             IN THE COMMONWEALTH COURT OF PENNSYLVANIA


Kingdom Vapor and Smoke 4                        :
Less, LLC,                                       :
                     Petitioners                 :
                                                 :
                       v.                        :    No. 697 M.D. 2016
                                                 :    Argued: April 11, 2018
Pennsylvania Department of Revenue,              :
                       Respondent                :



BEFORE:        HONORABLE MARY HANNAH LEAVITT, President Judge
               HONORABLE RENÉE COHN JUBELIRER, Judge
               HONORABLE ROBERT SIMPSON, Judge
               HONORABLE PATRICIA A. McCULLOUGH, Judge
               HONORABLE MICHAEL H. WOJCIK, Judge
               HONORABLE CHRISTINE FIZZANO CANNON, Judge
               HONORABLE ELLEN CEISLER, Judge


OPINION NOT REPORTED


MEMORANDUM OPINION BY
JUDGE COHN JUBELIRER                                 FILED: June 22, 2018


       Before this Court is the Application of Kingdom Vapor and Smoke 4 Less,
LLC (Petitioners) for Summary Relief1 (Application) on their Amended Petition for
Review (Amended Petition), filed in this Court’s original jurisdiction, seeking a
declaratory judgment.         Petitioners assert that the Pennsylvania Department of

       1
         The Application included a request for special relief in the form of preliminary injunctive
relief, which, after an evidentiary hearing, this Court granted in part and denied in part by an
Opinion and Order dated January 31, 2018. Kingdom Vapor & Smoke 4 Less, LLC, v. Pa. Dep’t
of Revenue (Pa. Cmwlth., No. 697 M.D. 2016, filed Jan. 31, 2018) (Cohn Jubelirer, J., single judge
op.) (Kingdom Vapor I).
Revenue’s (DOR) interpretation of the Tobacco Products Tax Act2 (TPTA) to tax
separately packaged component parts of the “electronic cigarette” (e-cigarette)
device that DOR considers “integral” to the device, is unsupported by the TPTA’s
plain language. In the alternative, Petitioners assert that DOR’s interpretation
violates the Uniformity Clause of the Pennsylvania Constitution. DOR counters that
Petitioners have prematurely invoked this Court’s jurisdiction and should have first
exhausted their available administrative remedies by presenting their claims to the
Board of Finance and Revenue (Board). DOR contends that Petitioners may not
bypass the Board because they have not raised a substantial constitutional challenge
to the TPTA and the Board’s review is an available and adequate remedy. We
concluded in East Coast Vapor, LLC v. Pennsylvania Department of Revenue, __
A.3d __, __ (Pa. Cmwlth., No. 515 M.D. 2017, filed June 22, 2018) (en banc) (East
Coast Vapor II), slip op. at 25, that the “integral” component parts of an e-cigarette
are not taxable under the TPTA. Based on East Coast Vapor II, we must reach the
same result here. Therefore, we will grant the Application in part and declare that
the separately packaged component parts of an e-cigarette that DOR considers
“integral” to the e-cigarette are not taxable under the TPTA.


I.     Factual and Procedural Background3
       Kingdom Vapor is a vapor product wholesaler, while Smoke 4 Less is a
vaping retail shop. Under the TPTA, wholesalers and retailers, such as Petitioners,


       2
          Act of March 4, 1971, P.L. 6, added by Section 18 of the Act of July 13, 2016, P.L. 526,
72 P.S. §§ 8201-A–8234-A.
        3
          We briefly set forth the relevant provisions of the TPTA, and the factual and procedural
background of this matter. A more detailed background discussion can be found in Kingdom
Vapor I and East Coast Vapor II.



                                                2
are subject to a 40 percent tax on “tobacco products.”4 Section 1202-A(a.1) of the
TPTA, 72 P.S. § 8202-A(a.1).5 “Tobacco products” include “electronic cigarettes,”6
Section 1201-A of the TPTA, 72 P.S. § 8201-A, which are defined as follows:

       4
           If the wholesaler does not collect the tax from the retailer, the same tax is imposed on the
retailer, which the retailer must then remit to DOR. Section 1202-A(b) of the TPTA, 72 P.S. §
8202-A(b). The TPTA also imposes a one-time Floor Tax on the retailer, requiring it to pay the
40 percent tax on any “tobacco products” in its possession as of October 1, 2016. Section 1203-
A of the TPTA, 72 P.S. § 8203-A. Smoke 4 Less has paid the Floor Tax. Kingdom Vapor I, slip
op. at 13 n.13.
         5
           Section 1202-A(a.1) provides,

       (a.1) Imposition of tax on electronic cigarettes.--A tobacco products tax is
       imposed on the dealer or manufacturer at the time the electronic cigarette is first
       sold to a retailer in this Commonwealth at the rate of 40% on the purchase price
       charged to the retailer for the purchase of electronic cigarettes. The tax shall be
       collected for the retailer by whomever sells the electronic cigarette to the retailer
       and remitted to the department. Any person required to collect this tax shall
       separately state the amount of tax on an invoice or other sales document.

