Eight Reasons Why Today’s Sales Tax Ruling Won’t Change How Cigars Are Sold

Today, the Supreme Court overturned a ruling that prevented states from requiring out-of-state internet retailers to collect sales tax.

While it is a long-awaited change to the laws about how business is done online,  its impact, particularly in the cigar industry, is oftentimes overstated. For starters, the largest online retailer, Amazon, voluntarily collects sales tax on every order. But there are other basic issues—beyond sales tax—as to why people are buying things online, many of which apply to cigars.

Sales tax fairness has long been expected, though most seemed to think it would come from a bill in Congress. That was until earlier this year when the Supreme Court agreed to hear a challenge to a 1992 ruling that effectively made it illegal for states to require out of state retailers to pay sales tax. For the cigar industry, many have believed that this will lead to a curbing in the shift of sales from brick and mortar retailers to online retailers, which are now believed by some to account for over half of the cigars sold in America.

Today’s ruling specifically affects sales tax. It didn’t deal with OTP tax—also known as excise taxes or cigar taxes—an additional tax most states apply to the wholesale price of cigars and are then factored into the price you see on the shelf. It might be the case that a future challenge based on today’s ruling could lead to a decision on whether states are allowed to collect OTP tax for out-of-state sales, but as of today that doesn’t change. (The mechanism that would change it would likely be a state trying to do so and then a subsequent lawsuit.)

---

I am here to rain on the parade of the long list of people who texted and called me at 10:30 a.m. to tell me how this would change the business. I don’t think it will change much. I certainly don’t think it will stop the momentum of online retailers and most importantly, I don’t think it will do anything to help brick-and-mortar retailers address their own issues.

So here are eight reasons why I believe today’s sales tax ruling won’t change how people buy cigars in America.

One note: I’m going to use the terms “internet retailer” and “catalog retailer” interchangeably. They both refer to the same group of America’s largest retailers who offer cigars both online and in physical printed catalogs.

1. IT’S JUST SALES TAX

It’s not like there is some added internet tax now. It’s just sales tax, the same sales tax that your local retailer also has to charge.

If the internet retailers had to pay an added “internet tax” than I could understand some of the belief of a change of cigar buying behavior, but it’s not. Some will argue that shipping could serve as an effective internet tax and in some cases that’s true. But many retailers offer free shipping on boxes, orders over $100 or other promotions that negate the cost of shipping.

Sure, I suppose if you are buying a five-pack of cigars that aren’t discounted the shipping would play a noticeable part in the difference in price. But that’s a pretty specific example and one that likely accounts for a minute amount of transactions online, let alone in a brick and mortar store.

2. IT’S NOT ON THE PRICE SHOWN

It’s also worth pointing out that neither shipping or sales tax are shown to consumers while they shop. You have to wait to see those costs until everything is added to your cart and by that point, a consumer is much more likely to buy something versus a scenario where those prices were already factored into each item.

It might seem like a small thing—particularly if you are committed to reading the rest of the 2,000-word article about buying cigars—but it would make a big difference and does factor into point #4.

3. INTERNET RETAILERS OFTEN PAY LESS FOR CIGARS

There are a lot of different reasons here: volume, ownership, exclusive products and relationships. But the big online retailers, and even the medium ones, don’t pay the same for a cigar as what your local brick and mortar most likely does. As such, they also oftentimes don’t sell cigars for the same price.

And it’s not just Gurkha’s Gargantuan Grab Bag on Cigars International. In the last few days alone I’ve seen Curivari, Four Kicks Maduro, Oliva Serie V Melanio, Padrón and Tatuaje offered at discounts ranging from “up to 30 percent” to 50 percent off. And that’s just three emails in my inbox since June 17.

This is before we talk about the free goods promotions, the exclusive swag, or the times when catalogs are closing out products at prices lower than what your brick and mortar paid for them.

I’d just like to point out that while all this sounds bad, some of it is necessary. In brief: one, the cigar industry has inventory control problems and hasn’t had a great mechanism to control that for years. Two, many of those exclusive catalog brands are essential for helping to keep the prices of your favorite cigars down. The industry needs cheaper cigars to use lower grade tobaccos. Remove that demand—which is largely at catalog retailers—from the supply chain and the cost of every other cigar goes up.

4. EVEN IF RETAILERS COULD DISCOUNT THE SAME, THEY’D STILL BE MORE EXPENSIVE (MOST OF THE TIME)

Retailers outside of the three states without a cigar tax—Florida, New Hampshire and Pennsylvania—as well as the District of Columbia, along with super low tax states like Texas (1.1 cents per cigar) are still at a massive disadvantage in this regard.

The median cigar tax in the U.S. is 15 percent of the wholesale price. On a cigar with an MSRP of $9.50, that means the price increases to $10.93 on the shelf because of the cigar tax.

That $10.93 is before sales tax, which is key.

There are four states that have the 15 percent OTP tax on cigars: Delaware, Kentucky, Maryland and Mississippi.

Delaware has no sales tax, so if you buy a cigar at a local retailer it’s the price you see on the shelf: it’s $9.50 plus $1.43 in OTP tax for a grand total of $10.93. But if you live in Delaware and buy that same cigar at MSRP, it’s back to $9.50 since the internet retailer paid neither sales tax, nor excise tax.

