Cigars in California will suddenly be more expensive.
Starting July 1, California’s tax rate for other tobacco products (OTP), including cigars, will increase from 27.3 to 65.08. The reason for this massive increase is Proposition 56, a ballot measure which passed overwhelmingly in November that increased the state’s tax on cigarettes from 87 cents to $2.87.
California taxes other tobacco products by dividing the tax rate per cigarette by the average wholesale cost per cigarette, that number is then the OTP tax. Since 2011, this has generally stayed around 30 percent, but because of the massive cigarette tax increase, the OTP tax has more than doubled.
Consumers are likely already feeling the effects of the cigarette tax. It went into effect on April 1 and because of the turns, i.e. how quickly stores sell their inventory of cigarettes, the higher-taxed cigarettes are likely already being bought.
For cigars, the change will take additional time.
First, because of how the OTP taxes are set, the change was delayed until July. Secondly, the new tax rate only applies to cigars coming into the state beginning July 1. Any product that is already in a retailer’s humidor as of today will still be taxed at the old rate.
Once the changes take affect, they will be substantial. Per halfwheel estimates, a cigar with an MSRP of $9.50 likely retails for around $12.09 in California before the state’s 7.25 percent sales tax. Under the new tax, that price will increase to $15.68. When all is said and done, that $9.50 cigar will cost $16.82 with the new tax and sales tax, a total increase of $3.85.
While many manufacturers have encouraged California retailers to load up on stock under the old rate, at least one manufacturer actually shipped new cigars to California early, just so the retailers could enjoy the old tax rate. Tatuaje shipped its TAA 2017 early, a move that will likely save consumers around $4.85 per cigar.
Though it might take consumers a while to feel the effects, the industry will see negative impacts much earlier. Attendance at the 2017 IPCPR Convention & Trade Show, which begins July 11, is expected to be negatively impacted by the California tax situation. At least three companies have told halfwheel they will not be attending the show because they believe attendance will be light due to the California tax.
Per halfwheel’s estimates, California will now have the third highest tax on cigars in the U.S., it previously ranked 17th.