Cigarette tax hike hurting stores

Wilson Farms is cutting jobs and scaling back store investment, blaming economic fallout from a sharp increase in cigarette taxes

Wilson Farms at Elmwood

Judy Penkack, manager of Wilson Farms at Elmwood and Sheridan, sorts through cigarettes. The convenience store chain is eliminating 20 administrative jobs and reducing store labor hours.

imposed over the summer.

The convenience store chain, with corporate offices in Amherst, is eliminating 20 administrative jobs, reducing store labor hours by 10 percent, and curbing capital spending it had planned for 2011, said Paul Nanula, the president and chief executive officer.

The $1.60-per-pack state tax hike that took effect July 1 has ignited a furor among convenience store operators, who claim the increase is onerous and driving customers to sales outlets that do not generate revenues for the state. Meanwhile, the state’s efforts to collect taxes on tobacco products sold by Native Americans to non-Indians are tied up in court.

Nanula said the tax hike is not only hurting Wilson Farms’ cigarette sales, but prompting some customers to bypass its stores altogether, cutting into sales of other items they might usually buy, like sandwiches and coffee.

Wilson Farms officials say the chain was on track for a year of record sales and profits until the tax hike took effect July 1, raising the total state excise tax per pack to $4.35, the nation’s highest. The chain’s cigarette sales are down 30 percent to 40 percent from a year ago, and its overall store sales are down 8 percent to 10 percent, Nanula said.

“We have to right-size our organization and there are jobs frankly lost because of that,” he said.

Nick Gallegos, Wilson Farms’ vice president of sales and marketing, said the tax hike is leading more New York State residents to at reservation stores, on the Internet, or in lower-cost Pennsylvania if they live close to the border. Those buying trends subtract from tax revenues the state was counting on, Gallegos said.

Yet, from July through October, state tax revenues from cigarettes and tobacco products increased 24 percent from the same four-month period in 2009, before the $1.60 hike was in effect, according to state sales tax figures.

James Calvin, president of the New York State Association of Convenience Stores, an Albany-based trade group, said while cigarette tax revenues have risen since July 1, the rate of increase is far short of the 58 percent per pack hike. That outcome is hurting convenience store operators, he said.

The cigarette sales drop-off impacts established chains like Wilson Farms as well as single-store “mom-and-pop” operations, Calvin said. “It’s heartbreaking. It’s through no fault of their own. It’s not that they don’t run a good business. They do.”

Erik Kriss, a spokesman for the state Division of the Budget, said he is not surprised to hear a retailer say its cigarette sales have fallen since the tax hike. Budget officials had projected sales of cigarettes would drop 22 percent as a result of the tax increase, he said.

One reason for the hike, Kriss said, was for the state to create a “disincentive” for people to smoke, by making the products more expensive. The bigger-picture goal is to make people healthier and reduce related health care costs, he said.

“One of the objectives was to get fewer people to smoke,” Kriss said. Plus, cigarette tax revenues support Health Care Reform Act-funded programs.

Even with the tax hike prompting some to quit or buy their products elsewhere, the state expects to hit its target for cigarette tax collections by the time the current fiscal year ends in 2011, Kriss said.

Convenience store operators say they can’t afford the tax hike’s impact. The NYACS has called for Gov. David A. Paterson to suspend the $1.60 per pack tax increase until tax collection begins on Native American sales to non-Native Americans. A spokesman for the governor said that suggestion has been rejected, noting that Paterson cannot suspend the law.

The trade group also advocates the State Legislature going further and repealing the increase.

Pleas for relief from chains like Wilson Farms are colliding with the dire fiscal picture of the state, which is desperate to raise revenues.

When the current state budget was passed, the spending plan projected the cigarette and tobacco products tax increase would yield about $290 million in revenues, according to the state Comptroller’s Office. The budget also projected $150 million in revenues from taxes collected on cigarette sales by Native Americans to non-Native Americans, but the likelihood of collecting those taxes is unclear.

Both the convenience store operators and Native American retailers claim the state’s actions — or intentions — threaten their economic viability.

Convenience stores argue that high cigarette taxes, and a lack of collection of taxes of sales by Native Americans to non-Native Americans, put their jobs and revenues at risk by creating an “unlevel playing field.”

Native American retailers contend that if the state is allowed to collect taxes on sales to non-Native Americans, their operations would suffer lost sales and jobs. What’s more, they see the state’s efforts as in violation of centuries-old treaties, a point the convenience store trade group disputes.

Nanula stressed his complaints are not directed at the Native Americans. “This is really a call to action to New York State,” he said.

Wilson Farms officials say the summertime tax hike has disrupted the chain’s growth curve.

In 2005, WFI Acquisition, including the Nanula family and a New York City-based private equity firm, bought Wilson Farms from Dutch supermarket giant Ahold, which had operated the chain as a division of Tops Markets.

The chain now consists of 188 stores, including some branded as Sugar Creek and Wilson Farms Express. Convenience Store News ranked Wilson Farms tied for 44th among chains in the country, based on its number of stores.

More than $23 million of investment has been poured into its stores since the acquisition, benefiting local contractors and building materials suppliers, Nanula said. Wilson Farms generates $400 million to $500 million a year in sales, including sales of gasoline. Cigarettes account for about 25 percent of its typical store’s sales.

While the chain has budgeted for a drop in cigarette sales of about 5 percent to 7 percent on a year-over-year basis since the acquisition, this year’s tax hike produced a much bigger hit, Nanula said. “We obviously never intended to lose 30 to 40 percent of our cigarette sales.”

The sharp drop in cigarette sales has created a hole that is difficult to fill, he said. The chain is responding by cutting 20 percent of its administrative staff, reducing labor hours for store employees, and lowering its projected 2011 capital spending by $4.5 million. It has also told media outlets it is reducing its advertising budget by $500,000.

“It is a major trickle-down effect to everybody we do business with,” Nanula said.

By Matt Glynn

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