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Philip Morris Must Keep Paying Old Tax Rates

(CN) - Agriculture regulators need not use current tax rates to calculate assessments across tobacco product makers, the 4th Circuit ruled, rejecting a challenge from Philip Morris.

The tobacco giant had sued the U.S. Department of Agriculture (USDA) and Secretary Thomas Vilsack last year under the Fair and Equitable Tobacco Reform Act (FETRA) of 2004, which marked an end to the quota system that tobacco growers had enjoyed for over 65 years.

To ease the transition, Congress implemented a temporary system of periodic payments from tobacco manufacturers and importers to growers from 2005 to 2014.

For the fiscal year 2005, FETRA lists specific assessment percentages for all six classes of tobacco products based on 2003 tax rates. For subsequent years, however, the percentages are to be adjusted "to reflect changes in the share of gross domestic volume" of each kind of product.

After Congress upped excise taxes on tobacco products via the Children's Health Insurance Program Reauthorization Act of 2009, however, the USDA amended the FETRA assessment methodology so that it would continue to use the 2003 tax rates instead of current ones.

In its lawsuit, Philip Morris sought an order vacating the amendment and directing the government to refund the allegedly excessive payments the company had already shelled out.

A federal judge in Virginia sided with the USDA at summary judgment, finding that its methodology "faithfully adjust[s] the percentage of the total amount required to be assessed against each class of tobacco product" and "reasonably reflects the congressional intent underlying FETRA."

Philip Morris appealed, but the 4th Circuit affirmed the lower court's ruling Wednesday, holding that there is "nothing incoherent" about the USDA taking a different, "permissible" approach.

The court tossed aside the tobacco giant's claim that because "Congress commanded USDA to adjust the class shares based upon changes in the share of currently taxable removals," it intended for the USDA to always use current rates.

"The only direct evidence of Congress's intent in this regard is its actual use of the then-current 2003 rates, in establishing the initial allocation under § 518d(c)(1)," Judge Allyson Duncan wrote for the three-judge panel. "But this provides no basis for determining whether Congress intended that USDA would always use current rates or that it would always use 2003 rates. The minimal textual evidence is equally consistent with both methodologies."

Congress did not mean to further the policies underlying its choice of excise tax rates by building them into the FETRA assessment allocation, according to the ruling.

"There is no evidence in the text of FETRA or elsewhere to indicate that Congress intended to use FETRA as a vehicle to further tax policy writ large," Duncan wrote. "The record equally supports the conclusion that Congress used the 2003 excise tax rates only because they were a useful mathematical expedient."

The 4th Circuit also threw out Philip Morris' contention that the USDA has denied changing its position.

"USDA's recognition of the difference between the original regulation and the amended one is precisely why it issued the technical amendment," Duncan wrote. "Moreover, in response to Philip Morris's rulemaking petition, USDA issued a detailed determination explaining why it would continue to use 2003 rates instead of current rates, as Philip Morris had proposed - an act quite inconsistent with the view that USDA regarded the two approaches as equivalent."

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