Smoking out the money

State legislators last month approved $260,000 for the Nevada Taxation Department to hire a team of auditors to track cigarette sales by smaller tobacco corporations who were not participants in the 1998 national tobacco lawsuit settlement.

Under that settlement, negotiated between several state attorneys general and the major tobacco corporations, payments are made to state governments to cover Medicaid and other costs caused by tobacco-related illnesses and paid for by taxpayers. Nevada was one of the last states to join the lawsuits.

The manufacturers who were a party to that agreement were Philip Morris USA, R. J. Reynolds Tobacco Company, Brown & Williamson Tobacco Corp., and Lorillard Tobacco Company.

But there are a number of smaller, little-known corporations that comply with the settlement but were not a party of it. They pay a portion of their tobacco sales into an escrow account. Up to now, no one has tracked whether the amounts they pay correctly reflect their share of the settlement.

“The team will enhance the tracking of what we call NPMs—non-participating manufacturers,” said state taxation chief William Chisel.

The need for the team is partly that, under the lawsuits settlement, a failure by a state to fully police all corporations’ payments could cause a reduction in payments by the majors.

When the news came that the new team is being formed to watch over the small companies, we got to wondering who’s watching over the big companies.

“Who’s minding the big guys if we’re minding the little guys?” Chisel asked whimsically when we called.

He wasn’t certain, so he checked with the state attorney general’s office. It turns out that no one is doing the job—at least, no one in the state.

As part of the original settlement, the National Association of Attorneys General (NAAG) set up a mechanism to cover the large companies. When we tried to find out how it works, we ran into another obstacle—no staff member at NAAG is permitted to talk to the press.

Follow the taxes

We did, however, obtain from a source this description of the process:

The large companies pay based on their sales. They pay each year on April 15 based on their domestic sales of the previous year—the sales on which federal tobacco excise tax is paid, which provides a tool for tracking sales.

Under the agreement, the tracking program has access to the tax returns filed by the tobacco companies with the U.S. Alcohol and Tobacco Tax and Trade Bureau. So if Corporation X says it sold x-number of cigarettes in the United States in a year, that information can be checked against its return. In addition, supplemental information can be gathered as backup checks. An independent auditor at Price Waterhouse Coopers may also gather some corroborating evidence.

That is the process by which states know the corporations are paying what they should. How the money is distributed state by state is less clear. The distribution to states is handled by the Price Waterhouse auditor, who calculates the total amount due and how it will be divvied up among the tobacco companies and how much will go to each state.

In the lawsuit settlement there was a document called Exhibit A that gives each state a fixed percentage of the money from the corporations. Turnover and institutional memory being what it is, no one seems to know how those percentages were set in 1998, whether it was by population or historic tobacco use or what. Nevada has long had a very high rate of smokers.

According to the Centers for Disease Control in February 2011, “In Nevada, 22.2 percent of the adult population (aged 18+ years)—over 428,000 individuals—are current cigarette smokers. Across all states, the prevalence of cigarette smoking among adults ranges from 9.3 percent to 26.5 percent. Nevada ranks 43rd among the states [51st being the worst].” The state does better among Nevada youth, ranking 20th, but it also has the worst death rate from smoking related diseases among the states.

In addition, there is greater official and private tolerance of smoking in Nevada, creating the worst workplace hazards, according to CDC surveys: “Among adults who work indoors, the percentage who reported anyone smoking in their work area within the preceding two weeks has remained higher in Nevada than in the nation overall. Currently, Nevada ranks 51st among the states [and the District of Columbia] for workplace exposure, at 16.9 percent.”

Not including burn or secondhand smoke deaths, smoking kills 3,310 Nevadans annually (343.7 per 100,000). Smoking costs $709 million in Nevada annually in health care costs—prescription drugs, nursing home care, hospital care, etc.

Acme Inc.

There is an astonishing number of companies currently selling in Nevada that were not participants in the 1998 lawsuit settlement: Chancellor Tobacco Co, American Cigarette Company, Cheyenne International LLC, Commonwealth Brands, Dosal Tobacco Corporation, Grand Tobacco LLC, Imperial Tobacco Limited/ITD (USA) Limited, Japan Tobacco International U.S.A., King Maker Marketing, Inc, King Mountain Tobacco Company, Konci G&D Management Group (USA) Inc., KT&G Corporation, Lane Limited, Liggett Group, Lorillard Tobacco Company, Native Trading Associates, Ohsearase Manufacturing, People’s True Taste, Peter Stokkebye, Premier Manufacturing, Inc., Procesadora Nacional Cigarrillera S.A./Pronalci S.A., P.T. Djarum, Rouseco , Inc., Sandia Tobacco Manufacturers, Santa Fe Natural Tobacco Company, Seneca Cayuga Tobacco Company, Seneca Manufacturing Company, Sherman’s 1400 Broadway NYC, Ltd., Six Nations Manufacturing, Skookum Creek Tobacco Co., Smokin Joes, Tabacalera del Este, S.A. AKA “TABESA,” TOP Tobacco, L.P., Truth & Liberty Manufacturing, US Flue-Cured Tobacco Growers, Inc., Vector Tobacco Inc., Von Eiken Group, Wind River Tobacco.

Their products are marketed under names like Kite, Treasurer, American Harvest, Complete, Montclair, Fortuna, Checkers, Carnival, Timeless, Maverick.

Most of the tobacco settlement money Nevada receives is used for health care. About 40 percent is used for a scholarship program, which has had chronic financial problems with the decline of smoking.

That ratio was set at the 1999 Nevada Legislature, where health-care forces wanted all of the money but were blocked by Gov. Kenny Guinn’s proposal for the scholarships.

Another proposal heard at the 1999 Legislature came from Assemblymember Lynn Hetrick, a Douglas County Republican. He proposed that the state not use the money at all and let it accumulate over time or take a buyout until it produced as much interest annually as it then produced in direct annual payments. Lt. Gov. Brian Krolicki still supports this kind of a plan, known as securitization.