Pennsylvania to fight costly ruling in tobacco tax dispute

Published: Sep 25 2013 09:26:19 AM EDT   Updated On: Sep 25 2013 01:41:34 PM EDT
HARRISBURG, Pa. -

The Pennsylvania attorney general's office plans to challenge an arbitration decision related to payments from tobacco companies that threatens to blow a $170 million hole in the state budget next year, officials said Tuesday.

First Deputy Attorney General Adrian King said the request to reconsider the Sept. 11 decision in a fight over enforcing payments from certain tobacco companies could be filed as early as Tuesday or Wednesday. King said the amount of the loss to Pennsylvania is only approximate until an auditor makes a determination.

The long-running dispute has drawn in the last three attorneys general and involves whether Pennsylvania appropriately collected payments based on the 2003 sales of certain tobacco products.

Tobacco companies in the dispute agreed to a 1998 pact that requires them to pay states for the costs of health care for smokers, in exchange for protection from states suing the three companies that joined it. Pennsylvania gets about $340 million a year from tobacco companies as part of the settlement.

Those companies that joined the settlement — Philip Morris USA Inc., R.J. Reynolds Tobacco Co. and Lorillard Tobacco Co. — then challenged whether Pennsylvania appropriately collected payments from the sales of products made by competitors that didn't join the pact. Pennsylvania could potentially have to fight over the collections in 2004 and later years, as well.

A provision in the settlement entitles tobacco companies to a reduction if they lose market share to competitors that didn't join the agreement. Participating companies must prove the states didn't adequately enforce laws requiring those competitors to pay into escrow accounts in case of future litigation.

Part of the dispute over 2003's collections stems from whether Pennsylvania is obligated to collect taxes on roll-your-own cigarette tobacco.

The attorney general's office maintained that the state had no law authorizing it to collect taxes on such a product when it signed on to the 1998 settlement and thus had no obligation to count it as part of what it should have collected from competing tobacco companies.

However, the arbitration panel of three former federal judges seemed to think that Pennsylvania did have an obligation, and it called Pennsylvania the only state not to count escrow payments on roll-your-own cigarette tobacco. The judges then concluded that sales of roll-your-own tobacco made up 25 percent of the sales by competing companies in Pennsylvania versus a 2 percent national average.

That, the judges said, suggested that Pennsylvania's departure from other states was "unusual and not well justified."

But King said no such testimony backing up that statistic on roll-your-own sales in Pennsylvania had been provided to the panel and unduly inflated the potential award to tobacco companies.

"It's a major, major error," King said.

The attorney general's office previously declined a settlement offer by tobacco companies that 22 other states accepted. If the effort to overturn the arbitration panel's decision fails, King said, the attorney general's office could try to challenge it in court or revive a lawsuit that challenges the settlement, saying it could unfairly punish states that didn't sign on.