Texas Spares Big Tobacco on Taxes, Group Says

AUSTIN (CN) - As a favor to Big Tobacco, Texas enacted an unconstitutional law that subjects only small tobacco companies to a tax of 55 cents per pack, the Texas Small Tobacco Coalition claims in court.

The coalition sued Attorney General Greg Abbott and Comptroller Susan Combs, in Travis County Court.

It claims that Texas caved to Big Tobacco's lobbyists who aim to cripple smaller companies, which were not included in the Master Tobacco Settlement - because the small companies did not engage in the massive wrongdoing that spurred the litigation.

Texas House Bill 3536, which Gov. Rick Perry signed into law on June 14, "was designed ... to protect the market share of the Big Tobacco manufacturers," the complaint states.

The 17-page lawsuit gives a concise history of the nationwide tobacco litigation, and Texas's part in it.

In 1997, four companies controlled 97 percent of the cigarette market: "Phillip Morris Companies - 47.5%, RJR Nabisco Holdings (parent of R.J. Reynolds Tobacco) - 25.4%, BAT Industries P.L.C. (parent of Brown & Williamson Tobacco) - 16.1% and the Loews Corporation (parent of Lorillard Tobacco-7.9%)," according to the complaint.

Texas filed a federal antitrust lawsuit against these Big Tobacco companies in March 1996.

"The facts alleged in Texas' 130-page complaint were remarkable," the complaint states. "Texas' complaint provided many specific details about the Big Tobacco defendants' effort to illegally manipulate the tobacco industry and promote their products through unconscionable tactics. For example, with regard to marketing, it was alleged that the defendants:

"Targeted adolescent girls by creating products and marketing campaigns designed to prey on feelings of insecurity and inferiority in some young women.

"Took advantage of societal pressure to have a 'thin' body type by presenting cigarettes as a suitable alternative to dieting;

"Promoted a cartoon campaign which resulted in 'Joe Camel' being as universally recognized by six-year-olds as Mickey Mouse;

"Created anti-smoking materials that were, in reality, designed to promote smoking; "Fraudulently and deceptively advertised low levels of tar and nicotine in cigarettes; "Represented that cigarettes had health benefits (e.g. kept one clear-headed and offered protection against colds);

"Secretly bred high nicotine tobacco plants while denying such to the FDA;

"Created a 'gentlemen's agreement' to suppress independent research on smoking and health." (Parentheses in complaint.)

Dozens of other states brought similar lawsuits against Big Tobacco, seeking billions of dollars in damages, and the companies eventually signed a universal settlement with 46 states, the District of Columbia and six territories.

"The Big Tobacco defendants also entered into individual settlements with the remaining four states, including Texas," the complaint states. "Under the Texas Tobacco Settlement, the Big Tobacco defendants agreed to pay Texas billions of dollars through a multi-year payout structure, and pay an additional $2.3 billion to Texas counties and hospital districts that had intervened in the suit."

But the Small Tobacco Coalition claims that in negotiating these settlements, Big Tobacco companies "insisted on unusual provisions designed to protect their standing in the industry."

The coalition claims: "It is this historical background that explains Big Tobacco's battle to impose state taxes on plaintiff's members, and the genesis of the Texas statute that is the subject of plaintiff's claims. In an effort to impose the type of economic sanctions that the settlement saddled the Big Tobacco defendants with, large deep-pocketed tobacco companies began to push for legislation in Texas that would impose a targeted tax on a handful of small tobacco manufacturers. These efforts to tailor a punitive tax paid off during the 2013 regular session after the Big Tobacco companies descended on the Texas Legislature to argue in favor of the unprecedented tax.

"House Bill 3536 (the 'Act'), which was signed into law on June 14, 2013, amended the Health and Safety Code by creating a 'fee' (constituting a tax under well-established Texas law) on small, independent manufacturers of certain cigarettes and cigarette tobacco products manufactured.

"The Act contains a confusing tax scheme that imposes a perpetual tax of 55 cents only on certain tobacco products sold, used, consumed, or distributed in Texas. Significantly, the tax is neither equal nor uniform and it does not apply to all cigarettes.

"Under the Act, only cigarettes manufactured by 'non-settling manufacturers' ('NSM') are subject to the tax. The Act defines 'NSM' as a manufacturer of cigarettes or cigarette tobacco products who did not sign either the Comprehensive Settlement Agreement and Release in the Texas Tobacco Lawsuit (the 'Texas Tobacco Settlement') or a March 20, 1997 settlement agreement involving Liggett Group (the 'Liggett Settlement'). Thus, the Big Tobacco defendants who were targeted for their illegal conduct in those lawsuits are wholly exempted from the tax. Under the Act, NSM distributors are required to file monthly reports and remit fees/taxes for cigarettes or cigarette tobacco products. The tax rate is 2.75 cents on each NSM cigarette sold, used, consumed, or distributed in Texas, which amounts to 55 cents for each 20-cigarette pack." (Parentheses in complaint.)

The Small Tobacco Coalition seeks a declaration that the Act violates the Texas Constitution and the Equal Protection and Due Process Clauses of the U.S. Constitution.

It also wants an injunction to stop Texas from collecting any fees or taxes under the Act.

The coalition is represented by Craig Enoch with Enoch Kever of Austin.

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