From: Brenda Grantland
Date: March 29, 1995

I was asked to investigate the constitutional and procedural issues we might raise in this drug tax penalty case, based on the Kurth Ranch case and recent Supreme Court decisions regarding civil forfeitures and similar punitive civil penalties.

For the reasons set out below, I believe the Kansas Drug tax, like the Montana drug tax construed in Montana Department of Revenue v. Kurth Ranch, 114 S.Ct. 1937 (1994), is a punitive civil penalty analogous to a civil forfeiture. If it is punitive, we should be able to raise the excessive punishments defense recognized in civil forfeiture cases. See Austin v. United States, 113 S.Ct. 2801 (1993).

Also, if it is punishment, that should change the amount of Due Process that is required. However, the case law on Due Process requirements of non-remedial civil penalties is still in flux. The only recent Supreme Court decision interpreting Due Process in a forfeiture case is United States v. James Daniel Good Real Property, 114 S.Ct. ___ (1993). That case held that preseizure notice and hearing are required before real estate can be seized. Although Good distinguished real estate from liquid assets such as funds, and did not reach the question as to whether preseizure notice and hearing are required before funds can be seized, that
principle may apply here, where the government is seizing virtually all of an individual's property, interfering with their ability to retain counsel and subsist. The Good opinion has a fairly extensive discussion of jeopardy assessments too.
 

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Kurth Ranch sets out the following test for when a tax on contraband is punitive:

Criminal fines, civil penalties, civil forfeitures, and taxes all share certain features: They generate government revenues, impose fiscal burdens on individuals, and deter certain behavior. All of these sanctions are subject to constitutional constraints. A government may not impose criminal fines without first establishing guilt by proof beyond a reasonable doubt. Cf. In re Winship, 397 U.S. 358, 90 S.Ct. 1068, 25 L.Ed.2d 368 (1970). A defendant convicted and punished for an offense may not have a nonremedial civil penalty imposed against him for the same offense in a separate proceeding. Halper, supra. A civil forfeiture may violate the Eighth Amendment's proscription against excessive fines. Austin v. United States, 509 U.S. ----, 113 S.Ct. 2801, 125 L.Ed.2d 488 (1993). And a statute imposing a tax on unlawful conduct may be invalid because its reporting requirements compel taxpayers to incriminate themselves. Marchetti v. United States, 390 U.S. 39, 88 S.Ct. 697, 19 L.Ed.2d 889 (1968).

As a general matter, the unlawfulness of an activity does not prevent its taxation. Marchetti, 390 U.S., at 44, 88 S.Ct., at 700; United States v. Constantine, 296 U.S. 287, 293, 56 S.Ct. 223, 226, 80 L.Ed. 233 (1935); James v. United States, 366 U.S. 213, 81 S.Ct. 1052, 6 L.Ed.2d 246 (1961). Montana no doubt could collect its tax on the possession of marijuana, for example, if it had not previously punished the taxpayer for the same offense, or, indeed, if it had assessed the tax in the same proceeding that resulted in his conviction. Missouri v. Hunter, 459 U.S. 359, 368-369, 103 S.Ct. 673, 679, 74 L.Ed.2d 535 (1983); see also Halper, 490 U.S., at 450, 109 S.Ct., at 1903. Here, we ask only whether the tax has punitive characteristics that subject it to the constraints of the Double Jeopardy Clause.

Although we have never held that a tax violated the Double Jeopardy Clause, we [Page 1946] have assumed that one might.⁽¹⁾ In the context of other constitutional requirements, we have repeatedly examined taxes for constitutional validity. We have cautioned against invalidating a tax simply because its enforcement might be oppressive or because the legislature's motive was somehow suspect, A. Magnano Co. v. Hamilton, 292 U.S. 40, 44, 54 S.Ct. 599, 601, 78 L.Ed. 1109 (1934). Yet we have also recognized that "there comes a time in the extension of the penalizing features of the so-called tax when it loses its character as such and becomes a mere penalty with the characteristics of regulation and punishment." Id., at 46, 54 S.Ct., at 602 (citing Child Labor Tax Case, 259 U.S. 20, 38, 42 S.Ct. 449, 451, 66 L.Ed. 817 (1922)). That comment, together with Halper' § unequivocal statement that labels do not control in a double jeopardy inquiry, indicates that a tax is not immune from double jeopardy scrutiny simply because it is a tax.

