State Supreme Court Rules "Crack Tax" Unconstitutional 

On July 24, 2009, the State Supreme Court ruled that the Unauthorized Substances Tax, popularly known as the "crack tax," is in violation of Tennessee’s constitution. This tax was enacted by the Legislature five years ago and required those who have marijuana, cocaine and other illegal substances to buy tax stamps from the Department of Revenue, which supposedly would provide confidentiality to purchasers as a way to circumvent the citizen’s right against self-incrimination. Individuals arrested with drugs in their possession could then be assessed for back taxes and additional penalties if they were unable to provide the appropriate tax stamps approving their already illegal possession.

The Supreme Court decision upheld rulings by a Loudon County judge and the Court of Appeals, and developed out of the case of Steven Waters, 51, an individual caught with cocaine allegedly purchased from an undercover Knoxville County officer. After his arrest, authorities seized his bank accounts for failure to pay the drug tax. His defense attorney, Phil Lomonaco of Knoxville, then went to court to successfully challenge the constitutionality of the law.

The Supreme Court was not unanimous in their decision to deem the tax unconstitutional as Justices William Koch and Cornelia Clark voted to uphold the tax. However, it was still struck down with Justices Gary Wade, William M. Barker, and Janice Holder voting against the tax, culminating in a 3-2 decision. The essential reason for the majority vote as clarified by Justice Gary Wade is that illegal drugs are not subject to taxation under the state constitution, which authorizes taxes on "merchants, peddlers and privileges." Since the tax is on possession, not sales, the possessors are neither merchants nor peddlers. Furthermore, because possession of the products in question is outlawed, the possession of illegal drugs is thus not a legal privilege subject to taxation. Therefore, it was the definition of the product taxed which rendered the taxation unconstitutional, as illegal drugs do not fall under the ‘privilege’ tax as the State has classified the cocaine in question for this case.

Interestingly, the majority rejected arguments that the law violates the U.S. Constitution's provisions against self-incrimination and double jeopardy. Consequently, this decision allows for the Legislature to theoretically revise the law in the future to make the tax apply to drug sales.  In anticipation of this decision, our office has filed Petitions on behalf of clients whose property was seized and similar taxation assessed in protection of our clients’ constitutional rights.

From the desk of Lane Cryar