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Price breaks persist for small Mo. tobacco makers

Price breaks persist for small Mo. tobacco makers

February 18th, 2014 in News

The state of Missouri could lose nearly $70 million this year in tobacco settlement payments due to a unique pricing advantage enjoyed by some small cigarette companies.

Missouri is the only state that signed a landmark settlement agreement more than 15 years ago to not eliminate a loophole allowing small cigarette manufacturers and retailers to avoid making escrow payments, the St. Louis Post-Dispatch reported Sunday. The payments are required of companies that didn't sign the settlement, in part to keep them from selling highly discounted cigarettes and gaining a market advantage.

State lawmakers have refused requests by two Missouri attorney generals over the past 12 years to neutralize a pricing advantage that current Attorney General Chris Koster said allows the companies to "game the system." A federal arbitration panel found that Gov. Jay Nixon neglected to file lawsuits against the smaller tobacco companies to force them to pay into the escrow fund when he was attorney general. And the state Department of Revenue hasn't audited the companies for possible underreported sales.

Missouri was among 46 states in 1998 to settle a case with major cigarette makers, including the parent companies of R.J. Reynolds and Philip Morris. To cover the damage caused to smokers' health, the companies agreed to make payments to states based on their annual nationwide cigarette sales.

The escrow money was intended to remain untouched for 25 years unless needed to pay a judgment. States that failed to require payments from the nonparticipating companies could forfeit a share of their settlement if the larger companies lost a set amount of market share.

The arbitration panel ruled in 2013 that Missouri had not "diligently enforced" the law requiring escrow payments, finding that such payments were made on fewer than one-quarter of the more than 400 million off-brand cigarettes sold in the state in 2002. Missouri's 24 percent collection rate was the lowest among the 15 states in arbitration.

Nearly 25 percent of cigarette sales in Missouri are by the smaller companies not bound by the tobacco settlement, according to state Auditor Tom Schweich. That compares to 6 to 8 percent of sales nationally.

In addition to the loss of $69.2 million that had already been budgeted to help pay for Medicaid, early childhood education and other services, Missouri could also lose tens of millions in tobacco money each year for at least seven years.

Lobbyists for small tobacco manufacturers in Missouri said it would be unfair to make them shoulder the large cigarette makers' liabilities.

It's shifting the market from the small guys to the big guys," said Andy Arnold, who works on behalf of Fenton-based tobacco distributors Hub Inc. and LPC Inc., and U-Gas Inc., a tobacco retailer. "Our big issue is, why should we be penalized for Philip Morris' and R.J. Reynolds' lies in the past? That's kind of the kicker for us. It's a fairness issue."

Missouri passed a partial fix to its escrow enforcement problems in 2010. Before then, the state had to chase manufacturers down and try to serve legal papers in places such as Nepal, Brazil and the Philippines. Now, the firms are required to have registered agents in Missouri, which makes it easier to enforce collection efforts.

House Budget Committee Chairman Rick Stream, R-Kirkwood, plans a work session on the issue after a recent legislative hearing on the need to replace the money. No committee members asked a question about the convoluted system.

"Frankly, I don't believe many of them even know what this is about," said Stream, who is sponsoring a bill to make the smaller manufacturers pay as much as the large companies do. "It's going to cost us money for the next eight to 15 years. ... I'm not sure we'll get it resolved."