Supply Scan

Reclassify Cigarettes, Cigars? AWMA Objects

The American Wholesale Marketers Association (AWMA) has officially filed comments in opposition to proposed federal regulations that would likely result in the reclassification of some cigars as cigarettes and change the tax treatment of this major product category.

In comments submitted last month, the AWMA objected to the Proposed Rulemaking on Classification of Cigars and Cigarettes offered by the Alcohol and Tobacco Tax and Trade Bureau (TTB) of the U.S. Department of the Treasury. According to the AWMA, the proposal fails to take into account the requirements and costs to the wholesale distributors that will result from such a change.

"Nearly all of the cigarettes and other tobacco products sold in the convenience store segment are supplied by the wholesale distributor sector represented by AWMA. AWMA member companies in the tobacco distribution trade contract with state agencies to affix revenue stamps and collect taxes due," wrote the AWMA. "Any changes in the economics of tobacco distribution and sale have a substantial impact on the wholesale distribution industry."

AWMA also takes issue with the TTB's conclusion that "the proposed rulemaking will not have a significant economic impact on a substantial number of small entities." The AWMA said its members anticipate substantial increases in costs arising from the proposed change, and that the proposed regulations fail to address the potential economic effects on the distributors and retailers of tobacco products.

The AWMA also contends that the TTB has not conducted the required analysis of the impact that the changes will have on small businesses.

"AWMA members will suffer substantial additional costs if these proposed changes are adopted," continued the association. "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," said the AWMA.
AWMA member companies have advised that, if the current TTB proposal is adopted, they anticipate the need to hire employees for additional shifts or to purchase additional stamping machines.

The proposed changes in the definitions of cigarette and cigar will result in a change in tax status for a number of cigar products. For instance, the proposed definition of "cigarette" includes any product containing burley tobacco filler.

The Cigar Association of America estimates that over 20 percent of large cigars contain burley tobacco filler. These cigars are known as pipe-tobacco cigars. It is unlikely that stamping machines designed for cigarettes could even be reconfigured to stamp such products. The only other alternative would be manual stamping, a cost-prohibitive process. The result would be to make a legal product inaccessible to the consuming product.