Florida Cigarette Maker Battles Proposed State Fees

OPA-LOCKA, Fla.—Freda Witherspoon marched up to the counter to buy cigarettes at a Kwik Stop store here, and bypassed the big-name tobacco brands.

“Give me two packs of DTC,” said the 53-year-old Ms. Witherspoon. The price: just $4 a pack.cigarettestock

Little known outside Florida, DTC, which stands for Dosal Tobacco Corp., has become a major player in the Sunshine State, selling nearly as many smokes statewide as Reynolds American Inc., the second-largest U.S. tobacco maker by revenue.

“They’re cheap, and they have a good taste,” said Ms. Witherspoon, who has smoked DTCs for 15 years.

Big tobacco makers, however, hope to stub out the Miami-based cigarette maker’s growth. Reynolds, Altria Group Inc. and other industry giants are lobbying the Florida Legislature to close what they say is a loophole that allows Dosal to sell its cigarettes at cut-rate prices.

In the session that began last week, state lawmakers are expected to consider several bills that would impose fees of about 50 cents a pack on Dosal and other smaller producers.

Dosal has survived similar campaigns before, but this time its larger rivals are turning up the heat at a time when Florida, which faces a $3.6 billion budget deficit, is under pressure to find new funds.

The big tobacco makers’ beef against Dosal is rooted in a 1997 settlement they signed with Florida, which sued them to recoup the money its Medicaid program spent on treating sick smokers. Under the settlement, Altria, Reynolds, Lorillard Inc. and other major companies agreed to make payments to the state that have totaled more than $300 million a year.

Dosal was the only small tobacco producer sued by the state, partly because Florida accounted for the bulk of its sales. But it was cig maker Floridaultimately dropped from the lawsuit because its market share at the time was tiny—less than 2%.

As a result, Dosal and other small producers aren’t required to pay settlement-related fees to Florida, which pursued its own litigation, rather than joining the so-called 1998 master settlement the major tobacco companies reached with 46 other states.

Exempting Dosal and about 30 other small players from the settlement fees has tilted the playing field, giving them a cost advantage of about 40 to 50 cents a pack, according to Altria and Reynolds.

That’s at least partly why Dosal is roughly tied for sales with Reynolds, the No. 2 player in Florida behind Altria’s Philip Morris USA unit. The industry’s largest players dominate the market in most states, making Dosal, whose Florida market share was 18% in the second half of last year, an unusual case.

“Essentially, they are taking advantage of a loophole to get these huge market shares,” said Frank Lester, a spokesman for Reynolds, maker of Camel and Pall Mall.

Lawyers for Dosal argue that imposing a fee on the company would be unfair. Dosal, they say, wasn’t involved in the alleged industry practices, such as manipulating the nicotine content of cigarettes, that triggered the wave of lawsuits against major tobacco makers in the 1990s.

Dosal’s chief executive, Yolanda Nader, said the company’s value pricing has helped fuel its robust growth. Cigarette prices in Florida range from about $4 a pack for Dosal and other bargain brands to about $6 a pack for Philip Morris’s Marlboros.

It doesn’t hurt that Dosal, which is housed in a former boat factory, has deep roots here. It was founded in 1962 by an eponymous cigarette-making family that left Cuba after the revolution, and has been controlled since 1992 by Margarita Dosal. The company’s 305’s, it’s top-selling brand, was named for a Miami area code.

But the real key to the company’s success, according to Ms. Nader, is the “greedy” larger tobacco companies, which have raised prices sharply over the years, especially after cigarette-tax increases. “They’ve done more to help us than what we have done,” she said.

Some of that advantage could soon disappear. John Tobia, a Republican state representative from Melbourne, has introduced a bill that would require Dosal and other small producers to pay Florida a fee of 52 cents per pack sold. “This is a fairness issue,” he said. Republican state Sen. Thad Altman said he is considering a similar proposal.

Such fees would cost Dosal about half its volume and eventually push it out of business, said Ms. Nader, the CEO.

Dosal recently created a website, SaveDosal.com, where it displays photographs and vignettes about some of its 150 employees, including a machine operator who sends part of his income each month to his mother in the Dominican Republic.

The company also has hired a handful of lobbying firms, and it contributed more than $700,000 in the 2010 election cycle to candidates for state office, according to public records. “This, for us, is life or death, so we put forth every possible effort,” Ms. Nader said.

Bob Butterworth, the former state attorney general who brought the case that led to the Florida tobacco settlement, said he supports the proposed legislation because Dosal’s cigarettes are “causing a health problem for which the state of Florida has to pick up the cost.”

Legislators say new fees could raise around $100 million in state funds for Medicaid, the joint state-federal health-care program for the poor. Dosal says that estimate is too high.


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