The Impact of Tax Parity on Retailers

Legality of online OTP sales could wreak havoc if N.J. tax increase passes

Thomas A. Briant, NATO Executive Director

OTP Products
MINNEAPOLIS -- A relatively new idea among state lawmakers is to propose taxing other tobacco products including cigars, smokeless tobacco, pipe tobacco and even electronic cigarettes on a par with a state’s cigarette tax rate.  
During a recent New Jersey Senate Health, Human Services and Social Services Committee hearing, two state senators proposed an amendment to Senate Bill 1867 that would adopt tax parity for all other tobacco products. As introduced, Senate Bill 1867 only proposed a 75% tax on the wholesale cost of e-cigarettes. However, the amendment would “equalize” the tax on all other tobacco products with the state’s $2.70 per pack cigarette tax by proposing the following tax increases:
1. Cigars with a retail price of more than $2.00 per cigar would be taxed at $2.70 per cigar.
2. Cigarillos with a retail price of not more than $2.00 per cigarillo would be taxed at 54 cents per cigarillo, or $2.70 per five pack.
3. Little cigars weighing not more three pounds per 1,000 would be taxed at $.135 per little cigar or $2.70 per pack of 20.
4. Pipe tobacco would be taxed at $4.15 per ounce or $66.40 per pound.
5. Moist snuff would be taxed at $2.25/ounce, triple the current tax of 75 cents per ounce.
6. Snus would be taxed at 13.5 cents per single pouch of snus.
7. All other tobacco products would be taxed at a rate of 68% of the wholesale price.
Moreover, the amendment would impost a floor stocks tax on both wholesalers and retailers on all of these tobacco products in stock on the day that these tax increases would go into effect.
This kind of tax parity would be economically devastating on family-owned retail stores. While federal laws including the Jenkins Act and the Prevent All Cigarette Trafficking (PACT) Act restrict the sale of cigarettes over the Internet, there are no similar federal laws restricting the sale of cigars, pipe tobacco and electronic cigarettes over the Internet where consumers can escape paying any tobacco taxes and sales taxes.  
This ability to avoid such high taxes in New Jersey will result in a broad decline in tobacco sales resulting in brick-and-mortar retail stores going out of business because of the Internet. Consequently, retail employees will lose their jobs and the State of New Jersey will likely fall far short of collecting $35 million in additional revenue from the electronic cigarette tax and not succeed in raising $22 million more from the higher “equalized” taxes on all other tobacco products.
The underlying premise that lawmakers rely on to argue in favor of tax parity, or equalizing the tax on all tobacco products with the cigarette tax rate, is flawed. Essentially, lawmakers are claiming that all tobacco products have the same health consequences as smoking cigarettes and, therefore, cigars, pipe tobacco and electronic cigarettes should all be taxed at the same proportionate rate as cigarettes.
The New Jersey amendment demonstrates the fallacy of the parity argument. There is no scientific evidence that smoking one cigar a day has the same health consequences as smoking a pack of cigarettes per day. The same holds true with smokeless tobacco and pipe tobacco. However, by taxing a single cigar at $2.70, moist snuff at $2.25 per ounce, and pipe tobacco at $66.40 per pound, lawmakers are forcing New Jersey adults to look to the Internet or neighboring states to escape paying such exorbitant tax rates.
Lawmakers need to understand that the basis for tax parity is suspect and equating the health consequences of smoking cigarettes is an unsustainable argument. Otherwise, retailers will be forced out of business and employees will lose their jobs.