States' Evidence

What are the best and worst places to be a tobacco retailer?

By  Linda Abu-Shalback Zid, Senior Editor

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How can you hit a moving target? The question begs asking when trying to determine the best and worst states in which to sell tobacco. Continual changes in no-smoking laws, taxation and other policies mean nothing is constant in the tobacco world.

For now, one place to start: Follow the money. Current high state excise taxes most certainly are leading to a challenging tobacco retailing atmosphere in some states. “Some lawmakers believe that tobacco products are a source of unending revenue to fund statewide projects,” says Thomas Briant, executive director of the Minneapolis- based National Association of Tobacco Outlets (NATO). “We have tried to educate lawmakers that taxing tobacco products has reached a point of diminishing returns. Some lawmakers understand that point, while others continue to support ever-higher taxes on cigarettes and other tobacco products.”

At press time, the headlines were full of potential increases in state excise taxes, including Nebraska, Idaho, Georgia, Michigan and Ohio.

There’s also regulation, legislation and percentage of tobacco users to examine. For example, Utah prohibits displaying tobacco products on billboards; it also has the lowest percentage of smokers, according to the Centers for Disease Control and Prevention (CDC).

It can even be based simply on the state’s location. As John Singleton, spokesperson for Winston-Salem, N.C.-based Reynolds American Inc., puts it: “If you have a high-tax state that’s located in proximity to a lower-tax state, the difference is really exacerbated—especially if there’s ease of movement across a broad state border.”

This article looks at all of that, with the caveat that retailing tobacco continues to be a complex, constantly moving target—and that there’s also more to “best and worst” than meets the eye. The top worst and best, neighbors New York and Pennsylvania, were somewhat easy to discern, but other states also emerged (albeit less dramatically) through research and interviews with industry insiders.It’s likely no surprise that New York topped the list as worst place to retail tobacco. Not only is its $4.35 state cigarette excise tax the highest in the country, but organizations such as the New York Association of Convenience Stores (NYACS) are constantly battling anti-tobacco regulation.

Add to that mix local American- Indian reservations that don’t require those taxes and neighboring states with taxes ranging from $1.35 to $2.75 less per pack, and you have a recipe for troubled tobacco sales at the Empire State’s c-stores.

James Calvin, NYACS president, said his organization had an economist examine the tax issue, and found that more than half the cigarettes consumed in New York are purchased without the state collecting any tax.

In addition to the American Indian reservations and the border states, Calvin points to a thriving black market that takes advantage of the fact that more than half the price of cigarettes in New York goes to taxes.

“It’s easy for [consumers] to avoid that tax,” he says. “And when they do, and hundreds of thousands of smokers do, it routinely means our stores lose that sale of the tobacco that they purchased, in addition to whatever else they might have bought while they were in the store.”

It also means the state loses excise and sales taxes, and the county loses sales taxes. “And beyond that,” he says, “it defeats the whole public-health policy objective of making cigarettes so expensive that people will quit smoking, because if they don’t have to pay the tax, there’s no incentive to quit. So it accomplishes nothing to drive the cigarette tax through the roof.” According to analysis from the New York Post, legal sales of taxed cigarettes have dropped 27%, from 41 million packs per month to 30 million per month, since the state excise tax increase.

When the last state excise tax increase of $1.60 went into effect last July, requirements for state excise taxes from American Indian reservations were also passed and scheduled to begin last September. The reservations filed a restraining order to block the tax collection, and efforts were tied up in court at press time.

Henry Bays, general manager of Tonawanda, N.Y.-based NOCO Express, said that when that latest increase occurred, he lost 30% of his cigarette sales, as well as some customers who might have purchased other items. Many of his stores are in the Buffalo area, and there are American Indian reservations within a 20-minute drive of most, he says.

“Native Americans have almost a $5-a-pack advantage on us going out the door,” he says. “It was almost instantaneous that we saw cigarette sales drop off.”

Another New York retailer (who requested anonymity) points out that some tribes even make their own brands, with one brand retailing for about $2 a pack—compared to nearly $10 for a pack of Marlboros at his stores. Since the new sales tax was enacted, he also has seen his sales down by about 30%.

