RJR, Santa Fe Take on Tribe

Suit challenges Onondaga Nation over trust fund fees

Onondaga Nation Reunolds Santa Fe (CSP Daily News / Convenience Stores / Tobacco)

WASHINGTON -- The R.J. Reynolds Tobacco Co. is taking on tribal cigarette manufacturers in a fight that has already included covert investigations, aerial surveillance and confidential informants, reported the McClatchy Washington Bureau.

With a lawsuit filed late last week in Washington, the Winston-Salem, N.C.-based R.J. Reynolds and Santa Fe Natural Tobacco Co. challenged the U.S. Department of Agriculture's failure to collect Tobacco Trust Fund fees from two tribal cigarette manufacturers in particular.

"Certainly, it's a matter of significant importance," R.J. Reynolds spokesperson David Howard told the news agency. "The government has failed in its duty to diligently enforce the laws."

If R.J. Reynolds and Santa Fe win their suit, they will get a refund from some of the trust fund payments they have made. It might challenge tribal sovereignty, said the report, while the Agriculture Department would have to start taking account of the tribal companies' market share.

While the lawsuit is against the Agriculture Department, it really zeroes in on cigarette production from two New York state tribal entities, the Onondaga Nation and T&D Enterprises, the report said.

"They fear competition," Joe Heath, general counsel of the Onondaga Nation, told the news agency. "Here, you have a multibillion-dollar corporation whining about an Indian nation that's trying to serve its people."

Congress created the Tobacco Trust Fund in 2004 as part of the "tobacco buyout," which was designed to phase out federal tobacco subsidies. Manufacturers and importers of tobacco products pay quarterly assessments, and the money goes for payments to producers and holders of the government-allocated "quotas" required for production.

The 10-year trust fund program was capped at $10.1 billion. It's set to end this year.

Companies contribute to the trust fund based on their estimated share of the U.S. tobacco-product market. It's up to the Agriculture Department to calculate the total market. A similar formula is used to determine payments to a Food & Drug Administration (FDA) tobacco program.

The lawsuit contends that the Agriculture Department "underestimated gross domestic volume of cigarette production, causing the agency to overstate [R.J. Reynolds'] and Santa Fe's respective market shares."

The low-ball estimate, R.J. Reynolds argued, results from the Agriculture Department's failure to account for "rogue cigarette manufacturers." The company's lawsuit cites the two tribal businesses in the state of New York.

The Onondaga Nation, near Syracuse, "manufactures approximately one million cartons of cigarettes per year," the lawsuit claimed. A separate tribal entity called T&D Enterprises "produces approximately 6.5 million cartons of cigarettes per year," according to the suit. In both cases, the suit contends, a "substantial portion" of the cigarettes are sold to non-Native Americans.

Neither manufacturer contributes to the trust fund, although the law that set up the trust fund does not exempt Native American manufacturers.

"It's putting an unfair burden on tobacco manufacturers like us, who are playing by the rules," Howard said.

Heath countered that the Onondaga Nation's sales of its Eagles brand cigarette are "infinitesimal compared to RJR," and said the tribe used the revenues for needed public services such as health programs and the fire department. Heath further said the tribe's sovereign immunity posed a "very significant problem" to those seeking legal action on the trust fund issue.

Neither the Onondaga Nation nor T&D Enterprises report their sales volumes or pay federal excise taxes, which the Agriculture Department uses to calculate what a company owes the trust fund, according to the suit.

Heath said the Onondaga Nation maintained that its sovereign immunity shielded it from owing the federal taxes. Other New York state tribes have come to a different legal conclusion, and do pay excise taxes, the report said.

Click here to view the full report.