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As taxes rose, cigar makers supersized their stogies

Staff file photo

Under the new tax rates, little cigars and large cigars are taxed differently, which apparently has given rise to some major changes in cigar production.

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By MICHAEL SASSO | The Tampa Tribune

Published: November 3, 2009

TAMPA - Last spring, the cigar industry fretted that the government might tax so-called "little cigars" into oblivion.

Several months later, though, it appears the makers of cigarette-shaped little cigars have found a way to escape the high taxes. The cigar makers have added more weight to their cigars, reclassified them as large cigars and now are subject to a lower tax rate, said Norman Sharp, president of the Cigar Association of America.

Last spring, the cigar industry rallied against a higher tax rate implemented to benefit the State Children's Health Insurance Program, or SCHIP. One Tampa cigar factory, Hav-A-Tampa, blamed SCHIP for a steep drop in sales, and it ceased its Tampa operations over the summer. Hav-A-Tampa's parent, Altadis USA, moved the Tampa plant's operations to Puerto Rico.

Little cigars may not be as iconic as fat stogies, but hundreds of millions are produced every year. They look like cigarettes and come 20 to a pack. Some popular brands include Cheyenne and Dutch Treats.

Under the new tax rates, little cigars and large cigars are taxed differently, which apparently has given rise to some major changes in cigar production.

For example, little cigars had been taxed at about 4 cents per pack before the new tax rate took effect. That rose to about $1.01 per pack after April 1.

Large cigars previously had been taxed at about 5 cents per cigar. That rose to up to 40 cents per cigar after April, depending on price. These federal tax rates do not include separate state taxes.

In recent months, the cigar industry has seen a curious surge in the production of large cigars. Technically, the government classified large cigars as those that weigh more than 3 pounds per 1,000 cigars. Little cigars weigh less than 3 pounds per 1,000.

For example, factories in the United States and Puerto Rico produced about 743 million large cigars in August, according to data from the U.S. Department of the Treasury. That's up 85 percent from August 2008, when they made 402 million large cigars.

Meanwhile, production of little cigars plummeted. In August, factories in the United States and Puerto Rico produced about 145 million little cigars, down from about 480 million little cigars in August 2008. Cigars made outside of the United States and Puerto Rico saw a similar rise in large cigar production and decline in production of little cigars.

What's going on?

Sharp, the cigar association president, said it appears cigar makers changed their production techniques to factor in the SCHIP tax. Cigar makers began adding enough extra weight to their little cigars so they exceeded the 3-pounds-per-1,000 threshold. So they could be classified now as large cigars.

Because of the complicated way cigars are taxed, Sharp said he didn't know how much cigar makers were saving by morphing into large cigars.

"I certainly didn't anticipate the migration factor," Sharp said. "What I anticipated was the decimation of the little cigar category."

Reporter Michael Sasso can be reached at (813) 259-7865.

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