Philip Morris targets Indian tobacco market

Tobacco giant Philip Morris is funding an aggressive ad campaign against the Indian tobacco industry, urging the state to collect taxes on cigarettes sold on Indian reservations.

Indian leaders and business people say the ads are just the latest effort to force sovereign nations to collect taxes for the state, effectively putting them out of business – a scenario that would help Philip Morris’ efforts to dominate the cigarette market.

Playing off the fact that the state faces a $9.2 billion deficit, the ad uses citizens’ anxiety about the economy as an emotional hook.

“The state loses revenue. Retailers lose sales. Their employees could even lose jobs. And it adds to the burden on hardworking taxpayers,” the ad says, disregarding the fact that Indian citizens also pay federal income taxes and state taxes on off-reservation purchases.

But it wasn’t always that way, said Robert Hilburger, the director of business development for the Oneida Indian Nation.

Philip Morris, for more than a decade, encouraged and helped build up Native American cigarette sales by signing contracts with Indian retailers for preferential programs that would provide stores with racks, signage, special coupon sales, and “backside” payments for every carton of Marlboros sold, a strategy that is legal and widely practiced in the trade, Hilburger said.

“The reason they were so good to us is because they wanted low-priced product to get out to the public. Now they have utter disdain for the Native American retailers that helped them build to the point of monopoly they have today. We believe now that because their sales are being impacted by Native-manufactured cigarettes that are retailed through Native stores, they hope to knock us out of business altogether so they could increase their market share even more.”

Philip Morris’ attack ads are the latest volley in New York’s longstanding cigarette tax war with Indian nations. The state claims it’s losing millions or billions of dollars in “lost taxes,” while the nations say they are not responsible as sovereigns to collect state taxes.

Snow said Philip Morris was clearly losing market share on the reservations because of the success of Indian manufactured cigarettes.

“I probably sell 10 to 1 Seneca cigarettes over Marlboros.”

Native-manufactured cigarettes have a cost advantage over Philip Morris products. Currently, Marlboro cigarettes cost $65 a carton while Native-manufactured Niagara brand cigarettes cost $32 a carton.

Indian retailers can’t fight Philip Morris’ big bucks ad campaign, Snow said, “so we’re pretty much just trying to expose them for what they are and let people make up their own minds. We have a lot of face-to-face customers so we try to get to them through those transactions.”

The Indian tobacco industry, which contributes hundreds of millions of dollars each year to the general economy directly and indirectly through jobs and tobacco industry-related businesses, is under siege right now.

Last year, President Barack Obama signed the Family Smoking Prevention and Tobacco Control Act, granting the Food and Drug Administration federal regulatory authority over tobacco products.

Both the FSOTCA and the PACT Act will hugely benefit the tobacco company. FSOTCA puts onerous demands on small manufacturers, such as requiring changes in the design and packaging of cigarettes and restrictions in advertising and promotions, among other things, that will be easily accommodated by big budget Philip Morris, but not by small manufacturers.

Hilburger said that he and another Oneida representative met with Philip Morris representatives around two years ago and told them the Oneida Nation was continuing to negotiate with the state to try to reach a settlement regarding tobacco sales.

“The Philip Morris reps said they encouraged a negotiated settlement and wouldn’t do anything to hurt it, that they would maintain a position of neutrality with regard to the state tax situation. Then 14 days ago out of the blue and without even the courtesy of a phone call to tell us we’re going to be attacked, they take out these ads and they almost label us as criminals, even though they’re the ones who helped grow our business so greatly,” Hilburger said.

Asked why Philip Morris abandoned its position of neutrality, Sutton said, “I’m not going to comment on Philip Morris USA’s relationships with the company’s specific retail partners.”

The company’s lobbyists were active in the state capitol of Albany late last year and early this year leading up to the posting of the new tax regulations. The Altria Group made political contributions of $127,190 in 2009 and in early 2010, according to a Gannett Albany Bureau report. The payments included $50,000 to the Democratic Senate Campaign Housekeeping Committee and $30,000 to the equivalent committee for Republican senators. Altria spent $224,558 on lobbying in the second half of 2009, records filed with the state Commission on Public Integrity show.

Asked about the status of the new regulations, Morgan Hook, a spokesman in Gov. David Paterson’s office said, “We do not comment on legislation that has not passed both houses. We have no position on the bill, as it has not been passed yet and is essentially a draft.”