Lynn v. West , 134 F.3d 582 ( 1998 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
DAVID L. LYNN, JR.; ROBIN DIXON
LYNN; RODNEY LYNN; ROXANNE
LYNN; DAVID L. LYNN, SR.,
Plaintiffs-Appellants,
v.
DEBORAH WEST, in her individual
No. 96-1371
capacity and official capacity as an
agent of the State of North
Carolina; JANICE FAULKNER,
Secretary of Revenue, State of
North Carolina, in her official
capacity; STATE OF NORTH CAROLINA,
Defendants-Appellees.
Appeal from the United States District Court
for the Middle District of North Carolina, at Greensboro.
N. Carlton Tilley, Jr., District Judge.
(CA-94-577-2)
Argued: December 5, 1996
Decided: January 13, 1998
Before RUSSELL, WIDENER, and MICHAEL, Circuit Judges.
_________________________________________________________________
Affirmed in part and reversed in part by published opinion. Judge
Michael wrote the opinion, in which Judge Russell and Judge Wid-
ener joined.
_________________________________________________________________
COUNSEL
ARGUED: Terry Goodwin Harn, Chapel Hill, North Carolina, for
Appellants. Christopher Edward Allen, Assistant Attorney General,
Raleigh, North Carolina, for Appellees.
_________________________________________________________________
OPINION
MICHAEL, Circuit Judge:
The main question in this case is whether a North Carolina tax on
illegal drugs is in reality a criminal penalty. North Carolina's Con-
trolled Substance Tax (Drug Tax), N.C. Gen. Stat.§§ 105-113.105
through 105-113.113, imposes a special excise tax on"dealers" who
illegally possess a sufficient quantity of a "controlled substance," as
that term is defined in the state criminal code. The statute requires
drug dealers to submit a form reporting their illegal possession and to
pay the tax. In return, dealers are supposed to receive stamps to affix
to the drugs before they are resold. Payment of the Drug Tax does not
make possession or resale legal, however. It should come as no sur-
prise that no drug dealer has ever filed a form and voluntarily paid
this tax.
In 1993 North Carolina assessed a $390,000 tax liability against
David Lynn, Jr. (Lynn) under the Drug Tax. Lynn and certain of his
relatives filed a lawsuit against the state and two of its tax officials
in the United States District Court for the Middle District of North
Carolina challenging the constitutionality of the tax and alleging civil
rights violations under 42 U.S.C. § 1983. The heart of the complaint
is that the Drug Tax is a criminal penalty, not a tax. The district court
properly dismissed part of the complaint for failure to state a claim
and on the grounds of Eleventh Amendment immunity, but it erred in
concluding that the Drug Tax is a true tax. This error led the court to
invoke the Tax Injunction Act, 28 U.S.C. § 1341, and dismiss the
claims for declaratory and injunctive relief. We hold that the Drug
Tax is in reality a criminal penalty under Department of Revenue v.
Kurth Ranch, 511 U.S. 767 (1994). Because the tax is a criminal pen-
alty, federal court jurisdiction is not barred by the Tax Injunction Act.
2
We further hold that the Drug Tax, like any other criminal penalty,
cannot be enforced without the constitutional safeguards that accom-
pany criminal proceedings. We therefore affirm the district court in
part and reverse in part.
I.
On March 1, 1993, state law enforcement agents obtained a warrant
to search Lynn's residence in Reidsville, North Carolina. When both
state and federal agents executed the warrant later that day, they dis-
covered 970 grams of cocaine. Lynn was thereafter convicted on fed-
eral drug charges in the United States District Court for the Middle
District of North Carolina. In that same proceeding the United States
also obtained an order of forfeiture for Lynn's house and furniture
under the corresponding criminal forfeiture statute, 21 U.S.C. § 853.
The cocaine seized at Lynn's house on March 1, 1993, was worth
about $25,000. On March 2, 1993, after receiving notice of the sei-
zure from the Sheriff of Rockingham County, the North Carolina
Department of Revenue assessed a $389,125.20 Drug Tax liability
against Lynn for unpaid taxes, penalties, and interest. According to
the Department, Lynn owed a tax of $200 per gram on the 970 grams
of cocaine taken from his house ($194,000), plus a 100% penalty for
failure to pay the tax on time ($194,000), plus interest ($1,125.20).
On March 4, 1993, Janice Faulkner, the North Carolina Secretary of
Revenue, filed a Certificate of Tax Liability with the clerk of the
Superior Court of Rockingham County, where Lynn resided. See N.C.
Gen. Stat. § 105-242(c) (1996). On the same day the Department of
Revenue obtained a writ of execution in Rockingham County, direct-
ing the sheriff to seize Lynn's personal property in order to satisfy the
$389,000 assessment.
Around March 18, 1993, Lynn filed an objection to the assessment
with the Department of Revenue and requested an administrative
hearing under N.C. Gen. Stat. § 105-241.1. The administrative hear-
ing was held on March 15, 1994, before an Assistant Secretary of
Revenue. The Assistant Secretary issued his decision on May 9, 1994,
sustaining the assessment and declaring it "to be final and immedi-
ately due and collectible." Lynn did not petition for a review of the
Assistant Secretary's decision before the Tax Review Board. See N.C.
3
Gen. Stat. § 105-241.2 (1996). In the meantime, on April 12, 1994,
the Sheriff of Rockingham County (in an effort to collect the assess-
ment) had already seized some items of Lynn's personal property,
including televisions and VCRs, stereo and Nintendo equipment, a
grandfather clock, and an oak cabinet.
The Revenue Department assigned further responsibility for collec-
tion of the Drug Tax assessment against Lynn to Deborah West, a
Revenue Enforcement Officer in the Controlled Substance Tax Divi-
sion of the Department.1 In an effort to collect, West (in July and
August 1994) seized two cars originally purchased by Lynn, a 1992
Mitsubishi 3000GT and a 1976 Mercedes Benz 450SL. Robin Dixon
Lynn, Lynn's current wife, claims that a contract she and Lynn signed
in February 1993 gave her sole ownership of the Mitsubishi before it
was seized by West. Rodney Lynn, who is Lynn's brother, claims that
he owned the Mercedes when it was seized. The Department of Reve-
nue also seized (and sold at public auction) a commercial building
belonging to Lynn. Roxanne Lynn, Lynn's ex-wife, claims an interest
in that building under a judgment lien from her divorce case against
Lynn. Lynn's father, David Lynn, Sr., claims that he owns some of
the seized property, presumably certain of the personal items taken by
the sheriff.
