Case Information
*1 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. *2 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,
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. *4 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 . . . ."). *5 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,
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).
*7
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,
III.
Lynn, the central plaintiff, seeks monetary and prospective relief from Enforcement Officer West and Secretary Faulkner in their offi- *8 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.,
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,
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,
This holding has permitted the Civil War Amendments to
the Constitution to serve as a sword, rather than merely as
*10
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,
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,
IV.
We now turn to Lynn's claim for prospective relief. Lynn argues
that under Department of Revenue v. Kurth Ranch ,
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 ,
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 *12 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,
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,
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,
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,
The Drug Tax also has the fourth feature present in Kurth Ranch: the tax has no relationship to lawful possession. As the Court *16 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,
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,
[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,
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,
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,
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,
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,
The Drug Tax lacks the second element, however. A criminal pen-
*22
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 ,
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,
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,
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.