72 P.S. § 8202-A(a.1).
        6
          Section 1201-A of the TPTA defines “tobacco products” as follows:

       (1) Electronic cigarettes.

       (2) Roll-your-own tobacco.

       (3) Periques, granulated, plug cut, crimp cut, ready rubbed and other smoking
           tobacco, snuff, dry snuff, snuff flour, cavendish, plug and twist tobacco, fine-
           cut and other chewing tobaccos, shorts, refuse scraps, clippings, cuttings and
           sweepings of tobacco and other kinds and forms of tobacco, prepared in such
           manner as to be suitable for chewing or ingesting or for smoking in a pipe or
           otherwise, or any combination of chewing, ingesting or smoking.

       (4) The term does not include:

           (i) Any item subject to the tax under section 1206.

           (ii) Cigars.




                                                  3
       (1)     An electronic oral device, such as one composed of a heating
               element and battery or electronic circuit, or both, which
               provides a vapor of nicotine or any other substance and the use
               or inhalation of which simulates smoking.

       (2)     The term includes:

               (i)    A device as described in paragraph (1), notwithstanding
               whether the device is manufactured, distributed, marketed or sold
               as an e-cigarette, e-cigar and e-pipe or under any other product,
               name or description.

               (ii) A liquid or substance placed in or sold for use in an
               electronic cigarette.

Id. (emphasis added).
       DOR has interpreted the TPTA to include as taxable the “integral”7
component parts of an e-cigarette, which DOR defines as those parts that can only
be used in an e-cigarette, such as replacement coils, regulated mods, and tanks.8
(Hr’g Tr., Jan. 10, 2018, at 141-43); Kingdom Vapor v. Pa. Dep’t of Revenue (Pa.




72 P.S. § 8201-A (emphasis added).
        7
          Previously, DOR had used a more expansive definition of component parts.
        8
          The parties have stipulated to the definitions of various vaping products, including
replacement coils, regulated mods, and tanks, which are as follows:

       Replacement Coils: These are made from resistance wire and are used in a tank.

       Regulated Mod: A power supply for an attached tank or atomizer. The device has
       a digital display allowing the user to adjust various settings. Without a
       tank/atomizer this cannot be used as an e-cigarette.

       Tanks: A part that holds a certain volume of e-liquid and contains a coil/heating
       element. Used in the PA Medical Marijuana industry and are tax exempt when
       used for that purpose.

Kingdom Vapor I, slip op. at 6-7 n.8.


                                              4
Cmwlth., No. 697 M.D. 2016, filed Jan. 31, 2018) (Cohn Jubelirer, J., single judge
op.), slip op. at 17 (Kingdom Vapor I).
       As a result of DOR’s interpretation, Petitioners filed the Amended Petition in
this Court’s original jurisdiction and then the Application, claiming entitlement to
summary relief on their claim for a judgment declaring that “integral” component
parts of an e-cigarette are not taxable under the TPTA and that DOR’s interpretation
of the TPTA is unconstitutional. Petitioners’ arguments, as relevant here, are as
follows. Noting that a taxing statute must be strictly construed, Petitioners argue
that DOR has rewritten the TPTA by taxing separately packaged component parts
of an e-cigarette that DOR considers “integral.” Petitioners point out that the TPTA
does not contain the words “integral” or “components” and argue that the definition
of “electronic cigarette” is limited to the “entire e-cigarette device” and the liquid or
substance placed in the e-cigarette, not its individual component parts. (Petitioners’
Brief (Br.) at 21, 23.) The General Assembly, Petitioners argue, could have easily
defined an e-cigarette to include “integral” component parts if the General Assembly
had wanted those items taxed when packaged separately, but it did not do so.
Petitioners assert that DOR has, therefore, rewritten the TPTA, which it may not do.
While DOR attempts to justify its interpretation on the basis that an e-cigarette could
be sold disassembled in order to evade the tax, that issue is for the General Assembly
to resolve, Petitioners argue. Moreover, Petitioners contend, DOR’s interpretation
of the TPTA violates the Uniformity Clause of the Pennsylvania Constitution.9
Although DOR has acknowledged that it cannot tax items sold by vaping companies



       9
          The Uniformity Clause of the Pennsylvania Constitution provides: “All taxes shall be
uniform, upon the same class of subjects, within the territorial limits of the authority levying the
tax, and shall be levied and collected under general laws.” Pa. Const. art. VIII, § 1.