On the regulation front, at press time NYACS was in the middle of a battle regarding licensing fees. The fee had been $100 per year per store, but a new fee schedule was approved last year by then-governor David Paterson. The new fees range from $1,000 to $5,000 per location per year, depending on gross sales of all products—not just tobacco. Bays, with his company’s 32 stores, says, “You can see how detrimental that would be if you’re paying $100 now.”

Calvin takes particular exception that many tobacco retailers are selling less tobacco than they used to, but the fee doesn’t account for diminished tobacco sales. “The outrageously excessive fee schedule was inspired by the public health community—and it was specifically designed to force 40% of the tobacco retailers in New York state to stop selling tobacco,” he says. At press time, there was a temporary restraining order barring the collection of those fees; the case had been argued and a ruling by the Appellate Division of New York State Supreme Court was expected sometime in the first quarter of the year.

Even on the local level, the hits keep coming in New York. At the end of 2010, a judge struck down a New York City law that would have required tobacco retailers to post gruesome images of diseased body parts to discourage cigarette purchases. But Calvin didn’t feel up to celebrating: “I didn’t cheer. … I know there’s another battle that’s just around the corner. It’s not an end; it’s just the latest chapter.”

As if to prove the point, at press time, a proposed Buffalo ordinance sought to further restrict tobacco advertising at retail stores, mandate compliance inspections and even hit manufacturers with a fee of $1,000 per brand style. Singleton says Reynolds is opposing those changes. “You’re going after requirements that are probably going to be met in a much broader fashion by the FDA,” he says. “Why would you make it much more difficult for your retailers in an already extraordinarily difficult environment, New York state, by coming in with additional business burdens?”

“The only recourse is to go to court,” Calvin says. “And we’re not hesitant to do that; it’s just that you can drain your budget and your reserves in a hurry, going to court to fight every new law and regulation regulating tobacco. And the public health community knows that.” Other states where tobacco retailers face difficult challenges (in no particular order):

Oklahoma. Ask Mike Thornbrugh, spokesperson for Tulsa, Okla.-based QuikTrip Corp., the toughest state in which to sell tobacco, and he doesn’t hesitate. “The worst state is Oklahoma,” he responds in an e-mail, pointing out that Indian reservations in the state have varying tax rates, all much lower than that of c-stores. “They can and do bootleg contraband all the time. If you think New York is tough, try Oklahoma.” Vance McSpadden, executive director of the Oklahoma Petroleum Marketers and Convenience Store Association, explains that there are currently 39 registered American Indian tribes in the state—each with different tobacco compacts, agreements to make payments to the state on sales in lieu of taxes. Some border tribal stores pay 6 cents for tax stamps on cigarettes, while the state’s excise taxes are $1.03. “What happened is that border spread all the way across the state illegally,” McSpadden says. In the past, sales might have been conducted out of trunks of cars or sold retail to retail. Laws have since been put in place to prohibit that illegal activity. “The tribes still have an advantage, but not as much,” he says.

California. In California, just being near ports of call could lead to black-market cigarettes coming in and taking your business. The state’s Board of Equalization estimates the state loses $182 million a year in cigarette excise-tax-revenue evasion. But there’s more to California tobacco retailer troubles, according to Frank Lester, Reynolds American Inc. spokesperson. “The climate in California is difficult,” he says. “You have a state that led much of the antitobacco movement over the past 20 to 30 years.” Those efforts seem to have worked, with the percentage of smokers dropping to 12.9%, the second lowest in the country, according to CDC numbers. Ironically, the state has one of the lower taxes in the region, due to heavy lobbying. But Lester says his company is keeping an eye out for future taxes that could come in the form of a state excise tax on the ballot for February 2012, as well as in part of an overall tax package.

Utah. The Beehive State might have a $1.70 state excise tax that is less than half of New York’s, but it is one of the highest in its region—higher than five of the seven states it borders, and more than double in some cases. “In Utah, much of the tax policy regarding tobacco there is filtered through their religion,” Lester says of a recent increase. The predominance of the Mormon religion, in which smoking is frowned upon, also could be a factor in the state’s smoking rate being the lowest in the country, at 9.8%, according to the CDC. Laws in Utah also portray an antismoking sentiment. The legal age to smoke is 19, vs. 18 in most states. Utah also prohibits displaying tobacco-product advertising on most billboards, streetcars, signs, buses or placards.

