sounded awfully boring. I’ve never forgotten his reply: “Steve, you wouldn’t believe how many zeroes there are in these cases.” He told me that his client was negotiating fractions of a cent per cubic foot of natural gas, but the size of the order was in trillions of cf. That adds up to billions of dollars.
I humbly agreed with him that a practice like that was plenty exciting enough.
Today the Supreme Court of Virginia issues an opinion that sort of rhymes with my pal’s long-ago caseload. In Department of Taxation v. RJ Reynolds Tobacco Co., the court takes up a challenge to a corporate income tax assessment against aging tobacco leaves – lots of them.
RJR owns a warehouse in Danville where it stores tobacco leaves for 13-23 months before shipping them to North Carolina for processing into cigarettes. The Department included the value of the leaves in its calculation of the company’s income, according to a formula that considers where a multistate company earns its income.
The company challenged the assessment and sought a correction that eventually encompassed five years’ worth of taxes, running to $11 million. In circuit court, the issue was whether the company “used” the tobacco in its business while it lay peacefully in the warehouse. The company adduced evidence that it didn’t do anything at all to the tobacco during the aging process; Mother Nature did all the work, and the company just kept the product safe and relatively dry.
The court decided that RJR was right and directed a refund of the challenged taxes. On appeal, the Supreme Court unanimously agrees. In an opinion by the chief justice, the SCV holds that the statute unambiguously requires that inventory be used here in Virginia to trigger taxes, and merely allowing it to lie tranquilly in the shade doesn’t rise to that level.
The unambiguously part matters in one important respect: The Department had argued that one of its regulations compelled the opposite conclusion. But the justices today reaffirm that regulations are subordinate to statutes, and you can’t resort to the regs where – as both sides here agreed – the statute is clear.