Kentucky and Maryland both have a 6 percent sales tax, meaning that the $9.50 cigar would be $10.07 from a catalog, but $11.58 from a local retailer. In Mississippi, sales tax ranges 7-8 percent depending on the locality, but even at the low end, the pricing difference is $10.17 versus $11.69.

Even if the cigars were offered without any discounts and sold at MSRP plus applicable taxes, it would cost consumers 76 cents to $1.54 more per cigar to buy the cigars in a store versus online simply due to the OTP tax and its affect on sales tax.

Sure, a retailer might be able to run a promotion, you might have a locker membership or some other factor might bring the cost down in your brick and mortar, but most of the time, the catalogs are likely to be cheaper. And once you get to the top 20 states in terms of cigar tax, which begins at 20 percent, it’s unlikely brick and mortar promotions would be able to match the catalog retailer pricing advantage because of OTP tax.

5. BRICK AND MORTAR RETAILERS NEED TO GET BETTER

As I’ve pointed out before, many brick and mortar retailers are their own worst enemy. Regular cleaning, furniture upkeep and practices that encourage customers to come back would be new ideas for many of the cigar shops around America, including some successful ones. That’s before we get into inventory control and selection, staff training, smoke ventilation or understanding the economics behind running events.

The point is, there are a lot of brick and mortar stores in America that could use some help from within and oftentimes they instead spend their time talking about what the other guy is doing.

I regularly shop at a brick and mortar store that rarely offers me discounts, doesn’t typically carry the newest cigars and certainly doesn’t run very many specials on items they are not closing out. However, I like the lounge and the people that are in it. As such, I spend money there even though I could pay less elsewhere and that’s seemingly what many consumers would be willing to do: pay extra for cigars from a cigar shop they like.

Even here in the Dallas area, one of the most successful shops charges a bit more for cigars than the other shops in the market. They do this because they pay their employees a lot more than the other shops. And it works. Better employees and a better environment leads to better sales even if the consumers know they could get a better deal elsewhere.

6. THE BIG ONLINE RETAILERS HAVE MORE THAN JUST PRICE GOING FOR THEM

And more than just free goods too.

The bigger online retailers—Cigars International, JR Cigar, Famous, etc.—also have advanced customer marketing strategies. Some of these are explicit—JR Cigar’s Beat the Dealer game—while others are much quieter but still effective.

I can assure you that when I go to Thompson Cigar’s homepage, I’m shown a different version than you are. Mine is based on the product I’ve purchased and clicked on, which appears to be Arturo Fuente and Padrón.

Then there’s the massive search engine optimization efforts to get atop of Google, as well as the catalogs, the emails, the specialized emails, Famous’ large radio campaign on SiriusXM and so on. Many times these strategies are focused around either showing you products that you are looking for—call us today about OpusX!—or showing you prices that are almost absurdly cheap.

7. CON-VEN-IENCE

Last night, I looked on in horror to find that someone on my Instagram feed had ordered McDonald’s from Ubereats. They were then complaining about how it took 45 minutes to get to him.

You can make your own judgment about the dinner choice, but the reality is a lot of people—in increasing numbers—are willing to pay extra to not have to get in a car and go somewhere. Food is obviously a special case, but cigars can be too.

There are no questions it’s easier to shop for cigars online. You have more time, more options, a much easier ability to read halfwheel’s tasing notes—maybe it tastes like a 45-minute-old Double Quarterpounder With Cheese—while doing so, and you can price shop. Things that you either cannot do—or are much more challenging to do—when you are in a humidor.

Convenience is hit or miss depending on where you are and how good your local cigar shop is, but as a consumer myself, I find it easier and easier to purchase things online and then just wait for my daily interaction with the UPS delivery guy, who normally comes before the FedEx Ground guy shows up.

8. THE PEOPLE THAT REALLY CARE ABOUT PRICING KNOW WHERE THE BEST PRICING IS (ONLINE)

Since the whole question is about whether this would lead to some sort of seismic shift in where cigar sales take place, it’s important to point out: the consumers who care about this the most, i.e. the most price-conscious, already know where the best pricing is, and that’s probably online.

---

A NOTE: THIS IS NOT EIGHT REASONS TO SHOP ONLINE

I haven’t done the exact math, but the majority of the cigars that halfwheel buys are not from the big catalog retailers. The majority of our spending for halfwheel is done online, but it’s with a lot of independent stores who have various size e-commerce businesses, and then some of it is done with the big guys.

I also walk into cigar stores and buy cigars at a counter, I do it over the phone, sometimes even via text.

Much of this article could sound like reasons why you shouldn’t go to your local brick and mortar; that’s not my intention and not something I would recommend.

You should go to your local brick and mortar cigar shop and let them try to earn your business, but you shouldn’t forfeit it to them.

The shop that I go to most does a good job with their hospitality, but not price, not selection and not amenities. That’s fine for me and I gladly spend money there. Where I try to avoid spending money are at retailers who don’t do a good job, online or otherwise.

Brick and mortar cigar retailers are the backbones of this business and we need them to survive, both as an industry whole, but also for this blog’s sake.

But if a brick and mortar retailer thinks today is the day their business changes, they need some help and not via the Supreme Court.