 |
|
|
|
|
 |
American Wholesale Marketers Association Files Comments Objecting to Proposed Rulemaking on Classification of Cigars and Cigarettes (2006R-276P) Docket No. RIN 1513-AB34, 71 Federal Register 62506
FAIRFAX, VIRGINIA — The American Wholesale Marketers Association (AWMA), a national trade association representing wholesale distributors of consumer products to the convenience store industry, submitted comments on March 26, 2007 objecting 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. Upon thorough review, AWMA determined that the proposal fails to 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.
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. 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 percent of retail cigarette sales in 2005. The gross retail sales of cigarettes in the convenience sector came to over $52 billion in 2005. Cigarettes constituted over 34 percent 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," we disagree with this 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 Administrative Procedure Act, Sec. 603, requires that TTB conduct an initial regulatory flexibility act analysis to assess the impact on small businesses. There is no indication in the Federal Register notice for this proposed rule that a regulatory flexibility analysis was conducted. Instead, these statutory requirements have just been summarily dismissed as being irrelevant. Nothing could be farther from the truth. There is no mention of wholesale distributors or retailers, nor any acknowledgement that these proposed changes in the regulations would have any effect on the companies in the distribution chain.
AWMA members represent nearly all of the tobacco wholesale distributors – approximately 350 such companies -- in the United States. Among these companies, the majority are small businesses, employing fewer than 50 people. Under the Small Business Administration’s North American Industry Classification System, a "small entity" in the wholesale trade is one with fewer than 100 employees.
AWMA 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.
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. These economic factors were not considered by the TTB when the proposal was issued.
The proposed changes in the definitions of cigarette and cigar will result in a number of products now classified as "cigars" to be treated as "cigarettes" for tax purposes. 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.
Sec. 553(c) of the Administrative Procedure Act requires that the final rule include a "concise general statement of [its] basis and purpose." Although this is not a requirement for the proposed rule, the TTB should be laying the foundation for the concise statement in the notice and comment period. AWMA fails to understand the basis for these proposed changes. What is the purpose or goal of these proposed changes, i.e., the benefit to be gained? While TTB suggests there is "confusion" about the definitions of cigarette and little cigars which may result in "possible revenue losses," no evidence is offered that there has been any revenue losses suffered by the Treasury Department or by any state agency, and the possible magnitude of the losses is not touched upon. Without evidence of a real problem, of significant proportions, the disruptions and dislocations that this change would cause are not justified and should not be pursued.
The preamble to the proposed rule mentions three petitions received from the tobacco industry and state attorneys general. These petitions are related to either the Master Settlement Agreement (MSA) or public health concerns. As TTB correctly states, however, these matters are outside the scope of its authority (71 Fed. Reg. at 62516). Neither MSA fees nor public health responses can be a lawful basis for changing a federal excise tax law.
AWMA and its members believe it is improper for the Government to attempt to restrict if not outright ban a legal product through an unsubstantiated, "back door" regulatory event such as proposed here through an artificial and previously unimaginable regulatory process combining tobacco sugar content with state cigarette taxing authority. The Government has no legal basis to effect its anti-tobacco policies through the use of a tax which is happening in this instance. AWMA and its members are available for further discussions regarding this matter.
ABOUT AWMA
The American Wholesale Marketers Association (AWMA) is the only international trade organization working on behalf of convenience distributors in the United States. Its distributor members represent more than $85 billion in U.S. convenience product sales. Associate members include manufacturers, brokers, retailers and others allied to the convenience product industry.
Typical products purchased and sold by convenience distributors include candy, tobacco, snacks, beverages, health and beauty care items, general merchandise, foodservice and groceries. In addition to convenience stores, their largest customer segment, convenience distributors also service grocery stores, drug stores, tobacco shops, mass merchants, newsstands, concession stands, gift shops, fundraising groups, restaurants, institutions and much more.
|
|
|
|
