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Arbitration Panel Rules in Favor of New York State, Finds No Obligation to Collect Escrow for Tribal Sales

As mentioned in a previous blog post, on September 11, 2013, a three-member federal arbitration panel settled the on-going dispute among three participating manufacturers (“PMs”) and 15 states involving the 2003 payment obligations under the Master Settlement Agreement (“MSA”).

New York is one of the states that the arbitrators ruled in favor of in denying the PMs a credit under the non-participating manufacturer (“NPM”) Adjustment.  The arbitration panel concluded that “the MSA’s first condition for application of the 2003 NPM Adjustment was satisfied: the PMS had suffered a ‘Market Share Loss’ for 2003.”  In particular, the independent auditor calculated approximately an 8 percent market-share shift from the PMs to the NPMs from 1997-2003.  New York (nor any of the other 14 states) disputed the auditor’s finding that the PMs suffered a market share loss in 2003. 

Rather, New York (and the other 14 states) only disputed whether a “significant factor” for the PMs’ loss in market share was attributable to the MSA provisions.  In determining whether the second step of the NPM Adjustment was met, the only contested issue was “whether New York failed to diligently enforce its escrow statute because it did not impose an excise tax on the sales of units sold by Native American Tribes on their Reservations in New York State, or make any attempt to have escrow collected on those sales.”

The PMs first argued that New York did not “diligently enforce” its escrow statute because it unilaterally excluded state excise taxes for NPM sales on tribal lands.  The arbitration panel recognized that the NPMs who sold cigarettes on tribal land had a considerable cost advantage over the PMs with sales on tribal land.  With that being said, the arbitration panel concluded that the PMs’ argument that New York did not “diligently enforce” its escrow statute hinged on the definition of “units sold.”  New York’s view, and that of the arbitration panel, was that under the plain meaning of the definition of “units sold,” the state was not required to collect escrow for sales on tribal lands because state excise taxes were not imposed on those sales.

Although New York’s definition of “units sold” does not require that escrow be collected for sales on tribal lands, the PMs next argued that New York was obligated either to change the definition of “units sold” or to change its policy of not collecting state excise taxes for sales on tribal land.  Either of these changes would require the NPMs to pay escrow for sales on tribal land.  The arbitration panel stated that, in order for the PMs to prevail on this argument, it must be shown that New York was not acting in good faith because the state does not collect escrow for NPM sales on tribal land.  The arbitration panel examined whether New York had a history of collecting state excise taxes for sales on tribal land.  After examining New York’s history, the arbitration panel concluded that the New York Governor’s decision not to collect state excise for tribal sales on tribal land was consistent with the state’s prior practices and did not amount to bad faith.  Consequently, the arbitration panel concluded that New York satisfied its obligation to diligently enforce its escrow statute for the 2003 calendar year.

For questions and/or comments, please contact Bryan Haynes, at 804.697.1420 or by email.