In October 1994 Lynn, along with his relatives and ex-wife men-
tioned above, went to federal court to try to block North Carolina
from collecting the Drug Tax assessment. They sued the state,
Enforcement Officer West, and Secretary Faulkner, seeking compen-
satory damages under 42 U.S.C. § 1983 for various constitutional vio-
lations. They also sought declaratory and injunctive relief on the
grounds that under Department of Revenue v. Kurth Ranch, 511 U.S.
767 (1994), further enforcement of the Drug Tax would violate the
Double Jeopardy Clause of the Fifth Amendment and the Due Process
Clause of the Fourteenth Amendment. The district court dismissed the
complaint for failure to state a claim under Fed. R. Civ. P. 12(b)(6)
_________________________________________________________________
1 See N.C. Gen. Stat. § 105-242(a)(2) (1996) ("The Secretary may issue
a warrant . . . to any revenue officer or other employee of the Department
of Revenue charged with the duty to collect taxes, commanding the offi-
cer or employee to levy upon and sell the taxpayer's personal property
. . . .").
4
and for lack of subject matter jurisdiction under Rule 12(b)(1). The
district court concluded that (1) West, in her individual capacity, was
entitled to qualified immunity, (2) North Carolina was immune from
suit under the Eleventh Amendment, (3) West and Faulkner were
entitled to Eleventh Amendment immunity on the claims for damages
against them in their official capacities, and (4) the Tax Injunction
Act, 28 U.S.C. § 1341, precluded subject matter jurisdiction over
Lynn's claims for declaratory and injunctive relief. Lynn and the
other plaintiffs appeal.
II.
Roxanne Lynn, David Lynn, Sr., Robin Dixon Lynn, and Rodney
Lynn (the relatives) allege that West, a Revenue Enforcement Officer,
is liable for damages in her individual capacity because she afforded
them no due process before seizing their property to satisfy a tax
assessment against someone else. The relatives argue that West acted
outside her lawful authority and "is not protected by Qualified Immu-
nity [because] her actions were not justified under state law and were
patently unreasonable under the circumstances of this case." Br. of
Appellants at 12. The district court held that West is protected by
qualified immunity and dismissed the § 1983 claims brought against
her in her individual capacity for failure to state a claim. We review
a dismissal for failure to state a claim de novo, construing the factual
allegations in the light most favorable to the plaintiffs. See Biggs v.
Meadows, 66 F.3d 56, 59 (4th Cir. 1995).
We agree that the complaint fails to state a claim against West in
her individual capacity. On West's motion to dismiss in district court
the parties fully developed their arguments on whether the relatives'
complaint states a claim for deprivation of a property interest under
state law. These arguments, which are repeated to us, make clear that
we do not need to reach the immunity question. Even accepting the
facts as alleged, and drawing all reasonable inferences in favor of the
relatives, the complaint does not indicate that West deprived them of
any of their property. As we will explain, the allegations of one of the
relatives reveal that her interest was not affected by anything that
West did. The other three do not allege anything to establish that they
had an ownership interest in any of the property seized. Because the
relatives cannot identify a property interest affected, they have not
5
stated a claim under the Due Process Clause, and we need not con-
sider whether the doctrine of qualified immunity applies to the claim.
See DiMeglio v. Haines, 45 F.3d 790, 799 (4th Cir. 1995) (noting that
claims directed at public officials may sometimes be dismissed at the
pleading stage without considering immunity because"it may be
readily apparent on the face of the plaintiff's complaint that, even
accepting the facts as he alleges them to be, he cannot possibly pre-
vail on the merits of his claim under current law"); see also Dunbar
Corp. v. Lindsey, 905 F.2d 754, 759 (4th Cir. 1990) (analyzing Bivens
action by first asking whether plaintiff has a property right under state
law).
First, Roxanne Lynn complains that West violated her property
rights by arranging for the sale of David Lynn, Jr.'s commercial
building. The allegations in the complaint, however, do not permit
any reasonable inference that the sale affected her interest in the prop-
erty. When she divorced Lynn in 1990, Roxanne Lynn was awarded
a judgment against Lynn that, among other things, required him to
pay her a certain sum. Roxanne Lynn alleges that the judgment
(which is recorded) operates to give her a lien against Lynn's prop-
erty, including the commercial building. See N.C. Gen. Stat. § 1-234
(1996) ("[A] judgment . . . is a lien on the real property in the county
where the same is docketed . . . ."). Under North Carolina law the
Revenue Department's execution sale did not interfere with any inter-
est Roxanne Lynn had as a lienholder; the sale was made subject to
duly recorded prior liens.2 As a result, the buyer took the property
subject to her lien. Because her interest in the building was preserved,
she has no claim that West took any steps to deprive her of her prop-
erty.
Second, David Lynn, Sr. claims that West caused some of his prop-
erty to be seized, but he has not identified the items of property that
allegedly belong to him. We can only assume, by process of elimina-
_________________________________________________________________
2 See N.C. Gen. Stat. § 105-241(d) (1996) ("A tax lien . . . is not
enforceable against . . . the holder of a duly recorded lien unless: (1) In
the case of real property, a certificate of tax liability or a judgment was
first docketed . . . . The priority of these claims and liens is determined
by the date and time of recording, docketing, levy, or bona fide pur-
chase.") (emphasis added).
6
tion, that he is referring to some of the televisions, VCRs, stereo
equipment, or other personal items taken from his son, the subject of
the Drug Tax assessment. Our assumption is not enough. Lynn, Sr.'s
conclusory allegation that West seized his (unidentified) belongings
fails to state a claim for deprivation of property.
Lastly, Robin Dixon Lynn and Rodney Lynn each claim that they
own one of the cars seized by West. Robin Dixon Lynn's allegations
regarding the 1992 Mitsubishi, however, do not reveal that she is the
owner of record. David Lynn, Jr. bought the car in the name of
Lynn's Auto Sales in September 1992. In February 1993 Lynn and
Robin Dixon (who was then engaged to Lynn) agreed in writing that
Robin would own the Mitsubishi. But the agreement (attached to the
complaint) states that title would not be placed in her name until she
began making payments on the car. Nothing in the pleadings suggests
that Robin Dixon Lynn ever began making payments or received title
to the car. Under North Carolina law ownership of a car does not
change hands until the certificate of title has been assigned and the
new owner makes application for a new title. See Nationwide Mut.
