Big Tobacco Blames Indians for High Taxes

WASHINGTON (CN) - The federal government refuses to account for the billions of cigarettes produced and sold by rogue manufacturers when it tallies up taxes owed by tobacco companies who play by the rules, R.J. Reynolds claims in court.

R.J. Reynolds and Santa Fe Natural Tobacco Co. sued the U.S. Department of Agriculture, the Farm Service Agency, the Commodity Credit Corporation on Aug. 14 in Federal Court, challenging the government's quarterly assessments against the industry under the Fair and Equitable Tobacco Reform Act.

That law directs the USDA "to impose assessments on a pro rata basis reflecting every manufacturer's and importer's proportional market share within each of six classes of tobacco products, including cigarettes," according to the complaint.

Reynolds claims the USDA calculates each manufacturer's and importer's market share by dividing their cigarette production volume by the gross domestic volume from all sources - including unlicensed manufacturers such as the Onondaga Nation Cigarette Factory in New York and T&D Enterprises.

"To support their challenge, plaintiffs provided USDA with detailed relevant information on significant unreported production by rogue cigarette manufacturers," the complaint states. "The evidence showed, among other things, that non-reporting manufacturers in one state alone - New York - produce and introduce into commerce approximately 4 billion cigarettes per year."

Reynolds claims that Uncle Sam is taxing legitimate tobacco counties for the billions of cigarettes produced by the fly-by-nighters.

"After a thorough investigation and based on relevant information provided to USDA in connection with their joint appeals, plaintiffs established that Onondaga Nation manufacturers approximately 1 million cartons of cigarettes per year and sells a substantial portion of those cigarettes to non-Native Americans," the complaint states. "Information obtained through plaintiffs' investigations initially established that T&D Enterprises produces approximately 2.5 million cartons of cigarettes per year and sells a substantial portion of those cigarettes to non-Native Americans." Reynolds claims these rogue smokes cost it $257,148 in over-assessed taxes in September 2013 and $257,148 in December 2013.

Santa Fe says it had to pay an extra $6,543 and $15,836 in each of those two quarters.

The USDA denied the companies' appeal of the tax assessments.

"Unreported production and sale of cigarettes is a widely recognized, notorious problem," the complaint states. "USDA cited no evidence that contradicts or conflicts with the relevant information provided by plaintiffs concerning Onondaga Nation and T&D Enterprises specifically or non-reporting cigarette manufacturers generally. USDA did not dispute the existence of rogue cigarette manufacturing operations that fail to report their volume of sales, as required by law. Nor did it dispute that the agency's failure to account for those unreported volumes of sales significantly inflates the putative market share of law-abiding cigarette manufacturers and importers, including plaintiffs."

The tobacco companies want the court to declare the tax hike a violation of the Fair and Equitable Tobacco Reform Act and the Administrative Procedure Act.

They also want an order reducing their previous tax assessments.

They are represented by Mark Brown of King Spalding.

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