‘Small Tobacco’ Tax in Texas Dealt a Major Blow

AUSTIN (CN) - The 55-cents-per-pack fee that Texas imposes on smaller tobacco manufacturers is an unconstitutional tax, an appeals court ruled.

House Bill 3525, which Texas lawmakers approved in 2013, levied fees on tobacco companies that did not participate in the 1997 and 1998 settlements Texas reached with the "Big Four" tobacco firms - Philip Morris Inc., R.J. Reynolds, Brown & Williamson and Lorillard.

Several state attorney generals filed the lawsuits that led to those multibillion payouts, accusing the companies of having marketed tobacco to children. The settlements are meant to reimburse public health costs associated with smoking.

Big Tobacco's payments to the state are tied to each company's existing market share, but the growth in sales of nonsettling manufacturers has caused settlement funds to dwindle in recent years

When the Legislature passed HB 3525 to protect the Big Tobacco settlement funding, the Texas Small Tobacco Coalition and manufacturer Global Tobacco Inc. filed suit in Travis County Court against Texas Attorney General Greg Abbott and Texas Comptroller Susan Combs.

They challenged the fee as a tax in violation of the Texas Constitution, which requires taxes to be "equal and uniform." They also argued the fee violated the equal protection clause and due process clause of the U.S. Constitution.

In granting the plaintiffs summary judgment and entering a permanent injunction, the trial court found the new law unconstitutional "in its entirety."

A three-judge panel with the 3rd District Court of Appeals unanimously affirmed the ruling Friday.

Protecting the market share of one company over another "does not justify the unequal treatment of identical products," Justice David Puryear wrote for the court.

"Few would take issue with goals of reducing underage smoking or recovering costs of medical care related to smoking," the 10-page opinion states. "However, imposing a tax on only one class of identical products is not equal and uniform under Texas law and cannot be upheld."

While the settlement gave Big Tobacco a release of past and future claims, smaller manufacturers receive no similar release in exchange for the fee, Puryear noted. Nonparticipating manufacturers can only receive a dollar-for-dollar credit if later found liable for claims.

"And, unlike in states with escrow laws, an alternative to taxation discussed in more detail below, here, 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."

Texas also failed to show that nixing the fee amounts to "declaring unreasonable the judgment" of 54 other legislatures and "reasoning of every court of appeals in the nation."

"Only two other states, Minnesota and Mississippi, have assessed a per-cigarette tax on non-settling manufacturers," Puryear wrote. "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. 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.' After twenty-five years, funds remaining in the escrow accounts, along with any earned interest, are returned to the non-participating manufacturers."

The attorney general's office did not respond to a request for comment. Chris Bryan, a spokesman for the comptroller's office, said Friday the state will review the ruling and evaluate its options for appeal to the Texas Supreme Court.

The TSTC could not be reached for comment but uses its website to condemn the fee as "nothing but a new tax on small businesses."

"The new tax would cripple these small businesses and the result would very likely be the loss of Texas jobs in exchange for very little revenue for the state," the group said. "Big Tobacco claims these bills are leveling the playing field, but don't be fooled - they are only leveling small businesses from being on the playing field. These bills are nothing more than a market share grab by Big Tobacco."

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