Small Tobacco Companies Could Pay Additional Tax

Small tobacco companies could be facing a tax hike after the 2013 legislative session if three large tobacco companies get their way.

The Texas House Ways and Means Committee held a hearing Tuesday in anticipation of a tobacco tax bill that will probably come up in the next session. The bill would essentially levy an extra tax on small tobacco companies to equalize what the big companies call a competitive advantage because of pricing. In a similar bill that failed to pass in the last session, officials estimated that the taxes would result in an extra $25 million for the state.

The three large tobacco companies, Philip Morris USA, R.J. Reynolds Tobacco Company and Lorillard Tobacco Company, already pay the state extra fees under a 1998 lawsuit settlement in which the Texas alleged they were misleading consumers about the health repercussions of their products, and advertising to children. Because they pay more fees, their cost per carton of cigarettes is more.

Keith Teel, a lawyer who represents the big companies, told the committee that this competitive disadvantage has resulted in those companies losing 10 percent or more of their market share, which used to be 98 percent before the fee was imposed.

The smaller companies argue that they did not mislead their consumers, so they weren't sued and are therefore not part of the settlement. But Teel argued that the settlement was about more than that. He said that the fees make up for health care costs incurred by the state because of smoking and that all tobacco companies should therefore be subject to such a fee.

“Right now, you're not getting anything to cover health care costs incurred by the products they sell,” Teel told the committee.

Yolanda Nader, chief executive at Dosal Tobacco Corporation, said the small companies can't afford an additional tax, which would eventually put them out of business cost the state money in the long run.

“Quite simply, the money is not there,” Nader said. “This is a market share grab. The state does not get the money. The states lose the businesses and the jobs that companies that do business in these states provide.”

Additionally, the small companies argue that a tax on only their businesses would be unconstitutional because it would not treat all the tobacco companies equally. Even if the intent of the bill was to level the playing field, it might not hold up in court because the big companies would be paying their fees as a result of a lawsuit, and the small companies would be paying a tax.

Nader argued that if the intent of the Legislature is to collect a fee for health care costs from all tobacco companies, then the state should hash out a separate settlement with the smaller companies, not impose a tax. If legislators do impose a tax, it should be on all the companies, she said.

Another complication of imposing a tax on only small tobacco companies is ensuring they aren't paying twice.

Texas is one of four states that that has its own settlement with the large tobacco companies. The other 46 states combined their lawsuits into one big settlement. Under this big settlement, companies divide their fees among the states according to their national market share. Texas figures into the calculation of that market share, but doesn't receive any of the fees.

More than 50 of the smaller companies signed onto this national settlement after the fact to avoid similar lawsuits that would probably arise. If they are already paying the fee, then those states have no reason to sue them.

So if Texas imposes an additional tax on the small companies that signed onto the national settlement, then those companies would be paying for their market share in Texas, and then paying again because of the state tax. These companies advocate for a credit that would exempt them from paying for their market share in Texas to remedy this problem. But to do that, all 46 states that were a part of the national settlement would have to agree to it.

Rob Wilkey, a representative of Commonwealth Brands, said that paying double would put his company out of business.

“If you make us pay twice, we'd just go away in Texas,” Wilkey said. 

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