Court denies cigar maker’s constitutional challenge of tobacco tax
The case brought by a cigar maker, who argued that a tax on tobacco imported as raw material for the business amounted to a constitutional breach, was denied by the Supreme Court last month.
The court ruled that the company — as its case inferred — would need to produce evidence of its imminent destruction.
Barrington Cigars Jamaica Limited, the island’s sole cigar manufacturing company, contended that a new tax rate introduced under amendment to the schedule of the General Consumption Tax Act and gazetted ministerial orders relating to GCT and the special consumption tax, were improperly imposed and went beyond the minister’s powers, that is, ultra vires.
The adjustment resulted in more than $5 million of additional taxes for the company, which the Minister of Finance would later waive.
Barrington Cigars, as the court documents indicate, buys 90 per cent of the tobacco it processes from local farmers, and 10 per cent from overseas. The company’s contention was that the tax was oppressive and arbitrary and would harm the viability of the business run by CEO Barrington Adams.
Barrington’s lawyer Georgia Gibson-Henlin argued that the Minister of Finance did not act in good faith or the national interest when he imposed orders for the tax; and that Parliament acted coercively when it later validated the amendment. Gibson-Henlin posited to the full court — comprising Justices Jennifer Straw Sarah Thompson-James and Justice David Fraser — that those actions ultimately put businesses like Barrington Cigars out of operation with an attendant decrease in productivity as well as job losses.
She contended that the destructive results that the orders would have on Barrington Cigars amounted to a deprivation of property without compensation, contrary to Section 15 of the Constitution.
State lawyer Carlene Larmond, Director of Litigation, represented the Finance Minister and Commissioner of Customs.
In its legal claim, the company alleged that the Minister of Finance & Planning and the Commissioner of Customs breached its constitutional rights, under Section 15 of the Constitution, and asked the court to nullify the tax rate of $10.50 per 0.7 grammes per stick applied to unmanufactured tobacco in 2012.
As a result of the new rate, in March 2013 the Commissioner of Customs advised Barrington Cigars that it owed an additional $5.43 million of special consumption tax.
The next month, April 2013, the company filed an application for judicial review in the Supreme Court, but was denied by Justice David Batts in a decision handed down February 2014. Barrington filed notice of appeal over Batts’ decision, but Gibson-Henlin later gave an undertaking to withdraw it, paving the way for the full court to hear the case.
Meanwhile, amid the legal challenge to the tax, in March 2014, the Minister of Finance issued a tax relief advisory to Barrington Cigars waiving the reassessed sum of $5.43 million. And, following consultations between the Ministry of Finance and the Ministry of Industry and Commerce, in which the cigar maker had input, the tax rate was adjusted from $10.50 per 0.7 grammes to $1.05.
Adams gave evidence to the full court that 0.7 grammes is the average weight of a cigarette, while the average weight of a premium cigar is 28 times more at 20 grammes. As such, the ministerial orders effectively imposed the same rate on unmanufactured tobacco as on manufactured tobacco, and would result in the importer of cigarettes and manufactured tobacco and the importer of unmanufactured cigar tobacco leaves paying the same amount of SCT, he said.
Adams said the new tax rate would immediately render his business unprofitable and at risk of closure as the cost of unmanufactured tobacco used to create one cigar would exceed its retail cost.
Gibson-Henlin submitted that although the rate was adjusted to $1.05, it was still unreasonable as it continued to impose the same charge on finished and unfinished products.
However, the court in its decision held that even if it could be argued that the original rate of $10.50 was manifestly excessive, the central issue to be determined was whether it was so arbitrary that it could be said to be imposed for reasons other than exertion of the taxing power of Parliament.
In the judgement written by Straw and affirmed by her colleagues, the justices said the court was being asked to draw inferences that the adjusted rate was oppressive, discriminatory, arbitrary and would lead to the destruction of Barrington Cigars’ business.
They ruled instead that the General Consumption Tax (Validation and Indemnity) Act of 2013 was not ultra vires, and that the burden would be on Barrington Cigars to put evidence before the court concerning the imminent destruction of its business.
That was even more so against the backdrop of a waiver of the initial assessment and a reduced tax rate that resulted from the inter-ministry consultations, the court said.
In refusing to grant any of Barrington Cigar’s applications, the full court affirmed that Parliament has the remit to prescribe tax rates for special consumption tax under the relevant acts, and held that the enabling legislation actually reduced the tariff that would be payable by Barrington Cigars, to its benefit.