Halper recognized that "[t]his constitutional protection is intrinsically personal," and that only "the character of the actual sanctions" can substantiate a possible double jeopardy violation. 490 U.S., at 447, 109 S.Ct., at 1901. Whereas fines, penalties, and forfeitures are readily characterized as sanctions, taxes are typically different because they are usually motivated by revenue-raising rather than punitive purposes. Yet at some point, an exaction labeled as a tax approaches punishment, and our task is to determine whether Montana's drug tax crosses that line.

We begin by noting that neither a high rate of taxation nor an obvious deterrent purpose automatically marks this tax a form of punishment. In this case, although those factors are not dispositive, they are at least consistent with a punitive character. A significant part of the assessment was more than eight times the drug's market value--a remarkably high tax. That the Montana legislature intended the tax to deter people from possessing marijuana is beyond question. The DOR reminds us, however, that many taxes that are presumed valid, such as taxes on cigarettes and alcohol, are also both high and motivated to some extent by an interest in deterrence. Indeed, although no double jeopardy challenge was at issue, this [Page 1947] Court sustained the steep $100-per-ounce federal tax on marijuana in United States v. Sanchez, 340 U.S. 42, 71 S.Ct. 108, 95 L.Ed. 47 (1950). Thus, while a high tax rate and deterrent purpose lend support to the characterization of the drug tax as punishment, these features, in and of themselves, do not necessarily render the tax punitive. Cf. Sonzinsky v. United States, 300 U.S. 506, 513-514, 57 S.Ct. 554, 556, 81 L.Ed. 772 (1937).

Other unusual features, however, set the Montana statute apart from most taxes. First, this so-called tax is conditioned on the commission of a crime. That condition is "significant of penal and prohibitory intent rather than the gathering of revenue." Moreover, the Court has relied on the absence of such a condition to support its conclusion that a particular federal tax was a civil rather than a criminal sanction. In this case, the tax assessment not only hinges on the commission of a crime, it also is exacted only after the taxpayer has been arrested for the precise conduct that gives rise to the tax obligation in the first place. Persons who have been arrested for possessing marijuana constitute the entire class of taxpayers subject to the Montana tax.

Taxes imposed upon illegal activities are fundamentally different from taxes with a pure revenue-raising purpose that are imposed despite their adverse effect on the taxed activity. But they differ as well from mixed-motive taxes that governments impose both to deter a disfavored activity and to raise money. By imposing cigarette taxes, for example, a government wants to discourage smoking. But because the product's benefits--such as creating employment, satisfying consumer demand, and providing tax revenues--are regarded as outweighing the harm, that government will allow the manufacture, sale, and use of cigarettes as long as the manufacturers, sellers, and smokers pay high taxes that reduce consumption and increase government revenue. These justifications vanish when the taxed activity is completely forbidden, for the legitimate revenue-raising purpose that might support such a tax could be equally well served by increasing the fine imposed upon conviction.⁽²⁾

The Montana tax is exceptional for an additional reason. Although it purports to be a species of property tax--that is, a "tax on the possession and storage of dangerous drugs," Mont.Code Ann. § 15-25-111 (1987)-- it is levied on goods that the taxpayer neither owns nor possesses when the tax is imposed. Indeed, the State presumably destroyed the contraband goods in this case before the tax on them was assessed. If a statute that amounts to a confiscation of property is unconstitutional, Heiner v. Donnan, 285 U.S. 312, 326, 52 S.Ct. 358, 361, 76 L.Ed. 772 (1932); Nichols v. Coolidge, 274 U.S. 531, 542, 47 S.Ct. 710, 713, 71 L.Ed. 1184 (1927), a tax on previously confiscated goods is at least questionable. A tax on "possession" of goods that no longer exist and that the taxpayer never lawfully possessed has an unmistakable punitive character. This tax, imposed on criminals and no others, departs so far from normal revenue laws as to become a form of punishment.

