Tobacco Outlet Express, LLC et al v. U.S. Department of Treasury, Alcohol and Tobacco Tax and Trade Bureau et al

Filing 26

Memorandum Opinion and Order: For the reasons set forth herein, and in reliance on RYO Machine, LLC v. U.S. Dep't of Treasury, 696 F.3d 467 (6th Cir. 2012), this case is DISMISSED. Judge Sara Lioi on 12/28/2012. (H,KR)

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF OHIO
EASTERN DIVISION

TOBACCO OUTLET EXPRESS, LLC, et al.,

PLAINTIFFS,
vs.
U.S. DEPARTMENT OF TREASURY,
ALCOHOL AND TOBACCO TAX AND
TRADE BUREAU, et al.,
DEFENDANTS.

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CASE NO. 4:12CV2095

JUDGE SARA LIOI

MEMORANDUM OPINION
AND ORDER

I. INTRODUCTION
On August 14, 2012, Tobacco Outlet Express, LLC and Freedom Filler, LLC
(“plaintiffs”) filed a complaint against the United States Department of Treasury, Alcohol and
Tobacco Tax and Trade Bureau (“TTB”), and TTB’s administrator, John J. Manfreda. The
complaint alleges that Section 100122 (“the Amendment”) of the Moving Ahead for Progress in
the 21st Century Act, Pub. L. No. 112-141 (“the MAP-21 Act”), violates the equal protection
clause and the takings clause of the Constitution by subjecting “small retailers . . . to
unprecedented and unachievable regulatory burdens.” (Verified Complaint [hereafter “Compl.”]
¶ 2.)1 “This Amendment purports to regulate all retailers who offer in-store access to ‘roll-your                                                            
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Section 100122 amends 26 U.S.C. § 5702(d), which defines “manufacturer of tobacco products.” Section 5702(d)
subjects such manufacturers to federal laws, including permitting requirements and tax liability. Prior to the
amendment, these laws applied only to commercial cigarette manufacturers and expressly exempted cigarettes made
by consumers for their own personal use. The Amendment provides, in relevant part, that “manufacturer of tobacco
products”
shall include any person who for commercial purposes makes available for consumer use
(including such consumer’s personal consumption or use . . .) a machine capable of making
cigarettes, cigars, or other tobacco products.

own’ cigarette equipment of any kind as ‘manufacturer[s] of tobacco products’ under 26 U.S.C.
§ 5702(d).” (Id. ¶ 23.) “By this lawsuit, Plaintiffs seek to enjoin enforcement of [Section
100122], both preliminarily and permanently.” (Id. ¶ 8.)2
On August 21, 2012, following the Sixth Circuit’s issuance of its opinion in RYO
Machine, LLC v. U.S. Dep’t of Treasury, 696 F.3d 467 (6th Cir. 2012),3 the Court sua sponte
directed the parties to file briefs addressing two jurisdictional issues: standing (since plaintiffs do
not claim to be retailers subject to the terms of the Amendment) and applicability of the AntiInjunction Act, 26 U.S.C. § 7421(a) (which provides that “no suit for the purpose of restraining
the assessment or collection of any tax shall be maintained in any court by any person, whether
or not such person is the person against whom such tax was assessed.”). The parties have filed
their briefs (Doc. Nos. 21, 22) and responses (Doc. Nos. 23, 24). The matter is ripe for
determination.
For the reasons set forth below, this case is DISMISSED.
II. DISCUSSION
A.

Allegations in the Complaint
For purposes of this ruling, the following allegations in the complaint are taken as

true.4

2

Plaintiffs also filed a motion for temporary restraining order and preliminary injunction. (Doc. No. 2.) Following
two telephone conferences with counsel, plaintiffs advised the Court that, in light of an agreement reached with
defendants, they would be withdrawing that motion. Plaintiffs’ motion to withdraw was subsequently filed and was
granted without prejudice to renewal should TTB begin enforcing the amendment. (See Doc. No. 20.)
3

The opinion was originally issued as an unpublished opinion; on or about September 19, 2012, the court designated
it for full-text publication, retaining the filing date of August 20, 2012. On September 18, 2012, plaintiff/appellee
filed a petition for en banc rehearing, which the Sixth Circuit denied on October 26, 2012. On November 6, 2012,
the mandate issued. Therefore, RYO Machine is now controlling precedent for this Court.
4

The dismissal herein is essentially on the Court’s own motion. Factual allegations in the complaint are taken as
true for purposes of motions to dismiss, which, as here, are dealt with at the pleadings stage. Glenn v. Holder, 690
F.3d 417, 420 (6th Cir. 2012) (citing White v. United States, 601 F.3d 545, 551 (6th Cir. 2010)).

