SN 2001-1

Escrow Accounts Required to be Established by Nonparticipating Manufacturers

This publication has been superseded by AN 2005(7)

PURPOSE: This Special Notice describes 2000 legislation requiring each nonparticipating manufacturer to establish a qualified escrow fund and to deposit into the fund each April 15 a specific amount for each cigarette that such manufacturer sold in Connecticut, whether directly or through a distributor, retailer, or similar intermediary or intermediaries, during the preceding calendar year. The 2000 legislation excludes from the annual escrow requirement any nonparticipating manufacturer that chooses to become a participating manufacturer ("subsequent participating manufacturer") and generally perform its financial obligations as such under the Master Settlement Agreement (MSA).

EFFECTIVE DATE: Effective July 1, 2000.

STATUTORY AUTHORITY: 2000 Conn. Pub. Acts 208 ("the Act"). The Act was codified as Conn. Gen. Stat. §§4-28h to 4-28j, inclusive.

DEFINITIONS: As used in this Special Notice:

Tobacco product manufacturer means any entity that, after July 1, 2000, directly and not exclusively through an affiliate:

• manufactures cigarettes anywhere which the manufacturer intends to be sold in the United States, including cigarettes intended to be sold in the United States through an importer, or
• is the first purchaser anywhere for resale in the United States of cigarettes manufactured anywhere that the manufacturer does not intend to be sold in the United States, or
• becomes a successor of an entity described above.

Tobacco product manufacturer does not include:

• an affiliate of a tobacco product manufacturer unless the affiliate itself meets any of the three above-described criteria, or
• an entity that manufactures cigarettes that it intends to be sold in the United States exclusively through an importer, provided:
  • such importer is an original participating manufacturer, as defined in the MSA, that will be responsible for the payments under the MSA with respect to such cigarettes as a result of the provisions of subsection II(mm) of the MSA and that pays the taxes specified in subsection II(z) of the MSA on such cigarettes, and
  • the entity that manufactures the cigarettes does not market or advertise such cigarettes in the United States.

Nonparticipating manufacturer means any tobacco product manufacturer that is not a participating manufacturer.

Participating manufacturers means and includes the original participating manufacturers and subsequent participating manufacturers.

Original participating manufacturers means Brown & Williamson Tobacco Corporation, Lorillard Tobacco Company, Philip Morris Incorporated, and R.J. Reynolds Tobacco Company, and the respective successors of each of them.

Subsequent participating manufacturer means a tobacco product manufacturer that becomes a signatory to the MSA but that is not an original participating manufacturer.

Master Settlement Agreement (MSA) means the agreement that the settling states and the original participating manufacturers entered into on November 23, 1998. Under the MSA, the parties settled and resolved all claims by the settling states directly or indirectly based on the sale, distribution, manufacture, development, advertising, and marketing of tobacco products by the participating manufacturers. The MSA required, among other things, that each of the settling states enact a model statute.

Settling states means the 46 States, including the State of Connecticut, that signed the MSA on or before November 23, 1998.

Model Statute means legislation that the MSA obligated each settling state to enact that would require each nonparticipating manufacturer either:

• to become a subsequent participating manufacturer and perform its financial obligations as such under the MSA, or
• to place into a qualified escrow fund not later than April 15 of each year a certain amount based on the number of cigarettes that the manufacturer sold in the state, whether directly or through a distributor, retailer, or similar intermediary or intermediaries, during the preceding calendar year.

The Connecticut General Assembly fulfilled its obligation to enact the model statute by enacting the Act.

Cigarette means any product that contains nicotine, is intended to be burned or heated under ordinary conditions of use, and consists of or contains:

• any roll of tobacco wrapped in paper or in any substance not containing tobacco; or
• tobacco, in any form, that is functional in the product, which, because of its appearance, the type of tobacco used in the filler, or its packaging and labeling, is likely to be offered to, or purchased by, consumers as a cigarette; or
• any roll of tobacco wrapped in any substance containing tobacco which, because of its appearance, the type of tobacco used in the filler, or its packaging and labeling, is likely to be offered to, or purchased by, consumers as a cigarette described in (A).

For purposes of this Special Notice:

• Each nine one-hundredths (0.09) of an ounce of roll-your-own cigarette tobacco also constitutes one individual cigarette.
• A small cigar that is properly treated as a cigarette for purposes of the federal excise tax on cigarettes (26 U.S.C. §5701(b)) is a cigarette, but a small cigar that is properly treated as a small cigar for purposes of the federal excise tax on cigars (26 U.S.C. §5701(a)(1)) is not a cigarette.