Taken as a whole, this drug tax is a concoction of anomalies, too far-removed in crucial respects from a standard tax assessment to escape characterization as punishment for the purpose of Double Jeopardy analysis.

Halper, Austin and Kurth Ranch all involve a test which turns on whether the penalty, though nominally civil, is punishment. They make it clear that, for the Constutitional guarantees that adhere to punishment -- protection against excessive punishments under the Eighth Amendment, or double jeopardy -- it does not matter if the sanction is civil.

Another standard probably applies to Due Process analysis, because Due Process is a fluid concept. Due process is a continuum⁽³⁾ -- the more serious the deprivation, the more procedural protections are required. The varying level of "process which is due" was designed to cut down on the "false positive" rate of wrongful convictions, penalties, or other deprivations (i.e., because of insufficient or unreliable evidence). Recognizing that there are many degrees of seriousness of penalties the courts can inflict upon someone -- from a civil judgment for $1 in damages to the death penalty -- the Supreme Court found it fit to have the amount of process which is due depend on the onerousness of a "false positive" in that type of proceeding.

U.S. v. Ward, 448 U.S. 242 (1980) and Kennedy v. Mendoza-Martinez, 372 U.S. 144 (1963) may still be the proper standard for Due Process analysis in this context, although the recent forfeiture case, U.S. v. James Daniel Good Real Property, 114 S.Ct. ___ (1993) did not mention either case, and the Supreme Court did not employ the multi-factor analysis when it held that seizure of real estate requires pre-seizure notice and hearing. It may be that, after they decided in Austin that civil forfeiture was punishment as a matter of law, they didn't need the Kennedy-Ward analysis to require greater procedural safeguards.

However, we might need to apply Kennedy-Ward analysis anyway because it would probably show this tax to be punitive enough to require more due process -- especially pre-seizure notice & hearing.

Here is the Kennedy test:

[T]he question whether a particular statutorily defined penalty is civil or criminal is a matter of statutory construction. . . . Our inquiry in this regard has traditionally proceeded on two levels. First, we have set out to determine whether Congress, in establishing the penalizing mechanism, indicated either expressly or impliedly a preference for one label or the other. . . . Second, where Congress has indicated an intention to establish a civil penalty, we have inquired further whether the statutory scheme was so punitive either in purpose or effect as to negate that intention. . . . In regard to this latter inquiry, we have noted that "only the clearest proof could suffice to establish the unconstitutionality of a statute on such a ground."

In U.S. v. Ward, the Supreme Court applied the test in Kennedy v. Mendoza-Martinez, 372, U.S. 144, 168-69 (1963), which applied the following factors to determine whether a particular penalty was so punitive, either in purpose or effect, as to override a legislative intent to enact a civil penalty:

[w]hether the sanction involves an affirmative disability or restraint, whether it has historically been regarded as punishment, whether it comes into play only on a finding of scienter, whether its operation will promote the traditional aims of punishment - retribution and deterrence, whether the behavior to which it applies is already a crime, whether an alternative purpose to which it may rationally be connected is assignable for it, and whether it appears excessive in relation to the alternative purpose assigned.

(1) Punitive purpose

[The laws were part of a crime bill?] They were nestled in with mandatory minimum sentences and other periods of incarceration as punishment for the same predicate offenses that allowed third parties' property to be forfeited. [stated purpose in bill & legislative history?]

