The Office of the Attorney General administers the Tobacco Master Settlement Agreement, or the MSA, Compliance Advisory Board established by Kentucky law, which meets quarterly to monitor MSA enforcement actions. This historic agreement between 52 states and territories and the major cigarette companies was signed by Kentucky in 1998. Kentucky received $102 million in April 2018 and is on pace to collect another $500 million over the next five years, bringing the total for Kentucky to nearly $2.5 billion. The MSA became effective on November 23, 1998. The settlement arose from state lawsuits against the major tobacco companies for Medicaid costs related to smoking. Kentucky's payments will continue as long as cigarettes are sold by the participating manufacturers. In addition to getting annual payments to the states, the MSA was designed to reduce underage smoking through marketing restrictions and the creation of a foundation to reduce the number of new smokers.
What are the three main categories of restrictions in the MSA?
The MSA contains three main categories of restrictions: advertising restrictions, brand name restrictions, and give-away restrictions. The first set of restrictions ban outdoor and transit advertising of tobacco products, any advertising targeted at youth (under 18 years of age), and any use of cartoons in advertising, promoting, packaging, or labeling tobacco products. There are two main exceptions to the advertising prohibitions. First, manufacturers may advertise tobacco products on the property of retail establishments, subject to certain size restrictions (generally, no larger than fourteen square feet). Additionally, manufacturers may advertise tobacco products at adult-only facilities or adult-only events.
The brand name restrictions relate to the use of tobacco brand names in sponsorships, merchandise, and third party use. The manufacturers are prohibited from sponsoring with brand names the following types of events: concerts, events intended for a significant youth audience, events with paid youth participants or contestants, sport leagues, teams, or games. The manufacturers are permitted to engage in one brand name sponsored event in a twelve-month period, as long as the sponsorship does not constitute a prohibited sponsorship as outlined above. Additionally, the manufacturers may sponsor brand name events in adult-only facilities. With regard to merchandise, manufacturers are prohibited from distributing or selling apparel or merchandise with brand name logos. Notwithstanding these restrictions, the tobacco manufacturers may sponsor any athletic, musical, artistic, or other social or cultural event, entrant, participant, or team using the corporate name.
The give-away restrictions deal with free samples and proof of purchase gifts. The manufacturers cannot distribute free samples, except in adult-only facilities and cannot provide proof of purchase gifts to underage persons (those persons younger than the legal age to purchase cigarettes). To comply with this provision, the manufacturers must require sufficient proof that a recipient of a proof of purchase gift is an adult.
What is type of compliance is required for tobacco manufacturers?
Because of the MSA, the legislature amended and created new sections in
Kentucky Revised Statutes, Chapter 131 intended to ensure that only legally-compliant cigarettes are sold in Kentucky. Provisions of the law include:
- Annual certification to the Office of Attorney General by all tobacco product manufacturers, including a listing of cigarette brands.
- Creation of a directory, including the names and brands of certified manufacturers in compliance with state law, published each July on the
Revenue Cabinet website.
- Prohibition against a stamping agent or distributor from affixing a tax stamp to a cigarette package that is not included in the directory.
- Penalties for violations, including injunctions against the stamping agent or distributor, seizure of cigarettes, loss of wholesaler license and payment of costs for legal actions.
- Manufacturers may be required to submit packaging and labeling samples to the Commonwealth.
- Appointment of registered agents for service of process.
A Kentucky certification form for tobacco product manufacturers is available
here. The certification must be completed and delivered to our office on or before April 30th each year. The directory of compliant manufacturers is available on the
Revenue Cabinet website and is updated as necessary. If a manufacturer or brand is not found on the directory, tax stamps may not be placed on packages of those cigarettes. Please contact our office should you have any questions regarding the certification or directory.
What are the requirements of non-participating manufacturers (NPMs)?
Another result of the MSA, the escrow statute, was passed in 2000 by the legislature (KRS 131.600-131.602) and is designed to insure that companies selling cigarettes in Kentucky fulfill their financial obligations to the state. This is done by setting up an escrow fund or joining the MSA and making payments to the states in return for a release of liability for cigarette sales. In other words, manufacturers of tobacco products should bear financial burdens related to and arising from cigarette smoking.
This law requires all tobacco product manufacturers and importers of their products who are not participating in the Master Settlement Agreement ("non-participating manufacturers"), to place into a qualified escrow account each quarter an amount that is based upon the number of NPM individual cigarettes sold in Kentucky. The NPM receives all interest or other appreciation earned on the funds. Funds in the escrow account may be released to the NPM in the following situations:
- To pay a judgment or settlement on any released claim brought by Kentucky;
- If NPM establishes that the amount it was required to pay was greater than Kentucky’s allocable share of payments the NPM would have been required to pay under the MSA; or
- 25 years after the date on which they were placed into escrow.