                                                 5
without taxing those same items when sold by non-vaping companies, DOR’s use of
the word “integral” is less than a model of clarity and is arbitrary.
       DOR contends that its interpretation of the TPTA’s definition of “electronic
cigarettes” to include their separately packaged “integral” component parts is correct
because otherwise vaping companies would simply disassemble the e-cigarette
device, sell its parts separately, and have the purchaser reassemble the e-cigarette so
as to evade the tax. The General Assembly, DOR argues, did not intend such an
absurd result. Moreover, there is no Uniformity Clause violation. The General
Assembly has made clear, through its passage of Section 2 of the Tobacco Settlement
Agreement Act,10 35 P.S. § 5672, of the dangers and costs associated with tobacco
use. Because vaping companies sell “tobacco products,” the General Assembly is
justified in treating vaping companies as members of a distinguishable class, which
classification is reasonable given the health problems and financial costs associated
with tobacco use.
       In addition, DOR argues that the Amended Petition should be dismissed
because Petitioners have not exhausted their administrative remedies. DOR notes
that Petitioners claim that they are aggrieved by the unlawful collection of taxes,
which, DOR argues, Petitioners may contest by petitioning the Board pursuant to
Section 503(e) of the Fiscal Code, 72 P.S. § 503(e).11 DOR claims “a cursory
review” of the Amended Petition shows that Petitioners have not raised a substantial
constitutional challenge, so they may not bypass the administrative review process.
(DOR’s Br. at 7.)         Instead, Petitioners merely allege unconstitutionality and


       10
         Act of June 22, 2000, P.L. 394, as amended, 35 P.S. § 5672.
       11
         Act of April 9, 1929, P.L. 343, as amended, 72 P.S. § 503(e). Section 503(e) of the
Fiscal Code provides for a right of appeal to this Court by a party “aggrieved by the decision of
the Board . . . on a petition for refund.” Id.


                                               6
challenge DOR’s interpretation of the TPTA. Petitioners have not suffered any
harm, DOR argues, because Petitioners are still in business and, in fact, earning a
profit. DOR further argues that “‘all that [Petitioners are] complaining about is
money[,]’” that is, the amount of tax Petitioners are required to pay based on what
items are covered by the TPTA, which, if Petitioners’ interpretation of the TPTA is
correct, can be refunded to them through the administrative process. (Id. at 9
(quoting Sands Bethworks Gaming, LLC v. Pa. Dep’t of Revenue, 958 A.2d 125, 131
(Pa. Cmwlth. 2008)).)
       In response, Petitioners argue that they are not required to exhaust their
administrative remedies by going before the Board. Petitioners assert that this is so
because they have brought a declaratory judgment action challenging the validity of
the TPTA. Where, as here, there is a facial constitutional challenge to a statute, the
administrative agency is not competent to rule on the merits and, thus, the agency
cannot provide complete and adequate relief. In addition, review before the Board
with different entities involved in vaping having to seek a refund would result in
piecemeal litigation, which, again, suggests that review before the Board is
inadequate. Also, Petitioners argue, the Board would not be able to adjudicate
Petitioners’ federal claims, which are currently stayed.12 Further, as in Bayada
Nurses, Inc. v. Department of Labor and Industry, 8 A.3d 866 (Pa. 2010), and
Arsenal Coal Company v. Department of Environmental Resources, 477 A.2d 1333

       12
          On March 9, 2017, DOR removed this proceeding to the United States District Court for
the Middle District of Pennsylvania. DOR then moved to dismiss the Amended Petition for failure
to state a claim. Petitioners, by motion, asked the federal court to abstain and remand the
proceeding to this Court. In a memorandum and order dated July 18, 2017, the District Court
granted Petitioners’ motion to abstain from ruling on their state claims. Kingdom Vapor v. Pa.
Dep’t of Revenue (M.D. Pa., No. 1:17-CV-0439, filed July 18, 2017), slip op. at 20-21. The
District Court, however, retained jurisdiction over Petitioners’ federal constitutional claims and
stayed the matter until this Court adjudicates Petitioners’ state claims. Id. at 21 n.7.


                                                7
(Pa. 1984), Petitioners here, were they to proceed through administrative review,
would have to suffer through ongoing uncertainty and expend substantial sums of
money, all while Petitioners’ day-to-day business would be adversely impacted, both
immediately and directly, because of DOR’s evolving interpretation of the TPTA in
this new statutory scheme.


