S-Chip Update – REQUIRED READING FOR ALL CigarFox CUSTOMERS

Dear Customers~

It is my intent in the coming weeks to keep you updated as the S-Chip legislation as it develops.

1/13/09 - The latest version of the State Children's Health Insurance Program (SCHIP), HR2, was officially introduced in the House Ways & Means Committee. The industry compromise on the revised tax rate on large cigars has been incorporated into HR2. According to this new legislation, the new tax rate is proposed to be 52.4% of manufacturer cost with a maximum tax cap on any one cigar at .40 cents per cigar.

In previous versions of SCHIP legislation that were vetoed twice by President Bush, the tax cap rate was proposed at $3 to $10 per cigar. Trade associations and our federal lobbyists, working in conjunction with the Cigar Association of America, and our industry, came together to aggressively challenge the disastrous, proposed $3 tax cap. Through our efforts we have been able to get the cap substantially reduced in this new legislation to the more sustainable 40-cent per cigar tax.

While HR2 looks to breeze through the House, it may have a slower journey through the Senate, though our lobbyists do not expect any direct changes to the tax cap rate. According to Nancy Pelosi, the Senate will move this bill quickly and present it to the President as one of the first pieces of legislation that he will sign and put into effect.

Current “PROPOSED” S-CHIP Legislation Details

The new tax rates are proposed to be effective April 1, 2009;
The cigarette tax rate goes from $.39 per pack to $1.00 per pack; +$6.00 per carton
The tax on snuff goes from $.585 per pound to $1.50 per pound;
The tax on pipe tobacco goes from $1.0969 per pound to $2.8126 per pound;
The tax on RYO Cigarette Tobacco goes from $1.0969 per pound to $24.62 per pound (This is not a typo).
The tax change to small cigars (Items that look like a cigarette and come in packs of 20 cigars weighing less the three (3) pounds per thousand will be phased in over five (5) years at the following rates per year:

2009 & 2010 - $.25 per pack; =$2.50 per carton
2011 & 2012 - $.50 per pack = $5.00 per carton
2013 & 2014 - $.75 per pack = $7.50 per carton
2015 and beyond - $1.00 per pack = $10.00 per carton

The tax on large cigars will be 52.4% of the manufacturer cost with a cap of .40cents per cigar

What does this mean to you?

All that I can do is try my best to read into my crystal cigar and give you my best guess as to what will happen in the coming weeks. With 45 years experience in the tobacco industry all I can say is One Thing Is Certain….The tax man is going to tax your cigars….SOON!

1. The current funding of SCHIP expires 3/31/09 so this legislation will move quickly. I predict the new tax will go into effect as early as April 1, 2009, but most likely not later than June 1, 2009.
2. The tax rate that is shown in the House version above is likely to be close to the final legislation that comes out of the Senate. Keep in mind that the lobbyists have been working for months behind the scenes to get this new version of the funding in order. It is only my guess that the Senate version has also been negotiated and will be very close to this House Version.
(Disclaimer: I thought the Detroit Lions would at least WIN 1 game this past year….They were 0 - 16)

For Cigars this means an increase in price to the consumer someplace in the area of 70% over the current prices you are paying. The reason it will be more than the 52.4% is because the manufacturers, the wholesalers, and the retailers are all going to experience an increased cost of doing business. As a result of this increased cost, one can anticipate that they will take an additional mark up on the products. Plus you have to keep in mind that the States Other Tobacco Products Taxes will be levied on this new cost!

Looking into my My Crystal CIGAR here is an EXAMPLE – Premium Cigars
Current Price Estimated New Price
$30.00 per Box $50.00 to $60 per Box
$50.00 per Box $60.00 to $70 per Box
$60.00 per Box $70.00 to $80 per Box
$70.00 per Box $80.00 to $90 per Box

Note – The above example are for 25ct boxes of Premium Cigars. Keep in mind that the manufacturers, distributors, wholesalers, and retailers will take an increase on top of the .40 cent cap and the states levy their OTP tax on the new cost including the tax.

3. What will happen in the next 75 days?
This is where things could get very interesting….

~Manufacturers could raise prices within days or weeks and make the additional income between now and the actual tax increase and then not have to raise prices when the increase goes into effect. I give this a 50/50 chance of happening.

~Manufacturers will be bombarded with pre tax orders as all cigar smokers hoard inventories prior to the tax increase. When this happens, the manufacturers will not be able to meet the demand and cigars will be put on allocation and be in short supply until after the actual tax increase!

~Retailers will attempt to unload all kinds of “Don Nobody Cigars” with great pricing as they attempt to minimize their inventories of the garbage they have bought. CIGAR BUYERS BEWARE!


4. What should you do if you smoke Premium Cigars?
Hey, no matter how you look at it, a $10 to $20 increase per box is a ton of money! At a prjected increase of a minimum of .50 cents per cigar and a consumption rate of 2 per day, you are talking about an increased cost of over $300 in the next 12 months! I would buy a couple of boxes for insurance reasons alone….Remember the Cap could be increased in the Senate version to $1.00 per cigar and then you would be looking at an increase of $25.00 or more per box!

5. What should you do if you smoke little cigars or roll your own cigarettes?
This might be the easiest answer of all….Mortgage the house and BUY BUY BUY! If a tobacco item looks like a cigarette or is used to make a cigarette, it is about to be taxed out of existence! For you smokers of tins of little Premium Cigars….You are looking at a $4.00 to $5.00 per tin increase! RYO 16 oz. Tobacco is going from about $15 per bag to $40 per bag!

In closing, I hope that my best “guestimate” at this early stage of the game is helpful to you as you contemplate your next move. I can tell you that we are staffing up and building inventory here at CigarFox as I am betting the house on what is about to unfold. We are already experiencing back orders and out of stocks from the manufacturers. We want to be ready for you when you call and be able to ship your product to you prior to any tax increase! The final decision is yours, but if you are smart, you will get your order in soon!

Thanks for your business and Sorry to be the bearer of Bad News, but I do hope this information is helpful to you. I will keep you updated as the bill moves through the House and Senate.

Cigar Dan