Federal Tax – Large Cigar/Small Cigar/Pipe Tobacco Excise
Tobacco excise is a significant source of revenue for the Federal Government, but more often it is used as a means to manipulate consumer choice by raising the price of tobacco. This has been an open recommendation by anti-tobacco advocates in their effort to eliminate cigarette use. However, diminishing returns on cigarette tax revenues have led to interest in expanding this policy to all tobacco products in what is termed, “Tobacco Tax Equity.” Recent proposals in Congress would result in approximately a 1000% increase in the tax on cigars and about 1650% increase in the tax on cigarettes. Advocates are pursuing this tax increase on three fronts: 1) as a standalone measure; 2) as a means to pay-for specific healthcare initiatives; and 3) as a means to pay for an infrastructure stimulus plan. https://www.durbin.senate.gov/newsroom/press-releases/durbin-wyden-krishnamoorthi-colleagues-introduce-bicameral-bill-to-reduce-tobacco-use-in-america
Federal Tax – FDA Center for Tobacco Products (CTP) User Fee
User fees are a way for the government to offset costs of regulation by directly taxing the regulated industry. According to FDA, “the user fees provide FDA with a source of stable, consistent funding that has made possible our implementation of the Tobacco Control Act.” The CTP budget is determined by the government each fiscal year and the cost is divided among all producers of tobacco products. According to Cigar Aficionado, these user fees have cost the premium cigar industry around $63 million dollars a year.
The Biden Administration has recommended a $100 million increase in the CTP user fee for fiscal year 2022 and recommended that e-cigarettes and vaping products be included in the pool of producers paying the fee.
State Tax – Other Tobacco Product (OTP)
Several states are currently proposing raising the taxes collected on “other tobacco products,” which includes premium cigars. Uniformly, such increases move consumers to shopping out of state or online platforms in order to save money. Having a wide difference in tobacco tax from state-to-state creates an uneven playing field, especially for retailers located along major highways and near state borders.
*Though shopping online has traditionally offered consumers a tax-free experience this is changing due to the Supreme Court decision in South Dakota v. Wayfair. In this ruling, The Court established that states have the absolute right to collect all appropriate taxes from online purchases. This would include all the associated taxes that come with purchasing tobacco products. This ruling will surely level the playing field more for brick-and-mortar v. online retailers.
State Tax – OTP Tax Caps
A tax cap is an economic tool that provides an industry, in this case cigars, with clear and concise parameters for the taxation of their products. The tax cap would put a monetary cap on the amount of taxes that can be collected on a product. For example, a state has an OTP tax rate of 50% and a tax cap of $0.50 per stick. If the cigar costs $10, the total price would be $10.50 v. without the tax cap where that particular cigar would cost $15. Tax caps offer the cigar industry a protection against excessive taxes that will hurt a business’ ability to operate. States that have adopted tax caps have done so in the interest of harmonizing their OTP tax rates with those of nearby states, to encourage consumers to shop (and pay taxes) in their home state.
In April 2021 the Biden Administration announced its intention to outlaw sales of menthol cigarettes and flavored cigars. FDA has yet to propose what defines a flavored cigar, however, at the state and local levels the term “characterizing flavor other than tobacco” has been utilized to distinguish such products. In its most extreme, some jurisdictions have proposed that the definition of flavored tobacco products should encompass any with descriptive characteristics, such as the analogous references often provided in cigar reviews.
FDA’s announcement on its intended actions on flavored cigars: https://www.fda.gov/news-events/press-announcements/fda-commits-evidence-based-actions-aimed-saving-lives-and-preventing-future-generations-smokers
Smoking Bans and Distance Restrictions
Another regular target for states and localities has been imposing smoking bans in public outdoor areas. While many of these laws are reasonable — not directly outside of a hospital or a school — most of them go much further. This often includes smoking bans in public parks, trails, beaches and even sidewalks. These restrictions place an undue burden on the consumers to navigate the minefield of outdoor public non-smoking zones.
