Altria Group and Swedish Match’s clash over excise tax

It’s one of the most old-fashioned taxes of all, but the question of what you measure to levy it is emerging as the latest skirmish in Smokeless Tobaccothe never-ending battle for space on stores’ tobacco shelves.

The stakes can be high — a change in the way Texas levied its excise tax on smokeless tobacco has just about driven old-fashioned, loose-leaf chewing tobacco out of the state.

Now, in Virginia, the muted clash over the excise tax between two tobacco giants on either side of the James River — Henrico County-based Altria Group and Swedish Match’s Chesterfield County-based North American operations — could have echoes across the country.

The question: Should the state levy the tax by the units sold, as Altria, with its relatively more expensive premium brands of snuff, wants? Or should it levy a tax that’s a percentage of the price, the position urged by Swedish Match, now that it has carved out a healthy chunk of the market with its less costly brands.

“Imagine you’re in a Cadillac and I’m in a junker and we’re driving up to the toll booth; are you going to feel it’s fair if your toll is twice mine?” said William Phelps, spokesman for Altria.

Gerry Roerty, Swedish Match’s vice president and general counsel, sees it differently:

“We have a market that’s developed with one kind of tax, where someone has seen market share fall from 80 percent to 50 percent, and now we’re talking about a change,” he said.

U.S. Smokeless, long before Altria acquired it in 2009, once had about 80 percent of the smokeless market.

The proposed change in the tax would mean lower-priced products, such as Swedish Match’s Timberwolf, likely will see higher taxes, while premium brands such as Altria’s Copenhagen and Skoal will pay less.

Virginia now taxes smokeless tobacco at 10 percent of the wholesale price. Legislation in the state Senate and House would change the tax to 18 cents an ounce for moist snuff. Both bills originally left the 10 percent tax on other tobacco, including the old fashioned “loose-leaf” or chewing tobacco, like Swedish Match’s flagship Red Man brand.

But Sen. John Watkins, R-Powhatan, amended his legislation to include a proposal from Swedish Match to tax loose-leaf tobacco on the basis of units of sale.

The bill proposes a 21-cent tax on small pouches of loose-leaf chewing tobacco, which are usually 3 ounces and account for most sales, rather than a per-ounce tax. Larger pouches would pay at different rates, a complication that has drawn opposition from the wholesalers who pay the tax.

On a per-ounce basis, the loose-leaf tobacco rates in Watkins’ bill would be lower than the proposed snuff tax, but Roerty said that reflects the fact that chewers use about three times as large a pinch at a time as do snuff dippers.

Texas didn’t make that distinction, and with the higher rate it levied per ounce, pushed the price of a carton of 12 three-ounce bags to close to $100.

“People drive to Oklahoma now for Red Man; it’s disappearing from the shelves,” Roerty said. “Loose-leaf has been shrinking 7 to 10 percent anyway, but the Texas tax just about wiped us out. . . . Wholesalers and retailers say our customers can’t pay that and we’re not going to order it and I can’t really blame them.”

He’s hoping that if Virginia makes the change, Texas will listen and follow suit.

Meanwhile, he’s intrigued that in Virginia, unlike the roughly dozen states that recently have moved to weight-based excise taxes for snuff, nobody has proposed the idea that the tax on cans containing less than an ounce be rounded up to the 1-ounce charge.

It’s intriguing, he said, because “snus,” the Swedish-style spitless tobacco that many tobacco firms see as having huge growth potential, and the increasingly popular pouches of moist snuff, are often sold in smaller cans with less than an ounce of tobacco. Altria already has introduced a smaller “slim can” for pouched snuff.

By David Ress, Timesdispatch
February 19, 2010

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