Big Stink Over Little Cigars

40 AGs petition federal agency to close classification, taxation loophole

Published in CSP Daily News

WASHINGTON -- Attorneys General from 39 states and Guam have filed a petition with the U.S. Department of Treasury's Alcohol Tobacco Tax & Trade Bureau (TTB) asking the federal agency to close a loophole that allows tobacco manufacturers to pass off cigarettes wrapped in brown paper as little cigars.

The AGs want the TTB to change the way its rules and regulations classify these little cigars, and to change its policy of allowing tobacco companies to classify their own products in a way that avoids public health restrictions and taxes that are placed [image-nocss] on cigarettes.

While sales of these little cigars' are still small, this growing trend places at risk the health and safety of our citizens, especially our youth, said Iowa AG Tom Miller, co-chair of the National Association of Attorneys General (NAAG) Tobacco Committee. Attorneys General and public health organizations have been successful in lowering cigarette smoking rates among teens, but the growing use of little cigars' threatens over time to reverse these gains.

The current federal policy for classification of cigars and cigarettes allows products that are actually cigarettes to be marketed, taxed and sold as cigars. Tobacco companies use this self-classification loophole to evade state and federal laws aimed at protecting the public from the harms of cigarettes, the AGs claim. It also allows manufacturers to circumvent the landmark 1998 tobacco Master Settlement Agreement (MSA), which imposes significant additional public health restrictions on the advertising, promotion and marketing of cigarettes by tobacco companies, particularly to youth, they said.

Most of those public health restrictionsincluding the restrictions in the MSAapply to cigarettes and not to little cigars.

Many AGs take the view that some manufacturers discovered that if they wrap their cigarettes in brown paper and call them little cigars, they can avoid the restrictions and also avoid the much higher taxes that apply to cigarettes. Once the products reach the market, however, they are promoted as if they are cigarettes, the AGs contended.

Federal data shows that little cigar production, sales and consumption have increased dramatically in recent years, while cigarette production, sales and consumption have declined significantly. Earlier this year, AGs announced that cigarette sales in the United States had reached a historic 55-year low and that fewer Americans were smoking since implementing public health restrictions under the MSAt. The sharply divergent trends suggest that a good portion of the growth in the little cigar segment is attributable to brown cigarettes being passed off as little cigars, said the AGs.

The federal government currently defines a cigar as any roll of tobacco wrapped in leaf tobacco or any substance containing tobacco. Little cigars are those cigars that weigh less than 3 pounds per thousandthe same as cigarettes. A cigarette is defined as any roll of tobacco wrapped in paper or in any substance not containing tobacco and any roll of tobacco wrapped in any substance containing tobacco which, because of its appearance (packaging and labeling) or filler content, is likely to be offered to or purchased by consumers as a cigarette.

Traditionally, cigars are unflavored, wrapped in leaf tobacco, and made of aged, fermented air-cured tobacco with little sugar content. The petition is not aimed at traditional large cigars, or their miniature counterparts. Rather, the AGs said they are concerned with the many little cigars now appearing in the marketplace that are in virtually every respect indistinguishable from cigarettes. They assert that such little cigars, which are the same size and shape of cigarettes, have filter tips like cigarettes and are packaged in traditional cigarette packaging, are actually cigarettes disguised in brown wrappers.

Current TTB rules allow tobacco manufacturers themselves to decide whether their product is a cigar or a cigarette and pay the corresponding tax rate; however, cigars are taxed at a significantly lower rate than cigarettes by federal and state governments. By self-classifying their cigarettes as cigars, the tax differential allows the tobacco companies to price cigars at half the price of cigarettes, or even less, making them more affordable for youth, the AGs said.

The current ability of tobacco companies to self-police allows the manufacturers to evade the more restrictive public health protections that apply to cigarettes and not cigars, said Idaho AG Lawrence Wasden, co-chair of NAAG's Tobacco Committee. By disguising cigarettes as little cigars, the manufacturers endanger the public health, the gains achieved through the [MSA] and the integrity of our federal and state tax systems.

Cigarettes must carry health-warning labels, but only seven cigar manufacturers are required to place warnings on their packages. The ingredients of cigarettes, but not cigars, must be reported to the Centers for Disease Control & Prevention (CDC).

Cigarettes disguised as little cigars appear in the same varieties as regular cigarettes, such as light, menthol and full flavor, and are often sweetened with flavors like chocolate, chocolate mint, raspberry, cherry, vanilla, strawberry, wild berry, peach, rum, cinnamon and spearmint. These appealing flavors, and their ready availability in packs of five, eight or even single sticks, make the product more attractive and less costly for teens to buy, said the AGs.

Most states have laws that require cigarettes to be sold in packages of at least 20 to keep less-expensive kiddie packs out of the hands of children. According to the AGs, the tobacco companies are evading these laws designed to protect kids from the cheaper, smaller packages by simply labeling some cigarettes as cigars. They claim that studies have shown that increasing cigarette prices reduces smoking among children, who are particularly price-sensitive.

"Youth are attracted both to candy-flavored cigarettes as well as tobacco that is inexpensive, so these little cigars' appear tailor made just for them," said Cheryl G. Healton, president and CEO of the American Legacy Foundation. "We must be able to track their popularity to know if their sales are increasing while the sale of regular, more expensive cigarettes are on the decline. We applaud the [AGs] for championing this effort and support strong changes in policy that would keep these products on the federal government's radar screen."