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    Minnesota Imposes Discount Cigarette Fee

    Smaller tobacco manufacturers that did not participate in the 1998 Master Settlement Agreement affected.

    ST. PAUL, Minn. -- A new 35-cent-per-pack increase on discount cigarettes such as USA Gold, Winners and other niche-brands is rapidly taking hold on Minnesota store shelves.

    The state imposed the new fee on brands of cigarettes made by smaller manufacturers as part of its budget fix on July 1. Because most stores stocked up with products before the deadline, though, many didn't have to increase their prices immediately, state tax experts said.

    The Minnesota Department of Revenue said it is scrambling to impose the fee, which cigarette manufacturers call the first of its kind in the nation, on distributors in the state. In all, the fee is expected to raise $12.9 million for Minnesota's budget over the next two years.

    Tom Briant, executive director of a trade group representing 14 state cigarette and candy wholesalers, said because Minnesota law imposes a floor price on cigarettes -- based on manufacturers' costs plus state taxes and a mandatory 8 percent markup at the stores -- buyers should expect to see the 35 cent fee as soon as stores have to restock.

    Gov. Tim Pawlenty received some criticism over the fee. Even some of his supporters said it looked more like a new tax -- something he pledged not to impose -- than a fee.

    Minnesota reached a settlement with the big four tobacco companies in the 1998, for $6.6 billion. The smaller companies -- there are about 18 others that sell in Minnesota -- weren't part of that settlement, and Pawlenty and key lawmakers defended the new fee by saying it only levels the playing field for all the companies. One trade group representing the smaller companies, the Council of Independent Tobacco Manufacturers of America, filed a lawsuit last week seeking an injunction to suspend the new fee.

    Anthony Troy, the attorney representing the 12-company group, said the fee is unconstitutional because it effectively treats the smaller companies the same as the large companies the state settled with, even though the smaller companies were never accused of the same sorts of misconduct that spurred that lawsuit.

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