II.   Discussion
      Ordinarily, we would deny the Application because Petitioners have not
exhausted their administrative remedies. As DOR correctly contends, Petitioners
have not brought a facial constitutional challenge to the TPTA. Rather, Petitioners’
challenges are to DOR’s construction of the TPTA and its alleged unconstitutional
application of the TPTA to Petitioners. Such challenges are insufficient to permit a
party to bypass the administrative review process. Keystone ReLeaf LLC v. Pa.
Dep’t of Health, __ A.3d __, __ (Pa. Cmwlth., No. 399 M.D. 2017, filed Apr. 20,
2018), slip op. at 15; Smolow v. Dep’t of Revenue, 547 A.2d 478, 481 (Pa. Cmwlth.
1988), aff’d per curiam, 557 A.2d 1063 (Pa. 1989). Further, Petitioners have not
shown that they meet the Arsenal Coal exception to the exhaustion doctrine.
Bayada, 8 A.3d at 875; Arsenal Coal, 477 A.2d at 1339-40.
      However, we have already adjudicated the merits of Petitioners’ challenge to
DOR’s construction of the TPTA in East Coast Vapor II. In East Coast Vapor II,
the petitioner raised a substantial question as to the constitutionality of the TPTA.
East Coast Vapor II, __ A.3d at __, slip op. at 11. We therefore also addressed the
issue raised here, holding in East Coast Vapor II, that the TPTA’s definition of
“electronic cigarettes” does not include the separately packaged component parts of
an e-cigarette that DOR considers “integral” to the e-cigarette device. Id. at __, slip



                                          8
op. at 23-25. We reasoned that “[a]n electronic oral device” “refers to a singular,
integrated device that contains both a heating element and a power source, which,
working together, provides a vapor.” Id. at __, slip op. at 24 (emphasis in original).
The definition of “[a]n electronic oral device,” we noted, “does not include the term
‘integral’ or ‘component parts.’”             Id.    Therefore, we concluded, “‘integral’
component parts of an e-cigarette do not fit within the definition of ‘electronic
cigarette.’” Id. We were not persuaded by DOR’s argument that interpreting the
TPTA in this fashion would lead to absurd results. Highlighting “rational reasons”
the General Assembly might have had for choosing “to tax only the ‘electronic oral
device’ and not its component parts,” we concluded that “a plain language
interpretation of the TPTA does not lead to absurd results merely because some
vaping companies may attempt to evade the tax.” Id.
       Our en banc decision in East Coast Vapor II is binding precedent. Feudale v.
Aqua Pa., Inc., 122 A.3d 462, 468 n.8 (Pa. Cmwlth. 2015). It would serve no useful
purpose to dismiss the Amended Petition for Petitioners to exhaust their
administrative remedies when the issue has been decided. Therefore, we will grant
the Application in part and declare “that DOR’s interpretation of the TPTA to
include as taxable separately packaged component parts of an e-cigarette that DOR
considers ‘integral’ is unsupported by the plain language of the TPTA.” East Coast
Vapor II, __ A.3d at __, slip op. at 25.13


       13
           In light of our determination, we need not address the remaining arguments for summary
relief on the bases that DOR’s interpretation of the TPTA violates the Uniformity Clause of the
Pennsylvania Constitution, Pa. Const. art. VIII, § 1, or the separation of powers doctrine. See
Johnson v. Dep’t of Transp., Bureau of Driver Licensing, 805 A.2d 644, 648 n.5 (Pa. Cmwlth.
2002) (stating that “when a case raises both constitutional and non-constitutional issues, the court
should not reach the constitutional issues if the case may properly be decided on non-constitutional
grounds”).


                                                 9
_____________________________________
RENÉE COHN JUBELIRER, Judge




 10
        IN THE COMMONWEALTH COURT OF PENNSYLVANIA


Kingdom Vapor and Smoke 4               :
Less, LLC,                              :
                     Petitioners        :
                                        :
                  v.                    :   No. 697 M.D. 2016
                                        :
Pennsylvania Department of Revenue,     :
                       Respondent       :


                                   ORDER


      NOW, June 22, 2018, the Application of Kingdom Vapor and Smoke 4 Less,
LLC (Petitioners), for Summary Relief on their Amended Petition for Review is
GRANTED to the extent they request declaratory relief regarding the interpretation
of the Pennsylvania Department of Revenue (DOR) to include as taxable under the
Tobacco Products Tax Act (TPTA), Act of March 4, 1971, P.L. 6, added by Section
18 of the Act of July 13, 2016, P.L. 526, 72 P.S. §§ 8201-A–8234-A, the separately
packaged component parts of an electronic cigarette (e-cigarette) that DOR
considers “integral” to the e-cigarette. The Court hereby DECLARES that such
“integral” component parts of an e-cigarette are not taxable under the TPTA.
Petitioners’ Application is otherwise DENIED.




                                      _____________________________________
                                      RENÉE COHN JUBELIRER, Judge
