Tobacco Master Settlement Agreement: Payments, Escrow, and Directories

The Tobacco Master Settlement Agreement is the November 23, 1998 deal in which the four largest U.S. cigarette makers agreed to pay 46 states, the District of Columbia, and five territories every year in perpetuity, and to accept sweeping limits on how they advertise and market cigarettes, in exchange for resolving state lawsuits over smoking-related healthcare costs. It remains the largest civil litigation settlement in U.S. history, and the compliance system it built — annual state certifications, public tobacco directories, and escrow deposits for companies that never signed — still governs every cigarette manufacturer, wholesaler, and retailer in the country.¹

Who the Agreement Covers

The settlement sorts tobacco manufacturers into three categories, each with different obligations.

Original Participating Manufacturers (OPMs) are the four companies that negotiated and signed in 1998: Philip Morris, R.J. Reynolds, Brown & Williamson, and Lorillard. They carry the largest financial burden and are bound by the full set of marketing restrictions.¹

Subsequent Participating Manufacturers (SPMs) are smaller companies that joined later for protection from state lawsuits. They follow the same marketing rules but pay based on their own market share, so their annual obligations are much smaller.

Non-Participating Manufacturers (NPMs) never signed. They aren’t bound by the marketing restrictions, but every settling state requires them to deposit money into escrow for each cigarette sold, so they can’t undercut participants on price.

On the government side, 46 states, the District of Columbia, and five territories are “Settling States.” Four states are not part of the main agreement because they reached their own deals with the industry before 1998: Mississippi, Florida, Texas, and Minnesota.

Marketing and Advertising Restrictions

The MSA bars participating manufacturers from taking any action to target young people in advertising, promotion, or marketing, and translates that principle into specific, still-active prohibitions.¹

No cartoons in advertising, promotions, packaging, or labeling.
No billboards, bus shelters, or other outdoor advertising of tobacco products in any settling state.
No selling or distributing clothing, hats, or other merchandise bearing a tobacco brand name.
No payments to feature tobacco products in movies, television, theater, music, or video games.
No sponsoring athletic, musical, or cultural events in a tobacco brand name, and no sponsoring events where participants may be minors or team sports leagues.
No distributing free cigarettes except in designated adult-only facilities.

The agreement also funded the Truth Initiative, a national organization focused on reducing youth tobacco use. State attorneys general continue to press movie studios and streaming services on tobacco imagery in entertainment, though that work is an ongoing enforcement effort rather than text written into the 1998 agreement.¹

How the Payments Work

Participating manufacturers owe annual payments to the settling states for as long as cigarettes are sold in the United States by companies that have settled.¹ Each state gets a fixed “allocable share” of the total pool. What varies year to year is the size of the pool, driven by two adjustments.

The inflation adjustment increases payments annually by the greater of the Consumer Price Index change or a flat 3 percent.² The volume adjustment moves payments up or down based on how many cigarettes are actually sold domestically. As smoking rates have fallen, the volume adjustment has pulled the pool down and partially offset inflation increases. An independent auditor runs the numbers across all jurisdictions.

The NPM Adjustment

The most contentious financial provision is the Non-Participating Manufacturer Adjustment. If NPMs capture more than 2 percent of the market, the annual payment to states can be reduced, and the reduction is calculated at triple the market share loss above that threshold. States only face the penalty if they fail to “diligently enforce” their escrow statutes against NPMs. The MSA never defined what “diligent enforcement” means, which has produced years of arbitration disputes between the tobacco companies and individual states.

Many states have resolved past-year disputes through settlement agreements, which cut down on payment volatility going forward. But the adjustment stays live in any year that NPM market share climbs, and a state that lets enforcement slip risks a real reduction in what it receives.

Escrow Rules for Companies That Didn’t Sign

To keep non-signers from gaining a cost edge, every settling state passed a Model Escrow Statute. Any NPM selling cigarettes in the state has to deposit a set amount per cigarette into a qualified escrow account. The funds sit as a reserve against potential future health-related judgments against that manufacturer. If no judgment draws on them within 25 years, the money returns to the manufacturer.

