The vast majority of the costs associated with the regulation of premium cigars will not be in the forms of checks sent to the U.S. government. Instead, lawyers, lab workers, administrators and other firms and employees will reap the benefits of the regulation.
And because the majority of the money is not going to the government, it's impossible to estimate the total economic impact or even the cost of a single year of the regulations.
There are five main categories of expenses, of which only one is paid to FDA.
As of 2019, the legal bill for fighting FDA in court is in the millions and growing.
The cigar industry opted to support two main lawsuits but is likely to invest in a third lawsuit, defending the decision to delay regulations.
Three cigar trade organizations agreed to split the costs of the main lawsuit evenly, but the Texas lawsuit only deals with questions of premium cigars and as such the Cigar Association of America (CAA) is unlikely to provide financial support.
The cost of product approval will vary greatly depending on the portfolio of cigars a company sells. The total number of SKUs is probably not the most important factor to determining the costs, rather, the total number of non-grandfathered SKUs.
FDA believes that 60 percent of cigars will be grandfathered. (Final Regulatory Impact Analysis, 36) Of the remaining 40 percent it provided the following estimates:
3. OTHER ADMINISTRATIVE FEES
FDA regulations will 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.
While the warning labels themselves are quite inexpensive, the cost of being warning label complaint will likely be a noticeable burden for some companies.
Packaging will need to be redesigned, companies will have to create warning plans and it adds two more steps to the packaging process.
FDA did not provide a firm number on the total economic impact of the warning label changes for manufacturers, but it did say that it believes 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, though the higher end version of that number likely assumed a world where packaging changes would need to be approved by FDA, something that is no longer relevant due to a 2016 court case.
5. USER FEES
The only fee paid directly to FDA are user fees, which have varied between an estimated maximum of 4.31-5.15 cents per cigar for the first three years of regulation.
User fees are calculated based on the percentage of excise taxes, i.e. S/CHIP, a specific company pays compared to the other companies in six categories of tobacco products: cigarettes, roll-your-own, snuff, chewing tobacco, cigars and pipe tobacco.
The data FDA uses actually comes from the prior year’s excise data, so the FY2019 period—which began Oct. 1, 2018—is actually based on 2017 import data. That data shows that cigars paid $632.3 million in excises taxes in 2017, a 12.2 percent increase from 2016.
It should be noted that cigars refers to all cigars, so that includes Arturo Fuente and Macanudo, as well as mass market cigars like Swisher Sweets.
In addition, FDA’s Center for Tobacco Products (CTP) budget increased from $672 million to $712 million. In total, the cigar category will be liable for 11.35 percent of that budget or $80.8 million. For context, cigarette companies pay $616 million.
CTP's budget increased every year up until FY2020, where it is set to remain at $712 million unless Congress passes a law authorizing a change in its budget.
Since FDA regulations went into effect there have been more price increases by manufacturers and the price increases have often been more larger jumps than what took place pre-FDA. Ultimately, these costs are passed down to consumers.
That number is likely a reference to the PMTA product approval pathway, which FDA has repeatedly said it does not expect any cigar to have to use.
FDA regulations are based on a law that was originally written in 2007. That law allowed for FDA to regulate future tobacco products, but when it came to establishing how to pay for the cost of regulations, the law only specified user fees from six categories. E-cigarettes and vaping products weren't really around and as such, they were not named.
Last Updated: May 24, 2019.
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?