But indoor smoking is under further threat as well. In post-COVID reopening, some states and localities are specifically delaying the re-opening of smoking lounges. There are also threats on the horizon of further restricting or outright banning smoking in casinos. If certain politicians get their way, the only way a person will be able to enjoy premium cigars is hidden away in their homes like it is some kind of shameful act; they want those who enjoy cigars to feel ostracized by society.
One must ask, what are the long-term goals of the anti-cigar political actors. To put the answer simply, they want to see a tobacco free world. A case study of the long-term goals of the anti-cigar political movement is New Zealand. New Zealand recently proposed a popular law that would restrict all tobacco purchases to those who were born before 2004. This law would effectively remove tobacco products from New Zealand long term. It is not realistic to assume that US politicians are taking notes from New Zealand and thinking up their own path to a non-tobacco future.
Tobacco Product Manufacturing Practices
The tobacco manufacturing protocol is heavily regulated by the federal government. These restrictions relate to paying fees, providing an ingredient list, detailed plans for manufacturing, registering all buildings and businesses with the FDA, quarterly reports, health documents and warning plans. These restrictions are likely to continue to grow and develop to restrict the manufacturing of tobacco products. These continued regulations and restrictions will likely continue to hurt the industry in the US, threatening jobs, companies, and consumers.
For more information relating to the tobacco manufacturing protocols please see the following: https://www.fda.gov/tobacco-products/compliance-enforcement-training/manufacturing
Premarket Review/Substantial Equivalence
The premarket review and substantial equivalence test is offered by the FDA as a ‘shortcut’ of sorts for the approval process. The FDA says the following: “A substantially equivalent tobacco product is one that has been found by FDA to have either the same characteristics as a predicate product or has different characteristics than the predicate tobacco product, but the Substantial Equivalence Report demonstrates that the new product does not raise different questions of public health”. Using this method for characterizing products is used by the FDA to ensure there can be umbrella terms for all the products in their sights. Having substantial equivalence be the standard, it is easier for regulations, and policy to be written to affect a whole section of an industry in a very methodical way.
Last year a decision by federal Judge Mehta offered a breath of fresh air to the premium cigar industry by calling on the FDA to evaluate the question of premium cigars prior to requiring the industry to comply with its new premarket tobacco application requirements. FDA has since delegated this evaluation to the National Academy of Sciences. While unlikely that the FDA will give up their control over premium cigars without a fight, it has opened the door for a potentially less onerous and costly avenue to market.
For more information from the FDA on the substantial equivalence procedure, please see the following guide: https://www.fda.gov/tobacco-products/market-and-distribute-tobacco-product/substantial-equivalence
Warning Labels and Packaging
As it stands right now, the FDA does not have the authority to make premium cigar manufacturers or retailers put tobacco product warnings on premium cigars. Traditionally, the FDA would require all tobacco or nicotine containing products to have a warning describing the dangers of smoking affixed to an obvious point on the packaging. However, a court ruling determined the FDA’s reasoning for doing so was invalid.
The opinion written by Judge Gregory G. Katsas “The Tobacco Control Act permits the Food and Drug Administration to regulate tobacco products for the public health, but only after considering whether the regulation would likely increase or decrease the number of smokers. Under this authority, the FDA promulgated regulations requiring extensive health warnings on packaging and advertising for cigars and pipe tobacco. The FDA concluded that these warnings would help communicate the health risks of smoking, but it failed to consider how the warnings would likely affect the number of smokers. We hold that this failure violated the Tobacco Control Act and the Administrative Procedure Act.”
One of the biggest long-term threats based on the warning labels’ argument are plain packaging and behind-the-counter laws. While the likelihood of these extremes may seem far-fetched today, they are already a reality in many countries and considered a priority by anti-tobacco organizations in the United States. For example, Australia’s plain packaging law only allows for a drab gray/green band that says the name of the manufacturer and the name of the cigar, prohibiting any unique styling or art.
