New federal law restricting remote sales of tobacco may bring tax-evading smokers back to c-stores
In the thunderstorm of harmful tobacco legislation, the Prevent All Cigarette Trafficking Act (PACT Act) can be likened to a break of sunshine in the clouds for convenience store retailers.
Passed by Congress and signed into law by President Barack Obama earlier this year, the PACT Act was scheduled to go into effect on or about July 1, and restricts remote sales of tobacco, in an effort to lessen underage access and reduce sales of untaxed tobacco products.
The PACT Act goes a long way to close a loophole allowing tobacco retailers to remotely sell and ship untaxed cigarettes and tobacco products to consumers, according to industry players with knowledge of the law. As a result of the PACT Act, remote sellers are required to charge applicable state cigarette and sales taxes when they ship tobacco products, and the U.S. Postal Service (USPS) is prohibited from delivering tobacco products. USPS was one of few shipping methods left for tobacco products, as other carriers including Fedex and DHL had previously adopted policies against delivering tobacco products.
With these rules in place, brick-and-mortar convenience stores can expect a boost in cigarette and smokeless tobacco sales, though how much is yet to be seen, according to several industry advocates.
"This law is designed to require Internet sellers to charge state cigarette and sales taxes when they sell these tobacco products to consumers online," said Thomas Briant, executive director for the National Association of Tobacco Outlets (NATO). "That will eliminate [online sellers'] price advantage for cigarettes, which means consumers will revert back to buying cigarettes and smokeless tobacco at their local stores."
Others were optimistic, but unsure what concrete increase might be seen.
"It's certainly not going to hurt [c-store tobacco sales]," said Scott Ramminger, president and CEO for the American Wholesale Marketers Association (AWMA). "A lot of things happened that impact tobacco sales. We're in the middle of the FDA's tobacco regulation and state excise tax increases. All these things are going to have an impact one way or another, so I don't know if we can parse it out and measure the PACT Act impact separately."
The outlook was also encouraging, although reserved, for New York Association of Convenience Stores' (NYACS) President James Calvin, who represents the industry's interests in a state where the per-pack excise tax on cigarettes is $2.75 and untaxed tobacco products are sold through brick-and-mortar stores on Native American reservations. Calvin estimates half of the cigarettes being consumed by New Yorkers are purchased without any state tax collected.
"[The PACT Act] will drive some of the untaxed cigarette trade to the Native American reservations, but on the other hand, some [smokers] will come back to the tax-collecting side of the street," Calvin said. "I would expect that there will be some noticeable bump in cigarette volume for New York tobacco retailers, but how much and whether that will be sustained remains to be seen."
Similarly, the impact may vary from state to state depending on the tobacco excise tax rate for each, according to David Bishop, managing partner for Balvor.
"The financial incentive for many consumers will go away, but not completely be eliminated," he said, citing as an example New York smokers who will cross state borders to purchase cigarettes in lower tax states.
"The impact in New York could be that somewhere close to 5 percent of the state's cigarette volume comes back to brick-and-mortar stores, but what percentage goes to tribal stores vs. nontribal stores is yet to be determined," said Bishop. "In states with low tax rates, such as Virginia (30 cents per pack), I think it will be a slight uptick, but very minimal compared to New York."
The industry advocates were unsure of any loopholes in the law that may allow untaxed tobacco products to be shipped to consumers, but some questioned whether or not remote sellers would develop new methods of shipping untaxed products.
"People who want to circumvent the law are pretty clever," said Ramminger. "It will not totally eliminate remote cigarette sales, but it will get a lot tougher" for those looking to evade the law.
"We don't know how the Internet vendors will respond, and we shouldn't underestimate their resources or their resourcefulness," said NYACS' Calvin. "We're hopeful that there won't be many [channels of delivery] remaining, but whether or not Internet vendors will create their own fleet of trucks â there's an awful lot of money involved â so nothing would surprise me."
Enforcement of the act will be handled by the Alcohol Tobacco Tax and Trade Bureau, which will require Internet sellers to provide records of all online sales of cigarettes and smokeless tobacco products, according to NATO's Briant. He also noted the act of selling tobacco online without collecting the state excise and sales taxes is now a felony under the PACT Act, which means the law has "much greater teeth" in terms of enforcement power. The law also gives state and local governments a federal cause of action, or a right to bring a civil lawsuit, to enforce the PACT Act, he said.
Another plus of the PACT Act is the potential tax revenue windfall in all 50 U.S. states after July 1, as the channels to obtain untaxed cigarettes are closed, according to Briant. His association is using this argument as a weapon against state excise tax increases and launched a new campaign in April, alerting lawmakers in states where such increases are proposed, such as Kansas, Minnesota, South Carolina, New Hampshire and New York.
"It is vitally important to have the [state's] department of tax and finance analyze the impact of the PACT Act and confirm a windfall tax revenue estimate because the windfall amount may bring in substantially more tobacco tax and sales tax revenue than the proposed ... tax increase," Briant wrote in a letter to lawmakers in these states.
Regardless of impact or effectiveness, Ramminger said the c-store industry should take the PACT Act as a lesson in what can be accomplished when the industry acts together.
"Once and a while the stars align and come together," he said. "The lesson for retailers is although it's easy to be cynical, it's important to stay involved in government affairs and work with associations on issues that have an impact on the business."
For comments, please contact Mehgan Belanger, Associate News Editor, at [email protected].
The Bottom Line
- As of July 1, untaxed, remote sales of tobacco is illegal.
- Supporters believe the law will help tax-collecting tobacco retailers.
- The law also aims to restrict underage access to tobacco products.
"I would expect that there will be some noticeable bump in cigarette volume."
JAMES CALVIN, NEW YORK ASSOCIATION OF CONVENIENCE STORES