Ins. Co. v. Hayes, 174 S.E.2d 511, 517 (N.C. 1970); N.C. Gen. Stat.
§ 20-72 (1996). Therefore, Robin Dixon Lynn has not alleged any-
thing to show that she had title to the Mitsubishi under North Carolina
law. See Dunbar Corp., 905 F.2d at 760 (noting that "North Carolina
law determines whether [the plaintiff] has any property rights pro-
tected by the Fifth Amendment's Due Process Clause.") Similarly,
Rodney Lynn claims that he owns the 1976 Mercedes, but his claim
of ownership also falls short. In 1989 David Lynn, Jr. bought the
Mercedes and registered it in his own name. In the face of this fact
Rodney Lynn does not indicate when and how record title was trans-
ferred to him.
In sum, we conclude that none of the relatives has alleged anything
to show that he or she has any property rights under state law that
were affected by West's actions. Accordingly, we affirm the district
court's conclusion that the relatives have failed to state a claim
against West in her personal capacity.
III.
Lynn, the central plaintiff, seeks monetary and prospective relief
from Enforcement Officer West and Secretary Faulkner in their offi-
7
cial capacities and from the State of North Carolina itself. All three
defendants claim immunity under the Eleventh Amendment. The dis-
trict court concluded that the Eleventh Amendment protects North
Carolina from all claims "and bars the[ ] official-capacity claims [for
monetary relief] against [ ] West and Faulkner." However, the court
recognized that the Eleventh Amendment does not bar Lynn's claims
for prospective relief against West and Faulkner in their official
capacities. We agree with these rulings.
The Eleventh Amendment provides as follows: "The judicial power
of the United States shall not be construed to extend to any suit in law
or equity, commenced or prosecuted against one of the United States
by Citizens of another State or by Citizens or Subjects of any Foreign
States." U.S. Const. amend. XI. The Eleventh Amendment applies to
suits in federal court brought by a state's own citizens even though
the language of the amendment would seem to limit its application to
suits brought by "Citizens of another State." See Puerto Rico Aque-
duct & Sewer Auth. v. Metcalf & Eddy, Inc., 506 U.S. 139, 144
(1993); Harter v. Vernon, 101 F.3d 334, 337 (4th Cir. 1996).
Lynn has not suggested a valid reason, such as consent or congres-
sional abrogation, why the Eleventh Amendment does not bar his suit
against North Carolina. See generally Atascadero State Hosp. v.
Scanlon, 473 U.S. 234, 238 (1985) ("[I]f a State waives its immunity
and consents to suit in federal court, the Eleventh Amendment does
not bar the action."); Fitzpatrick v. Bitzer , 427 U.S. 445, 456 (1976)
(holding that Congress has power to abrogate Eleventh Amendment
immunity under § 5 of the Fourteenth Amendment). Accordingly, we
affirm the district court's determination that the State of North Caro-
lina is entitled to Eleventh Amendment immunity.
As noted, Lynn also sued West and Faulkner in their official capac-
ities. Under Ex parte Young, 209 U.S. 123 (1908), there is "federal
jurisdiction over a suit against a state official when that suit seeks
only prospective injunctive relief in order to ``end a continuing viola-
tion of federal law.'" Seminole Tribe of Florida v. Florida, 116 S. Ct.
1114, 1132 (1996) (quoting Green v. Mansour, 474 U.S. 64, 68
(1985)). Lynn seeks two forms of relief from West and Faulkner.
First, he seeks monetary damages for loss of property he claims was
seized in violation of the Fourteenth Amendment. Second, he seeks
8
declaratory and injunctive relief. He asks for a judgment declaring the
Drug Tax to be unconstitutional because it (1) imposes multiple pun-
ishment in violation of the Double Jeopardy Clause, (2) amounts to
a criminal penalty imposed without the required due process safe-
guards, and (3) is a bill of attainder. If the tax's present enforcement
scheme is declared unconstitutional, Lynn seeks an injunction against
West and Faulkner to stop their continuing efforts to collect the
assessment.
The Eleventh Amendment bars Lynn's § 1983 claim for monetary
damages against West and Faulkner in their official capacities.
"[W]hen determining if an officer or entity enjoys Eleventh Amend-
ment immunity a court must first establish whether the state treasury
will be affected by the law suit." Harter, 101 F.3d at 340. In the
action for monetary damages against West and Faulkner in their offi-
cial capacities, North Carolina would pay any "final judgment
awarded in a court of competent jurisdiction against a State employee
. . . ." N.C. Gen. Stat. § 143-300.6(a) (1996). Therefore, the lawsuit
could affect the state treasury. See Barfield v. Blackwood, 7 F.3d
1140, 1146 (4th Cir. 1993) (noting effect on state treasury and con-
cluding that N.C. Gen. Stat. § 143-300.6(a) does not waive Eleventh
Amendment immunity). "[W]hen the action is in essence one for the
recovery of money from the state, the state is the real, substantial
party in interest and is entitled to invoke its sovereign immunity from
suit even though individual officials are nominal defendants." Ford
Motor Co. v. Department of Treasury, 323 U.S. 459, 464 (1945).
Accordingly, we affirm the district court's conclusion that the Elev-
enth Amendment bars Lynn's § 1983 claim for monetary damages
against West and Faulkner in their official capacities.
To the extent Lynn seeks a declaratory judgment and an injunction
to block further enforcement of the Drug Tax, Ex parte Young does
permit his action against West and Faulkner in their official capaci-
ties. In Ex parte Young the Supreme Court held that the Eleventh
Amendment did not bar an action in federal court to enjoin the Attor-
ney General of Minnesota from enforcing a statute claimed to violate
the Fourteenth Amendment. See Ex parte Young, 209 U.S. 123, 159-
60 (1908).
This holding has permitted the Civil War Amendments to
the Constitution to serve as a sword, rather than merely as
9
a shield, for those whom they were designed to protect. But
the relief awarded in Ex parte Young was prospective only;
the Attorney General of Minnesota was enjoined to conform
his future conduct of that office to the requirement of the
Fourteenth Amendment.