Advertising and Promotional Restriction
Advertising and promotions have been continuously targeted as a way to limit youth access to all tobacco products and as happens, premium cigars are lumped in with the other actors in the tobacco industry. The FDA regulated what kinds of events can be sponsored by any actor in the tobacco industry very heavily; baring all advertisements or sponsorships of the following types of events: “athletic, musical, artistic or other social or cultural event, or any entry or team in any event, in the brand name, logo, symbol, motto, selling message, recognizable color or pattern of colors”. There is no reason to believe the federal, state, and local governments are going to stop at these hefty restrictions. It is likely that all three actors will continue to regulate marketing relating to tobacco products and tobacco businesses until it is either too difficult or expensive to operate.
For more information relating to the FDA’s restrictions on advertisements relating to tobacco products please see the following: https://www.fda.gov/tobacco-products/products-guidance-regulations/advertising-and-promotion
Nicotine testing, as condition of employment
In an article entitled “Penn Medicine: Toward a Tobacco Free Future,” the University of Pennsylvania explains how they would like to make their work force completely nicotine free. All of this is done in the name of public health, although, if you believe in science, it does not seem to hold up. This is discrimination in employment and does not grant all people equal protection under the law. Within the workplace there are 20 states that allow discriminatory hiring practices based on tobacco use. In many of the discriminatory practices aimed against smokers of all kinds, what is cited are statements like: “The health risks and related costs associated with tobacco use have caused UPHS to mobilize action for moving toward a tobacco free future by focusing on the health of its workforce while containing the escalating costs of health care associated with tobacco use.” This was pulled from the University of Pennsylvania Health Service’s policy on the hiring of smokers. So, it is clear that the reasoning for the discriminatory practices is due to the perceived health risks of tobacco use.
FDA studies have shown that the risk of smoking related maladies for the average consumer of cigars is statistically insignificant from that of a non-smoker. This is because the greater majority of cigar smokers do not inhale the cigar smoke, and that cigars are consumed with less frequency.
Link to the FDA referenced studies are here: https://bmcpublichealth.biomedcentral.com/articles/10.1186/s12889-015-1617-5
Insurance Discrimination Among Cigar Smokers
“An insurance company has the right to charge up to 50% higher premiums for tobacco users. While the states allow insurance companies to drastically increase premiums for smokers, not many states charge the full 50 percent. Instead, the insurance companies generally charge tobacco users 10-20 percent higher rates.” Seeing as the average American pays ~$7,188 per year this could be premium as much as $3,594/year for those charged the legal limit and $718-$2875 for the 10%-20% price increase. An important point to keep in mind are the health risks associated with cigar smokers that were listed above.
This insurance hike costs the American cigar smokers between $11,411,120,000 and $57,762,768,000 based on perceived health risks that, according to the FDA, are statistically insignificant. This figure is based on CDC data that shows that ~4.9% of adults (Approximately 16,072,000 people) are labeled as cigar smokers and therefore would be subject to the increased insurance costs.
Food & Beverage in Premium Cigar Establishments
Another major state level battle are the restricting of food and beverage services in cigar shops and lounges. In many states, something as simple as serving water at your lounge could end up with state action. That is a major concern for us, but even more concerning are the states that are attempting to implement this at a worrying rate. These restrictions can greatly restrict a store’s ability to make a profit if their business was based on food and beverage sales prior to the restrictions being in place.
Withdrawal of the ANPRM on Premium Cigars
“(…) based on current information and policy considerations, we do not intend to take further action pursuant to the ANPRM and no longer intend to request information about conducting additional possible studies before reviewing the results of the ongoing NASEM review, as such additional studies may be unnecessary. Accordingly, the agency has withdrawn the Unified Agenda entry pertaining to the premium cigars ANPRM and RFI.”
