Minnesota says tobacco companies owe $58 million in underpayments from landmark settlement

Minnesota is seeking $58 million from tobacco companies Philip Morris and R.J. Reynolds Tobacco Co., alleging that they underpaid what they owe the state in a landmark 1998 lawsuit settlement over the costs and dangers of tobacco use.

Attorney General Keith Ellison filed a motion this week in Ramsey County District Court to enforce the settlement agreement, alleging that when the federal corporate tax rate changed in 2018, the companies recalculated their 1997 profits using the new and lower tax rate, leading the manufacturers to underpay Minnesota by nearly $10 million a 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,” Ellison said in a statement.

His office is asking Ramsey County District Judge Mark Ireland to order the tobacco companies to pay the state $58 million plus interest and legal fees. A hearing is scheduled for Aug. 8.

Messages with Philip Morris USA’s parent company, Altria Group, Inc., and R.J. Reynolds Tobacco Company weren’t immediately returned Wednesday.

According to court documents, the tobacco manufacturers have argued that they get to re-calculate their 1997 profits with modern tax rates. Ellison’s office argued in court filings that the settlement specifically required using 1997 tax rates when calculating 1997 after-tax profits.

In 1994, Minnesota was one of the first states in the nation to sue tobacco companies. Attorney General Hubert Humphrey III sued tobacco companies and advertisers for violating antitrust and consumer protection statutes, arguing they misrepresented or concealed the dangers of tobacco.

In the settlement agreement with the state and Blue Cross Blue Shield of Minnesota, manufacturers agreed to make annual payments to the state in perpetuity, with the amounts tied in part to their tobacco sales. It was considered payment to the state for what the government spent or would spend on the health repercussions of tobacco on smokers, such as increased Medicaid payments.

In 2023, the three remaining tobacco companies in the settlement — Philip Morris, R.J. Reynolds and ITG Brands, LLC — paid Minnesota about $160 million, according to court documents.

Tobacco manufacturers owe more if their post-tax profits are higher than they were in 1997 despite lower tobacco product sales. When the federal corporate tax rate was cut in 2019 from 35% to 21%, Philip Morris had its payment administrator PricewaterhouseCoopers recalculate its 1997 post-tax profits with the 2018 tax rate, which Ellison’s office said misrepresented the settlement, according to the court documents.

The state of Mississippi sought similar legal action to Minnesota’s recent filing in 2019 over tobacco companies not paying fully, and a court agreed with the state in 2022 that tobacco companies owed what was agreed upon in the original settlement. The manufacturers have appealed that case. Then, in 2023, Texas took action against manufacturers over the same tax rate issue and a Texas court sided with the state.

Minnesota sued R.J. Reynolds and ITG Brands in 2018 to recoup payments that hadn’t been made since 2015. The companies agreed in 2021 to make $81 million in back payments to the state.