'Little Tobacco' MSA Money at Issue in Missouri

State will forfeit $69 million of the approximately $130 million

Chris Koster

Chris Koster

JEFFERSON CITY, Mo. -- For the last 12 years, legislators have refused the Missouri state attorney general's request to pass a law to neutralize a pricing advantage that small tobacco manufacturers of "value-brand" cigarettes enjoy. Missouri is the only state that has not passed such a law. The issue is drawing heightened attention this year because of an arbitration panel's decision, reported The St. Louis Post-Dispatch. Under that decision, Missouri will forfeit $69 million of the approximately $130 million that the state had expected to receive this year from the national tobacco Master Settlement Agreement (MSA).

The state could lose tens of millions in tobacco money each year for at least seven years, said the report. Attorney General Chris Koster is once again urging that the pricing advantage be addressed.

"The small-tobacco people keep telling folks that this is a tax increase, and that it's big business picking on small business, none of which is true," said Rep. Chris Kelly (D).

In 1998, Missouri was among 46 states that settled a case with major cigarette makers, including the parent companies of R.J. Reynolds and Philip Morris. Among other provisions, the companies agreed to make payments to the states based on their annual nationwide cigarette sales.

Missouri Governor Jay Nixon, who was then the state's attorney general, signed off on the deal. As part of the settlement, the legislature passed what was called a "model statute." It required smaller tobacco companies that were not bound by the settlement to pay into an escrow fund.

Of the 432 million off-brand or nonparticipating manufacturer cigarettes sold in Missouri in 2002, companies made the escrow payment on only 102 million in 2003, the report said.

Missouri's 24% collection rate was the lowest among the 15 states in the arbitration case.

The arbitrators said that Nixon had neglected to file lawsuits against the smaller tobacco companies to force them to pay into the escrow fund and the state Department of Revenue had failed to audit them to see if their sales were underreported.

In a 2012 letter to legislators, Koster said the law allowed the small tobacco companies to "game the system." Missouri returns about $80 million in escrow payments each year "and stands alone in its coddling" of the small producers, he wrote.

Like Nixon before him, Koster asked legislators to close that loophole by repealing a section of law that allows the escrow returns. All states except Missouri have done so.

Small cigarette manufacturers and retailers have fought that move vigorously, and each year they win. They say they weren't in existence when the master settlement was signed, and thus bear none of the blame for marketing cigarettes to children. They also say they get no benefit from the settlement, such as immunity from lawsuits.

"It's shifting the market from the small guys to the big guys," Andy Arnold told the newspaper. He has lobbied against the change on behalf of Fenton, Mo.-based tobacco distributors Hub Inc. and LPC Inc., and U-Gas Inc., a tobacco retailer. "Our big issue is, why should we be penalized [for what Big Tobacco did]? … It's a fairness issue."

Changing the escrow fund "is not some sort of silver bullet," Ron Leone, executive director of the Missouri Petroleum Marketers & Convenience Store Association, told the paper.

Click here to view the full St. Louis Post-Dispatch report.