The Price of Your Cigars and the Taxes You Pay By Scott “Poppa P” Partridge

The Price of Your Cigars and the Taxes You Pay

By Scott “Poppa P” Partridge

What goes into the price of the cigars that you smoke?  First there is the simple commerce; a retailer buys the product from a manufacturer or wholesaler, marks them up and sells to the consumer. Most cigars manufacturers have a suggested retail price (SRP), and that price is commonly known in the retail world as “keystone” pricing.  Keystone pricing is a 100% markup from the wholesale price. If a retailer pays $5.00 for a cigar, they sell it for $10.00. Before you jump out of your seat and cry foul, remember that out of that $5.00 markup, the retailer needs to pay their rent, insurance, payroll, business taxes, utilities, etc. Trust me when I tell you that few retailers in the cigar business are getting rich! Most of us do it for the passion.

But out of that retail price, how much do you the consumer pay in taxes? The answer varies from state to state, but it is a lot. Most consumers pay three different taxes each time they purchase a cigar; local & state sales tax, state tobacco tax (known as OTP, Other Tobacco Product which is separate from cigarette tax), and a federal excise tax (FET). The biggest effect on your cigar prices are the OTP taxes and the FET taxes.

There has been a federal excise tax for a long time. But the biggest impact came in April of 2009 when President Obama signed the expansion of the State Children’s Health Insurance Program (SCHIP) into law. SCHIP was created in 1997 during the Clinton administration, and is the largest taxpayer-funded health insurance coverage in the U.S. since Medicaid began in the 1960s. To fund the expansion in 2009, the government targeted the tobacco industry. FET taxes on large cigars were raised to 52.75% (from 20.719%), with a cap of 40.26 cents per cigar. In essence, this means that any cigar with a price of more than 76 cents is taxed 40.26 cents. Previously the tax was capped at 4.875 cents per cigar. By law, the manufacturer pays this tax. Ultimately you the consumers pay it. The tax increase was so high that the manufacturers could not absorb it, so they passed it onto the retailers, who in turn had to pass it onto the consumer.

Now, let’s move onto the state tobacco taxes.  They vary widely from state to state. Here in Tennessee where my store is, our state tobacco tax is 6.6 % of the wholesale price.  In comparison to other states, this is low. New York State the state tobacco tax is 75%. Washington State is a whopping 95%! North Carolina has a 12.8% state tobacco tax.  New Jersey is 30%. Vermont is 92%.

So when you total up the federal tobacco tax, state tobacco tax and local & state sales tax, you are definitely paying your fair share of taxes on cigars. I would argue more than your fair share.  For a $10 cigar in Tennessee you will pay about $1.65 in taxes or just under $40 in taxes for a box of 24.  And that is in a state with a low state tobacco tax. Imagine buying cigars in states New York or Vermont!  Do the math.

These taxes are a bourdon on all of us. As a retailer in Tennessee, we have to pay the 6.6 % tobacco tax monthly when we receive the product, not after we sell it. If I receive a $5,000 order of cigars from a company, I have to pay the OTP tax of $330 usually before I sell the product.  We constantly have cash flow tied up as a result of it. Retailers have had to become creative to survive in the current over-taxed environment we work in.  You must create a welcoming atmosphere.  Lounge areas with comfortable seating, HD TV’s and Wi-Fi are a must.  Offering a wide range of cigars with a price points that will fit many budgets is needed.  You must find ways to give customers added value when they visit your shop.  Those added values do not necessarily need to be discounts or special sales. A welcoming environment and a greeting with a smile do wonders to make a customer feel good. I do everything from hosting meet and greet events with cigar industry personalities to holding live music events.

For you the consumer, you need to stay aware of your local; state and federal governments and the actions they take that will affect the prices of cigars. Join the Cigar Rights of America. PAY ATTENTION to the attempts by the Food and Drug Administration (FDA) to take control premium cigars. If they gain control, it will be the end of our business and your enjoyment as we know it. There is something very enjoyable and relaxing about smoking a fine cigar. The comradery that takes place at your local cigar shop or on a back porch enjoying cigars with friends is very cool. We are all in this together…..let’s do what we can to protect our rights!

 

Scott Partridge is the owner of Big Star Cigar in Mt. Juliet, TN.  He is also the former general manager of Uptowns Smoke Shop in Nashville.  We are grateful to have him as a valuable source on all things cigars, and are very pleased he accepted our invite to do a guest post. Scott is known by cigar geeks as the godfather of the retail cigar business.  He is also know by friends as Poppa P, and when he is south of the border, by his Dominican name, Poppy P.

 

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Comments (2)

  1. Poppa P

    Thanks Chad. I look forward to meeting you next time you visit the shop!

  2. Chad Martin

    I completely understand what you’re saying and just thankful for guys like you who take on the challenge and the passion to open a shop. I was in your shop on Thursday night last week really enjoyed the Torano night and loved the shop. My first time in it and I will def be back. Hopefully tonight for Monday Night Football.

    Thanks for the info and product.