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United States v. Native Wholesale Supply Co.

October 20, 2009

UNITED STATES OF AMERICA, PLAINTIFF,
v.
NATIVE WHOLESALE SUPPLY CO., DEFENDANT.
NATIVE WHOLESALE SUPPLY COMPANY, PLAINTIFF,
v.
THOMAS VILSACK, IN HIS CAPACITY AS SECRETARY OF THE UNITED STATES DEPARTMENT OF AGRICULTURE, DEFENDANT.



The opinion of the court was delivered by: H. Kenneth Schroeder, Jr. United States Magistrate Judge

REPORT, RECOMMENDATION AND ORDER

The two above-captioned cases, United States of America v. Native Wholesale Supply Co., Case No. 08-CV-850 (hereinafter referred to as "the First Filed Action") and Native Wholesale Supply Company v. Thomas Vilsack, in his capacity as Secretary of the United States Department of Agriculture, Case No. 09-CV-241 (hereinafter referred to as "the Second Filed Action"), were referred to the undersigned by the Hon. Richard J. Arcara, pursuant to 28 U.S.C. § 636(b)(1), for all pretrial matters and to hear and report upon dispositive motions. Dkt. ##30 and 6, respectively.

Currently before this Court in the First Filed Action is the government's motion for summary judgment (Dkt. #7) and Native Wholesale Supply Co.'s motion to consolidate the Second Filed Action with the First Filed Action (Dkt. #24). In the Second Filed Action, the government's motion to dismiss or in the alternative to stay is currently pending before this Court. Dkt. #8. A more complete discussion of the procedural history of both cases follows. For the following reasons, Native Wholesale Supply Co.'s motion to consolidate the Second Filed Action with the First Filed Action is granted. By reason of this Court's decision to consolidate the Second Filed Action with the First Filed Action, this Court recommends that the government's motion to dismiss or in the alternative stay the proceedings in the Second Filed Action be denied. This Court further recommends that consideration of the government's motion for summary judgment in the First Filed Action be held in abeyance pending resolution of the issues raised by Native Wholesale Supply Co. in the Second Filed Action.

FAIR AND EQUITABLE TOBACCO REFORM ACT

The Fair and Equitable Tobacco Reform Act of 2004 ("FETRA") was enacted in 2004 as Title VII of the American Jobs Creation Act of 2004, Pub. L. No. 108-357, §§ 601-43, 118 Stat. 1418, 1521-36 (2004) (codified at Title 7, United States Code, Section 518, et seq.). In the memorandum of law submitted in support of its motion for summary judgment, the government summarized the pre-FETRA regulatory landscape as follows. Prior to the enactment of FETRA, the supply of domestic tobacco for sale in the United States was regulated through quota programs established by the Agricultural Adjustment Act of 1938 ("1938 Act"). Dkt. #7-2, p.2. "Under the 1938 Act, tobacco producers were permitted to market, without incurring a penalty, only as much acreage or poundage of tobacco for which they held an acreage allotment or marketing quota." Dkt. #7-2, p.2. The price of domestic tobacco was controlled through price support systems established by the Agricultural Act of 1949 ("1949 Act"). Id. "Under the 1949 Act, if eligible tobacco producers could not sell their tobacco on the open market at a rate exceeding a support price established by the Commodity Credit Corporation ("CCC") of the United States Department of Agriculture ("USDA"), they could sell instead to one of several producer-owned cooperative associations established pursuant to that Act. CCC would loan the associations the value of the tobacco the associations had purchased, and the tobacco would serve as collateral for the loans. The associations would eventually sell the tobacco at a CCC-approved price, and the proceeds of those sales would serve as payment of the associated loans." Dkt. #7-2, p.2 (internal citations omitted). Both the quota program and the price support systems were administered by the United States Department of Agriculture. Id.

