New Law Threatens Sales of Cigars in California

During the summer, the California State Legislature passed A.B. 3218, a law that hopes to stop the sale of most flavored tobacco products in the state. California passed a flavored tobacco ban in the summer of 2020, but that law wasn’t clear about how the ban would actually function. A.B. 3128 was designed to clean that up: the legislature has directed the California attorney general’s office to create a list of unflavored tobacco products. If a product is on the list, it’s legal to sell in California; if doesn’t appear on the list, it probably isn’t legal to sell.

It sounds simple, but the legislature created a situation in which many manufacturers are considering whether to keep selling unflavored cigars in the state.

There are two main issues. One comes down to money though the other is more of a doomsday scenario.

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California’s legislature banned the sale of most flavored tobacco products in the summer of 2020. The law was supposed to be enacted on Jan. 1, 2021, but tobacco companies used California’s direct democracy provisions to get a recall vote on the legislation scheduled for the November 2022 elections. Had a majority of voters voted to overturn the bill, the ban would have gone away. Instead, 63.4 percent of voters supported the ban.

During that time, the bill’s enforcement was suspended, meaning that the products that would be banned by the 2020 legislation could be sold for another two years. However, once the ballot measure failed, the 2020 law went into effect. However, the original bill lacked details about how the law would be enforced, perhaps most notably, it didn’t make clear who was responsible for figuring out if a tobacco product was flavored.

That’s where A.B. 3218 comes in. The law passed earlier this year directs the California attorney general’s office to handle the process.

You can read the text of the bill here.

A.B. 3218 will require companies to pay up to $1,000 per product annually to have an item appear on the Unflavored Tobacco List. For cigarette and mass-market cigar companies, this isn’t a big deal because those companies tend to sell a small number of high-volume products. By contrast, most companies that sell handmade cigars work differently: there are lots of SKUs, many of which account for less than 1 percent of a company’s annual revenue.

Companies have already reached out to halfwheel to say that if the $1,000 annual fee remains, they will stop selling some SKUs in California. Some of these could be slower-moving SKUs, but it also probably means that some companies will choose not to register limited edition SKUs in California due to the costs.

“Premium cigar” means any cigar that is handmade, is not mass produced by use of mechanization, has a wrapper that is made entirely from whole tobacco leaf, and has a wholesale price of no less than twelve dollars ($12). A premium cigar does not have a filter, tip, or nontobacco mouthpiece and is capped by hand.

There is a big caveat to the whole rule, if a cigar meets the above definition of “premium cigar,” the law exempts the product from the Unflavored Tobacco List and presumably the $1,000 annual fee. The cigar would need to meet all the conditions above, including that it has a $12 minimum wholesale price. Industry standard norms encourage retailers to use keystone pricing, i.e., double the wholesale cost of a product, excluding any taxes. In very basic terms, this would mean any cigar with an MSRP of less than $24 wouldn’t be eligible to be considered a “premium cigar” simply because of price. The cigar could be sold legally in California, but companies will need to go through the compliance process and pay the $1,000 annual fee.

Interestingly, the way the law is written, it would appear that a flavored hand-rolled cigar that has a wholesale price of at least $12 would still be legal for sale, something that a loophole halfwheel noted in the original 2020 legislation. There are other exemptions for shisha and looseleaf tobacco, and tobacco companies across many sectors are continuing to sell products that California’s government probably thinks should be banned. For example, once the law took effect, cigarette companies pivoted from selling menthol cigarettes to cigarettes with a non-menthol cooling agent.

The Attorney General shall presume a brand style to have a characterizing flavor if the manufacturer or importer, or any employee or agent of the manufacturer or importer, in the course of their employment by the agency, has made a statement or claim directed to consumers or to the public that the tobacco product has or produces a characterizing flavor, including, but not limited to, any text, color, or images on the product’s labeling or packaging, that explicitly or implicitly communicates that the tobacco product has a characterizing flavor. This presumption may be rebutted by the manufacturer or importer.

The second and potentially larger issue is the enforcement of the rule as a whole. Now that the attorney general is tasked with deciding what’s flavored and what’s not, there’s a question as to how strictly the language will be enforced. One provision that stands out says that a product might be considered flavored solely based on how a company has marketed the products. To prove that a product isn’t flavored, the attorney general could ask for blend details, marketing info and more.

Penalties for businesses caught violating the law range greatly. If law enforcement finds a retailer selling any non-compliant products, the retailer could be fined $50 per package. Distributors and wholesalers will be fined up to $2,000 for a first violation, $3,500 for a second within five years, $5,000 for a third, $6,500 for a fourth and $10,000 for a fifth and subsequent violations within a five-year period.

The stiffest penalty is for anyone who tries to get a non-compliant product on the Unflavored Tobacco List. Up to a $50,000 fine can be imposed.

All of the fine money will go towards funding enforcement of the law itself as the bill’s language is clear that the money cannot be sent to California’s general fund.

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While some of the bill’s language takes effect Jan. 1, 2025, the enforcement is likely further down the road. A source told halfwheel that they expect the attorney general’s office to produce a draft document in early 2025 and then ask companies to provide feedback on any changes before a final version is published. The industry is hopeful that some of the language could be modified to make it easier for cigar companies to comply, though it’s unclear how much of the language—especially the definition of “premium cigar”—could be changed without the legislature. The bill requires the Unflavored Tobacco List to be published by Dec. 31, 2025.

Emails sent to the office of the bill’s author—Rep. Jim Wood, D-Healdsburg—were unreturned though Wood commented on the bill’s passing in September.

“As a practicing dentist, I have forever opposed the use of tobacco of any kind, and will continue to support policies that restrict its use,” said Wood in a statement. “Since my time on the Healdsburg City Council many years ago, I have successfully supported and passed measures to protect the health of Californians from the use of tobacco products, especially youth.”