Edelman v. Jordan, 415 U.S. 651, 664 (1974).
The Eleventh Amendment therefore does not bar Lynn's official
capacity claims for declaratory and injunctive relief. "Remedies
designed to end a continuing violation of federal law are necessary to
vindicate the federal interest in assuring the supremacy of that law."
Green v. Mansour, 474 U.S. 64, 68 (1985). Of course, a judgment
declaring that the Drug Tax is a criminal penalty could impact the
state treasury of North Carolina, at least until the state implements
enforcement procedures that conform to the requirements of the
United States Constitution.3 But some fiscal impact on the state trea-
sury is the necessary result of prospective decrees forcing compliance
with the Constitution. Edelman, 415 U.S. at 668. "Such an ancillary
effect on the state treasury is a permissible and often an inevitable
consequence of the principle announced in Ex parte Young." Id. The
district court in this case correctly held that the doctrine of Ex parte
Young allows Lynn's action to the extent he seeks prospective relief,
specifically, a declaratory judgment and an injunction against "ongo-
ing constitutional violations."
IV.
We now turn to Lynn's claim for prospective relief. Lynn argues
that under Department of Revenue v. Kurth Ranch , 511 U.S. 767
(1994), the Drug Tax must be called a criminal penalty, not a civil
_________________________________________________________________
3 North Carolina has been the most aggressive of the states in enforcing
its tax on illegal drugs. In 1993, for example, North Carolina collected
over six million dollars, more than ten times as much money as the next
highest state, Kansas. See Payoff From Taxing Drugs, News & Observer
(Raleigh, NC), June 7, 1994, at A1. At oral argument counsel for North
Carolina reported that the state had collected $26 million since 1990, all
through forced collections.
10
tax. We agree and hold that the Drug Tax may not be enforced absent
the constitutional safeguards that attach to criminal proceedings.
In Kurth Ranch the Supreme Court examined Montana's Danger-
ous Drug Tax Act. The Kurth family had a ranch in central Montana.
They raised grain and livestock, but they also cultivated and sold mar-
ijuana. In 1987 Montana law enforcement officials raided the ranch,
arrested the Kurths, and confiscated the marijuana. Six members of
the Kurth family were charged with drug crimes under Montana law.
All eventually pled guilty; two Kurths went to prison, and the others
got suspended or deferred sentences. Kurth Ranch , 511 U.S. at 772.
The county attorney also brought a civil forfeiture action, which the
Kurth family settled by agreeing to forfeit certain cash and farm
equipment. Id. Next, the Montana Department of Revenue attempted
to collect $900,000 in taxes assessed against the Kurths under the
Montana Dangerous Drug Tax Act. Collection efforts were stayed
when the Kurths filed for Chapter 11 bankruptcy. Later, the bank-
ruptcy court decided that the tax assessment was a form of double
jeopardy. After the district court and the court of appeals for the Ninth
Circuit affirmed, Montana brought the case to the Supreme Court. Id.
at 773-76.
The Supreme Court also affirmed, holding that assessment of the
Montana tax following state criminal proceedings violated the Double
Jeopardy Clause:
This drug tax is not the kind of remedial sanction that may
follow the first punishment of a criminal offense. Instead, it
is a second punishment within the contemplation of a consti-
tutional protection that has deep roots in our history and
jurisprudence, and therefore must be imposed during the
first prosecution or not at all.
Id. at 784 (internal quotation marks and citation omitted). The Court
reached its holding by discussing four features that rendered the tax
a second punishment: (1) the high tax rate, id. at 780-81, (2) the deter-
rent purpose of the tax, id., (3) the fact that the tax was conditioned
on the commission of a crime, id. at 781-82, and (4) the fact that the
tax was levied on "``possession' of goods that no longer exist and that
the taxpayer never lawfully possessed," id. at 783. "Taken as a
11
whole," the Court concluded, "this drug tax is a concoction of anoma-
lies, too far removed in crucial respects from a standard tax assess-
ment to escape characterization as punishment . . . ." Id.
The central question in this case, like that in Kurth Ranch, is
whether the tax in question is, despite its label, a criminal penalty.4
A "tax" can encompass any "pecuniary burden laid upon individuals
or property for the purpose of supporting the government." New Jer-
sey v. Anderson, 203 U.S. 483, 492 (1906). The North Carolina Drug
Tax, as a pecuniary burden laid upon drug dealers, is in that sense a
tax. But the question here is whether the tax is so punitive that the
constitutional protections afforded to criminal defendants should
attach to its enforcement. "``[T]here 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 regula-
tion and punishment.'" Kurth Ranch, 511 U.S. at 779 (quoting A.
Magnano Co. v. Hamilton, 292 U.S. 40, 46 (1934)). A penalty "may
be termed a duty or tax and yet be a penalty. Its name does not deter-
mine its nature."5 Fontenot v. Accardo, 278 F. 871, 874 (5th Cir.
1922). As we explain below, North Carolina's Drug Tax, like Mon-
tana's Dangerous Drug Tax, has enough punitive features that its
nature is that of a criminal penalty, not a civil tax.
The North Carolina Drug Tax shares the first two features of the
_________________________________________________________________
4 Whether the statute imposes what amounts to a criminal sanction
remains the proper inquiry. See Hudson v. United States, 1997 WL
756641 at *6 & n.6 (U.S. Dec. 10, 1997) (acknowledging that Kurth
Ranch engaged in a proper analysis); see also id. at *10 (Stevens, J., con-
curring) (noting majority's reaffirmation of central holding of Kurth
Ranch); id. at *13 (Breyer, J., concurring) (same).
5 Kurth Ranch dictates that we analyze the tax according to its substan-
tive effect, not its formal label. Id. at 779 (noting that "a tax is not
immune from double jeopardy scrutiny simply because it is a tax").
Accord Lipke v. Lederer, 259 U.S. 557, 561 (1922) ("The mere use of the
word ``tax' in an act primarily designed to define and suppress crime is
not enough to show that within the true intendment of the term a tax was
laid."). Accordingly, the fact that North Carolina labels its tax an "excise
tax," while Montana characterized its tax as a"property tax," does not
affect our analysis.
