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Costs

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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.

Given FDA's decisions to delay and modify its substantial equivalence process combined with the lack of clarity on HPHC testing, it's still not clear just how much substantial equivalence will cost.

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:

  • 10 percent — Substantial equivalence exemption ($1,443 estimated cost)
  • 10 percent — Same characteristics ($3,570)
  • 5 percent — Full substantial equivalence ($22,787)
  • 5 percent — Bundled substantial equivalence ($6,836)
  • 4 percent — Product quantity change ($6,608)
  • 1 percent — Bundled product quantity change ($4,709)
  • 5 percent — Withdraw from market
  • HPHC testing isn't included in those numbers and FDA has not issued any guidance on the testing procedure so it is impossible to provide a cost estimate. One lab told halfwheel that the process could cost as much as $20,000 per SKU if FDA opts for a stricter testing protocol.

    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.

    Questions

    You are.

    Since FDA regulations went into effect there have been not only more price increases by manufacturers but also the price increases have been more aggressive 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.

    No.

    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.

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