UST Settles Tax Suit Against California

UST Inc., the maker of Copenhagen and Skoal snuff, said it has agreed to settle a lawsuit against California over a state tax increase.

Under the settlement, California, which in June increased the excise tax on smokeless tobacco to 150%, agreed to return the tax to 52.65%, UST said.

The largest producer of smokeless tobacco sued in August, claiming the tax increase was unfair. The company accused the state’s Board of Equalization of exceeding its authority under Proposition 99, which links state taxes on smokeless tobacco to the rate on cigarettes. The tax increase took effect July 1, a company spokesman said.

Had the tax remained in place, it could have reduced company sales by 3 million to 5 million tins of tobacco each year, said Bonnie Herzog, an analyst with Credit Suisse First Boston. The tax resulted in about 1.7 million fewer sales during UST’s third quarter, she said.

Shares of Greenwich, Conn.-based UST fell 1 cent to close at $35.89 on the New York Stock Exchange.

UST and the California Assn. of Retail Tobacconists had asked a state judge to order the state to apply a lower tax rate that covers cigars and other tobacco products. The June tax increase raised the tax on a 1-ounce tin of snuff to $3.24 from $1.30.

In September, a state court in Sacramento granted a preliminary order barring the tax increase.

The Equalization Board voted last week to settle the litigation, UST said. The board is responsible for collecting taxes and fees that make up 34% of California’s annual revenue.