Anto Kamarian fears his cigar business could be collateral damage of the tobacco tax on the June statewide ballot.
While most of the money from the proposed tax would come from cigarette sales, the worst impact would be on cigar merchants. And Kamarian is one of those. He owns Cigars by Chivas in Pasadena, one of scores of tobacco specialty shops in Los Angeles County and nearly 300 statewide that could be devastated by passage of Proposition 29.
The measure, designed to raise $750 million annually for medical research, imposes a $1 additional tax on a cigarette pack, more than doubling the current rate. But it would also hike taxes on other tobacco products – including cigars and pipe tobacco – from the current 32 percent to 54 percent of wholesale costs. The cost of a box of 18 premium cigars, in some cases, would zoom from about $265 to $305.
Internet prices already undercut him, so Kamarian fears that the tax hike will drive many of his remaining customers away from his Old Town Pasadena shop to buy online, where sales aren’t taxed. About 90 percent of his sales comes from cigars and accessories such as humidors.
“It this passes, we will lose an enormous amount of money,” he said.
He is one of a handful of local cigar shop owners who have contributed money to one of two committees opposing Proposition 29. That committee had only raised $7,500 through late March, an amount dwarfed by the $12.1 million raised by the other committee controlled by tobacco giants Philip Morris USA, a unit of Richmond, Va.-based Altria Inc., and R.J. Reynolds Tobacco of Winston-Salem, N.C.
In a late February poll by the Public Policy Institute of California, Proposition 29 held a commanding lead, with 67 percent support and 30 percent opposed.
Proponents say their measure does not specifically target cigar and pipe tobacco shops. They note that in 1988, voters approved a 25-cent tax on each pack of cigarettes and a related tax on other tobacco products.
“The intent of the voters (in taxing cigars and pipe tobacco) was to prevent people switching from cigarettes to other addictive tobacco products,” said Beverly May, western region director for the Campaign for Tobacco Free Kids, one of the organizations that sponsored the current ballot measure. “That intent remains just as valid today, so when the tax on cigarettes goes up, so should the tax on cigars and other tobacco products.”
Specialty shops
The debate on Proposition 29 has focused on the $1-a-pack hike in cigarettes, which would bring the total state tax on cigarettes to $1.87 a pack. When combined with a $1.01-a-pack federal excise tax, the total taxes on cigarettes would rise to $2.88, pushing the retail price for a pack to roughly $7.
But most cigarettes are sold at supermarkets and convenience stores, which won’t be hurt as much by the tax because they sell so many other products. The impact of the tax hike on specialty tobacco retailers – especially cigar shops – likely would be severe. That’s because most of these stores get the vast majority of their revenue from the sale of cigars and other tobacco products.
Proposition 29 would increase the retail price of a box of cigars between 10 percent and 17 percent, depending on how a retailer marks it up from wholesale. Some retailers base their markup on the pretax wholesale cost of the cigars; others factor in taxes first. So, a box of premium cigars with a wholesale price of $100 that currently retails for about $265 could sell for about $305 due to the hike in the tobacco tax. Add sales tax, and the price could hit $330.
But a cigar smoker might find an Internet price of $200 for that same box of premium cigars and that price won’t go up. So the price differential between the brick-and-mortar retailer and the Internet seller would widen to $105, even more if you add sales tax. That, retailers fear, would be enough to prompt cigar smokers to abandon retail stores and shop exclusively over the Internet.
One local cigar smoker said the higher tax would force him to buy more from the Internet.
“I already order most of my cigars through the Internet or mail order and only once in a while buy them at local stores,” said Nick Searcy, an L.A. actor featured in “Justified” on the FX Network. “If this tax were to pass, it wouldn’t make sense for me to buy cigars at all from local stores. It would put a lot of little cigar shops out of business.”
The way the tax is collected is a big concern, too.
The tax on cigars, pipe tobacco and related products is applied at the wholesale level. So cigar wholesale distributors pay the tax to the state Board of Equalization, but pass the costs to retailers like Kamarian. This puts cigar shops in a tight corner: They pay the tax to their suppliers with no guarantee that they can sell all the cigars to their end customers.
“This system is a double whammy,” said Rio Fiumara, owner of Marty’s Cigars & Divan in Glendora. “You pay the tax when you buy the inventory. If you can’t sell inventory, you pay the taxes on it anyway. This will only hit harder if Proposition 29 passes and the tax rate goes up more than 50 percent.”
When the last big hike in state tobacco taxes took place in 1999, Kamarian said customer traffic plunged 60 percent and he was left with a huge amount of inventory that he had already paid taxes on.
As a result, the first thing Kamarian and Fiumara said they would do if Proposition 29 passes is slash inventory.
That would hurt tobacco manufacturers and distributors such as Prometheus Inc. in City of Commerce. Prometheus makes and distributes God of Fire brand cigars.
Keith Park, founder and chief executive of Prometheus, said he expects that the tax would decimate his California business, which accounts for about 20 percent of Prometheus’ revenue.
“What’s going to happen is everyone is going to buy cigars on the Internet from out-of-state distributors and then they don’t pay the tax,” said Park, who is also the executive director of the campaign committee formed by specialty tobacco retailers and distributors.
Park said he believes many specialty tobacco retailers will go out of business.
“All these politicians talk about lowering unemployment,” he said. “Then they do things like this that will result in small businesses closing, people being laid off and less revenue for the state. It just doesn’t make any sense.”
While politicians did not place the measure on the ballot, many have since endorsed it, including Los Angeles Mayor Antonio Villaraigosa and several local city councils.
Internet threat
Tax supporters say the Internet threat to specialty tobacco retailers is present and growing even without the proposed tax hike.
“This shouldn’t come as a surprise to retailers and they should already be diversifying their business anyway,” said the Campaign for Tobacco Free Kids’ May.
Cigar shop owners say diversifying won’t be easy.
Javier Hernandez, owner of Valencia Cigars & Newsstand, said he will try to boost sales of magazines and convenience items such as potato chips and sodas. Currently, he said cigar sales account for roughly half his total business.
“I’m not optimistic about increasing magazine sales, since the Internet is taking over that, too,” he said. “As for convenience items, those are impulse buys once people are in my store. They don’t bring people into the store like cigars do.”
Shop owners who get the vast majority of their sales from cigars will likely find it even more difficult to diversify. They say they will likely be forced to lay off employees and, if that doesn’t cut costs enough, close down.
“Maybe I would have to convert the store into a gift store, if that’s even possible,” Kamarian said. “This cigar shop has been my livelihood and I would really hate to have to shut it down. I’m not a quitter.”
