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December 1998
Volume 25
Number 6

RETAILER & TOBACCO INDUSTRY NEWS

Voters Narrowly Approve California's Proposition 10
Stunned Retailers Fear Drastic Losses from Soaring OTP Taxes
Proposition 10, entitled the California Children and Families Initiative, passed by the narrowest of margins in the November 3 elections in California. The vote went down to the wire, with Proposition 10 clinging to a mere 13,000-vote lead at the close of Election Day. Early returns had indicated a possible defeat of the measure, but the subsequent counting of absentee ballots, which lasted until December 1, widened the lead slightly and assured passage.

The initiative, spearheaded by actor and director Rob Reiner, places an additional 50 cents per pack tax - approximately 35 percent of the wholesale cost - on all cigarettes sold within the state to fund health and development programs for young children. The new tax on cigarettes will go into effect on January 1, 1999. California now has the third highest cigarette taxes in the nation, behind Alaska and Hawaii.

The measure also imposes proportional increases on other tobacco products. But determining the increased costs on OTPs is not quite as simple. When Proposition 10 goes into effect on January 1, the 35 percent tax increase will be added to the 26 percent currently levied, bringing the total tax on OTPs to 61 percent. A cigar selling for $8 will cost approximately $12.88 when the new tax is assessed. In addition, the California OTP tax rate changes annually each each July 1. Therefore, on July 1, 1999, the revised annual OTP tax would be calculated based on the new cigarette tax, upping the tax on OTPs to more than 95 percent. It is also possible that tobacconists may be paying a double tax, as Proposition 10 may overlap with Proposition 99, the initiative passed in 1988 that levied a 25-cent per pack tobacco tax. The State Board of Equalization will meet in December to seek a resolution to this anomaly.

Nonetheless, retailers and merchants of the 1,200 tobacco shops in the state are preparing for the worst, expecting sales to significantly decline due to the tax increase. Many retailers fear the tax may essentially put them out of business altogether. David Baker, vice president of the Cuban Cigar Factory, told the San Diego Union-Tribune he plans to lay off employees soon. Some tobacco shops are talking of moving to neighboring states. For most smoke shops, tobacco represents 90 percent of all sales, unlike convenience stores, supermarkets and magazine shops, where cigarettes make up a only small percentage of sales. The measure would also place California tobacconists at a great competitive disadvantage with out-of-state tobacconists and mail-order services. And with cigar and pipe smoking classified by many as pleasure activities, many customers may decide the rising costs aren't worth it.

Of immediate concern to retailers is an additional aspect of Proposition 10 known as a "floor tax." This is levied in advance on all tobacco inventory a proprietor has on hand. When the measure goes into effect, a tobacco shop with an inventory of $150,000 will have to pay approximately $52,500 for the floor tax, due by February 15. Many tobacco shops are without the resources to cover the floor tax.

"As a result of this punitive tax, we have organized retailers inÉCalifornia in an attempt to fight this measure," said Charles Janigna, president of the newly-formed California Association of Retail Tobacconists, Inc. (CART). The organization has retained the Coudert Brother law firm to research the validity of the Proposition and determine if legal action to block the measure based on Constitutional grounds is warranted. The organization is launching a major membership effort among retailers and suppliers to fund its fight. The Retail Tobacco Dealers of America (RTDA) has made a strong show of support with a $25,000 donation to CART. California Association of Retail Tobacconists, Inc., 1440 Koll Circle, Suite 104, San Jose, CA 95112, Tel: (408) 573-1105, Fax: (408) 573-1106.


PUBLIC MISLED?

The cause appeared sound, but did voters really understand how the programs would be funded? "We believe that the proponents of Proposition 10 carefully and willfully misled the voters of California by not disclosing the explicit details of their taxation plan," said Charles Janigna, president of the California Association of Retail Tobacconists. "We have witnessed the difficulties that the Board of Equalization in California is having interpreting the language of the initiative and the confusion it has created with [1988's] Proposition 99." The idea for Proposition 10 grew out of a 1997 White House conference on infant development, arranged by President Clinton at the urging of movie director Rob Reiner. It is estimated that Proposition 10 will bring in between $700-750 million annually to fund an integrated system of services to aid children from the prenatal period through the first five years of life. It will be implemented on a county-by-county basis with 59 regulatory commissions established to oversee the programs. Reiner, known for his role as "Meathead" on the popular '70s sitcom "All in the Family," began his crusade for early childhood development care several years ago. In the early to mid 1990s, he produced a documentary on child development featuring a parade of Hollywood stars that aired on ABC.

Court Denies FDA's Petition to Rehear Tobacco Regulation Ruling

In November, a federal appeals court upheld a ruling made by a three-judge panel in August that the FDA has no authority to regulate tobacco. In a 6-3 decision, the 4th U.S. Circuit Court of Appeals in Richmond, Virginia, refused to grant the FDA a petition for a rehearing of the August ruling by the 4th Circuit Court panel that struck down the federal agency's bid to regulate cigarette manufacturers.

The August ruling reversed a 1997 decision by U.S. District Judge William Osteen, which gave the FDA the authority to regulate nicotine as a drug and cigarettes as drug-delivery devices. In addition, Osteen upheld all the FDA restrictions, announced in 1996, involving youth access and labeling. But, his ruling denied the agency authority to control cigarette advertising.

The three-judge panel voted 2-1 to overturn Osteen's decision. In September, the FDA asked for a review of the ruling by the full Fourth Circuit Court. After this recent decision, the Justice Department plans to take the case to the Supreme Court.

Fuente, Opus One in Legal Settlement

In November, Fuente Cigar Ltd. and winemaker Opus One reached a friendly settlement in their trademark infringement lawsuit. The suit, brought by Opus One in October 1996 concerning the use of the Fuente Fuente OpusX brand name, was decided in the Fuentes' favor this past June by a Federal District Court Judge in Tampa. Under the resolution, which involved no monetary payments, the two companies agreed that Opus One would not contest Fuente's use of its "Fuente Fuente OpusX" trademark on cigars and Fuente would not contest Opus One's use of its "Opus One" trademark on its cigar.

"When we sat down face to face with Opus One's representatives," said Carlos Fuente, Sr., "we realized we had a common interest in putting our differences behind us."

The Fuente Fuente OpusX cigar is one of the most sought-after premium cigars on the market today. Introduced in 1995, it remains in limited distribution, available only at authorized retailers on the east coast.

"The Opus One partners and the Fuente family have agreed on the peaceful co-existence of their brands," said George Schlepper, Opus One's co-managing director. "Opus One is happy to have reached an accord with the Fuentes." Opus One, a partnership between Robert Mondavi Corp. and Baron Phillipe de Rothschild, produces ultra-premium wines from their Napa Valley vineyards.

The settlement clears the way for Davidoff to release its Opus One cigars, the first of which have been aging in Davidoff's Connecticut warehouse facility since 1997.

Arnold's Tobacco Shop Fetes Aristoff Cigars
Arnold's Tobacco Shop of New York City held an in-store promotion for Aristoff Cigars in November. Attendees sampled Aristoff cigars and enjoyed several fine brands of single-malt scotch and cognac. Arnold's also ran a week-long promotion in conjunction with the event, offering customers one free Aristoff with the purchase of two others.

A holiday window display at Arnold's featured Aristoff merchandise and gift bags.


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