FAIRFAX, Va. -- The American Wholesale Marketers Association (AWMA) made its feelings known to the Alcohol and Tobacco Tax and Trade Bureau (TTB) of the U.S. Department of the Treasury on Monday on a proposal to reclassify little cigars as cigarettes.
The national trade association representing wholesale distributors of consumer products to the convenience-store industry submitted comments on March 26 objecting to the Proposed Rulemaking on Classification of Cigars and Cigarettes. Upon thorough review, AWMA determined that the proposal fails to [image-nocss] take into account the requirements and costs to the wholesale distributors that will result from a change in the tax treatment of this major product category.
AWMA member companies in the tobacco distribution trade contract with state agencies to affix revenue stamps and collect taxes due. Any changes in the economics of tobacco distribution and sale have a substantial impact on the wholesale distribution industry because the retail sales of cigarettes through convenience stores constituted over 63% of retail cigarette sales in 2005, according to the AWMA. The gross retail sales of cigarettes in the convenience sector came to over $52 billion in 2005. Cigarettes constituted over 34% of total convenience store sales in 2005.
While the TTB concludes that the proposed rulemaking will not have a significant economic impact on a substantial number of small entities, the AWMA disagreed with the cursory dismissal of the unforeseen consequences of this proposed rule. Our members anticipate substantial increases in costs arising from the proposed change, yet the proposed regulations fail to address the potential economic effects on the distributors and retailers of tobacco products, the AWMA wrote.
The association claims its members will suffer substantial additional costs if these proposed changes are adopted. We anticipate that the proposed change in definitions would result in a number of tobacco products now labeled and sold as cigars' will be classified as cigarettes.' This has the potential to be a very costly change for the distribution industry, which is unique to tobacco products. The possible burden arises from the tax stamping process itself. The industry has developed highly specialized and highly efficient machines, each costing well over $100,000, to uniformly affix revenue stamps to packages of cigarettes, with a very low rate of error. The process is largely automated, using specially designed machines to open ten-pack cartons of cigarettes, affix a stamp on every pack, and close the carton. The efficiency of the machines depends on the uniformity of the product and its packaging.
Unlike cigarettes, the products and packaging of small cigars are not uniform. If the packs of small cigars vary in any dimension, they cannot go through the stamping machines, or they can be handled only after time-consuming alterations and adjustments to the machines. Any stop in the production line is, of course, very expensive. Any recalibration, even if possible, will cost thousands of dollars to the industry, an event not considered when the subject regulations were proposed.
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