The fourth in a five-part series examining the impacts of NY State’s recent tax hike on cigarettes
by Alex Cole
photo by Talbot Eckweiler
New York State increased its cigarette tax this summer in an effort to save lives. But convenience stores across the state are resting in pieces as a result.
The Uni-Mart on West State Street in Olean was once a bustling center of commerce – a hotspot right across from St. Bonaventure University. Endless lines of cars entered and exited the parking lot. Travelers refilled fuel tanks and grabbed food for the road. Truckers saluted each other with horn honks and quick waves.
Kids bought candy and ice cream. Students bought cheap beer and mixers. Adults bought gasoline and cigarettes. All brought in plenty of profit.
But the Uni-Mart’s golden era slowly came to an end.
Four handwritten signs are now plastered around the store’s premises. Big, black, bold letters sketched on crinkled sheets of white paper: Store Closed.
No more ringing bell on the door. No more “have a nice day.”
No more midnight munchies. No more cigarette and beer logos in the windows.
No more gasoline fumes. No more cigarette odors.
Cars zoom past it. People race by it. The parking lot remains silent.
Garbage spews over each of the store’s three trash cans. The stench of rotten candy bars, stale tobacco, and used chewing gum looms in the air. It lingers from the front of the store all the way to the broken black mailbox on the side of the road.
Stained plastic bags cover the shop’s four gas pumps. Chunks of rust and chips of paint peel from faded price signs. “$1.95. Unleaded regular. Includes all taxes”
Raindrops splat onto cigarette butts wedged between crevices in the pavement. Crushed cartons of smokes litter the lawn and top the overflowed trash cans. Green Newports. Red Marlboros. Blue Senecas. Joe Camel’s smiling bronze face kisses the pavement.
Crusty newspapers conceal the windows of the store, all loosely strung together by bits of masking tape. A quick peek past the papers reveals nothing but empty shelves and empty racks.
At the top of each newspaper rests a date. The date Uni-Mart decided to call it quits.
Sunday. June 8, 2008.
Five days after New York State officially raised its tax on cigarettes – the final blow to an industry already struggling.
A Trying Tax
Gov. Paterson and the state legislature enacted the new cigarette tax on June 3, effectively raising the price for a pack of smokes by $1.25. This bumped the state’s tax to a grand total of $2.75 – the highest in the nation.
That price is even higher in New York City. Big Apple residents fork over an extra $4.25 in state and county taxes for a pack of cigarettes.
Why? Officials say raising cigarette prices is the most effective way to curb smoking habits.
“Cigarette taxes have the very real effect of getting people to quit smoking while pricing a highly addictive product out of the hands of kids,” says American Lung Association CEO Donald Distasio.
They also have the very real effect of plummeting convenience store sales.
“Convenience stores in New York have lost anywhere between 15 and 25 percent of their cigarette sales since the tax increase on June 3,” says James Calvin, president of the New York Association of Convenience Stores.
The increased tax coupled with high gasoline prices and the struggling economy completes the recipe for disaster. And convenience store owners question whether the tax is fulfilling the state’s intentions in the first place.
“I have no doubt that some people have quit smoking,” Calvin says. “But nowhere near 15 to 25 percent of smokers quit. It might be two, it might be three percent.”
It hasn’t even been a year since the tax was implemented. How could cigarette sales across the state drop so quickly?
“The vast majority of smokers who are no longer coming to our stores didn’t quit,” Calvin claims. “They just quit coming to our stores and are now buying from lower-tax or no-tax venues.”
The competition is leaving convenience stores in a battle to stay alive.
“Most convenience stores are just trying to hang on, trying to weather this,” Calvin explains. “In a small but alarming percentage of cases, convenience stores have gone out of business.”
Closing stores have few options. Some call it quits altogether. Smaller convenience store chains, such as Uni-Mart, are trying to sell their companies to larger operators.
“There has been significant interest in Uni-Marts among potential buyers,” says Thomas E. Kelso, managing director of Matrix Capital Markets Group. “A bankruptcy sale creates a real opportunity for the right buyer.”
The tax wreaks so much havoc because it’s affecting more than just cigarette sales. Remaining convenience stores are losing profits from all sectors.
“We also lose the sales of the other stuff those cigarette customers used to buy when they came through the door,” Calvin explains.
Cigarettes are a gateway product for convenience stores. Smokers initially come into the stores to feed their habit, but they’re also likely to purchase other products.
A typical American convenience store relies on cigarette sales for about 35 percent of its total sales. That number is much lower in New York.
“In New York, if cigarettes are accounting for 15 percent of your stores, you’re doing well,” Calvin says.
Why? Tax-free venues have been taking sales away from convenience stores for years.
“There’s a direct correlation between the loss of cigarette sales in our stores and the increase in cigarettes purchased from tax-free venues,” Calvin reveals. “All the tax increase has done is just fuel a tax evasion epidemic that was already strong.”
Dodging the Bullet
Smokers can buy cigarettes at untaxed venues for as low as $14 a carton, allowing tax evasion trends since June 3 skyrocket.
“Over half of the cigarettes that are consumed by New Yorkers are purchased without a New York State tax being collected,” Calvin says. “That’s how pervasive the problem is.”