2

Plaintiff Freedom Filler is a manufacturer of roll-your-own cigarette machines.
(Compl. ¶ 14.) Its revenues come exclusively from sales of the machines and from royalties and
other charges associated with use of the machines. (Id.) Plaintiff Tobacco Outlet Express is a
distributor of an in-store cigarette-rolling machine known as the “RYO Filling Station.” (Id. ¶
12.) Its revenues come exclusively from fees paid by its retailers for use of the RYO Filling
Stations, from fees for service, technical support and training associated with the machines, and
from sales of tobacco and cigarette tubes used in the machines. (Id. ¶ 13.)
Neither plaintiff claims to be a retailer subject to the Amendment. They challenge
the Amendment because, by regulating retailers in an allegedly burdensome way, the
Amendment will “eliminat[e] [p]laintiffs’ source of business.” (Id. ¶ 37.) They allege that “[t]he
only market for [their] machines is at the retail level, but the Amendment functionally prohibits
all use of the machines at the retail level. Plaintiffs will thereby lose their customer base and shut
down, or at least severely curtail operations.” (Id. ¶ 41.) “Distributors such as Tobacco Outlet
will lose their client base of RYO Filling Station retailers, forcing them to terminate their
employees and dramatically reduce operations.” (Id. ¶ 46.)
Plaintiffs assert that the Amendment violates the equal protection clause because
it is “irrational to subject . . . retailers, who simply offer a service and do not manufacture prepackaged cigarettes, to the same extensive regulations imposed on large-scale manufacturers.”
(Id. ¶ 57.) The Amendment also allegedly violates the takings clause as follows: “Because
retailers cannot obtain the required permits, retailers will not buy the machines, and [p]laintiffs
will have no market for them.” (Id. ¶ 63.) Thus, the Amendment “renders [p]laintiffs’ business of
selling the machines, and the machines themselves, worthless.” (Id.)

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B.

Anti-Injunction Act
The Anti-Injunction Act (“AIA”), 26 U.S.C. § 7421(a), provides that “no suit for

the purpose of restraining the assessment or collection of any tax shall be maintained in any court
by any person, whether or not such person is the person against whom such tax was assessed.”
“This language prevents courts from asserting jurisdiction over such cases unless they fall into
one of two narrow exceptions to the AIA.” RYO Machine, 696 F.3d at 471.
In RYO Machine, the district court had granted a preliminary injunction to
plaintiffs RYO Machine (a manufacturer and retailer of roll-your-own cigarette machines) and
Tobacco Outlet Express5 (a distributor of the RYO machines and products related to their use),
concluding that the two companies fit into the exception to the AIA created by the Supreme
Court in South Carolina v. Regan, 465 U.S. 367, 378 (1984) (“Congress did not intend the Act to
apply to actions brought by aggrieved parties for whom it has not provided an alternative
remedy.”).6 TTB appealed. The Sixth Circuit Court of Appeals vacated the preliminary
injunction and remanded with instructions to dismiss the case for lack of jurisdiction. The court
of appeals rejected the argument that the South Carolina exception applied, finding “a significant
difference from South Carolina” because the two companies’ interests “are inextricably
intertwined with those of the retailers[,]” RYO Machine, 696 F.3d at 472, and concluding that
“[b]ecause the [c]ompanies’ suit is an attempt to impede the assessment of taxes, and because no
exception to the AIA applies, the district court should have dismissed this case for lack of
jurisdiction.” Id. at 473.

5

Tobacco Outlet Express is one of the plaintiffs in the instant lawsuit.

6

The district court dismissed a third plaintiff, Tightwad Tobacco, a retailer of tobacco products and accessories that
also operated the RYO machines at its retail locations, concluding that its claims were barred by the Anti-Injunction
Act because it had statutory procedures available to contest the constitutionality of the statute and regulations at
issue.

