Legalizing Opioid Use in New York: Constitutional Concerns

Taxation of Opioids: Constitutionality under the Commerce Clause

1. New York is considering enacting legislation to legalize the recreational use of “Opoids,” including heroin and fentanyl.  New York believes that the collection of various taxes will be a solution to the loss of tax revenue that has resulted in current residents leaving New York because of high taxes.  New York plans to implement several strong tax raising measures.  You, who is still working for the Big Four firm, is asked by the Partner that you work for, to write a memo covering each of the following questions as to their Constitutionality:

a) All sales of Opoids are subject to sales tax.  Opoids produced by out of state (non-New York) vendors are subject to a 10% sales tax when sold in New York, while sales by New York producers are subject to a 6% sales tax.  New York claims that the lower sales tax imposed on local producers can be justified because New York imposes a special “registration” tax on New York sellers.  The extra revenue collected from out of state sellers will be used to support and subsidize “Domestic (New York) Manufacturing” of Opoids.  New York claims that having the Opoids produced in New York enables New York authorities to more properly supervise the quality of the Opoids.  Will this structure pass the Commerce Clause?

 

b) All Sellers, regardless of the amount or number of sales of Opoids into New York, are required to collect sales tax and remit it to New York.  Will this requirement pass the Due Process Clause?

 

c)  New York plans to tax any income apportioned to New York from the sale of Opoids at 25%.  One of your CPA firm’s clients, Interstate Labs, Inc., a New Jersey corporation, plans to send salesmen into New York and solicit orders.  The salesmen will send the order back to New Jersey for acceptance and processing.  The order will then be shipped by trucks owned by Interstate Labs to New York retailers.  Interstate Labs will also give free posters, pens, caps and other promotion items to the New York retailers to give to their customers.  Will Interstate Labs be required to pay income tax to New York?

 

2. Curtis Pawling is a very wealthy person who lives in Florida.  He is a client of the Big Four CPA firm that employs you.  Pawling moved to Florida about 10 years ago to escape the high New York taxes (income, estate, sales).  The Partner that you work for asks you to draft separate memos regarding the following topics.  Pawling does not own any real or personal property in New York.  He does not file a tax return in New York because he has no New York income, and New York agrees that he is a non-resident of New York.  New York acknowledges that Pawling’s domicile is in Florida.

a) Pawling is considering setting up a trust in Florida to benefit his two children, Molly, who lives in Vermont, and Peter, who lives in Illinois, and their respective children who live with them.  The trustee will be located in Nevada and all of the assets will be bank accounts held in Nevada and a portfolio of publicly traded stocks. The Trustee will make distributions to each of the beneficiaries solely at the Trustee’s discretion, and no beneficiary is entitled to receive anything.  Florida imposes no income taxes on Trusts.  Pawling is agreeable that any distribution to his children or their families will result in income taxes in the states where the beneficiary lives, but he does not want any state income tax on the Trust income merely because a beneficiary is located in the state.  Can such a Trust be drafted and not incur income taxes because a beneficiary lives in that state?

 

b) Pawling would like to add a provision to the Trust in (a), above.  He would like to give each of his Children a power to appoint up to 50% of the income annually to any of their children.  Any amount not appointed remains in the trust.  Would the addition of the power to the trust change your conclusions regarding (a), above?