Tobacco Tax Smoke Hides Allocation Change

Battle continues over the tobacco MSA’s allocable share provision

When voters are asked to support a proposed referendum to increase revenue from the sales of cigarettes, it will be obvious they are voting whether or not to increase the tax on cigarettes; however, another significant change may be less obvious.  The referendum also proposes to change the statutes that determine how some cigarette manufactures have to comply with the 1998 Master Settlement Agreement (MSA) (for more on the MSA, see the recent blog post).  The proposed language could have a significant effect on the requirements for cigarette manufactures that were not originally bound by the MSA.  If adopted, the changes could add significant costs to these non-participating manufactures (NPMs).

When originally adopted, drafters of the MSA included a provision that required states to adopt model statutory language that would include a per-pack fee on NPMs, to be placed in an escrow account.  The escrow funds were designed to make sure funds would be available in the event that a claim was made by a state against a NPM.  This provision also had the effect of protecting the market share of the original participating manufacturers (OPMs).  Because the NPMs were not subject to the rules and payments included in the MSA, the model legislation was meant to force the NPMs to place in escrow an amount per cigarette similar to the amount being paid by the OPMs and subsequent participating manufacturers (SPMs) in order to account for the price advantage they might have as a result of the MSA.  The provisions of the model statute were included in House Bill 814, which was passed in Missouri in 1999.  The Missouri version of the model statute can be found in Chapter 196, sections 196.1000 and 196.1003 of the revised statutes.

The NPM statute includes a provision that allows for a refund if the NPM pays into escrow an amount in excess of the state’s allocable share.  The refund provision was based on an assumption that a manufacturer’s product would be sold nationally.  However, over time it was discovered that a NPM that operates in only a few states could get back most of what it had paid into the escrow account.  If a company sells in only a few states, then its percentage of total sales in a particular state may be higher than the state’s allocable share; as a result, a refund could be triggered.  According to the MSA, Missouri’s state allocation percentage (allocable share) was 2.2746011 percent.  The allocation percentage is a percentage of funds held in escrow to be distributed by the states in accordance to the MSA.  The percentage is constant and does not vary based upon the number of cigarettes sold in a state in a particular year.

An example may be useful to illustrate this situation.  If a NPM only sold cigarettes in Missouri, then 100% of its cigarettes would be sold here.  Missouri’s model escrow statute requires that $.0188482 be paid into the state’s escrow account for each cigarette sold in the state.  However, because of the refund provision in the escrow statute, the NPM could get a refund of all but 2.2746011% of the payment.  If a NPM sold 1 million cigarettes, the escrow payment could be calculated as follows:

Total Escrow Payment: 1, 000,000 x $.0188482 x 100%=$18,848.20

Allocable Share Liability: 1, 000,000 x $.0188482 x 2.2746011%=$428.72

Amount of refund $18,848.20 – 428.72 = $18,419.48

Note: If a NPM sold in multiple states, the appropriate percentage of cigarettes sold in Missouri would be used in the equation.

In 2002, the National Association of Attorneys General introduced a new model statute to account for this situation.  Although the MSA does not require it, legislation addressing this issue has been passed in every state except Missouri.  The language in the initiative petition would revise the original model statute by changing the refund calculation.  It would remove any reference to “allocable share” and would provide that any refund for a NPM would be based on the number of units sold in the state in a particular year.  A refund would be due only if the amount put in escrow is more than would have been due if the NPM would have had to pay under the MSA in that same year based upon the number of cigarettes sold.

Attorney General Chris Koster sent a letter to legislators dated Feb. 1 urging them to pass the provisions of SB 629, which was introduced during the past legislative session by Sen. Schafer and proposed some of the same changes.  He argues that Missouri needs to make the change or risk losing revenue from the MSA.  However, according to the MSA, only the model statute had to be passed if a state was to receive payments.  Problems with the statute did not come to light until after the MSA was in effect, so there is a difference of opinion as to whether a state must make changes to its escrow laws.

The initiative petition goes well beyond the “allocable share” issue and puts many other requirements on the NPMs.  It calls for them to make escrow payments quarterly instead of annually.  Additionally, it requires the NPMs to post a bond in order to do business in Missouri.