Minnesota AG recovers more than $58 million in underpayments from tobacco manufacturers

(ABC 6 News) – On Tuesday, Minnesota Attorney General Keith Ellison announced that a court has found tobacco manufacturers have not been paying what they own Minnesota under the 1998 tobacco industry settlement.

The AG’s Office calculated the combined underpayments from tobacco manufacturers Phillip Morris and RJ Reynolds to be around $58.2 million, plus interest.

The Attorney General’s Office filed a motion to enforce the settlement against the manufacturers in July 2024, asserting that the companies were wrongly using a 2018 change in the federal corporate tax rate to reduce their settlement payments to Minnesota.

This week, a court confirmed that the Attorney General’s Office’s reading of the settlement was correct and that Big Tobacco was underpaying Minnesota. The court ordered tobacco manufacturers to make full payments in the future and held that the parties must meet and confer on the appropriate amount of damages, interest, civil penalties, and attorney fees owed to Minnesota based on the manufacturers’ underpayment. 

“I’m not surprised Big Tobacco corporations tried to cheat the people of Minnesota,” said Attorney General Ellison via a press release. “I am glad my Office was able to catch them and stop them. Big Tobacco spent decades lying about the dangers of smoking, and I will not allow them to evade the consequences of their conduct. Big Tobacco will pay every cent they owe Minnesotans.”

After a months-long trial in 1998, Minnesota reached a $6.5 billion 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.

Attorney General Ellison’s motion 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.

The dispute over payment amounts arose 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 re-calculated their 1997 profits by applying modern corporate tax rates for this comparison, even though 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.

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 1.7% in 2024.