Rates vary by state and are adjusted for inflation each year. In 2005 the rate was roughly $0.0167 per cigarette, about $3.35 per carton. By 2025, California had reached roughly $0.046 per cigarette, about $9.21 per carton. A manufacturer selling across multiple states has to track each state’s current rate and deposit the correct amount for every cigarette sold there.

Annual Certification and State Tobacco Directories

For most companies in the tobacco supply chain, the MSA shows up as a yearly paperwork obligation and a directory to check. Every manufacturer selling cigarettes or roll-your-own tobacco files a Certificate of Compliance with each state’s Attorney General. Deadlines vary; many states require the filing by April 30 each year, covering the prior year’s sales.

The certification lists every brand family and style the manufacturer sells or plans to sell in that state, the address of each manufacturing facility, and the corporate officers responsible for operations. Monthly sales ledgers by brand are typically required so the state can verify escrow deposits or MSA payment math.

NPMs file more. They have to document that escrow deposits are fully funded, with bank records and account statements showing the funds are secured. They also appoint a resident agent in the state to accept legal notices, provide the agent’s name, address, and phone to the Attorney General, give 30 days’ notice before terminating any agent, and have a replacement in place at least five days before the termination takes effect. If the manufacturer fails to appoint an agent, the state Secretary of State typically serves as the default, but that default does not satisfy the directory listing requirement, so the manufacturer’s brands can still be pulled from the market.

Manufacturers also need a current federal permit from the Alcohol and Tobacco Tax and Trade Bureau under the Internal Revenue Code before producing tobacco products, and state certifications often require proof the permit is active.³

Checking a State Tobacco Directory

Every settling state publishes a tobacco directory listing the manufacturers and brand families approved for legal sale. Directories are hosted by the state Attorney General’s office or Department of Revenue, run as searchable databases or downloadable PDFs, and typically updated monthly or as certifications are approved and revoked. Some states keep separate directories for participating and non-participating manufacturers.

Wholesalers and retailers need to check regularly. Selling a product that isn’t on the active directory can trigger inventory seizure, license revocation, and civil penalties that commonly run to $5,000 per violation. Lookups work by manufacturer name or brand family, and it’s worth verifying both the manufacturer’s active status and the specific style names, because a brand family may remain listed while individual styles have been removed.

Where the MSA Ends and Other Law Begins

The Master Settlement Agreement is not the only legal regime in play for anyone selling cigarettes. Shipping cigarettes or smokeless tobacco across state lines pulls in the federal Prevent All Cigarette Trafficking (PACT) Act, which requires registration with the U.S. Attorney General and with the tobacco tax administrators of every destination state, plus monthly reporting of each shipment.⁴⁵ Possession of more than 10,000 cigarettes without evidence of state or local tax payment in the jurisdiction where they’re found is a federal crime under 18 U.S.C. Chapter 114, carrying up to five years in prison.⁶

These regimes overlap in practice. A retailer stocking products from a delisted manufacturer can face a state directory violation and a federal contraband charge from the same inventory, because the delisted products often lack proper tax stamps. For wholesalers and distributors, that overlap is the operational reality the MSA sits inside: a single documentation lapse can draw enforcement from more than one agency at once.

1
National Association of Attorneys General. The Master Settlement Agreement
2
National Association of Attorneys General. MSA Inflation Adjustment Calculation
3
Office of the Law Revision Counsel. United States Code Title 26 Section 5713 – Permit
4
Office of the Law Revision Counsel. United States Code Title 15 Section 376
5
Bureau of Alcohol, Tobacco, Firearms and Explosives. Tobacco Sellers Reporting, Shipping and Tax Compliance Requirements
6
Office of the Law Revision Counsel. United States Code Title 18 Part I Chapter 114 – Trafficking in Contraband Cigarettes and Smokeless Tobacco