Several states increased taxes on cigarettes during the past year, including Texas, which added a $1 per pack tax onto the already high-priced product. This created an even greater demand for smokers to look for cheaper alternatives to buying their favorite brand of cigarette. Some smokers switched from a premium brand to a discount brand; some smokers quit smoking or cut back on the amount they smoke; some smokers began buying cigarettes online, at discount stores, or smoke shops instead of popping into their neighborhood convenience store on their way to work.
When we owned a convenience store, almost all of our smoking customers questioned why our Marlboro’s or Doral’s were more expensive than the convenience store one block away. Sometimes, certain of our brands were cheaper than our competitor. Most smokers are not aware of the reasons behind different prices of cigarettes in different stores. It may alarm you to find out that you are smoking illegal cigarettes and could be fined and/or go to jail if you are caught. There are various forms of illegal trade in the tobacco business, but the most detrimental is the illegal possession and distribution of “gray market” cigarettes.
Gray market cigarettes are those that are manufactured for sale outside the U.S., are exported, and then re-imported illegally back into the U.S. by third parties for domestic sale without the permission of the trademark owner. Currently, the federal government, Washington D.C. and 49 states have passes laws that consider gray market cigarettes contraband and illegal. In most states, if you are found in possession of gray market cigarettes, you can be fined $1,000 and/or serve one year in jail. In most states, those who get caught with or distribute 20,000 or more gray market cigarettes can get fined $5,000 and/or serve 1-5 years in jail.
This problem is so prevalent in the U.S. that Philip Morris USA, makers of the number one selling cigarette, Marlboro, is supporting new legislation to toughen the penalties for illegal tobacco sales, and to require stricter enforcement of laws with respect to Internet tobacco sales. In a May 10, 2007 position statement posted on the Philip Morris USA web site, they propose certain changes to laws that govern cigarettes sold by Tribal Lands, over the Internet, and through gray markets.
When customers reported to me that they were able to buy a pack of cigarettes for $1.50 less per pack than I was selling them, my first question would be, “Are they legal?” The shocked customer then asked the golden question: How do I tell if a pack of cigarettes is illegal? In almost all the legislation banning gray market cigarettes, there is a provision making it illegal to place the state’s tax stamp on the bottom of a pack of cigarettes if it does not meet the federal labeling laws or if it has a label from the U.S. Department of Treasury showing it was intended for export.
Most of the third parties who re-import illegal gray market cigarettes do not have access to the state tax stamp because they are not licensed tobacco manufacturers or distributors. So, I told my customers: if your pack of cigarettes does not have the Texas State Tax Seal on the bottom, they are illegal unless you bought them on Tribal Lands.
There are also legal reasons for the differences in cigarette prices from store to store. These differences are based on contract deals the store owner makes with the tobacco manufacturer, and those deals are usually based on the volume of tobacco a particular store sells. Most tobacco companies offer brand promotion periods to retailers, allowing the retailer to discount a brand for a certain time period.
They rebate the retailer for the amount of lost profit. For example, I might have to pay $3.50 wholesale to buy a pack of Marlboro’s from Philip Morris. Normally, I would sell that pack to a customer for $3.99. I would make $.49 profit per pack. If Philip Morris wants to promote Marlboro’s, they might ask me to sell the pack at $3.29 even though I still have to pay $3.50 wholesale. I would then only be making $.21 profit per pack. Philip Morris would give me a rebate of $.28 per pack during this promotion so I would not lose profits.
Tobacco companies do this to boost sales volume and to better compete with the discount brands of cigarettes. Not every retailer participates in these deals because the store owner also has to agree with the merchandising terms that the tobacco company demands in the contract.
One term might be that the store owner use 20% of their cigarette shelf space to display a single brand, like Marlboro Lights. Another term might be that you do not use promotional displays from competing brands. Many mom-and-pop small stores (which represent 62% of all convenience stores) cannot meet the requirements of these contracts and therefore, do not qualify to offer discounted cigarettes.
Sometimes, the promotion periods change depending on whom the store uses as their wholesale supplier. That explains why I may have cheaper cigarettes in June and July than the store a block away that has cheaper cigarettes in August and September.
Incidentally, soda companies offer these same kinds of contract deals to retailers, but so far, I don’t know of any illegal Coca-Cola product that would land you in jail. If I hear of something, rest assured, I will report it on Associated Content.