The Supreme Court said in Kurth Ranch, at footnote 18:

For example, although the Act's preamble evinces a clear motivation to raise revenue, it also indicates that the tax will provide for anticrime initiatives by "burdening" violators of the law instead of "law abiding taxpayers"; that use of dangerous drugs is not acceptable; and that the Act is not intended to "give credence" to any notion that manufacturing, selling, or using drugs is legal or proper. 1987 Mont.Laws, ch. 563, p. 1416.

United States v. Constantine, 296 U.S. 287, 295, 56 S.Ct. 223, 227, 80 L.Ed. 233 (1935) (concluding that a tax was motivated by penal instead of revenue-raising intent in part because the taxpayer had to pay an additional sum based on his illegal conduct). See also United States v. La Franca, 282 U.S., at 571, 575, 51 S.Ct., at 279, 281 (holding that a liquor tax assessed only against those prosecuted for illegal manufacture or sale of liquor was barred on statutory grounds, thus avoiding the "grave constitutional question" whether double jeopardy principles precluded such an assessment).

In Sanchez we examined a federal marijuana tax, IRC § 2590- (a)(2) (since repealed, but last codified at 26 U.S.C. § 4741 et seq. (1964)), that taxed the transfer of marijuana to a person who has not paid a special tax and registered. Under the statute, the transferor's liability arose when the transferee failed to pay the tax; as a result, "[s]ince his tax liability does not in effect rest on criminal conduct, the tax can be properly called a civil rather than a criminal sanction." 340 U.S., at 45, 71 S.Ct., at 110.

Most people, even of modest means, who have worked hard and saved all their lives to buy a home and a car or two, to amass some savings and investments, or perhaps own a business -- when presented with the choice of whether they would rather go to jail for a year or lose most of what they own, would choose going to jail. At least then, when they get out they have something to come home to, and their family wouldn't be reduced to bankruptcy or even homelessness in the meantime.

(3) "whether the sanction involves an affirmative disability or restraint"

(I'm not sure what this means.)

(4) whether it has historically been regarded as punishment

We need to look at the history of such drug taxes. See U.S. v. Sanchez, 340 U.S. 42 (1950) and the cases listed in Kurth Ranch, footnote 24.

(5) whether it comes into play only on a finding of scienter

Although the marijuana provisions place a tax on contraband -- something which is not legal under any circumstances -- the controlled substances provisions here place a tax on something that is legal, and subject to the state tax only when illegal behavior is associated with the use of the drug. That requires a finding -- by someone -- of scienter.

It seems to follow that that "criminalization" of otherwise legal drugs would require that that "finding" of the scienter be done with Due Process notice and hearing.

(6) whether its operation will promote the traditional aims of punishment - retribution and deterrence

Kurth Ranch, in footnote 24 states:

Courts--including this Court in United States v. Sanchez, 340 U.S. 42, 71 S.Ct. 108, 95 L.Ed. 47 (1950)--have frequently commented on the punishing and deterrent nature of drug taxes. See, e.g., Sims v. State Tax Comm'n, 841 P.2d 6, 13 (Utah 1992); Rehg v. Illinois Dept. of Revenue, 152 Ill.2d 504, 515, 178 Ill.Dec. 731, 737, 605 N.E.2d 525, 531 (1992); State v. Gallup, 500 N.W.2d 437, 445 (Iowa 1993); State v. Roberts, 384 N.W.2d 688, 691 (S.D.1986); State v. Berberich, 248 Kan. 854, 811 P.2d 1192, 1200 (1991); State v. Durrant, 244 Kan. 522, 769 P.2d 1174, 1181 (1989), cert. denied sub nom. Dressel v. Kansas, 492 U.S. 923, 109 S.Ct. 3254, 106 L.Ed.2d 600 (1989).

Both grounds for imposition of this tax -- possession of marijuana and the illegal possession of otherwise legal controlled substances -- are already a crime. There is no non-criminal activity which triggers this tax.

