Tobacco Documents Online

1 PHILIP MORRIS U.S.A. INTER •OFFICE CORRESPONDENCE 100 Park Awnue, Now York, N.Y. 10017 To: • Mr. B. Robinson From • M. W. Murphy Subjact: FLORIDA CENTRAL STAMPING . Date: December 6, 1978 As we have discussed, it is anticipated that during the next legislative session, the Florida legislature will consider proposals to enact some type of central stamping operation, with the Florida Department of Business Regulation, which ad- ministers the cigarette tax, being the major proponent for such a move. The form that this central stamping operation will take is, at present, unclear. It would appear, however, that the state will not pursue its original intention of having the manufacturers affix the tax stamp underneath the cellophane to all packages of cigarettes prior to sale in Florida. This proposal, which was unveiled by the Florida administrators at this year's annual National Tobacco Tax Administrators meeting, met uniform resistance from cigarette manufacturers as well as / from administrators in other states that had considered and subsequently discarded this idea. It is possible, though, that Florida may consider a prop- osal to require all cigarettes destined for sale in Florida to be stamped at in-state public warehouses by either state tax personnel or warehouse personnel. As noted in an earlier memo on this subject, Florida personnel visited the proprietor of a large Jacksonville public warehouse in October to learn his reaction to this proposal. The warehouseman stated he would be reluctant to lease space within his warehouse to the state to conduct a stamping operation and that he would resist any effort to impose this responsibility on him. public warehouses. together with the Texas distributors association sought and obtained a temporary injunction against the state enjoining the Comptroller's office from requiring public warehouses to stamp cigarettes. The industry contended that warehousemen were not licensed as distributors and thus not liable for the collection and payment of the cigarette tax. In July 1966, a Texas District Court concurred with this argument and ruled iagainst the state's bid to impose such a responsibility on Texas is the only state thus far to have formally enacted such a central stamping operation, although_it was never opera- tional. In late 1965, the Texas State Comptrollers Office issued -a regulation requiring all public warehouses to purchase and affix Texas tax stamps on all packages of cigarettes received from manufacturers for sale to Texas consignees. The industry At

-2- 4 Under present state law, Florida requires wholesalers to affix tax indicia, usually a Pitney-Bowes meter impression, to all packs of cigarettes prior to offering them for sale within the state. In return for this activity, wholesalers are entitled to a 2% discount on their indicia purchases, which translates into a cash discount of $2.42 per 12m case. Much of Florida's interest in central stamping apparently stems from what they feel is the exorbitant discount they pay out to wholesalers for stamping. At this year's NTTA meeting, Florida's administrator claimed the state conducted a study which revealed that it costs wholesalers $1.65 to stamp a 12m case of cigarettes. If accur- ate, the state is inferring that it is paying wholesalers about 47% more than it should for stamping cigarettes. According to Tobacco Tax Council data, Florida wholesalers last year received nearly $4 million in stamping discounts. Should Florida succeed in instituting a central stamping operation, regardless of.who assumes responsibility for stamp affixing - be it the state or warehouse - it would pose a number of problems for us and other cigarette manufacturers. At present, cigarettes stored in a public warehouse are not subject to the state cigarette tax until they have been sold and arrive at the customers premises. While in the warehouse, the cigarettes re- main our property, with the warehouseman exercising a custodial responsibility to insure the safety of our brands. Were Florida to initiate a central stamping operation at the warehouse level, our only recourse to protect against any loss or damage to our merchandise during the stamping operation would be to sell the cigarettes to whichever agency - state or warehouse - would assume the responsibility for stamping. If we were to adopt such a position, it would mean an initial inventory investment for the stamper of over $1 million, exclusive of the cigarette tax, and it is uncertain whether or not any manufacturer would be willing to extend such a large amount of credit to any customer. Which- ever party had to purchase the cigarettes from us would thereafter have to invoice and collect from the wholesaler the combined value of the cigarettes, the state tax and all freight and shipping costs, which would require additional working capital. It is doubtful whether either the warehouseman or the state would want to assume such a large financial investment as would be required by our possible response to a central stamping operation. It is important to note that a move to central stamping creates a monopoly-like situation insofar as the manufacturers only customers under such an operation are the parties vested with the authority to stamp cigarettes. The creation of such a monopoly situation, administered by either the warehouse or the state, would have the potential of imposing a variety of obstacles to our marketing and sales ac- tivities. Chief among these would be the impact central stamp- ing would have on our distribution system. At present, we are able to provide merchandise to virtually all of our Florida accounts within one day after receipt of their order. It is highly probable that under central stamping noticeable delays

