Italy Overtaxed Cheap Cigarettes, Court Finds

(CN) - The European Union has a law for almost everything, including how cigarettes are taxed in member states. A tobacco tax is required across the EU, and member states are required to levy the same tax rate regardless of brand or price.

Antitrust regulators in Italy found themselves in regulatory crosshairs for their decision in 2012 to set the tobacco tax rate for bargain-brand cigarettes at 115 percent of the rate levied against higher-priced smokes.

Bargain tobacconist Yesmoke sued, claiming that the two tax rates reintroduced a minimum selling price for cigarettes, a practice the EU high court made illegal in 2008.

An Italian regional court agreed and annulled the higher tax. Italy appealed to its top administrative body, which asked the European Court of Justice whether EU law allows member states to levy different minimum-tobacco tax rates based on a brand's retail price.

The Luxembourg-based high court on Thursday identified two prongs to EU's tobacco-tax scheme: a VAT tax based on the pack's suggested retail price and an additional per-unit excise tax. Those taxes must be the same for all cigarettes, regardless of brand.

Though member states have the option of levying a minimum-tax threshold, the court said that tax rate can't vary depending on brand or retail price. This rule prevents competition distortions from creeping in and throwing the free market out of whack.

Although the Italian government had tried to argue that its tobacco-tax scheme was adopted in the interest of public health and to help people stop smoking, the court said those goals can still be achieved by working within the framework of EU law.

"That directive states that the level of taxation is a major factor in the price of tobacco products, which in turn influences consumers' smoking habits," the court wrote. "In this connection, the court has already held that fiscal legislation is an important and effective instrument for discouraging consumption of tobacco products and, therefore, for the protection of public health."

The war against smoking can be effectively waged by raising tobacco taxes equally among brands and price points - as EU law requires, the court concluded.

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