12
Montana tax examined in Kurth Ranch: a high rate of taxation and a
deterrent purpose. These features tend to show that the Drug Tax is
punitive, although standing alone they might not be enough. Many
taxes that are presumed valid, such as those on cigarettes and alcohol,
are also high and motivated in part by deterrence. See Kurth Ranch,
511 U.S. at 780-81; United States v. Sanchez, 340 U.S. 42, 46 (1950)
(upholding federal tax on marijuana). In Kurth Ranch the Court noted
that Montana had taxed the drugs at about 400 percent of their market
value. Id. at 780 n.17. Neither Montana nor the United States could
offer an example of a tax on cigarettes, alcohol, or anything else that
approached this rate. Id. The remarkably high tax rate, the Court con-
cluded, was "at least consistent with a punitive character." Id. at 780.
The deterrence factor, the Court said, was "beyond question." Id.
The rate of taxation imposed by the North Carolina Drug Tax
yields an even higher penalty than the tax in Kurth Ranch. Here, Lynn
was assessed a $194,000 tax for his possession of 970 grams of
cocaine, a rate of about $200,000 per kilogram. The parties in this
case have not estimated the market value of the cocaine seized from
Lynn. A review of several federal cases, however, indicates that the
market value for a kilogram of cocaine is about $25,000. See, e.g.,
United States v. Anderson, 76 F.3d 685, 692 (6th Cir. 1996) (affirm-
ing trial court finding that market price was $22,500 per kilogram);
United States v. Sureff, 15 F.3d 225, 228 (2d Cir. 1994) (concluding
that defendant's statement "24 or 25" referred to sales price of kilo-
gram of cocaine, in thousands); United States v. Hicks, 948 F.2d 877,
880 n.1 (4th Cir. 1991) (affirming sentence based on $32,000 per
kilogram). Based on this estimate the Drug Tax imposes a liability of
eight times the market value of the substance. North Carolina also
assessed a $194,000 penalty for Lynn's failure to pay the tax within
48 hours of when he came into possession of the cocaine. The addi-
tion of the penalty makes the effective rate of taxation 1,600 percent,
or sixteen times, the market value.6 This shows that, like in Kurth
_________________________________________________________________
6 Purity levels are irrelevant in determining the amount of the tax. For
assessment purposes a "quantity of marijuana or other controlled sub-
stance is measured by the weight of the substance whether pure or
impure or dilute[.]" N.C. Gen. Stat. § 105-113.107 (1996). The record in
this case does not reveal the purity level of the cocaine found at Lynn's
house.
13
Ranch, the tax rate has no rational relationship to the market value of
the drugs. In addition, the extremely high tax is"beyond question"
intended "to deter people from possessing [illegal drugs]." Kurth
Ranch, 511 U.S. at 780. Although the high tax rate and deterrent pur-
pose lend support to the argument that the Drug Tax is a criminal pen-
alty, "these features, in and of themselves, do not necessarily render
the tax punitive." Id. at 781. We will therefore look at other features
of the tax.
The Drug Tax also has the third feature discussed in Kurth Ranch:
it is conditioned on the commission of a crime. In Kurth Ranch the
Court explained that "[p]ersons who have been arrested for possessing
marijuana constitute the entire class of taxpayers subject to the Mon-
tana tax." Kurth Ranch, 511 U.S. at 781-82. The situation is the same
with North Carolina's Drug Tax. Counsel for North Carolina
explained at oral argument that when a drug arrest or seizure is made,
law enforcement officers send an arrest or seizure report to the
Department of Revenue. The Department then assesses the tax liabil-
ity and seizes any assets not already seized under federal and state
criminal or civil drug forfeiture laws. Because an assessment of tax
liability operates more broadly than an order of forfeiture, the Depart-
ment can levy upon the remaining property of the taxpayer without
proving the property's connection to a drug crime. 7
_________________________________________________________________
7 The Drug Tax goes much further than state and federal drug forfeiture
laws. The Supreme Court has said that most in rem civil forfeiture pro-
ceedings are properly characterized as civil, not criminal, and that in rem
forfeiture proceedings generally do not violate the Double Jeopardy
Clause when brought after a criminal prosecution. See, e.g., United
States v. Ursery, 116 S. Ct. 2135, 2149 (1996). North Carolina's tax on
illegal drugs takes asset confiscation to a different level. An assessment
of Drug Tax liability, unlike an order of forfeiture, can be satisfied out
of any property owned by the defendant, not just property linked to a
drug crime. See N.C. Gen. Stat. § 105-113.111 (1996) ("The Secretary
shall use all means available to collect the tax, penalty, and interest from
any property in which the dealer has a legal, equitable, or beneficial
interest."). Thus, unlike the in rem civil forfeiture situation, the Drug Tax
sweeps too broadly to take advantage of the legal fiction that the property
itself is guilty.
14
The Drug Tax is imposed on "dealers," i.e. , persons who possess
sufficient quantities of a "controlled substance" as that term is defined
in the criminal code of North Carolina. North Carolina argues that
dealers not yet arrested for drug crimes could, theoretically, pay the
Drug Tax. See State v. Ballenger, 472 S.E.2d 572, 574-75 (N.C. Ct.
App. 1996) (emphasizing that Drug Tax is not predicated upon
whether taxpayer has been arrested or charged); cf. State v. Ballenger,
481 S.E.2d 84, 84 (N.C. 1997) (affirming Court of Appeals without
explanation) (per curiam). The statute requires drug dealers to report
the tax on a form prescribed by the Secretary of Revenue. See N.C.
Gen. Stat. § 105-113.108 (1996). After payment, the Secretary is sup-
posed to send the dealers stamps to affix to the drugs. See id. Presum-
ably in an attempt to avoid conflict with the Fifth Amendment Self-
Incrimination Clause, the Drug Tax statute provides that information
obtained from the form cannot be used in a criminal prosecution. See
id. § 105-113.112. Counsel for North Carolina admitted at oral argu-
ment, however, that he does not know of any dealer who has in fact
self-reported and paid his Drug Tax bill. Counsel also admitted that
the Secretary has not prepared a form for reporting and paying the
tax, even though the statute says she is to "prescribe" one. Nor does
North Carolina collect the tax from those who legitimately possess
drugs, such as doctors who use morphine (a "controlled substance")
in medical treatment. See id. § 90-89(b) (listing morphine as Schedule
I controlled substance); see also id. § 105-113.107A (exempting from
Drug Tax any "dealer who is authorized by law to possess the sub-
stance"). Once again, as in Kurth Ranch, persons arrested for drug
crimes constitute the entire class of taxpayers generating revenue
under the North Carolina Drug Tax. See also Kurth Ranch, 511 U.S.
at 788 n.2 (Rehnquist J., dissenting) (commenting, after counsel for
Montana described a Minnesota tax similar to the North Carolina
Drug Tax, "Not surprisingly, when asked at oral argument ``Does
Minnesota collect any money off that scheme . . . . Not too many
stamps being sold?', counsel for respondents admitted, amidst laugh-
ter, that he did not know the answer."). The theoretical possibility that
a drug dealer could voluntarily pay the Drug Tax does not take the
tax out of the criminal penalty category. The unused statutory report-
ing and payment scheme, while clever, is not enough to distinguish
Kurth Ranch. The Drug Tax is still based on a criminal act.
