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Close, and It Is a Cigar

Sometimes a cigar is just a cigar. But sometimes, according to critics of the tobacco industry, it may be little more than a cigarette.

Last year, Congress sharply increased the federal excise tax on "little" cigars—filtered, often sweetly favored products that are similar in size and shape to cigarettes. Some manufacturers responded by increasing the weight of their little cigars so they qualified as conventional, "large" cigars, which are taxed at lower rates.

Now, a surge in sales of the small, inexpensive cigars is attracting the scrutiny of members of Congress and a prominent anti-smoking group, who say that tobacco manufacturers are exploiting this tax loophole.

Currently, little cigars—those weighing three pounds or less per thousand—are taxed at the same rate as cigarettes, about $10.07 per carton. But cigars heavier than three pounds per thousand are taxed at 52.75% of the manufacturer's price, resulting in taxes of only about $2 to $4 per carton for the smaller products in this bracket.

Many small cigars already weighed almost three pounds per thousand before the tax increase, so some manufacturers needed only to modestly increase the amount of paper, filter or tobacco in their cigars to meet the higher threshold.

In the 14 months since the excise-tax increase, sales volumes of cigars classified as large more than quadrupled to 12.3 billion units, according the federal Alcohol and Tobacco Tax and Trade Bureau. Sales of products listed as "little" cigars fell by 79%.

U.S. Rep. Henry A. Waxman, a California Democrat, said the House Energy and Commerce Committee he chairs is investigating whether some manufacturers in the $8 billion cigar industry are avoiding taxes.

The committee also is looking into whether some companies are violating Food and Drug Administration rules by marketing flavored cigars that are little different from cigarettes to attract the youth market. The FDA last year banned sales of cigarettes that include flavors other than menthol, and said its ban could encompass products labeled as cigars if they meet its definition of a cigarette.

"It appears that some tobacco companies are attempting to evade tax and health laws that protect our children," Mr. Waxman said in an interview. He said the weight changes made by manufacturers to reduce their tax burdens were "efforts to evade the law" and "should be stopped."

In April, the committee sent letters to the heads of six tobacco companies, including such little-cigar makers as Swisher International Inc. and Prime Time International Co., seeking information on the marketing of the small cigars and other tobacco products. Prime Time International declined to comment for this article, while an executive at Swisher didn't return phone calls. Many other little-cigar manufacturers didn't respond to requests for comment.

Ronald Denman, general counsel for General Tobacco, a company that manufactured "filtered" cigars—the industry term used to describe the small, non-conventional cigars—until earlier this year, said his company raised the weight of its products so it could pay a lower tax rate.

"If you can do something that is legal ... at a lower cost, I don't know that there are many companies that wouldn't," he said. His company is shutting down because of financial problems unrelated to the tax controversy.

The Campaign for Tobacco-Free Kids, an antismoking group in Washington, is urging members of Congress to rewrite the tax definitions of little cigars and cigarettes to better distinguish the products from each other and from large, conventional cigars.

Danny McGoldrick, vice president of research for the Campaign for Tobacco-Free Kids, said changing the weight threshold to 4.5 pounds per thousand would help address the issue.without affecting tax rates for products such as blunts and cigarillos "that really are cigars."

The group, he said, is concerned that the tax gap allows filtered cigars—including those with flavorings such as wild cherry and peach—to be sold inexpensively, making them attractive to minors.

Closing the tax gap may be worth a few hundred millions of dollars in revenue each year for the U.S. government, according to people in the tobacco industry. Congress in 2009 raised the excise taxes for cigarettes, cigars and other tobacco products to help finance the expansion of a children's health-insurance program backed by President Barack Obama.

Those tax increases, as well as the shaky economy, have prompted some cigarette smokers to switch to the small filtered cigars, according to tobacco retailers.

"Those blow off the shelves," said Andrew Beaupre, manager of a Cigarette Outlet store in Cedar Rapids, Iowa. Customers pay as little as $1.27 a pack of 20 filtered cigars, he said. The lowest-priced cigarette brand the store sells is about $3.75 a pack.

Darren Collett, president of Collett Enterprises Inc. of Seymour, Ind., which operates 18 Smoker Friendly stores in Indiana and Kentucky, said his sales of filtered cigars rose more than 30% since the tax increase. Manufacturers have met tax rules by adjusting the weight of their cigars, he said, "and ethically I see nothing wrong with it."

The tax and trade bureau data show that combined sales volumes for little and large cigars rose 41% in the first 14 months since the excise-tax increase, while cigarette volumes continued to decline, a sign some cigarette smokers are switching to the small cigars.

A person close to the conventional-cigar industry said volumes in that segment were down about 5% in the first half of this year, so the increase in overall cigar sales appears to stem from rising sales of the filtered cigars.

Total revenue figures for small cigars are hard to come by. The Cigar Association of America, a Washington trade group, estimates that retail sales of all cigars, including the small variety, totaled about $8.3 billion last year, about double the figure in 2008 as tax rates jumped.

Thursday, September 23, 2010

Source: The Wall Street Journal

Close, and It Is a Cigar