In June, the Appellate Court of Illinois upheld an assessment of over $314 million against Sam’s Club for unpaid county cigarette excise taxes, including a 10% late fee, a 25% penalty, and accrued interest. The assessment arose from Sam’s Club’s alleged failure to pay taxes on cigarettes that it sold to out-of-county retailers from 2009 to 2016. Following the June ruling, the company now appears poised to bring its arguments to the state’s highest court in a case illustrating the ambiguities of state and local excise taxation laws.
Cook County imposes cigarette excise taxes on “all cigarettes possessed for sale and upon the use of all cigarettes within the County of Cook.” Cook County, Ill., Code of Ordinances § 74-433(a). However, “use” does not “include possession for sale by a retail tobacco dealer,” which term means “any person who engages in the business of selling cigarettes . . . in the County of Cook to a consumer whether or not they are licensed to be a retail tobacco dealer.” Id. § 74-431.
Wholesale tobacco dealers are required to collect the tax “from any Purchaser,” which term means “a buyer of cigarettes . . . including, but not limited to, retail tobacco dealers, retail cigarette manufacturers and/or consumers.” Id. §§ 74-433(f), 74-431. The ordinance further requires each wholesale tobacco dealer, “before delivering or causing to be delivered any cigarettes to a retail tobacco dealer in the County of Cook to purchase from the Department a tax stamp for each package of cigarettes and to cancel said stamps prior to the delivery of such cigarettes to any retail tobacco dealer in the County of Cook.” Id. § 74-433(b).
1993 Audit
In 1993, the Cook County Department of Revenue (the Department) audited Sam’s Club’s cigarette sales. Sam’s Club provided the Department with evidence that some cigarette sales on which they paid taxes were made to out-of-county retailers. These retailers entered Cook County to purchase cigarettes from Sam’s Club and subsequently left to sell the cigarettes in other counties. The Department then updated its assessment to exclude those sales. Consistent with this assessment, Sam’s Club proceeded to sell cigarettes to out-of-county retailers without paying Cook County excise taxes on such sales. Department auditors inspected Sam’s Club stores over the next several years and did not issue any citations related to the sales of cigarettes without county tax stamps to the out-of-county retailers.
2016 Audit
During a 2016 audit, however, the Cook County Department of Revenue (the Department) changed its position. It suddenly asserted that the county cigarette tax applied to all sales made within the County, including to out-of-county retailers. As a result, the Department issued Sam’s Club a tax assessment for unpaid cigarette taxes during the period of 2009 to 2016.
Appeal of Assessment to Administrative Law Judge
Sam’s Club appealed to an administrative law judge (ALJ), arguing that the tax was not due if a retailer provided a non-Cook County address because the ordinance presumes that cigarettes are consumed where received, and that the out-of-county retailers received them in Cook County. The ALJ found that Sam’s Club’s interpretation was “plausible” and “led to their good faith practice of not collecting and remitting the taxes,” but ultimately deferred to the Department’s “defensible” interpretation and ruled against Sam’s Club.
Appeal to Circuit Court
Sam’s Club appealed the ALJ’s decision to the Circuit Court of Cook County, which reversed the decision and held in favor of the company. The circuit court found that the ordinance did not apply to out-of-county retailers because the “possession” and “use” of cigarettes must occur within the county for the tax to be properly applied. Given that the definition of “use” expressly excludes “possession for sale by a retail tobacco dealer,” the court reasoned that the tax did not apply.
Appeal to Appellate Court of Illinois
On appeal to the Appellate Court of Illinois, however, the Department’s $314 million tax assessment was upheld. In its June 13 opinion, the appeals court reversed the circuit court, focusing on the ordinance’s language regarding tax collection. Regarding the ordinance’s imposition of taxes, the court noted that the law expressly limits the carve-out in the “use” definition by referencing possession by “retail tobacco dealers,” which term only includes retailers that sell to consumers within the county. Instead, said the court, the out-of-county retailers are simply “purchasers” (i.e., “buyer[s] of cigarettes”) from which Sam’s Club must collect the county cigarette taxes as a wholesale tobacco dealer. Cook County, Ill., Code of Ordinances § 74-433(f). Thus, the appeals court reasoned that the ordinances required Sam’s Club to collect excise taxes on the out-of-county retailers’ purchases of cigarettes.
The appeals court similarly rejected Sam’s Club’s alternative arguments that the county cigarette tax violated the Illinois constitution. First, the company argued that the county cigarette tax as applied to sales to out-of-county retailers was an “occupation tax,” which only the state legislature may authorize. See Ill. Const. art. VII, § 6(e). Second, the company argued that the tax was “extraterritorial” as applied here. Third, Sam’s Club argued that the Department’s assessment of taxes for past sales to out-of-county retailers is an unconstitutional “retroactive tax,” based on the Department’s changing interpretation of the tax ordinance between the 1993 and 2016 audits. Fourth, Sam’s Club argued that the tax ordinance was unconstitutionally vague. The appeals court disagreed with each of these arguments, however.
Lastly, Sam’s Club argued that the Department’s interpretation of the county cigarette tax conflicts with Illinois’ Cigarette Tax Act, 35 ILCS 130/1 et seq. The company pointed to the Cigarette Tax Act’s role in coordinating which home rule jurisdictions may tax cigarettes. Specifically, the statute provides that “[t]he amount of local taxes shall be calculated based on the location of the retailer’s place of business shown on the retailer’s certificate of registration” with the state. See 35 ILCS 130/2(j). The appellate court dismissed this argument too, characterizing the ordinance as a tax within the jurisdiction of Cook County and with respect to a subject over which the state does not have an exclusive rule.
Forthcoming Appeal to Supreme Court of Illinois
On July 1, the company moved for an extension of time in which to file its Petition for Leave to Appeal in the Supreme Court of Illinois, indicating that the company intends to ask the high court to revisit the appellate court’s decision. Mot. for Extension of Time, Sam’s West, Inc. v. County of Cook, No. 132011 (Ill. 2025); see Ill. Sup. Ct. R. 315(b)(1) (allowing a party 35 days from the entry of appellate court’s judgment to file a Petition for Leave to Appeal to the Supreme Court of Illinois, unless a motion for extension of time is granted).
Why It Matters
Although the Appellate Court decision largely rested on an interpretation of Cook County’s ordinance, Sam’s Club may advance its other arguments in the Supreme Court as well. If the company prevails on its constitutional due process arguments, for instance, the ruling will have state-wide implications for taxpayers who detrimentally rely on prior interpretations by tax regulators. Such a ruling would also represent persuasive authority in cases outside of Illinois that concern the permissible scope of local cigarette stamping requirements.
Alternatively, if the appeals court’s decision stands, one implication appears to be the potential double-taxation of cigarettes at the local level. Under the appeals court’s decision, Cook County cigarette taxes were owed on cigarettes purchased by out-of-county retailers to be sold in other counties. If those cigarettes were sold in another county that levies a similar stamp tax, then both would apparently tax the same pack of cigarettes. This outcome is arguably contrary to the common, simplistic understanding of local excise taxation—that the taxes only apply to goods intended for ultimate sale within the taxing locality. Regardless of the outcome, this litigation evidences the numerous thorny issues involved in state and local tobacco taxation.
Receiving a state or local tobacco excise tax assessment can be a stressful event for any business. Optimal responses to assessments require careful consideration of the procedural situation of the assessment and the substantive issues surrounding the tax liability itself.
