Government

Dosal: Big Tobacco Blowing Smoke Over Tax

Companies spar over legality, 'fairness' in legislative battle
By: Kenric Ward | Posted: February 10, 2011 3:55 AM
Dosal Action Shot 1

Dosal employee | Courtesy: Dosal

The Legislature's perennial attempt to slap a tax on Florida's only tobacco company faces some tricky legal hurdles.

Sen. Thad Altman, backed by Big Tobacco interests, will try again this session to pass a 40-cent-per-pack tax on cigarettes made by Miami-based Dosal Corp. A similar bill by the Melbourne Republican failed last year, as have previous attempts by other lawmakers.

If there's one industry that is susceptible to a tax hike, it's tobacco companies, and Dosal's competitors call their tax gambit a matter of "fairness."

Dosal says Big Tobacco is blowing smoke, without a legal leg to stand on.

The dispute stems from the state's 1997 tobacco settlement, in which the biggest cigarette makers agreed to pay Florida billions of dollars to compensate for smoking-related health-care costs. 

The companies stood accused of racketeering, conspiracy, fraud and targeting of minors for sales.

Last year, these cigarette makers paid the state $365 million, and they will continue to make annual payments according to the settlement's agreed-upon formula.

But Dosal, a discount outfit that accounted for barely 2 percent of the market at the time of the settlement, was excluded from the state's lawsuit. Dosal's dismissal allowed the Miami company to keep its prices low and gain market share at the expense of the bigger brand names.

That has Big Tobacco fuming.

David Sutton, a spokesman for Altria, parent company of Philip Morris, said the state "voluntarily dismissed the claims [against Dosal] without prejudice."

"[Dosal] never received a release," Sutton maintains.

Though Dosal's rivals cannot legally renegotiate the state settlement, they're asking the Legislature to add a special tax on Dosal to close the price gap.

"This is not about the litigation, it's about closing a loophole that's draining revenues from the state," Sutton says.

In addition to Dosal, the Altman bill targets all other "nonparticipating manufacturers," which Sutton says now combine for 20 percent of cigarette sales in Florida.

LEGISLATURE VS. CIVIL JUSTICE SYSTEM

Mike Huey, an attorney representing Dosal, says it's wrong to slap a tax on Dosal for Big Tobacco's transgressions. He says that since Dosal was dismissed from the state's suit, there's no legal ground on which to impose a financial penalty 14 years later.

"It totally erases the civil justice system to just turn around and tax you," Huey argues. He calls any legislative attempt to stick Dosal with a financial penalty "a violation of the equal protection clause and a discriminatory tax.

"We would be taxed for the same liability the big boys were guilty of. The court ruled that Dosal had nothing to do with those claims."

Still, the drive for new tax revenues has lawmakers -- even putatively fiscal conservatives -- hungrily eyeing Dosal as the next cash cow.

Alluding to the Big Tobacco-Dosal fight, Senate President Mike Haridopolos has analogized that Burger King and McDonald's ought to be taxed at the same rate because they sell similar products.

But the comparison doesn't fit, counters Huey, who works for the Tallahassee lobbying firm of Gray Robinson. In the cigarette case, one party (Big Tobacco) admitted guilt, while another (Dosal) was dismissed from the proceedings altogether.

"Every year, we're up here fighting over 'fairness,' but you wonder how much these companies care about fairness versus market share. They're spending political capital to get government to get our market share," Huey said.

Sutton responds that Dosal sells its products in several other states and pays settlement fees in each of them. What's good for those states should be good for Florida, he reasons.

Dosal, whose market share has climbed to roughly 16 percent in Florida, presents a ripening target for lobbyists from Philip Morris/Altria, R.J. Reynolds and others. They entice legislators with the prospect of burgeoning revenues from a Dosal tax.

Former Attorney General Bob Butterworth, ironically, weighs in on the side of Big Tobacco. In a letter to then-Senate President Jeff Atwater last April, the man who negotiated the 1997 settlement stated:

"[The] non-settling manufacturers, whose growth is responsible for the overall decline in state settlement payments, were let go from the lawsuit not because of any finding of fact regarding their business practices, but simply because of their insignificant market share."

Now, 14 years later, Butterworth supports the Altman bill as a "quicker and better" way to recoup revenues.


MINNESOTA CASE: A WIN OR A WIN-WIN?

Citing the experience in Minnesota, lobbyists for each side joust vigorously over revenue estimates.

Sutton says legislation taxing "nonparticipating manufacturers" in Minnesota boosted that state's bottom line. Dosal claims the results have come up short as smokers shifted to discount brands marketed by Big Tobacco.

"It wasn't a win-win, just a win for Big Tobacco," Huey said.

Dosal believes the same thing would happen in Florida because Big Tobacco markets its own line of cheap smokes, and those brands would not be subject to the add-on tax. And because the payout formula is based on national sales, any increase in state sales would yield only pennies on the dollar.

That diluting effect has spawned wildly varying revenue estimates. Big Tobacco and its allies project additional tax proceeds of $80 million to $200 million a year. Dosal says the state would be lucky to get $4 million.

More fundamentally, Dosal (which does not sell its products in Minnesota) argues that the action by the Minnesota Legislature would be legally contestable here.

"The Florida Constitution is different in its interpretation of the equal protection clause," Huey observes. Additionally, since Dosal was removed from the initial settlement, imposing a related financial penalty at this point could smack of double jeopardy.

Amid the legal wrangling and political maneuvering, Huey says he bears no grudge against the state's prosecution of tobacco companies or the settlement that resulted.

"I don't blame Bob Butterworth for going after [Big Tobacco]. They were doing bad things and it needed to stop," he says.

Today, the biggest challenge may still lie in the court of public opinion.

As Huey sighs: "Everyone hates cigarette companies, so who cares?"

That's the kind of thinking that works up a continued appetite for selective "sin" taxes -- and keeps legislators, lobbyists and lawyers puffing.

--

Contact Kenric Ward at kward@sunshinestatenews.com or at (772) 801-5341.


Comments (3)

Bob Smiley
3:29AM DEC 9TH 2011
Is constantly taxing the sale of tabacco smokes really the best option for reducing the consumption of cigarettes? The big tabacco companies would always find ways to skirt major problems and market to different groups of the community.
shengsheng
2:19AM OCT 13TH 2011

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