The Drug Tax also has the fourth feature present in Kurth Ranch:
the tax has no relationship to lawful possession. As the Court
15
explained, "[a] tax on ``possession' of goods that no longer exist and
that the taxpayer never lawfully possessed has an unmistakable puni-
tive character." Id. at 783. In this case, as with the Montana tax, the
taxpayer (Lynn) had no property right in the drugs, which had been
confiscated by the time the Department of Revenue made its assess-
ment. See 21 U.S.C. § 881(a)(1) (providing that "no property right
shall exist in" controlled substances); J.A. 59 (Notice of Assessment
dated March 2, 1993).
Kurth Ranch's consideration of lawful possession alludes to the
distinction between license taxes and criminal penalties. A license fee
exacts a cost for the "privilege of carrying on" a "lawful business or
occupation." Black's Law Dictionary 921 (6th ed. 1990); Fontenot v.
Accardo, 278 F. 871, 875 (5th Cir. 1922) (explaining that tax on
liquor imposed during Prohibition was a criminal penalty, not license
fee on "lawful business or occupation"). Payment of a license fee con-
fers lawful possession. For example, tobacco and alcohol manufactur-
ers, wholesalers, and retailers must pay steep taxes as a condition to
legal operation of their businesses. See, e.g., N.C. Gen. Stat. § 105-
113.74 (1996) (describing alcohol license taxes). In addition, lawful
possession of cigarettes is conditioned on having tax stamps affixed
to the product. See, e.g., id. § 105-113.31 (possession of non-tax-paid
cigarettes). In the case of marijuana or cocaine, however, payment of
the Drug Tax does not confer a legal privilege to engage in drug deal-
ing. Nor is payment of the tax simply a condition precedent to lawful
possession. See id. § 105-113.105 ("Nothing in this Article may in
any manner provide immunity from criminal prosecution for a person
who possesses an illegal substance.").
In this context the Supreme Court has often cited the feature of
lawful possession to distinguish between a license tax and a criminal
penalty. In United States v. Sanchez, 340 U.S. 42, 46 (1950), for
example, the Supreme Court upheld the federal Marihuana Tax Act,
which imposed a $100 per ounce tax on transferees of marijuana who
were not registered with the Treasury Department. 8 The rate of taxa-
tion on legally registered transferees, however, was only $1 per
_________________________________________________________________
8 The Marihuana Tax Act was repealed by the Comprehensive Drug
Abuse Prevention and Control Act of 1970, Pub. L. No. 91-513, 84 Stat.
1236, 1292.
16
ounce. At the time, many states allowed state-licensed manufacturers
and wholesalers to process and sell marijuana. Many state laws also
allowed possession by apothecaries, researchers, physicians, dentists,
persons for whom marijuana had been prescribed, and others. See
Leary v. United States, 395 U.S. 6, 16-17 (1969). The Sanchez Court
noted that by requiring transferees to register with the Treasury
Department, the tax "implements the congressional purpose of
restricting traffic in marihuana to accepted industrial and medicinal
channels." Sanchez, 340 U.S. at 44. Cf. Minor v. United States, 396
U.S. 87, 97, 97-98 n.12 (1969) (noting that of the 400,000 registered
narcotics dealers in 1967, only four were reported during that year for
a violation of the narcotics laws). In this case, unlike Sanchez, there
is no legislative intent to allow cocaine trafficking within any "ac-
cepted [ ] channels."
If payment of the Drug Tax conferred legal ownership, then the tax
would amount to nothing more than an expensive licensing or excise
fee. The fact that it does not is another strong indication that the tax
is a criminal penalty. Compare Regal Drug Corp. v. Wardell, 260
U.S. 386, 392 (1922) (holding that tax on liquor during Prohibition
is penalty); Lipke v. Lederer, 259 U.S. 557, 561 (1922) (same); and
Fontenot v. Accardo, 278 F. 871, 875 (5th Cir. 1922) (same), with
Sonzinsky v. United States, 300 U.S. 506, 513-14 (1937) (upholding
license tax on firearms and distinguishing cases where subject of the
tax is criminal); and United States v. Doremus , 249 U.S. 86, 94
(1919) (upholding constitutionality of Harrison Narcotic Drug Act,
which imposed tax on "lawful business" in coca and opium; noting
that license tax provisions "tend to keep the traffic aboveboard and
subject to inspection by those authorized to collect the revenue"). We
therefore conclude that the Drug Tax also shares the fourth feature
examined in Kurth Ranch, the absence of a relationship to lawful pos-
session.
The Kurth Ranch Court did not indicate that the features it cited
were meant to be exclusive. However, the Drug Tax contains no fea-
tures that allow us to distinguish Kurth Ranch . The rate of taxation
is even steeper than the tax in Kurth Ranch. Unlike the application of
a normal income tax on illegal activity, the Drug Tax is enforced only
against criminals.9 And unlike the marijuana tax upheld in Sanchez,
_________________________________________________________________
9 Kurth Ranch does not affect the proper characterization of a tax on
illegal income as civil in nature. The income tax subjects criminals, such
17
the Drug Tax does not contemplate lawful dealings in the product that
is the subject of the tax. The Drug Tax singles out a class of persons
who have engaged in criminal activity and subjects the class to a rate
of taxation far beyond that faced by any legitimate taxpayer. As the
Supreme Court said when it held that a Prohibition era tax was a
criminal penalty,
[C]ertainly we cannot conclude . . . that penalties for crime
should be enforced through the secret findings and summary
action of executive officers. The guarantees of due process
of law and trial by jury are not to be forgotten or disre-
garded.
