August 12, 2010 - ALBANY, N.Y. -- The first six weeks following a cigarette tax-rate increase in New York showed a plunge in sales at convenience stores statewide, mainly because most smokers are finding ways to dodge the tax altogether, according to a report from the New York Association of Convenience Stores (NYACS).
On July 1, Gov. Paterson and the Legislature increased the cigarette excise tax in New York State from $2.75 a pack to $4.35, the highest state tax rate in the country. As NYACS predicted, the 58% jump unleashed a new wave of cigarette tax evasion, as tens of thousands of additional smokers—shocked at $9 to $12 pack prices—shifted their purchases to tax-free tribal smoke shops, the black market, and border states with lower tax rates, according to NYACS.
Field reports indicate convenience stores have suffered an average drop of 25% to 35% in cigarette packs during July, but that those in closest proximity to tribal outlets and state borders experienced losses of up to 45%. Meanwhile, Indian reservation and border-state "tax havens" are flourishing, with sales up as much as 300% at some outlets, NYACS reported.
"New York State has now increased its cigarette excise 691% in the past 10 years without closing off readily available channels for dodging that tax," said NYACS president James Calvin. "As a consequence, we're approaching the point where two-thirds of the cigarettes consumed in New York are purchased without collection of any New York State tax whatsoever.
"Law-abiding stores like ours lose enormous amounts of business, state and local governments lose hundreds of millions in tax revenue, and public health loses because the financial incentive to quit is easily and routinely circumvented. So what did the Governor and Legislature accomplish with this tax hike exactly?"
The upswing in tax evasion heightens the urgency for Gov. Paterson to follow through on the scheduled September 1 start of tax collection on Native American sales of cigarettes to non-Indian customers, currently the busiest avenue of cigarette tax avoidance in New York, costing the state $1.5 billion in lost revenue, according to NYACS.
The state law enacting the tobacco tax increases also set forth a plan to exercise New York's right to collect these taxes by requiring wholesale distributors, beginning Sept. 1, to certify that they are prepaying the tax before delivering cigarettes, so that the tax is built into the price paid by customers at both Indian and non-Indian stores.
The cigarette-tax plan would also allow the state to begin collecting taxes from the sale of cigarettes on American Indian reservations to non-tribal citizens, a revenue source that is expected to bring about $150 million. Cigarettes sold to tribe members would not be taxed.
Collecting taxes from cigarettes sold on reservations has been a long-sought source of revenue for the state and is opposed by the state's American Indian tribes. Enforcement would begin September 1, 2010. (New York State - state democrats insist governor tax cigarettes sold on Indian reservations..; NY State Governor Patterson - part of budget - collect Indian cigarette taxes..; NYC - wins round in fight against Indian Tobacco Vendors..)
Calvin said anyone who tries to attribute the 25% to 35% drop in sales to smokers quitting "is in La-La Land. Two or three percent, maybe as many as 5% have quit smoking. The rest just quit coming to our stores but continue to smoke cigarettes they found cheaper elsewhere."
On August 1, the situation got even worse for New York convenience stores, which have traditionally relied on tobacco as a major product category. Dramatic increases in state excises taxes on other tobacco products, such as cigars and smokeless tobacco, took effect, chasing even more of their customers to no-tax or lower-tax venues. (New York State - as of August 1st OTPs tax goes up such as little cigars will be taxed at same rate as cigarettes..)
The one-two tax punch threatens to cripple many c-stores—especially mom-and-pop independents and those closest to Indian reservations and the Pennsylvania border, NYACS said.
"It's not just the loss of sales revenue from cigarettes themselves," Calvin said. "It's fewer customers coming through the door to buy cigarettes and other merchandise. For example, many stores have seen a corresponding drop in lottery sales."
The Post-Standard newspaper reports a pack of Marlboros hovered around $6 or $7 a pack at convenience stores before the tax hike. Now, a pack costs $9.60. A pack of Senecas are $3.50 at the Onondaga Nation Smoke Shop. That's $2.52 less than the tax alone on the average pack of non-Nation cigarettes. A pack of Marlboro's costs $6.
Reference: N.Y. Cigarette Sales Plummet C-stores bear the brunt of tax hike, see 25%-35% drop in volume, Convenience Store/Petroleum (CSP) Daily News, 8/12/2010.