(8) whether an alternative purpose to which it may rationally be connected is assignable for it, and whether it appears excessive in relation to the alternative purpose assigned

Clearly the tax on legal drugs is excessive. (Compare legal price of drug to the amount of the tax on it.)

Part II C of the Good decision talks about the constitutionality of ex parte seizures of property when the government is collecting delinquent taxes. After saying that older Supreme Court cases permitted such seizures, the Court states:

In Phillips v. Commissioner, 283 U.S. 589 (1931), the Court relied upon the availability, and adequacy, of these preseizure administrative procedures in holding that no judicial hearing was required prior to the seizure of property. These constraints on the Commissioner could be overriden, but only when the Commissioner made a determination that a jeopardy assessment was necessary. Writing for a unanimous Court, Justice Brandeis explained that under the tax laws "[f]ormal notice of the tax liability is thus given; the Commissioner is required to answer; and there is a complete hearing de novo . . . . These provisions amply protect the [taxpayer] against improper administrative action."

[In] the Phillips case . . . the taxpayer's assets could not have been taken or frozen . . . until he had either had, or waived his right to, a full and final adjudication of his tax liability before the Tax Court (then the Board of Tax Appeals).

Similar provisions remain in force today. The current Internal Revenue Code prohibits the Government from levying upon a deficient taxpayer's property without first affording the taxpayer notice and an opportunity for a hearing, unless exigent circumstances indicate that delay will jeopardize the collection of taxes due.

Just as the urgencies that justified summary seizure of property in the 19th century had dissipated by the time of Phillips, neither is there a plausible claim of urgency today to justify the summary seizure of real property under §881(a)(7). Although the Government relies to some extent on forfeitures as a means of defraying law enforcement expenses, it does not, and we think could not, justify the prehearing seizure of forfeitable real property as necessary for the protection of its revenues.

Unless exigent circumstances are present, the Due Process clause requires the Government to afford notice and a meaningful opportunity to be heard before seizing real property subject to civil forfeiture.

² The Court states in footnote 22:

In this case, it is significant that the same sovereign that criminalized the activity also imposed the tax. Contrarily, most of our cases confirming that the unlawfulness of an activity does not prevent its taxation involve taxes on acts prohibited by other sovereigns. For example, United States v. Constantine, supra, involved a federal excise tax on retail liquor sales that violated state law. 296 U.S., at 293, 56 S.Ct., at 226. Likewise, in James v. United States, 366 U.S. 213, 81 S.Ct. 1052, 6 L.Ed.2d 246 (1961), a federal tax on embezzled money was imposed upon a man who had pleaded guilty in state court to conspiracy to embezzle. Id., at 214, 81 S.Ct., at 1052. And Marchetti v. United States, 390 U.S. 39, 88 S.Ct. 697, 19 L.Ed.2d 889 (1968), involved a federal tax on gambling activities primarily prohibited under state law, though as the Court there noted, some federal statutes also prohibited activities ancillary to wagering. Id., at 44-47, 88 S.Ct., at 700-702. The importance of the distinction between same sovereign proceedings and dual sovereign proceedings also is borne out by our cases holding that the Constitution does not prohibit successive prosecutions by different sovereigns based on the same conduct. See, e.g., Bartkus v. Illinois, 359 U.S. 121, 79 S.Ct. 676, 3 L.Ed.2d 684 (1959) (state prosecution after federal); Abbate v. United States, 359 U.S. 187, 79 S.Ct. 666, 3 L.Ed.2d 729 (1959) (federal prosecution after state).

³ Certain constitutional rights, however, arise whenever the government deals out "punishment" -- whether the punishment is civil or criminal. This is a totally separate test from the Due Process analysis. There is no continuum with double jeopardy. A penalty is either punishment or it is not. If it is punishment, the Eighth Amendment and the Double Jeopardy clause apply. If it is not punishment, they don't apply.