Retailers Margins

[Cigahs]

Cighas, you make a very acurate argument for not adding the taxes into the retail price. Let's see the difference, at least for California.

Wholesale cost of box of cigars (20 ct): $89.00
California tax rate: 45.13% of wholesale value

Scenario 1: Adding Tax into Price

89.00 x .4513 = 40.16
40.16 + 89.00 = 129.16
129.16 x 2(keystone) = 258.32
258.32 / 20 (box count) = 12.91

$12.91 is the price, probably marked up to 12.95 or down to 11.95 when put on the shelf.

Scenario 2: Determine Retail Price then add tax

89.00 x 2 = 178.00
178 / 20 = 8.90
89 x .4513 = 40.16
40.16 / 20 = 2.00
8.90 + 2.00 = 10.90

$10.90 is the price, but again probably mark this one up to 10.95 when put on the shelf.

So at least on this box, the customer is saving about $1 per stick. That certainly adds up. It would certainly add up on some of the more expensive cigars.

I'd be curious to know what some of the other vendors here are doing, especially in states with a high tax rate.

Stinki

Working a 5 state territory, with 2 of them being 'high tax' states (NY,NJ), I've seen the former scenario far too often. Based on your numbers, the calculation actually inflates the 'Suggested' retail price by $2. The funny part is that the people doing this are the squeakiest wheels when it comes to competing with discounters (online & off).

My point is simple. The state excise tax is a wash. To tack it on to your cost of goods and multiplying it by whatever variable is gouging and those that engage in the practice should not be surprised when their customers complain about their prices.

Humberto

First, let me state that my pricing is MSRP plus state tobacco taxes. As said earlier, MSRP is generally (but not always) keystone.

In defense of those retailers who make a margin on the taxes (and I don't), you do have to realize that the state tax is considered a "Cost of Goods", as it it levied and paid on inventory when it arrives, not when it is sold. If the tax were to be paid on sale, then I would agree that this is gouging, but for a retailer trying to make margin on his costs, this would make sense.

Of course, with the internet retailers avoiding the state taxes, I can't justify charging my customers double the state tax.

Jim

That is a good point, Jim. I hadn't thoiught of it that way. Nonetheless, your second point about dealing competetively with catalogs and the internet is also a strong argument to shave down the cost to the consumer as much as possible so the door stays open.

I work with a handful of retailers in NY and NJ that simply eat the tax altogether (37% and 30%, respectively) and chalk it up as a cost of doing business. It's an expensive and risky way to operate but I find that their customers rarely go elsewhere.

Humberto