Washington. One only needs to glance at a state cigarette excise tax map to see that Washington might also have its challenges. Its tax is $3.025, while Oregon to the south is $1.18 and Idaho to the east is 57 cents. Singleton says, “You don’t have to be a rocket scientist to figure out that retailers in Washington state must have some problems, given that their tax is substantially higher than all the surrounding states.” It also has the third-lowest smoking rate, at 14.9%. nia and its $1.60 tax. Pennsylvania topped our list of more tobacco-retailer friendly locales for another reason: It is the only state that has no state excise tax on other tobacco products (OTP).

“Pennsylvania has benefited quite a bit from New Yorkers streaming across the border to buy cigarettes and other tobacco products there, because of the discrepancy and differential in tax rates,” Calvin says.

Even though neighbors Ohio and West Virginia have lower cigarette excise taxes, Singleton says the state likely gets OTP business from the two—which have rates of 17% and 7%, respectively. “If you’re looking to open a tobacco shop, Pennsylvania might be someplace you want to look at,” he says. Robert Perkins, vice president of marketing for the 56-store Rutter’s Farm Stores, based in York, Pa., gave a decisive “yes” when asked if Pennsylvania was a good state in which to retail tobacco. Although his stores aren’t affected as much by New York’s cigarette taxes, being on the south central border has meant business seeps in from Maryland—although not as much as it did two years ago, when there was a bigger price difference.

OTP, on the other hand, has been a consistently big seller. Although he declined to provide numbers, he says, “We’re well above the averages.” And there’s another benefit: OTP means “a very profitable” customer. “The market basket tends to be higher for OTP shoppers,” he says.

A substantial 20.2% of the state smokes, and 5% uses smokeless tobacco, according to the CDC. It also has a more lenient anti-smoking policy than many other states, with smoking still allowed in some bars and casinos. Other states that serve retailers well:

Missouri. Missouri has the distinction of having the lowest cigarette excise tax in the country, at only 17 cents. Again, its neighboring states are substantially higher— and with eight of them, that can mean a lot of cross-border activity. In 2009, QuikTrip even moved one of its border stores about 100 feet—from Kansas to Missouri—with one reason being to take advantage of the lower tax rate, according to Thornbrugh. That 100 feet drops the price of a carton of cigarettes by more than $6. Missouri also has higher percentages of smokers (23.1%) and smokeless- tobacco users (5.4%), and doesn’t have a statewide smoking ban.

Southeastern united States. With the exception of Florida, the Southeast is a good region in general for tobacco retailers, particularly when it comes to cigarette excise taxes. Most of the taxes are less than $1, with several among the lowest in the country. Georgia is only 37 cents, Louisiana is 36 cents and Virginia is 30 cents. (All three also allow smoking in bars, hinting at a more tobacco-friendly nature.) “If you look at the [state excise tax] map, the states in the Southeast generally have lower taxes overall,” Singleton says. “And then if you look at the rest of the country, it’s really a patchwork.”

What Lies Ahead

It’s difficult to discern if the “best and worst” will be the same next year. A big piece of that puzzle lies in what happens with state excise taxes. Lester said Reynolds is watching Nevada and Idaho as states that are having severe budget problems. In Idaho, that could mean less crossborder sales from tobacco users in its higher-taxed neighboring states. “The retail community is very much concerned in Idaho, should Idaho raise their taxes,” he says. Louisiana might also be ripe for new taxes, with the recent oil spill and other budgetary pressures. “They’re looking for revenue enhancers, and tobacco will definitely be in play there,” Lester says.

Even Missouri, with the lowest cigarette excise taxes in the country, can’t rest on its laurels. At press time, a Missouri state representative was drafting a bill to raise the state’s cigarette tax by 12 cents a year each year for eight years.

Singleton of Reynolds says, “I do think that there is an inherent uphill battle. … Look at all that’s happening with the economy, and all the states looking for additional revenue.”

He points out that some states, including New York, actually lost revenue after tax increases: “Which I think would tell a reasonably bright legislator: You know what? We might have reached the tipping point on this. We can’t just keep going back to the well on the same product.”

Do you think your state should have made the list as a best or worst state in which to sell tobacco? Please let us know at lzid@cspnet.com.

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