"FETRA transformed the tobacco production system into a free market system at the end of 2004 by terminating the tobacco marketing quota programs established under the 1938 Act and by terminating the tobacco price support programs established under the 1949 Act." Dkt. #7-2, p.3. In addition, FETRA provides that over a ten year period, the Secretary of Agriculture was to make annual payments to owners of farms that held an established tobacco marketing quota under the 1938 Act, as well as to others engaged in the production of tobacco. These payments were intended to ease the tobacco producers' transition from a highly regulated market to the free market and "to constitute full and fair consideration for the termination of [the] tobacco marketing quotas and related price support." Id. (internal citations omitted). In addition, in order to terminate the price support programs established by the 1949 Act, FETRA required the Secretary to liquidate the tobacco loans and dispose of all tobacco the associations were holding as collateral for those loans. FETRA established the Tobacco Trust Fund (capped at $10.14 billion over the ten-year transitional program) in order to fund ten years of payments to tobacco quota holders and producers, as well as the projected costs to CCC resulting from the tobacco disposal and loan liquidation.

Pursuant to FETRA, the Tobacco Trust Fund is funded principally through quarterly assessments on all domestic manufacturers and importers of tobacco products over the ten year program. "CCC calculates quarterly assessments by projecting program costs for a particular program year and allocating those costs among the manufacturers and importers of each of the six classes of tobacco products - cigarette, cigar, snuff, roll-your-own tobacco, chewing tobacco, and pipe tobacco -according to percentages set forth in the Act." Dkt. #7-2, p.4 (internal citations omitted). The initial allocation for fiscal year 2005 among the six classes of tobacco products was set forth in the statute. Title 7, United States Code, Section 518d(c)(1). The statute further provides that subsequent allocations were to be made by the Secretary pursuant to periodic adjustments to the percentages reflecting changes in the share of gross domestic volume held by that class of tobacco product. Id. at § 518d(c)(2). Within each of the six product classes, the CCC further allocates program costs based on each manufacturer's or importer's share of gross domestic volume. "Gross domestic volume" means "the volume of tobacco products ... removed...." Title 7, United States Code, Section 518d(a)(2). The term "removed" means "the removal of tobacco products or cigarette papers or tubes from the factory or from internal revenue bond ... or release from customs custody ..." Title 26, United States Code, Section 5702(j).

FETRA further requires manufacturers and importers of tobacco products to submit to CCC information, consisting of, inter alia, copies of various Alcohol and Tobacco Tax and Trade Bureau and U.S. Customs and Border Protection forms, necessary for CCC to calculate their respective shares of gross domestic volume. Title 7, United States Code, Section 518d(h). Specifically, in order to compute market share, each entity that holds a permit from the Alcohol and Tobacco Tax and Trade Bureau to manufacture or import tobacco must submit to CCC, on a monthly basis, a CCC report entitled "Report of Tobacco Product Removals Subject to Tax for the Tobacco Transition Payment Program Assessment" ("Removal Report"). Dkt. #7-4, ¶ 6. The Removal Report provides the volume of a particular entity's taxable removals and the resulting federal excise taxes paid. Id. With the Removal Report, each manufacturer and importer must submit copies of the following supporting Alcohol and Tobacco Tax and Trade Bureau ("TTB") and U.S. Customs and Border Protection ("CBP") documents:

Manufacturers: (1) TTB Form 5000.24 - Excise Tax

Return

(2) TTB Form 5210.50 - Report,

Manufacturer of Tobacco Products or Cigarette Papers and Tubes Importers: (1) CBP Form 7501 - Importer Entry

Summary

(2) TTB Form 5220.6 - Monthly Report -Tobacco Product Importer Dkt. #7-4, ¶ 6. The knowing failure to provide the required information or providing false information may result in criminal penalties pursuant to Title 18, United States Code, Section 1003, as well as a civil penalty of up to two percent of the value of the tobacco manufactured or imported in the year of the violation as determined by the Secretary. Title 7, United States Code, Section 518d(h)(3).

At least thirty (30) days prior to the date when payment is due, CCC must provide manufacturers and importers with written notice setting forth the amount of their assessments. Id. at § 518d(d)(1). Assessments are due at the end of each calendar year quarter. Id. at § 518d(d)(3)(A). Within thirty (30) days of receiving an assessment, manufacturers and importers may challenge that assessment. Id. at § 518d(i)(1). Following the exhaustion of their administrative remedies, ...


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