“(…) (the) FDA has contracted with the National Academies of Sciences, Engineering, and Medicine (NASEM) to conduct a comprehensive and systematic assessment and review of the scientific literature and provide a final report of the study results. The review will include analysis of data on both short-term and long-term health effects of “premium” cigars. The NASEM review has begun and is expected to conclude in spring 2022.”
For more information regarding the FDA’s decision regarding the ANPRM please see the following page: https://www.fda.gov/tobacco-products/ctp-newsroom/ctp-statement-withdrawal-unified-agenda-entry-pertaining-advance-notice-proposed-rulemaking-premium
National Academy of Sciences Session on Premium Cigars
The National Academy of Sciences has been tasked by the FDA to provide a review of current literature and studies to determine the supportive health risks associated with premium cigars. It was made clear to the National Academy of Sciences that the FDA is not looking for a definition of premium cigars but is looking for a report that breaks down current research and studies that have been conducted about premium cigars. PCA has been advocating on behalf of the premium cigar industry and, has made sure that they are in the room for all discussions and comment sections of the study. The study is due to come out in Spring of 2022.
The issues surrounding local authority are founded in states relinquishing permitting and taxation powers to the local governments. If tobacco policy were to be localized from town-to-town the restrictions and taxes could be different in each jurisdiction. The outcome of that may be good in some regions and worse in others. In either case, the burden is on local businesses to navigate the regulatory minefield. This could include individual towns choosing to restrict all tobacco sales, some tobacco sales, in-store displays, taxes and more. Sometimes, the only recourse is for local businesses to challenge these local ordinances in courts, which is expensive and slow.
Having the switch to localized policy would also prove to provide retailers with a very unequal playing field when it comes to permits, taxes and restrictions. A store a mile down the road could have little to no taxes on premium cigars, be allowed to have an indoor lounge and a patio whereas the other store could be subjected to excessive taxes, more bureaucratic hoops to jump through and heavy restrictions on operations. Having localized tobacco policy would lead to confusion among the businesses, the consumers, and any enforcement mechanism a state has to enforce these policies.
Small Business Aid and COVID Relief
There have been major pushes to ensure that cigar manufacturers, retail stores and distributors can receive aid given by the federal government as well as states. As it currently stands there are still restrictions in place on several fronts when it comes to tobacco related businesses receiving different types of aid, depending on the state. As the discussion shifts to economic recovery new debates are taking root over the how to redirect aide to support reopening and rehiring.
Cigar lounge Permitting and Exemptions
Many of the issues surrounding cigar lounge permitting feed into and are a result of several other factors covered. First there are the issues relating to COVID-19 and state governments attempting to keep the cigar lounges closed perpetually or open them at a far slower rate to hut profitability. Pared with that are the concerns about localized regulations and permitting. Having all the tobacco related permits and licensing done at the local level could greatly restrict the ability for a lounge to open or continue to operate. A goal of many politicians is to restrict smoke lounges until it is either illegal to operate one, or it is so difficult and expensive that it would never be profitable to operate one. This is one of the front lines of the anti-tobacco legislation and a litmus test for where specific jurisdictions will trend on many of the other issues covered in this document.
With the federal age of purchase being raised in 2020, many states have updated their state statutes to reflect the federal standard. However, some states have 1) not updated their statutes 2) use legislation with an age increase to add in other anti-tobacco provisions, fees, or retailer compliance restrictions. In some localities such Suffolk County, NY the government has tried to raise the age of purchase to 25. The PCA will actively fight any age of purchase increases beyond the federal standard of 21 years old.
The Premium Cigar Association continues to monitor and engage on issues in premium cigar producing countries and to work to showcase their impact with domestic policymakers including the Biden Administration and Congress. PCA is placing a special emphasis on the international security, economic stability, and migration issues connected to premium cigar producing countries. The association will engage appropriately with contacts in Honduras, the Dominican Republic, and Nicaragua when necessary, as issues arise.