Last week the Tennessee Supreme Court overturned that state's "tax" on illegal drugs, which disguised punishment as a revenue measure. The case involved Steven Waters, who in 2005 paid an undercover agent in Knox County $12,000 for a kilogram of cocaine. The state Department of Revenue assessed a tax of $55,000 on the cocaine and seized Waters' bank account to cover it. Waters (who also was successfully prosecuted in criminal court) challenged the tax, arguing that it violated his right to due process and the guarantee against compelled self-incrimination. The local chancery court agreed, but both the appeals court and the Tennessee Supreme Court rejected the tax on different grounds, saying it was not authorized by the state constitution. The constitution allows state taxes on "privileges," "merchants," and "peddlers." Since possessing cocaine for nonmedical purposes is illegal, the Supreme Court reasoned, it can hardly be considered a privilege. And since the tax applies to mere possession, whether or not a sale occurs, it is not a levy on "merchants" or "peddlers" either.
I discussed the Waters case here, the Tennessee tax here and here, and then-New York Gov. Eliot Spitzer's interest in this innovative approach to combating vice here. For more on the subject, see this 2000 Reason article and this 2007 Reason Foundation study.
[Thanks to Justin Owen for the tip.]