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Attorney General Ellison moves to recover $58M in Big Tobacco underpayments under Minnesota's historic tobacco settlement

Alleges Philip Morris misrepresented settlement requirements to payment administrator; moves to recover underpayments, interest, and civil penalties, and prevent future underpayments

July 3 2024 (SAINT PAUL) – Attorney General Ellison has filed a motion to enforce Minnesota’s historic 1998 settlement agreement with tobacco manufacturers, alleging that the manufacturers have underpaid Minnesota in their annual settlement payments since 2019. The motion asks the Court to order the manufacturers to pay more than $58 million in underpayments, interest on the underpayments, civil penalties, and to prevent the tobacco manufacturers from underpaying in future years.

After a months-long trial in 1998, Minnesota reached a settlement with the largest tobacco manufacturers that restricted the manufacturers’ marketing of tobacco products and required annual payments to Minnesota. The payments to Minnesota are based, in part, on the size of the manufacturers’ after-tax profits in a given year. The motion Attorney General Ellison filed alleges that after the federal corporate tax rate changed in 2018, Philip Morris misrepresented the content of the Minnesota settlement to the third-party payment administrator, PricewaterhouseCoopers, in a way that incorrectly reduced the manufacturers’ payments to Minnesota by nearly $10 million per year.

“After lying to the American people about the dangers of their products, it is unfortunately not surprising that the largest tobacco manufacturers have also tried to avoid the commitments they made when settling with Minnesota,” said Attorney General Ellison. “It is particularly galling that, after these tobacco companies received a massive tax cut from President Trump, they turned around and used that windfall to justify underpaying the people of Minnesota. The motion I filed seeks to hold Big Tobacco accountable for the settlement payments they agreed to make by recovering millions of dollars the state was underpaid and forcing the manufacturers to make full annual payments in the future. Tobacco companies have demonstrated how little their commitments are worth, but as the lawyer for the people of Minnesota, I will do everything in my power to hold them to their word.”

The dispute over payment amounts arises from a settlement provision that increases the size of the manufacturers’ annual payments if their current after-tax profits are greater than they were in 1997. The manufacturers have argued that they get to re-calculate their 1997 profits by applying modern corporate tax rates for this comparison, despite the fact that the Minnesota settlement explicitly calls for the use of 1997 tax rates when calculating 1997 after-tax profits. Because President Trump and Congress lowered corporate tax rates from 35% to 21% in 2018, using the new, lower tax rate to calculate 1997 profits resulted in the manufacturers underpaying Minnesota by close to $10 million per year.

Tobacco manufacturers have faced challenges over similar underpayments in Mississippi and Texas, where courts have determined that the underpayments were improper and ordered reimbursement to the states.

The state settlements with the tobacco industry are widely recognized as landmark public health achievements. Since 1998, overall cigarette use has declined by more than 50% and cigarette use among high school students dropped from over 35% in 1997 to 1.9% in 2023.

 

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