Cigarette makers must pay $92 mln to New York state

By Karen Freifeld

NEW YORK, Sept 11 (Reuters) - Cigarette makers must pay New York state $92 million they withheld from their 2003 annual payment required by the landmark 1998 tobacco settlement, an arbitration panel ruled on Wednesday.

The panel, made up of three retired federal judges in San Francisco, rejected the tobacco companies' demand for a reduction in their 2003 annual payment to New York.

The dispute stemmed from untaxed sales of cigarettes on Native American reservations.

"This ruling is a huge victory for all New Yorkers," New York Attorney General Eric Schneiderman said in a statement.

"This is good news for investors in tobacco bonds issued within New York state," Dick Larkin, director of credit analysts at HJ Sims & Co, said in a statement.

Lorillard Tobacco Company, Altria Group Inc (NYSE: MO - news) 's Philip Morris USA, and R.J. Reynolds Tobacco Company, Inc did not immediately respond to calls for comment.

The settlement, first signed in November (Xetra: A0Z24E - news) 1998, resolved claims by states and territories for, among other things, the recovery of healthcare costs attributed to smoking-related illnesses. In exchange, the companies agreed to make annual payments based on their annual cigarette sales.

The tobacco manufacturers said an adjustment to their payment was necessary because New York did not seek to have non-participating manufacturers make escrow deposits for their untaxed sales in the state. New York said it did not have to collect escrow on sales on Native American lands because no excise tax was imposed on such sales.

In their ruling favoring New York, the arbitrators said the evidence showed it was state policy not to collect excise taxes on the sales on American Indian reservations before, during and after the master settlement agreement, and was not obligated to do so.