Tobacco Documents Online

.r . , PHILIP MORRIS U.S.A. INTER-OFFICE CORRESPONDENCE 120 PARK AVENUE, NEW YORK, N.Y. 10017 TO: Stanley S. S'cott DATS:1l /17 /83 FROM~ Jack Nelson ~ SUBJECT: Analysis of Alabama Tax Department Proposal This memo includes Mike Murphy's response (via telephone) to the proposal. Current Tax Situation The state imposes a complex series of taxes upon cigarettes. In general cigarettes weighing, "not more than 3' lbs. per 1000" and 85mm or less in length are taxed at 6 mills per stick plus 4~ per 20 (16G per 20-pack, 23G per 25-pack). Another provision in the tax law doubles the mill rate (to 12 per cigarette)! for cigarettes longer than 85mm and weighing "not more than~6 lbs. per 10001." All the manufacturers pay at the lower, 6 mill rate for 100mm and 120mm cigarettes because their weight falls within the 3 lbs. per 1000 category. The ambiguity in, the Alabama law is due to the length requirement; otherwise it mirrors the federal Class A/B weight categories. Samples are mentioned explicitly in, the law and taxed at 6G per 10. The additional 4G' per 20 tax was imposed after Alabama: exacted'the basic tax statute, thus the sample tax clause does not include this tax. Some 235 local jurisdictions impose taxes of between 1C and 6~ per pack. The state collects the taxes for only 7 of these jurisdictions. Proposal Assistant Revenue Commissioner for tobacco taxes, Jimmie Bradshaw, hass proposed to the TI lobbyist, Calvin Whitesell, that the industry agree upon a major overhaul of the state cigarette taxes along the following lines: 1. Abolish all local taxes. 2. Increase the state tax (around 50 to compensate for the local revenue loss and design a system for distribution of the added state revenues to the localities. 3. Abolish all present size and weight distinctions in lieu of one tax rate applied on a per-stick basis to all cigarettes sold or sampled. 4. Leave the stamping discounts as they are. 5. Allow the tax department discretion on whether to tax by report or by stamps. 6. Waive all past "violations" of the tax law involving underpayment of the tax due on 100mm and 120mm cigarettes. (The state estimates this~ liability to be in $150 million range.)

k 2 Possible Benefits to PM o Reduce the tax on our sample Vs and 6's. o Allow us in the years to come to focus our effort against excise tax increases upon one jurisdiction, the state, rather than 235 jurisdictions. o Eliminate the administrative and marketing problems associated with so many taxing jurisdictions. o Eliminate the potential liability for underpayment of taxes on 100mm and 120mm cigarettes. Possible Drawbacks to PM o Allow pack-size proliferation. o Open the door to a large state tax increase beyond merely compensating local governments for revenue losses. o Unless the tax collection method is specified (report or stamping), the tax department couldirequire manufacturers to pay all taxes by report, not just sample taxes. Other Negotiations with~Alabama PM (Mike Murphy) with the assistance of the Conboy Hewitt law firm (Jim Shea) is currently negotiating with the state tax department concerning the legality of the tax rules governing sample 4's and 6's. No resolution has been reached. We pay the state tax on samples, but no local tax. RJR'also has a: sampling problem. A state audit revealed that RJR was storing samples in Alabama that it used (and pay tax on) in Florida. The state contends that RJR owes Alabama: the tax on samples stored in the state regardless of where they are distributed. Finally, RJR and B&W have been negotiating,with the state on their 25-pack. jms cc: J'. Jeb Lee B. M. M. Robinson Irish~ Murphy