Roll-your-own cigarette tobacco means any tobacco that, because of its appearance, type, packaging, or labeling, is suitable for use and likely to be offered to, or purchased by, consumers as tobacco for making cigarettes.

Small cigar or little cigar means any roll for smoking which has a wrapper made of homogenized tobacco or natural leaf tobacco and which is a cigarette size so that it weighs three pounds or less per thousand. The treatment of a small cigar or little cigar for purposes of the MSA and the obligations imposed on nonparticipating manufacturers may differ from its treatment for Connecticut cigarette tax purposes. For more information, see Special Notice 2000(6), 2000 Legislation Affecting Cigarette Taxes and Sales of Cigarettes, and Special Notice 2000(16.1), Revised Special Reporting Requirements for Cigarette Stampers and Tobacco Products Distributors.

Qualified escrow fund means an escrow arrangement with a federally or state-chartered financial institution having no affiliation with any tobacco product manufacturer. The financial institution must have assets of at least $1.0 billion. The escrow arrangement must require that the financial institution hold the principal of the escrowed funds for the benefit of releasing parties (generally, the settling states) and prohibit the tobacco product manufacturer that placed the funds into escrow from using, accessing, or directing the use of the principal of the funds (except as consistent with §2(b) of the Act).

Adjusted for inflation means increased in accordance with the formula for inflation adjustment set forth in Exhibit C to the MSA.

NONPARTICIPATING MANUFACTURERS TO PLACE CERTAIN AMOUNT INTO QUALIFIED ESCROW FUND ANNUALLY: Every nonparticipating manufacturer that chooses not to become a participating manufacturer (a subsequent participating manufacturer) shall no later than:

April 15, 2001, establish an escrow account that is a qualified escrow fund and place into the fund, with respect to the nonparticipating manufacturer’s cigarettes sold to consumers within Connecticut, whether directly or through a distributor, retailer, or similar intermediary or intermediaries, during the period beginning July 1, 2000 and ending December 31, 2000, the amount of $.0111506* per cigarette; and

April 30, 2001, send Form TPM-1, Certificate of Compliance by Nonparticipating Manufacturer, to Connecticut’s Office of the Attorney General, and include a copy of the escrow agreement signed by the nonparticipating manufacturer and the financial institution where the escrow fund is held.

* This amount has been adjusted for inflation, and reflects the adjustment.

Thereafter, the amounts, as adjusted for inflation, to be placed into a qualified escrow fund by a nonparticipating manufacturer no later than April 15 of each year shall be as follows:

 ** These amounts have not been adjusted for inflation, and do not reflect the adjustment. Form TPM-1 will be revised annually to specify the amount, as adjusted for inflation. Nonparticipating manufacturers should obtain Form TPM-1 from either the DRS Internet web site.  (See Forms and Publications.)

PENALTIES FOR FAILURE TO COMPLY: The Attorney General may bring a civil action on behalf of the State of Connecticut against any nonparticipating manufacturer that fails to place into escrow the funds required under the Act. Any nonparticipating manufacturer failing to place into escrow the funds required under the Act shall be required within 15 days to place such funds into escrow as shall bring it into compliance with the Act. Each failure to make a required annual escrow shall constitute a separate violation.

The court, upon a finding of a violation, may impose a civil penalty in an amount not to exceed 5% of the amount improperly withheld from escrow per day of the violation and in a total amount not to exceed 100% of the original amount improperly withheld from escrow.

The court, upon a finding of a knowing violation, may impose a civil penalty in an amount not to exceed 15% of the amount improperly withheld from escrow per day of the violation and in a total amount not to exceed 300% of the original amount improperly withheld from escrow.

The court, upon a finding of a second knowing violation, may prohibit the nonparticipating manufacturer from selling cigarettes to consumers within Connecticut, whether directly or through a distributor, dealer or similar intermediary, for a period not to exceed 2 years.

EFFECT ON OTHER DOCUMENTS: None affected.

EFFECT OF THIS DOCUMENT: A Special Notice is a document that announces a new policy or practice in response to changes in State or federal laws or regulations or to judicial decisions. A Special Notice indicates the DRS’s informal interpretation of Connecticut tax law and may be referred to for general guidance by taxpayers or tax practitioners. 

SN 2001(1)
Cigarette Tax
Issued: 03/29/01