Court Rules Big Tobacco Must Pay New York $92 million

Gale Courey Toensing
September 21, 2013


Big Tobacco companies are required to pay New York State $92 million even though the state failed to collect taxes on Indian reservation cigarette sales since 2003, according to Buffalo News.

A three-judge arbitration panel ruled September 11 that New York’s failure to impose excise taxes on Indian reservation cigarette sales does not exempt the country’s largest tobacco companies from their financial obligation under the Master Settlement Agreement (MSA). The tobacco companies, which claim they were put at a competitive disadvantage because the state did not tax Indian cigarette sales, will have to pay the $92 million they withheld as required by the agreement. In the landmark 1998 settlement, Philip Morris USA and other large tobacco companies (participating manufacturers—PMs) agreed to pay $246 billion to states, including New York, to settle lawsuits brought by the attorneys general of 46 states to recover billions of dollars in costs associated with treating smoking-related illnesses. The historic settlement has distributed more than $70 billion in payments to the 46 states. New York has received about $11.5 billion in settlement proceeds since the 1998 agreement.

The tobacco companies central claim is that New York failed to “diligently enforce” the law through its failure to collect taxes on Indian reservation cigarette sales. The MSA requires participating states to enact and enforce a “qualifying escrow statute,” which requires cigarette manufacturers that didn’t sign the MSA (known as non-participating manufacturers—NPMs) to make annual escrow deposits of funds based on “units sold”—the number of cigarettes for which the state collects taxes. The escrow statute protects Big Tobacco from competition by forcing the NPMs to increase the price of their cigarettes so that they don’t have a cost advantage over the participating manufacturers who make annual MSA payments.

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But there are dozens of Native manufacturers that didn’t sign the MSA and are not required to make escrow payments because the cigarettes they sell do not fall within the definition of “units sold”—they don’t have tax stamps affixed to them.

Since 1998, participating manufacturers in the settlement have seen their sales volume in New York drop while the Native American tobacco economy flourished – at least until recent federal and state laws, such as the Prevent All Cigarette Trafficking Act (PACT) began to clamp down on the sales of untaxed cigarettes.

The panel decision by three retired judges involved New York and 14 other states. But the panel’s ruling said “New York is in a class by itself” because it is the only one where the contested issue involves failing to impose taxes on Indian sales, the Buffalo News reported.

“New York cannot be faulted for not collecting escrow on untaxed cigarettes when the statute on its face did not require collection of escrow on cigarettes that were not taxed,” said Fern Smith, writing for the three-member panel. She said New York has a history of “forbearance” in not collecting taxes on Indian tribes dating back to the 1930s.

The case could set a favorable precedent for the state, which is still facing arbitration challenges by the tobacco industry for every year since 2003. A provision of the MSA says that if Big Tobacco loses market share, it can withhold MSA payments to the states, putting the states in the conflicted position of needing Big Tobacco to keep its market share in order for the state to get its full annual MSA payment.

The states and tobacco companies are in arbitration over payments of more than $5 billion that Big Tobacco has withheld, claiming the states haven’t done the “diligent enforcement” required by the MSA to stop small rival cigarette companies that didn’t sign the settlement from undercutting them on prices and cutting into their market share. The $92 million court award affects only the payments due the state for 2003.