DALLAS — A Texas appeals court has upheld a lower court ruling that the state's fee on products from so-called "small tobacco" companies violates the state constitution.
The 55 cent-per-pack "fee" imposed on cigarettes from companies that were not party to a 1998 multi-state settlement of damages related to smoking is in fact a tax, the Third Texas Court of Appeals
The fee was included in House Bill 3536 in 2013 and was designed to protect the three "big tobacco" companies that signed the agreement with Texas and other states from competition from smaller manufacturers who could sell at lower prices.
The overarching goal of the bill was to reduce tobacco consumption in the state by closing a loophole on pricing of the product, as sought by the "big tobacco" companies.
"Protecting one company's market share over another's does not justify the unequal treatment of identical products," the court ruled. "Imposing a tax on only one class of identical products is not equal and uniform under Texas law and cannot be upheld."
The court upheld a 2013 ruling by state District Judge Stephen Yelenosky that the fee was unconstitutional "in its entirety" and barred the state from collecting or enforcing the tax.
In the name of state Comptroller Susan Combs, Texas appealed the ruling. The comptroller's office is considering an appeal to the state Supreme Court, a spokesperson said.
Big Tobacco's payments to Texas are linked to each company's existing market share. However, growth in sales of manufacturers that were not part of the master settlement agreement has reduced settlement funds in recent years.
The 1998 MSA released the big tobacco companies from past and future claims, but smaller manufacturers received no similar release in exchange for the fee, Justice David Puryear wrote in the appeals court ruling.
Under the Texas law, nonparticipating manufacturers can only receive a dollar-for-dollar credit if later found liable for claims.?
"And, unlike in states with escrow laws . . . non-settling manufacturers like Small Tobacco's members do not earn interest and have no opportunity to regain any of the funds that are not used to satisfy claims leveled against the companies by the state," Puryear wrote. "Instead, the tax money goes into the state's general revenue coffers for use in whatever way the state sees fit."?
Puryear noted that "only two other states," Minnesota and Mississippi, have assessed a per-cigarette tax on non-settling manufacturers.
"The other states established 'escrow statutes' that require tobacco manufacturers other than Big Tobacco to either join the master settlement agreement as a subsequent participating manufacturer or remain a non-participating manufacturer," Puryear wrote.
"In escrow-statute states, non-participating manufacturers must make annual deposits into escrow accounts, creating 'a pool of funds from which settling states may secure damage awards from [non-participating manufacturers] for any successful cigarette-related claims,'" Puryear wrote. "After twenty-five years, funds remaining in the escrow accounts, along with any earned interest, are returned to the non-participating manufacturers."
