75-cent cigarette fee probed

"MN Supreme Court"

04/12/2006

Justices question whether it’s fee or tax, who would get refund, other concerns; ruling pending

BY PATRICK SWEENEY
Pioneer Press

Six justices of the Minnesota Supreme Court on Tuesday pushed and prodded — questioned and questioned again — lawyers for the state and big cigarette manufacturers about the new 75-cents-a-pack cigarette fee that the companies contend violates a 1998 court settlement.

The justices asked the lawyers:

• Is the fee really a tax after all?

• If the court strikes down the fee, could the state the next day re-impose an equal 75-cent tax on cigarettes?

• Could the Legislature impose a tax and — just as it did with the fee — designate the proceeds to paying health care costs borne by the state?

• If smokers are the people who end up paying the fee, do the cigarette manufacturers and a handful of wholesalers have legal standing to challenge the fee?

After an hour of oral arguments, the court took the case under advisement and gave no indication when it will rule. Justice Sam Hanson did not take part in the case.

Justice Paul Anderson repeatedly questioned Stephen Patton, the lawyer for the cigarette companies, about who should get a refund if the court orders the state to pay back the more than $3.5 million a week the state has collected in fees since August.

Patton said smokers should get the refunds.

“The parties that ultimately bore this fee should have it returned,” Patton said.

But Patton stressed later in an interview that he was speaking for the manufacturers, not the distributors who paid the fee before passing on the cost to smokers.

Randy Gullickson, a lawyer for the distributors who did not participate in the oral arguments Tuesday, said the distributors want “all the parties that were harmed” by the fee to share in any refunds the court might order. He said the distributors would argue the fee hurt their business significantly by encouraging smokers to cross Minnesota’s border to buy cigarettes.

Gov. Tim Pawlenty and legislators enacted the 75-cent fee last summer to break a budget impasse that temporarily shut down state government. Pawlenty, who signed a no-new-taxes campaign promise in 2002, has insisted repeatedly the so-called “health impact fee” was intended to reimburse the state for health care costs caused by smoking.

Many lawmakers, especially Democrats, have argued it was an ill-disguised tax that — but for Pawlenty’s promise — would have been called a tax in statutes.

Shortly after the fee was enacted, the tobacco companies and distributors filed suit, alleging that the fee was barred by a 1998 court settlement in which the tobacco companies agreed to pay the state several billion dollars — including payments that currently are more than $100 million a year and are scheduled to run forever — to settle claims for both past and future health care costs paid by the state.

In December, Ramsey County District Judge Michael Fetsch ruled in favor of the tobacco companies.

On Tuesday, Anderson repeatedly questioned Patton and Assistant Attorney General Brad Delapena about whether the 75-cent charge is legally a fee or a tax.

“We say this is a tax, not a fee,” Delapena replied. But he said the state should win the case regardless of whether it is a fee or a tax.

Delapena said the 1998 court settlement, negotiated by then-Attorney General Hubert H. Humphrey III, dealt only with court claims that the attorney general could pursue. He said it did not apply to the Legislature’s “sovereign” right to impose taxes.

Patton said the charge is a fee but that the Legislature, if it chose to, could replace the fee with an increase in the existing 48-cents-a-pack excise tax on cigarettes. Patton also said, in response to a question from Justice Alan Page, that the Legislature could impose a tax increase and use the proceeds for health care costs.

“I guess I’m having a difficult time seeing what’s the harm,” Page said of the tobacco manufacturers’ claims.

“The harm, your honor, is a deal’s a deal,” Patton said, referring to the 1998 court settlement.

Brian McClung, a spokesman for Pawlenty, said after the court hearing that Pawlenty would not support replacing the fee with a tax if the court ruled against the state.

“If the health impact fee is ruled out of order and goes away, it would be the governor’s personal choice to just let that go,” McClung said.