-3- 1 would develop in shipping merchandise to wholesalers due to the additional time required to handle, unpack, stamp and re-pack cigarettes prior to shipmerit. Additionally, central stamping would necessitate the maintenance of dual inventories in Florida warehouses - one stamped, the other unstamped - in order to service customers who would not be subject to the state's cigarette tax. At present all military exchanges and commissaries in Florida, as in all states,-are exempt from payment of cigarette taxes by virtue of Federal legislation. Thus sales to all such accounts would not require the affixation of Florida tax stamps. -Moreover, a number of accounts in lower Georgia are shipped from a Jacksonville, Fla. warehouse, thus requiring unstamped merchandise. Likewise, a number of locations in north-western Florida are shipped from a warehouse in Montgomery, Alabama. This problem is compounded by the fact that we, like other manufacturers, do not stock all our brands in Florida warehouses. Smaller selling brands are normally shipped to Florida wholesalers directly from our regional ware- house in Atlanta or, on occasion, from Richmond. If central stamping were adopted in Florida, major modifications to our present distribution system would have to be installed in order to accomodate these exceptions and insure compliance with any statutory requirement for stamping. The adoption of central stamping in Florida would also have the potential of adversely impacting on the fiscal stability of some wholesalers in the state, as well as affecting the retail price of cigarettes. Florida wholesalers now receive a stamping discount from the state of about 4C per carton. They also receive a cash discount from the manufacturer equivalent to lOC per carton for timely payment of invoices. Under central stamping, Florida wholesalers would lose both these discounts since they would no longer be responsible for stamping nor would they be buying ciga- rettes directly from us, but rather from the central stamper. Deprived of this revenue, which is an integral part of their profit structure, Florida wholesalers could reasonably be ex- pected to increase their prices for cigarettes and seek new financial incentives, e.g. functional discounts, from the manu- facturer to offset any revenue shortfall. It should not be overlooked that under central stamping, whereby all cigarettes would be pre-stamped, a situation is created where the central stamper at some point could possibly attempt to compete with, or even by-pass, the wholesaler and seek to sell cigarettes dir- ectly to retailers. If this were ever attempted, the historical role of the cigarette wholesaler in the industry's distribution process would be significantly diminished. Aside from higher retail prices for cigarettes, the manu- facturers might also be confronted with increased storage and

1 -4- handling costs from Florida warehouses due to the necessity of maintaining dual inventories, as described earlier. Moreover, increased labor costs would conceiveably be passed on to the manufacturers if warehouse personnel performed the stamping operation. The most significant threat posed by an attempt to create a central stamping operation in Florida is that if successfully implemented, it could touch off a wave of similar legislation in other states. High tax states, hard-hit by revenue losses due to bootlegging and attempting to cut expenses, could be expected to advocate the creation of a central stamping operation. Ironically, two states possessing these characteristics, New York and Pennsylvania, have recently discussed the merits of introducing central stamping, although they have taken no firm steps in this direction. Were Florida to succeed in introducing central stamping, it might provide the impetus for New York, Pennsylvania and a number of other states to actively attempt the implementation of a similar operation. Central stamping is not the panacea some states perceive it to be. It is replete with problems for both the state and the manufacturers, many of which have not been discussed in this memo. Should you need additional information or clarification on any aspect of this issue, please let me know. MWM:md cc: H. Coleman R. Cremin E. Grefe J. P. J'eb ee J. Morgan R. E. Pruehsner