WASHINGTON — A dozen tobacco companies have gained from a legal loophole that helped them avoid up to $1.1 billion in U.S. taxes.
Their secret: Using fillers such as the clay found in cat litter or stuffing the products with more tobacco to tip the scales in their favor. The heavier weight lets the companies sidestep a 2,653 percent increase in a federal excise tax, taking advantage of a 2009 law that spared so-called big cigars.
There were 22 companies producing small cigars in the year before the law created the new tax structure, according to data from the Treasury Department’s Alcohol and Tobacco Tax and Trade Bureau. Twelve of those companies, none of which the government would name, either switched to or increased production of large cigars in the year following the law, the bureau found.
“It shows what length the tobacco companies will go to avoid taxes and regulation that were designed to improve public health without regard to their customers,” Danny McGoldrick, vice president of research at the Campaign for Tobacco Free Kids, said in a telephone interview. “They should equalize the tax to stop the shenanigans.”
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The practice has contributed to a doubling in sales of the weightier tobacco products and slowed a decadelong decline in tobacco use. The Centers for Disease Control and Prevention (CDC) in an Aug. 2 report blamed sharp increases in adult consumption of pipe tobacco and cigarettelike cigars since 2008 on the 2009 law “that created tax disparities between product types.”
The Government Accountability Office (GAO) estimated in an April report that “market shifts from roll-your-own to pipe tobacco and from small to large cigars reduced federal revenue by a range of” $615 million to $1.1 billion from April 2009 through September 2011.
Sen. Dick Durbin, D-Ill., introduced legislation Jan. 31 to close the loophole. The bill would equalize the tax structure so there wouldn’t be an incentive to manipulate products, generating $3.6 billion in new tax revenue over 10 years, spokeswoman Christina Mulka said.
The loophole appears to have mainly benefited smaller tobacco companies. Reynolds American, the second-biggest U.S. tobacco company, doesn’t operate in that market, David Howard, a spokesman for the Winston Salem, N.C.-based company, said in an email.
Altria Group, the largest seller of tobacco in the U.S., said its John Middleton unit had already been selling large cigars with its Black & Mild line before the change in the law.
Prime Time International sells some of its large cigars and flavored cigars in 20-count packs, similar to regular cigarettes. Cheyenne International also specializes in smaller cigars that have a similar look and design of cigarettes.
Jack Wertheim, chairman of Prime Time, said shifts into the “large” cigar market are about responding to customer demands. Prime Time isn’t saving on taxes, and any savings would be passed to the customer, he said.
Current rules require a rolled-tobacco product that weighs at least 3 pounds per 1,000 to be labeled as a “large” or “premium” cigar, a category where taxes increased just 155 percent.
The Treasury Department said tobacco companies aren’t doing anything illegal by making their products heavier. “If you meet the definition of a large cigar, then you’re a large cigar,” Thomas Hogue, a spokesman for the tobacco bureau, said in a telephone interview. “There’s nothing in the Internal Revenue code that goes after the specifics on how that weight is achieved.”
Sales of large cigars more than doubled to 1 billion units a month in September 2011, from 411 million when the law took effect in January 2009, the GAO said. At the same time, small-cigar sales dropped to 60 million from 430 million.