4

In their memorandum responding to this Court’s show cause order, plaintiffs
argue that RYO Machine does not dictate the same outcome here because of a critical distinction
in the procedural posture of the two cases. Plaintiffs note that “the Sixth Circuit explained that
retailers who offer cigarette rolling machines ‘have an incentive to move forward by obtaining
the permit, paying the excise tax, and then suing for a refund.’” (Memorandum in Response to
Show Cause Order, Doc. No. 22 at 423 (emphasis added), quoting RYO Machine, 696 F.3d at
472.) Plaintiffs now argue that this assumption that some retailer would be able to obtain a
permit from TTB “is contrary to the evidence in the case at bar, which shows that retailers
offering the machines cannot obtain a tobacco manufacturer’s license.” Id. (emphasis in original)
(citing Compl. ¶¶ 37-41.) They assert that “[u]nless and until this Court makes factual finding
that correspond to the Sixth Circuit’s assumption in RYO Machine, the two cases stand on
different footings and the decision in RYO Machine does not govern here.” Id. at 423-24
(emphases in original).
The “evidence” plaintiffs identify is contained in specific allegations in the
complaint, which are taken as true for purposes of the present proceedings. Those paragraphs
state:
37.

Although the Amendment purports to allow retailers to continue offering
rentals of the machines, provided they obtain a federal permit to
manufacture tobacco products, it is impossible for retailers to obtain the
allegedly required permit, thereby eliminating Plaintiffs’ source of
business.

38.

Under 27 C.F.R. §§ 40.69, 40.70 and 40.72, manufacturers of tobacco
products are permitted to conduct retail sales; however, the retail operation
must be completely separated by walls from the manufacturing operation,
which is described in the regulations as the “factory.” The factory
premises must be used exclusively for manufacturing and storing tobacco
products. Retailers do not physically separate, and cannot physically
separate, the machines from their retail operations. Retailers cannot use
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their physical premises exclusively for manufacturing and storing tobacco
products, as they also conduct retail sales from these premises.
39.

Under 26 U.S.C. § 5723 and 27 C.F.R. §§ 40.211-217, manufacturers of
tobacco products are subject to specified packaging and labeling
requirements. It is impossible for retailers to comply with these
requirements because the machines are not capable of producing
packaging in the manner required by the regulations.

40.

Finally, even if retailers could obtain a federal permit, the permit process
takes at least ninety days and generally longer. In the interim, retailers will
cease use of the machines, resulting in lost sales and royalties for
Plaintiffs. If the retailers continue to allow operation of the machines
without obtaining the allegedly required permit, they risk criminal
prosecution.

41.

The machines have a retail price between $14,000.00 and $35,000.00,
with ongoing royalty requirements. The only market for these machines is
at the retail level, but the Amendment functionally prohibits all use of the
machines at the retail level. Plaintiffs will thereby lose their customer base
and shut down, or at least severely curtail operations.
Plaintiffs’ argument, however, is to no avail because RYO Machine was in

essentially the very same procedural posture when it came to the court of appeals. The verified
complaint in RYO Machine alleged the following:
52.

Although the TTB Ruling [now the Amendment] purports to allow
retailers such as Tightwad Tobacco to continue operating provided they
obtain a TTB permit to manufacture tobacco products, TTB’s own
regulations and federal law make clear that it will be impossible for
Tightwad Tobacco and other similarly-situated retailers to obtain the
allegedly required permit.

53.

Specifically, under 27 C.F.R. § 40.61 (c), a permit to manufacture tobacco
products can be granted only to entities “whose principal business
activity” is the manufacture of tobacco products. Tightwad Tobacco’s
rental of the RYO Filling Stations for consumer use -- the activity that
TTB now characterizes as the manufacture of tobacco products -- is not
Tightwad Tobacco’s principal business activity. Tightwad Tobacco’s
principal business activity is the retail sale of tobacco products.
Accordingly, under 27 C.F.R. § 40.61(c), Tightwad Tobacco would be
foreclosed from obtaining a TTB permit.
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54.

Under 27 C.F.R. §§ 40.69, 40.70 and 40.72, manufacturers of tobacco
products are permitted to conduct retail sales; however, the retail operation
must be completely separated by walls from the manufacturing operation,
which is described by TTB as the “factory.” The factory premises must be
used exclusively for manufacturing and storing tobacco products. Retailers
such as Tightwad Tobacco do not physically separate, and cannot
physically separate, the RYO Filling Stations from their retail operations.
Retailers such as Tightwad Tobacco cannot use their physical premises
exclusively for manufacturing and storing tobacco products, as they also
conduct retail sales from these premises.

55.

Under 26 U.S.C. § 5723 and 27 C.F.R. §§ 40.211-217, manufacturers of
tobacco products are subject to specified packaging and labeling
requirements. It is impossible for retailers such as Tightwad Tobacco to
comply with these requirements because the RYO Filling Stations are not
capable of producing packaging in the manner required by TTB.