Lipke v. Lederer, 259 U.S. 557, 562 (1922). Accordingly, we hold
that the Drug Tax is a criminal penalty.10
_________________________________________________________________
as drug dealers, bookmakers, and moonshiners, to the same tax obliga-
tions faced by law-abiding taxpayers. See Thomas v. Commissioner, 62
F.3d 97, 101 (4th Cir. 1995) (noting that taxpayer who failed to pay
income tax on illegal drug income "is being treated no differently than
any other person who has failed to pay income tax. .. . Unlike the defen-
dants in Kurth Ranch, who were taxed because of their illegal activity,
Thomas would face this tax liability regardless of the source of his
income."). Taxing illegal income is simply an application of the broad
scope of Internal Revenue Code § 61, which defines income as all
income "from whatever source derived."
10 In Hudson v. United States , 1997 WL 756641 (U.S. Dec. 10, 1997),
the Supreme Court applied "traditional double jeopardy principles" and
concluded that certain administrative sanctions (monetary penalties and
disbarment) under the banking laws were not criminal punishment. Id. at
*7. The Court in Hudson noted that the "clearest proof" of a sanction's
punitive form and effect is required to overcome an indication of legisla-
tive intent to impose a civil sanction. Id. at *5, *7, *8, citing United
States v. Ward, 448 U.S. 242, 249 (1980). This does not appear to make
the challenger's burden any tougher than it already was. In any event, the
crucial aspects of the North Carolina Drug Tax do provide clearest proof
of punitive intent: although nominally labeled an"excise tax," the Drug
Tax is enforced only against those arrested for drug crimes, and --
unlike routine license and excise taxes -- payment of the tax confers no
legal privilege to possess or sell. See supra at 14-17.
18
V.
This case does not raise the same double jeopardy concerns as
Kurth Ranch. In Kurth Ranch characterization of the tax as a criminal
penalty triggered the protections of the Double Jeopardy Clause. In
this case the Double Jeopardy Clause does not apply because it does
not bar successive prosecutions by different sovereigns. See Abbate
v. United States, 359 U.S. 187, 195 (1959). Only the United States
prosecuted Lynn for cocaine possession, so the Double Jeopardy
Clause does not bar North Carolina's enforcement of the Drug Tax
even though it is a criminal penalty. Because the United States
brought the prior criminal prosecution, North Carolina remained free
to impose its own criminal sanctions.
VI.
Because the Drug Tax is in reality a criminal penalty, its enforce-
ment must conform to the constitutional safeguards that accompany
criminal proceedings. See Carbon Fuel Co. v. United Mine Workers,
517 F.2d 1348, 1349 (4th Cir. 1975) (holding that because contempt
proceedings were properly characterized as criminal, not civil, judg-
ment must be reversed because of denial of due process); see also
Bush Ranch, Inc. v. E. I. DuPont de Nemours & Co. , 99 F.3d 363, 369
(11th Cir. 1996) ("[W]e must reverse the contempt order because the
district court did not afford DuPont the procedural protections the
Constitution requires for the imposition of criminal contempt sanc-
tions."). "Some governmental exactions are so punitive that they may
only be imposed in a criminal proceeding." Kurth Ranch, 511 U.S. at
793 (O'Connor, J., dissenting) (citing United States v. Ward, 448 U.S.
242, 248-49 (1980)). This conclusion is consistent with the holding
in Kurth Ranch. As Justice Scalia noted in his dissent there, the
majority's holding relied on the basic notion that the tax was equiva-
lent to a criminal prosecution. "Assessment of a criminal punishment
in a civil tax proceeding would violate not only the Double Jeopardy
Clause, but all of the criminal-procedure guarantees of the Fifth and
Sixth Amendments." Kurth Ranch, 511 U.S. at 807 (Scalia, J., dis-
senting). Accord id., 511 U.S. at 797 (O'Connor, J., dissenting)
("[P]resumably the State cannot tax anyone for possession of illegal
drugs without providing the full panoply of criminal procedure pro-
tections found in the Fifth and Sixth Amendments, given the Court's
19
holding that ``[t]he proceeding Montana initiated to collect a tax on the
possession of drugs was the functional equivalent of a successive
criminal prosecution.'"). Enforcing a criminal punishment in a civil
proceeding is incompatible with the important constitutional distinc-
tions between civil and criminal procedure:
Civil Procedure is incompatible with the accepted rules and
constitutional guaranties governing the trial of criminal
prosecutions, and where civil procedure is prescribed for the
enforcement of remedial sanctions, those rules and guaran-
ties do not apply. Thus the determination of the facts upon
which liability is based may be by an administrative agency
instead of a jury, or if the prescribed proceeding is in the
form of a civil suit, a verdict may be directed against the
defendant; there is no burden upon the Government to prove
its case beyond a reasonable doubt, and it may appeal from
an adverse decision; furthermore, the defendant has no con-
stitutional right to be confronted with the witnesses against
him, or to refuse to testify; and finally, in the civil enforce-
ment of a remedial sanction there can be no double jeop-
ardy.
Helvering v. Mitchell, 303 U.S. 391, 402-04 (1938) (Brandeis, J.)
(footnotes omitted). North Carolina cannot treat the imposition of its
Drug Tax as if it is a civil sanction. It is a criminal penalty, and a tax-
payer pursued for Drug Tax liability must be afforded all of the con-
stitutional safeguards due a criminal defendant. 11
_________________________________________________________________
11 Lynn also challenges the constitutionality of the Drug Tax by arguing
that it is a bill of attainder passed by a state in violation of Article I, sec-
tion 10 of the United States Constitution. A legislative act is an unconsti-
tutional bill of attainder if it singles out an individual or narrow class of
persons for punishment without a judicial proceeding. See, e.g., United
States v. Brown, 381 U.S. 437, 449-456 (1965). Because we hold that the
Drug Tax is in reality a criminal penalty, future enforcement of the tax
must be accompanied by appropriate judicial proceedings. Accordingly,
we have no occasion to consider whether the Drug Tax is a bill of attain-
der.
20
VII.
The district court never reached the issue of whether the Drug Tax
is a criminal penalty under Kurth Ranch. The court reasoned that
because the Drug Tax is a "tax under State law," see 28 U.S.C.