But it’s not easy to halt tax-free sales. According to Calvin, there are four main pieces to the cigarette tax evasion pie.
Indian reservations across New York are the easiest place to find tax-free cigarettes. Smokers in Olean have no problem driving to the nearby Seneca Nation reservation to save an extra $2.75 or buy generic cigarette brands.
“Everyone I know goes down there,” says Jill Smith, a smoker and Olean resident. “I would almost say they have to, with [smoking] being so expensive. If you’re low income and have kids, you can’t afford 50 or 60 bucks a week.”
Smokers can also purchase untaxed cigarettes from Internet vendors. All it takes is a few simple clicks, and the discounted cigarettes are at smokers’ doors within days.
Buying cigarettes on the black market is another option. These sales range from organized crime activity to simple entrepreneurs selling cigarettes to friends, family members, and co-workers.
“There’s no monitoring of Internet mail-order cigarettes, no monitoring of the black market” Calvin reveals. “There’s no monitoring on the reservations.”
Smokers also have the option of crossing the New York border and buying cigarettes in a state with a lower tax. Pennsylvania is no more than 20 minutes away from Olean with a cigarette tax of only $1.35.
“Every time a smoker chooses to buy at [these venues], New York State loses $2.75 in state excise tax. Plus, the state loses four percent sales tax on that purchase,” Calvin explains. “And whatever county it is loses whatever the county’s sales tax is on that purchase.”
And when that happens, Calvin says all New Yorkers are left picking up the pieces.
“When the state and counties lose that revenue… we need to pay more taxes to make up for that loss of revenue,” Calvin argues. “[We’re] subsidizing the tax-free purchases of other people in our community who are finding ways to buy cigarettes tax free.”
The Kids Aren’t All Right
New York State didn’t increase its cigarette tax just to save lives. It also implemented the tax to keep cigarettes out of the hands of kids.
“Young people are particularly sensitive to price increases,” says State Health Commissioner Richard Daines. “If people don’t become addicted to cigarettes as teens, they almost never become smokers later in life.”
By putting cigarettes out of the economic reach of children, the state anticipates that more than 243,000 kids will never try their first cigarette.
But convenience store owners say the tax is hindering that public health objective. The NYACS argues that the tax increase is driving sales to places where kids can easily pick up a pack of smokes.0
“The [state] health department doesn’t go on the reservations to do undercover compliance checks,” Calvin says.
The same goes for black market and Internet vendors, where kids just need cash or a credit card to buy cigarettes.
The same rules don’t apply to convenience stores, where sales to children are heavily regulated.
“In our stores, the health department periodically comes undercover with a minor attempting to buy cigarettes,” Calvin explains. “And if the minor is successful, then that store gets in a lot of trouble. They can get fined. They can get their license suspended.”
Nearly $2.6 million in fines were collected in 2007. Only 10 percent of stores failed to comply with the law, the lowest in the nine years since the inspection program began.
The inspections also require that all stores post visible signs stating that the sale of tobacco products to minors is illegal. But tax-free vendors don’t always need to follow the requirements.
“The state of New York has two choices,” Calvin says. “You can have [cigarettes] sold on the licensed, regulated, taxable side of the street at stores like ours. Or you can have them sold at the unlicensed, unregulated, untaxed side of the street.”
Convenience stores profits continue to decline. Stores around the state are either being shut down or sold. Owners can’t do anything except watch.
What can be done to stop the problem from growing worse?
“The only thing that can be done… is enforcement by the state to prevent New Yorkers from buying cigarettes at tax-free venues,” Calvin echoes.
The NYACS says sales at Indian reservations need to be targeted first. The organization continues to support a state law requiring Native Americans to collect taxes on non-tribal members.
“Unfortunately, Gov. Pataki, Gov. Spitzer, and up to now Gov. Paterson have all refused to enforce that law,” Calvin says.
As a result, Indian reservations continue to cost convenience stores about $600 million a year.
“[Those] estimates don’t include lost tax revenue on sales of motor fuel by Native American tribal stores to non-Native American New Yorkers and lost sales tax revenue on other taxable products,” Calvin adds.
Convenience store owners also urge the state to crack down on sales at other tax-free venues currently being ignored.
“There’s lots of things they could be doing to try to curtail Internet and mail-order sales of cigarettes. They don’t do it,” Calvin says. “There’s a lot more enforcing they could be doing to curtail black market sales. They’re not doing it.”
Until New York tackles the tax evasion epidemic, NYACS believes sales will be driven to untaxed venues to the point where it will be impossible for the state to regulate them.
“From our perspective, it’s a lose-lose-lose proposition,” Calvin explains. “Small businesses lose sales. State and local governments lose tax revenue. And the anti-smoking crusade loses ground.”
As for the tax itself, convenience store owners admit they can’t do much except bear with it. Some will suffer the same fate as Olean’s abandoned Uni-Mart. Others will have to keep trying to hold on.
“It doesn’t look like this is a temporary condition,” Calvin sighs. “It’s something that [we’re] just going to have to live with unless the government decides to level the playing field.”
Alex Cole is a freelance writer and recent graduate of St. Bonaventure University in New York. He currently resides in Syracuse, NY.
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