CANADA CIGARETTE TAX CUT EXPECTED TO BOOST SALES

RICHARD TURCSIK

OTTAWA -- A major slash in the Canadian cigarette tax is expected to boost supermarket sales, Canadian industry officials told SN.

The Canadian federal government here decided to cut taxes on a carton of cigarettes by Canadian $5 (U.S. $3.72) a carton, in an effort to eliminate widespread smuggling that has resulted from cigarette prices that are substantially higher than in the United States.

However, the federal tax cut, implemented last month, has also raised several new problems for retailers, such as the disposition of already taxed products in their inventories. In addition, provincial tax rates could continue to affect sales negatively.

The federal government said it will match reductions in provincial cigarette taxes up to $10 a carton. (All dollar amounts are Canadian.) For example, Quebec, where smuggled cigarettes make up to 70% of the sales volume, lowered its cigarette taxes by $11, contributing to a total cut of $21 after the $10 federal tax cut is figured in.

Retail cigarette prices dropped overnight as a result of the tax changes. Retailers said they were concerned, however, that they would lose out on taxes already spent on existing inventory.

"The slashing of the cigarette tax will have an impact both on our inventory and our sales," Tim Carter, vice president of public affairs for Oshawa Group, Etobicoke, Ontario, told SN. "We have inventory of cigarettes in stores and warehouses that has already been taxed. While Quebec has said that it will cut the tax and compensate us for all of the tax we have in our existing inventory, Ontario and the other provinces still have to make up their minds."

John F. Geci, president and chief executive officer of the Montreal-based Canadian Council of Grocery Distributors, which represents more than 80% of Canadian grocery wholesalers and retailers,

said estimates of tax money lost by retailers range from $11 million to $55 million in Quebec alone. That figure is even higher once other retail outlets, such as gas stations, convenience stores, bowling alleys and pool rooms, are figured in.

"We're still discussing with the federal government about the full reimbursement of federal excise taxes paid. The initial documentation shows that wholesalers and retailers may take a hit on the second portion [matching portion] with thresholds of 5,000 cartons at the wholesale level and 1,000 cartons at the retailer level.

"That means they would have to take a hit on it, because while theoretically they could continue selling it with the tax included, nobody will buy it. So if the guy across the street is selling it at the new price of $21 less a carton, your product won't move unless you absorb that portion of the tax," Geci said.

Geci said Canada's other provinces will have to slash their taxes for smuggling to truly cease.

"We continue to believe that the only way to stop smuggling is to lower the tax enough so that a carton could sell at about the same price as contraband," he said.

"What we are foreseeing is that unless the Ontario government does the same thing as Quebec, major amounts of product will go across the Quebec-Ontario border and Ontario will have the same problem that Quebec has had for the last two and a half years," Geci said.

While Geci doesn't expect more people to take up smoking because of the cut, if provincial taxes are lowered he expects sales to return to the legitimate retail trade. As a result, the government will collect taxes on more products.

Rob Parker, president of the Canadian Tobacco Manufacturers' Council here, said that two-thirds of contraband cigarettes are actually manufactured in Canada. The one-third that is imported comes from U.S. brands, smugglers' own brands that they make for the Canadian market and imported brands of Virginia flue-cured tobacco.

"People buy smuggled cigarettes at every imaginable distribution point that you can think of. They are sold out of backs of trucks that pull up to schools or factory gates, and delivered to houses or places of work. They are available from guys with bags who make the rounds in bars. Cab drivers sell them out of the trunk," Parker said.

The federal government also decided to raise the federal tax rate on tobacco manufacturers' profits to 30% from 21% for a three-year period, to fund an antismoking campaign.

Geci said the CCGD has been attempting to answer antismoking concerns by emphasizing that supermarkets strictly enforce the legal smoking age.

"We are often being erroneously criticized because the general public sees youths smoking in the streets or schoolyards or shopping centers. Most, if not all, of those purchases by youths are being done through vending machines, but grocers are being stigmatized with sales. We have been very high profile in not selling to minors. We support the education campaign," he said.