§ 1341, the Tax Injunction Act prevents a district court from exercis-
ing subject matter jurisdiction over Lynn's claims for declaratory and
injunctive relief. We disagree because a tax on illegal drugs that
reaches the level of a criminal penalty under Kurth Ranch is not prop-
erly characterized as a "tax under State law."
The Tax Injunction Act provides:
The district courts shall not enjoin, suspend or restrain the
assessment, levy or collection of any tax under State law
where a plain, speedy and efficient remedy may be had in
the courts of such State.
28 U.S.C. § 1341. The Tax Injunction Act prohibits district court
jurisdiction over an action if (1) the action is to"enjoin, suspend or
restrain the assessment, levy or collection" of a state tax, (2) the tax
is a "tax under State law," and (3) the state provides a "plain, speedy
and efficient remedy" in its own courts. See International Lotto Fund
v. Virginia State Lottery Dep't, 20 F.3d 589, 593 (4th Cir. 1994); San
Juan Cellular Tel. Co. v. Public Serv. Comm'n, 967 F.2d 683, 685
(1st Cir. 1992).
The first element of the Tax Injunction Act is present. An injunc-
tion against the continued enforcement of the Drug Tax against Lynn
would "enjoin" the "collection" of what has been labeled a state tax.
Declaratory relief concerning state taxes is also barred by the Tax
Injunction Act. See California v. Grace Brethren Church, 457 U.S.
393, 408 (1982). See also Great Lakes Dredge & Dock Co. v.
Huffman, 319 U.S. 293, 299 (1943) ("[T]hose considerations which
have led federal courts of equity to refuse to enjoin the collection of
state taxes, save in exceptional cases, require a like restraint in the use
of the declaratory judgment procedure.").
The Drug Tax lacks the second element, however. A criminal pen-
21
alty, however labeled, is not a "tax under State law" for Tax Injunc-
tion Act purposes. The Act "was initially ``predicated upon the
desirability of freeing, from interference by the federal courts, state
procedures which authorize litigation challenging a tax only after the
tax has been paid.'" International Lotto Fund , 20 F.3d at 593 (quoting
Great Lakes, 319 U.S. at 301). The policy considerations that support
the Tax Injunction Act do not extend to state criminal prosecutions,
which raise different constitutional concerns than those present in
assessing and collecting an ordinary state tax. See Steffel v.
Thompson, 415 U.S. 452, 472 n.20 (1974) (noting that there is no stat-
utory counterpart of Tax Injunction Act applicable to state criminal
prosecutions).12
The few cases that address the issue confirm that federal courts
have jurisdiction to examine a tax that is in reality a criminal penalty.
"[I]n such a setting, where the so-called tax has clearly punitive quali-
ties, it may, if invalid, be enjoined." Denton v. City of Carrollton, 235
F.2d 481, 485 (5th Cir. 1956) (citations omitted) (holding that despite
Tax Injunction Act district court should have considered constitu-
tional questions arising from steep license tax on labor organizers).
Cf. Lipke v. Lederer, 259 U.S. 557, 561-62 (1922) (holding that
because Prohibition era tax on liquor was a penalty, statutory mandate
that "[n]o suit for the purpose of restraining the assessment or collec-
tion of any tax shall be maintained in any court" did not apply); Regal
Drug Corp. v. Wardell, 260 U.S. 386, 392 (1922) (same).13 Accord-
_________________________________________________________________
12 We reiterate that the Eleventh Amendment, discussed supra, operates
to protect the state treasury from direct interference by the federal courts.
At issue in this case is the future enforcement of a criminal penalty, not
the ancillary effect on the financing of state government. Cf. Edelman v.
Jordan, 415 U.S. 651, 668 (1974) ("Such an ancillary effect on the state
treasury is a permissible and often an inevitable consequence of the prin-
ciple announced in Ex Parte Young[.]"); Green v. Mansour, 474 U.S. 64,
68 (1985) ("[T]he availability of prospective relief . . . gives life to the
Supremacy Clause. Remedies designed to end a continuing violation of
federal law are necessary to vindicate the federal interest in assuring the
supremacy of that law.").
13 The district court relied on a series of cases distinguishing taxes from
regulatory fees, which are not subject to the Tax Injunction Act. See, e.g.,
Bidart Bros. v. California Apple Comm'n, 73 F.3d 925, 931 (9th Cir.
22
ingly, we reverse the district court's holding that jurisdiction is barred
by the Tax Injunction Act. The Tax Injunction Act does not apply to
state taxes that are in reality criminal penalties. 14
VIII.
For the foregoing reasons we hold that the Controlled Substance
Tax is a criminal penalty, and we reverse the district court on that
point. North Carolina's enforcement scheme must provide the consti-
tutional safeguards that attach to criminal prosecutions. We do not
believe, however, that a remand is necessary in this case. In their
complaint the plaintiffs ask for monetary damages, declaratory relief,
and injunctive relief. Their request for monetary damages is barred by
the Eleventh Amendment and for failure to state a claim, and we
affirm the district court on those determinations. Although we have
declared that the Drug Tax is a criminal penalty, we do not believe
that injunctive relief is necessary at the present time. Even though
North Carolina has only partially satisfied its Drug Tax assessment
against Lynn, there is no pending state proceeding to be enjoined. Nor
is there any indication that North Carolina will not comply with this
opinion in the future. The judgment of the district court is therefore
AFFIRMED IN PART AND REVERSED IN PART.
_________________________________________________________________
1996) (considering as factors "(1) the entity that imposes the assessment;
(2) the parties upon whom the assessment is imposed; and (3) whether
the assessment is expended for general public purposes, or used for the
regulation or benefit of the parties upon whom the assessment is
imposed"). The district court concluded that the Drug Tax was not a reg-
ulatory fee. The cases discussing regulatory fees do not help in the analy-
sis in this case, however. Regulatory fees are civil and remedial in
nature. A criminal penalty raises different constitutional concerns that
outweigh the state's interest in the orderly administration of taxes. We
simply note that no court has held that a criminal penalty, although
labeled as a tax, falls within the ambit of the Tax Injunction Act.
14 Because the Drug Tax is not a"tax under State law," we need not
consider the third element, that is, whether Lynn has a "plain, speedy and
efficient remedy" in state court.
23