As is true of the U.S. government, within the executive branch of state governments live administrative agencies, which state legislatures have vested with powers to implement and enforce the laws enacted by state legislatures. Pennsylvania courts have established what is known as the nondelegation doctrine which allows the Pennsylvania General Assembly to delegate authority and discretion to administrative agencies, such as the Department of Revenue. However, the Pennsylvania Constitution requires the General Assembly make the basic policy choices and set sufficient standards to guide and restrain the administrative agencies. A recent decision by the Pennsylvania Commonwealth Court is an example of a taxpayer successfully pushing back against the Department of Revenue (the “Department”) when it acts without proper legislative restraints. East Coast Vapor LLC v. Dep’t of Revenue, No. 153 C.D. 2023 (Pa. Commw. Ct. Jan. 3, 2025). State legislatures may delegate, but they may not abdicate, and taxpayers should not be afraid to fight back against improperly unrestrained state taxing authorities.
At issue in the case was Pennsylvania’s Tobacco Products Tax Act (the “Act”), which imposes taxes on certain types of tobacco products, such as e-cigarettes and e-liquids, and creates a licensing regime for manufacturers, wholesalers, and retailers of those products. The Act creates three categories of licenses for manufacturers, wholesalers, and retailers and prohibits anyone from selling, transferring, or delivering tobacco products in Pennsylvania without first obtaining the proper license. For manufacturers, the Act provides that an applicant can obtain a license by “submitting an application to the [D]epartment containing the information requested by the [D]epartment and designating a process agent.” Unlike for manufacturers, the Act further includes other specific requirements for wholesalers and retailers that the Department could seek to confirm through the information requested in the license application (e.g., that the “premises on which the applicant proposes to conduct business are adequate to protect the revenue”).
East Coast Vapor LLC (the “Company”), sells e-cigarettes and e-liquids at retail in Pennsylvania, including e-liquids that it makes itself. The Company applied for a manufacturer’s license under the Act and submitted a Manufacturing License Application Form to the Department along with other requested information. However, the Company did not submit a License Application Consent Form (“Consent Form”). The Consent Form would authorize the Department’s Bureau of Criminal Investigations “to conduct consensual investigations/searches of East Coast's financial accounts and other financial records and credit records.” The Company asked the Department to provide legal authority justifying the Consent Form requirement for manufacturers but not for wholesalers or retailers. The Department never responded to the Company’s request and denied the Company’s application on the grounds that the Company had not provided all requested information.
On appeal, the Commonwealth Court found that the Act violated Pennsylvania’s nondelegation doctrine, noting that while the provisions for wholesalers and retailers “at least contain some enumerated criteria or requirements of applications, there is nothing in the manufacturer’s provision that suggests what information would be appropriately required.” The lack of express criteria of what information the Department could request from manufacturers “allows the Department to make unconstrained, arbitrary, capricious requests for any information whatsoever.” Finding that the Act was an unconstitutional delegation of legislative authority to the Department with respect to the licensing of manufacturers, the Court struck the provisions of the Act relating to the licensing of the manufacturers but left undisturbed the provisions relating to the licensing of wholesalers and retailers. As a result of its decision, the Court found that the Department could no longer license manufacturers under the Act and, accordingly, reversed the Department’s decision to deny the Company’s application and directed the Department not to further consider the Company’s application.
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