Thursday, January 15, 2009

"SCHARE" Tactics

As 2008 ended, the panic button went off about the proposed SCHIP tax. This bit of legislation floating around the halls of congress had sparked much controversy over imminent price increases on premium cigars in the near future. Widespread rumors foretold of the federal government taxing the cigar industry out of business with astronomically draconian tariffs to the tune of anywhere from 50 cents to $3.00 per cigar. There was also news of a "floor tax" on existing inventory sitting on every retailer’s shelf. If any of these rumors had been true, there would have been good reason for concern. But the truth is they were only rumors; scare tactics perpetrated by people with much to gain by spreading them.

In truth, no one knew for sure what the final version of this legislation would look like until a few days ago. All we knew was that a bill had been agreed upon calling for a 50+% tax with a 40 to 50 cent CAP per cigar. The industry, as a whole, would rather have seen a lesser amount (or nothing at all), but will not fall off the face of the earth with these numbers. There was NO FLOOR TAX and NO SET DATE for anything to go into effect. Anyone saying otherwise was selling more than cigars and should be ashamed of profiteering on a matter that should have been taken far more seriously.

Charlie Rangel, Representative from the 15th Congressional District and head of the Committee on Ways and Means, has probably the largest Dominican constituency in the US (Harlem and Washington Heights) and showed cause for concern over how a large cigar tax would affect the Dominican Republic's economy. Together with some of our lobbyists, he was instrumental in brokering a reasonable compromise.

And that is what we ended up with. The US House of Representatives will cast their votes today on this bill, which did finally rear its ugly head on Tuesday - long after all the hype started.

Reading the whole thing will make your head spin. If you want the nitty-gritty on how it affects cigar pricing, go to section 701 on page #271. This is a change in the import tax. It used to be 20.719% of the import price with a cap of $48.75 per thousand (approx 5 cents a cigar) and has been changed to 52.4% with a cap of 40 cents a cigar ($400 per thousand!). In short, we (industry importers), can expect an increase of 35 cents per cigar when it arrives at port. While it may not affect the premium cigar business too drastically, the bundle and little cigar businesses (Macanudo Ascots, Agio, and just about anything in a small pack or tin) will be devastated after April 1st. HR2, a.k.a. SCHIP, is expected to pass quickly with little or no change; the senate may take longer.

A word of advice: if it's cheap cigars or tins you crave, buy them now and buy plenty. Just don’t fall for the fanfare from people who should know better than to make an entire industry run for cover.

- Humberto Gonzalez

1 comment:

Anonymous said...

Nice Blog Humby! I think your article is pretty much right on. Schip turned into marketing to promote sales.