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    SCHIP and Tobacco: A Storm Brewing

    In this first installment of a two-part series on the impending federal excise tax increase on tobacco, industry experts present details of the tax hike and the resulting short-term business decisions being made by retailers.

    By Mehgan Belanger

    With a health-care focused president and a Democratic-controlled Congress behind him, it came as no surprise when the Children's Health Insurance Program Reauthorization Act of 2009 -- also known as the State Children's Health Insurance Program (SCHIP) bill -- was signed into law Feb. 4, 2009. The bill expanded SCHIP to cover an additional 4 million children on top of the existing 7 million already in the program, and called for an additional $35 billion in funding to be paid for on the back of the tobacco industry, in the form of an increase in the federal excise tax (FET) on tobacco products, among other measures.

    Although the bill was passed nearly a month ago, confusion and questions remain in the convenience store industry regarding the details of the new FET rate, as well as the requirements of retailers.

    What is currently known are the new tax rates for each type of tobacco sold. According to the National Association of Tobacco Outlets (NATO), the old and new FET tax rates are as follows:

    -- Cigarettes: 39 cents per pack; $1.0066 per pack
    -- Large Cigars: 20.719 percent of manufacturer's price, cap of 4.875 cents per cigar; 52.75 percent of manufacturer's price, cap of 40.26 cents per cigar
    -- Little Cigars: 4 cents per pack; $1.0066 per pack
    -- Pipe Tobacco: $1.0969 per pound; $2.8311 per pound
    -- Chewing Tobacco: 19.5 cents per pound; 50.33 cents per pound
    -- Snuff: 58.5 cents per pound; $1.51 per pound
    -- RYO and Cigar Wrappers: $1.0969 per pound; $24.78 per pound
    -- Cigarette Paper: 1.22 cents per 50 papers; 3.15 cents per 50 papers
    -- Cigarette Tubes: 2.44 cents per 50 tubes; 6.30 cents per 50 tubes

    Adding to the ambiguity, the final regulations of the FET increase will not be available until they are issued by the U.S. Treasury's Alcohol, Tobacco Tax and Trade Bureau (TTB), which had only two months to draft and disseminate the policies before the April 1 deadline. Sources close to the agency told CSNews Online retailers should watch for more information on the TTB's Web site, www.ttb.gov. In addition, NACS will send out the information to its members as soon as it is available, according to Chris Tampio, senior director of government relations at NACS.

    One part of the law that raises a significant amount of uncertainty is a floor stocks tax that requires all "individuals" in possession of tobacco products (i.e., retailers, wholesalers and manufacturers) to pay the federal government the equivalent of the difference between the old and new tax rate on all tobacco products in their inventories -- with the exception of large cigars -- as of 12:01 a.m. on April 1, 2009.

    "A lot of questions still need to be answered, such as buy-one, get-one packages -- how will they be taxed? And what happens if [retailers] pay the [floor excise] tax and then the product expires -- do they get the tax back when the product is returned to the manufacturer?" asked Tampio.

    The floor stocks tax is due to the Treasury on or before Aug. 1, 2009. It also includes a $500 credit on a per-company basis, not per store, warehouse or tobacco segment, according to NATO. The association's executive director, Thomas Briant, emphasized a company operating 10 convenience stores receives only a $500 tax credit, not $5,000.

    The exemption of large cigars from the floor stocks tax is thanks in part to the lobbying work done by the Cigar Association of America (CAA), according to the organization's President Norm Sharp, who explained, "We didn't want to create a burden for distributors and retailers."

    He continued: "But there's something more basic here ... As long as I've been here, since 1981, [the floor stocks tax] only applied to cigarettes. This [floor stocks tax] applies to all tobacco except for large cigars. The government is trying to maximize its revenue."

    The government was also not willing to compromise on the FET measures, according to many sources that lobbied on behalf of the tobacco industry. "It became increasingly clear ... that members of Congress simply do not care about the impact these large tax increases will have on the tobacco industry," Briant said, adding despite the association's attempts, "our efforts fell on deaf ears in Congress."

    To Sell or to Pay
    The April 1 deadline forces tobacco retailers to make some quick business decisions for their tobacco categories. Those who do not want to send Uncle Sam a large check in August may find themselves caught in a balancing act of selling down tobacco inventory while trying to avoid out of stocks.

    "C-store operators like to have every product available to have what customers want," said NACS' Tampio. "You don't want someone coming in and having to tell them no." He added, despite this strategy, "NACS believes folks will sell down their inventory before paying, to protect themselves from a big tax bill."

    NATO's Briant agreed, adding retailers should also clear out any slow-selling tobacco products from their inventory ahead of April 1. "If a product does not sell well, chances are that the product will become even a slower seller after the tax increase," he said.

    He also advised retailers to set money aside in a separate fund for the floor stocks tax, to ensure it is available when the tax is due in August.

    For Boulder, Colo.-based Smoker Friendly, a chain of 100 tobacco outlets and a supplier of tobacco products to more than 600 retailers, the floor stocks tax will likely cost more than $1 million, according to vice president of trade marketing, Mary Szarmach. As a result of this impending bill, the company is in the midst of closing some "moderate and underperforming stores," moving inventory to locations with higher volumes and in some cases, relocating closed stores to better locales.

    "With the cost of goods this high, we can't afford to have any underperforming stores out there," Szarmach said, adding the floor stocks tax "will be a big bill for us. We'll sell down inventory, but it's a good selling period and you don't want to be out of stock. But you don't want to pay our government too much as of April 1."

    By that date, 15 Smoker Friendly stores will be closed. Szarmach noted five of the locations slated to be closed were decided by an annual analysis of the chain, while 10 of the closings were due to the FET.

    Click here to read the second installment of this series, which addresses the long-term impact the FET will have on the tobacco industry, including c-stores, wholesalers and manufacturers.

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