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Price Rise Puts Heat On Smokers Run on cigarette sales and Internet vendors Kenneth Howe, Chronicle Staff Writer |
Friday, November 27, 1998
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With cigarette prices set to rise by almost $1 a pack in California in the New Year, many smokers are scrambling to find the cheapest way to feed their addiction.
Retailers say smokers are starting to hoard cartons of cigarettes as the first of two price increases goes into effect in this week.
Meanwhile, law enforcement officials worry that many smokers may turn to the Internet gray market for cigarettes. Worse, they may start buying smuggled packs as prices ratchet up. California has been losing about $50 million in unpaid cigarette taxes a year, or about 8 percent of the total revenue.
``As cigarette prices go up, it's hard to deny there won't be a greater incentive to smuggle,'' said Larry Nickell, an attorney in San Francisco with the Bureau of Alcohol Tobacco and Firearms. ``I think our antennae are up already.''
The nation's two biggest tobacco companies raised the wholesale price of their cigarettes by 45 cents a pack on Monday, as the industry begins to pay the $206 billion bill for settling smoking-related health claims filed against them by 46 states.
Some retailers have not yet passed on the 45-cent price increase because they are still selling inventory they acquired at lower prices. Others are making a quick profit by raising prices right away.
Store owners who have kept prices down reported that business is brisk. Costco stores have reported double-digit sales increases in the past few weeks.
``I'm going to buy as many cartons as I can before the New Year,'' said Jay Page, as he left the Cigarettes Cheaper store on Kearny Street in San Francisco.
``The smart people started buying last week,'' said Ned Roscoe, vice president of the Benicia chain, which has 385 outlets across the country, 209 in California. He said he has tripled his normal inventory to handle what he expects to be a crush of customers.
The next big price jump for California's estimated 4 million smokers will come in the New Year, when a 50-cents-per-pack tax goes into effect as a result of Proposition 10, which was passed earlier this month.
Still, retailers have a tough balancing act ahead of them, since if they are overstocked on January 1, their inventory becomes subject to the new Proposition 10 tax.
The measure, which won a narrow victory in the November 3 election, is expected to raise about $700 million, to be spent on early childhood development programs, from prenatal care to day care for preschoolers.
The extra 50 cents in the price of a pack of cigarettes is expected to discourage some smokers. ``The price increase will clean out those who were ready to quit,'' said Dr. John Pierce, a respected tobacco researcher at the University of California at San Diego.
Pierce's figures showed that after a 25-cents-a-pack tax took effect in 1989 after Proposition 99, the decline in cigarette consumption attributable to the tax was initially about 12 to 13 percent.
It is unclear how big an effect the two new price increases will have. ``I've committed myself to quit by the first of the year,'' said Audrey of San Ramon, who declined to give her last name. ``I was planning to quit anyway, but the (new tax) deadline makes it easier.''
Some smokers, forced to cough up more per pack, might switch to cheaper generic cigarettes. But the major tobacco companies own those brands, such as Basic (Philip Morris), GPC (Brown and Williamson) and Doral (RJ Reynolds). Analysts say big tobacco is likely to raise the price of generics enough to keep customers from migrating from the premium brands, where profits are higher.
Other smokers are hustling to find ways to avoid the price jumps
--for example, on the Internet.
Online smokers are flocking to Discount Cigarette World, physically located near St. Louis, Mo., where Internet customers can order a carton of Camel Filters for $15.60. That compares with $22.19 at Safeway in San Francisco.
``Business is picking up,'' said a spokesman for the Discount Cigarette Shop, another Internet seller, whose site advertises discount prices, free shipping and no state taxes.
The Internet is shaping up to be a gray market for cigarettes, an area where the law is unclear.
Under a personal exemption clause in current law, consumers are allowed to bring in two cartons of cigarettes from out of state without paying California state taxes, according to Monte Williams, chief of the excise tax division of the California Board of Equalization.
The trouble is, the law does not specify whether two cartons is per purchase, per year or a one-time exemption.
``It's really never been an issue before,'' Williams said. The exemption, written in 1962, was designed for vacationers returning from Nevada with a few cartons of cheaper cigarettes.
But out-of-state Internet cigarette sellers routinely do not charge California taxes, robbing the state of untold tax revenues.
Some Internet smoke shops argue that they are selling not in California but in their home state, and thus do not need to pay the tax. Others are located on Indian reservations and claim their sovereignty protects them from state taxes.
Either way, Williams said, state law requires that after two cartons, the consumers buying the cigarettes and bringing them into the state should pay the tax themselves and report it to the state.
Needless to say, compliance is rare, and tracking down Internet tobacco tax scofflaws is difficult.
If Internet sales increase markedly, Williams says, the state might ask the Bureau of Alcohol Tobacco and Firearms to enforce the Jenkins Act. This federal statute requires cigarette sellers everywhere to notify local tax officials of shipments to their states. With a shipping list, the Board of Equalization could theoretically go to buyers and demand back taxes.
Whether cigarette smuggling will increase is uncertain, state officials say. Smuggling represents an undetermined portion of the estimated $50 million the state loses each year in uncollected cigarette tax revenue.
Clearly, however, California's cigarette taxes, which will total 87 cents after the 50-cent increase on January 1, will be higher than those of bordering states, such as Nevada (35 cents), Arizona (58 cents) and Oregon (68 cents).
Williams says most smugglers now are small, organized groups that buy in states with low taxes and sell in local grocery markets or even from bags on neighborhood streets.
Larger black-market dealers legally buy millions of dollars' worth of cigarettes ostensibly for the tax- free export market and then divert them to California.
``We know there probably will be some increase, but we really don't know how much larger it will get,'' Williams said. ``We're hoping it will be small,'' he said. His office has a staff of only nine cigarette tax enforcement officers.
Besides, smuggling from California can still be profitable. On Tuesday night, a man came out of a Financial District cigarette shop carrying a plastic bag loaded with cartons of cigarettes.
Asked if he was stocking up to beat the price increase, the gaunt young man with a large, crescent- shaped scar on his left cheek stopped and shook his head. ``No. Doing a little business overseas. Cigarettes are $5.75 a pack in Canada,'' he said, marching off into the night.
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Puff it out "I don't smoke but am against tobacco taxes and punitive regulations on smoking. I felt my needs were fully met when they instituted smoking and non-smoking sections in public places." --from the Tobacco & Politics topic
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