Nowhere does more conflicting information about the potential regulations exists than the cost of implementing these regulations.
Part of the confusion is due to the complexity of the rules, but some part of it also likely due to the fact that most costs are not fixed and not set by FDA.
There are four main costs, only one of which will be paid to FDA.
1. Pathway to Approval
There are four different ways a company could receive approval to sell or continue to sell a product. As noted, most cigar companies will apply under the grandfather or substantial equivalence provision.
FDA expects that an initial substantial equivalence report will take 300 hours, on average, to prepare. However, it notes that once the initial application is done, subsequent applications for previous products would take less time; it refers to these as "bundled" reports. (Final Regulatory Impact Analysis, 93)
FDA estimates that a substantial equivalence report will require different occupations to complete. It estimates that 30 percent of these will be science-based individuals, 20 percent engineering, 30 percent office and administrative and 20 percent legal. It estimates this creates a composite hourly wage of $37.98. It then doubles this number to account for overhead and other costs.
Assuming this wage breakdown, it estimates a full substantial equivalence report would cost $22,787 while a bundled report will cost $6,836.40.
FDA believes that 60 percent of cigars will be grandfathered. (Final Regulatory Impact Analysis, 36) Of the remaining 40 percent:
There does not appear to be an estimated cost of grandfather reports as part of the finalized economic impacts. It seems likely, given it will be almost exclusively administrative costs, that it would be similar to a substantial equivalence exemption.
While it’s true that these reports would be required on a vitola by vitola basis, it’s likely that the cost of producing these reports will go significantly down if you are applying for multiple vitolas as much of the information would like be applicable to all reports, hence the much lower rates for any bundled report.
2. OTHER Administrative Fees
In addition, FDA would require companies to submit tobacco master files, monthly excise tax data, advertising plans and other information. Like pathways to approval, there’s no inherent fee associated for submitting this information, however, it will cost time.
3. Warning Labels
The addition of warning labels will include both labor for ensuring compliance as well as the physical cost of the labels. FDA estimates it will cost premium cigar retailers $770,000 to create the necessary signage to display warning labels. This is a one time fee. (Preliminary Regulatory Impact Analysis, 46)
FDA estimates that it will cost $1,540-5,626 per SKU for each labeling change.
4. User Fees
The one cost that will be paid directly to FDA is user fees. These are fees charged to importers and manufacturers of tobacco products to help FDA pay for the cost of tobacco regulation and research.
There are six categories of tobacco products designated to pay user fees—cigars, pipe tobacco, cigarettes, snuff, chewing tobacco and roll-your-own tobacco. However, cigars and pipe tobacco currently do not pay user fees because they were previously unregulated products and as such not expected to commit to FDA’s budget. Now that they are regulated user fees will begin.
For cigar companies, these user fees will not be due until October 2017, though importers and distributors with a TTB license will be required to begin submitting monthly excise tax data as of Aug. 20, 2016. (21 CFR Part 1150, 28707)
FDA has a set amount of fees it is required to raise from tobacco companies. These fees are paid proportionally by both industry and company. In short, a cigar company pays a percentage of user fees equivalent to the percentage of excise taxes (SCHIP) it pays in comparison to all cigar companies (mass market/premium/etc.) multiplied by the percentage of excise taxes all cigars pay in comparison to the other five tobacco categories.
While cigars are exempt from user fees for 2016, user fees have already been estimated for both cigars and pipes.
These payments are to be made quarterly, though manufacturers and importers will be required to submit monthly reports by the 20th of each month regarding their excise taxes beginning in August 2016.
User fees are not set in stone and will change annually based on three variables.
- FDA will increase its user fees annually through 2019. They will be $635 million in 2017; $672 million in 2018 and $712 million in 2019. After 2019, FDA will collect $712 million annually. (<a href="http://www.fda.gov/downloads/AboutFDA/ReportsManualsForms/Reports/EconomicAnalyses/UCM394933.pdf">Preliminary Regulatory Impact Analysis</a>, 53) It's likely Congress will set a new total user fee amount for 2020-2029, but it only had the authority to set the user fee collection for the first 10 years when the Tobacco Control Act passed.
- The percentage of cigar excise taxes compared to other products will vary.
- A manufacturer's percentage of cigar excise taxes will change annually.
Because many companies use importers and do not import their own products, they will have to work with their importer to determine the exact fees. Interestingly, if an importer or manufacturer has less than .0001 percent of excise taxes owed, they will not owe any taxes. (Requirements for the Submission of Data Needed to Calculate User Fees for Domestic Manufacturers and Importers of Cigars and Pipe Tobacco, 5)
This guide estimates that to be roughly 15,000 cigars annually. However, if a manufacturer used an importer, this exemption will likely not apply as the importer will have likely imported more than 15,000 total cigars.
- I thought it was supposed to cost $100,000-1 million per vitola?
That estimate, on the top end, includes premarket tobacco product application (PMTA), which cigars will not be subject to. It seems unlikely that even at the most extreme level these costs will hit the $100,000 mark and far less when looking at the average cost per vitola across a line.
- How much will my cigars go up in price?
- Are user fees tax deductible?
- Why aren't e-cigarettes/vapor products subject to user fees?
- Is FDA increasing taxes on cigars?