56.

Finally, even if retailers could obtain a permit from TTB, the permit
process takes at least 90 days and generally longer. In the interim, retailers
such as Tightwad Tobacco will be forced to cease use of the RYO Filling
Station, resulting in lost revenues for the retailers as well as RYO Machine
and its authorized distributors such as Tobacco Outlet. If the retailers
continue operations without obtaining the allegedly required permit, they
risk criminal prosecution. 26 U.S.C. §§ 5712 and 5713 require
manufacturers of tobacco products to obtain a TTB permit before
manufacturing cigarettes.
These allegations in the verified complaint of RYO Machine asserted virtually the

same “impossibility” theory as is asserted here; yet the court of appeals did not remand to the
district court for fact-findings. The court remanded with directions to dismiss for lack of subject
matter jurisdiction based on the AIA.7

7

The Sixth Circuit also extended its holding to anticipated claims, which would raise, as here, “serious questions
about the constitutionality of the new legislation . . . involv[ing] the equal protection aspect of the Due Process
Clause and/or the Takings Clause.” RYO Machine, 696 F.3d at 470, n. 2, quoting Appellant Ltr. Br. 2. The court of
appeals concluded: “To the extent the Companies raise a question before this Court as to the constitutionality of the
[MAP-21] Act, such a claim preemptively challenging the validity of a tax is barred by the Anti–Injunction Act, just
as the Companies’ claim with regard to the Ruling [i.e., the Amendment] is barred[.]” Id. (citing Bob Jones Univ. v.
Simon, 416 U.S. 725, 736–37, 749 (1974)).

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There is no principled way to distinguish RYO Machine from the instant case.8
Accordingly, based on RYO Machine, this Court concludes that the Anti-Injunction Act
precludes the exercise of jurisdiction over plaintiffs’ claims, which must be dismissed.
C.

Standing
This Court also asked the parties to address the question of standing. “A federal

district court’s subject matter jurisdiction is limited by Article III of the U.S. Constitution to
actual cases or controversies. U.S. Const. Art. III, §2. One element of the case or controversy
requirement is that the plaintiff must establish it has standing to sue.” Ellias v. Phoenix Life Ins.
Co., No. 11-2181, 2012 WL 4490789, at * 5 (6th Cir. Oct. 1, 2012) (citing DaimlerChrysler
Corp. v. Cuno, 547 U.S. 332, 342 (2006)). “[S]tanding is ‘the threshold question in every federal
case.’” Murray v. U.S. Dep’t of Treasury, 681 F.3d 744, 748 (6th Cir. 2012) (quoting Coyne v.
Am. Tobacco Co., 183 F.3d 488, 494 (6th Cir. 1999)). “The ‘well established’ law of Article III
standing requires a plaintiff to ‘allege personal injury fairly traceable to the defendant’s allegedly
unlawful conduct and likely to be redressed by the requested relief.’” Id. (quoting Hein v.
Freedom from Religion Found., Inc., 551 U.S. 587, 598 (2007)).
In light of the determination that this action is barred by the AIA, the Court has no
subject matter jurisdiction and need not address the question of standing. Even the Sixth Circuit
noted the same. RYO Machine, 696 F.3d at 473, n. 3.

8

Plaintiffs, in their reply memorandum, also argue that the Sixth Circuit’s decision “rests heavily on the fact that a
specific, identifiable retailer, Tightwad, was formerly a plaintiff in that case and, thus, solved the problem of
“find[ing] an elusive third-party challenger.” (Doc. No. 24 at 458, quoting RYO Machine, 696 F.3d at 472.) They
claim this distinguishes the instant case, which has no retailer among the parties-plaintiff. This argument is not
strong enough to overcome the force of the AIA. In addition, as already noted, plaintiff Tobacco Outlet is a party
here and was a party in RYO Machine. Therefore, it is not in the position of having “to find an elusive third-party
challenger[.]” Id. (emphasis added). Tobacco Outlet is already quite familiar with a potential third-party challenger,
i.e., Tightwad.

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III. CONCLUSION
For the reasons set forth herein, and in reliance on RYO Machine, LLC v. U.S.
Dep’t of Treasury, 696 F.3d 467 (6th Cir. 2012), this case is DISMISSED.

IT IS SO ORDERED.

Dated: December 28, 2012
HONORABLE SARA LIOI
UNITED STATES DISTRICT JUDGE

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