Follow the (cigarette tax) money

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In an Aug. 27 phone interview, Philip Morris USA spokesman David Sutton told Indian Country Today that the giant tobacco company wrote a bill – A-11834 – that New York Assemblyman William Magee introduced into the Assembly Aug. 13. The bill is intended to force Indian retailers to collect taxes on cigarettes they sell to non-Indian customers on sovereign tribal land.

The bill would require all cigarettes sold to Indian reservations for resale by retailers to have tax stamps on them. Since tribal members are exempt from paying taxes on items purchased on tribal land, the retailers would have to file affidavits to the state each month, requesting a refund of the taxes on cigarettes sold to tribal members. The state would determine which refund requests were “reasonable” and when the refunds, if any, would be made.

Legislators say the state could collect $400 million or more from cigarette sales on reservation. But why would Philip Morris USA be so eager to help New York state collect those taxes? Because Philip Morris USA and other big tobacco companies would profit from the bill by reducing or eliminating competition from Native tobacco companies, distributors and retailers, and gaining market share.

Here’s how it would work:

In 1998, Philip Morris USA and other large tobacco companies signed the $246 billion Master Settlement Agreement to settle lawsuits brought by the attorneys general of 46 states to recover billions of dollars in costs associated with treating smoking-related illnesses.

Under the terms of the MSA, the participating manufacturers – the tobacco manufacturers who signed the settlement – are required to pay millions of dollars each year to the participating states, including New York.

The MSA requires participating states to enact and enforce a “qualifying escrow statute,” under which those tobacco manufacturers that sell cigarettes but didn’t sign the MSA (known as non-participating manufacturers) must make annual escrow deposits of funds based on “units sold,” meaning the number of individual cigarettes on which the state collects taxes.

The purpose of the qualifying escrow statute is to protect the big tobacco companies from competition from tobacco companies that are not parties to the settlement. The escrow payments increase the cost of cigarettes sold by non-participating manufacturers so that they do not have a cost advantage over the participating manufacturers who make annual MSA payments. Escrow payments based on the units sold are equal to the MSA payments based on the volume sold by participating manufacturers.

The only cigarettes that may be sold in a settling state are brands manufactured by a participating manufacturer or by a non-participating manufacturer that has agreed to make escrow payments based on the “units sold.”

The statute defines “units sold” to mean all cigarettes sold in the state with tax stamps affixed. Tax stamps can only be affixed to cigarettes that are manufactured by a participating manufacturer or a non-participating manufacturer that makes escrow payments.

But there are more than two dozen tobacco companies and distributors, such as Smokin’ Joe and Native Wholesale Supply Co., that did not sign the MSA and are currently not required to make escrow payments because the cigarettes they sell to Indian reservations do not fall within the definition of “units sold” – they don’t have tax stamps affixed to them.

Under the new bill, all cigarettes on an Indian reservation in New York would have to bear state tax stamps, and unstamped cigarettes would be considered contraband and subject to seizure either by the state or the federal government.

American Indian manufacturers, therefore, would have to make escrow payments on all cigarettes sold on Indian reservations. If they refused, they could not lawfully sell their cigarettes to Indian retailers on reservations.

Even though New York does not have the authority to collect taxes on reservation sales between tribal members, the new bill would require the tax stamps to be affixed and taxes to be collected (although the tax would theoretically be refunded later). Consequently, Native-manufactured cigarettes could not be sold even to Native purchasers on tribal land under the new bill. The Native manufacturers would have to sell their cigarettes at the same price as the big tobacco companies, which would effectively put them – and Native retailers – out of business, leaving their market share for Philip Morris USA and the other big tobacco manufacturers to gobble up.