jaded in new jersey

As New Jersey faces its fourth excise tax increase in four years, retailers are watching their dwindling tobacco sales head across state lines.

Every state has its own issues to deal with, but it seems that New Jersey has been dealt a particularly difficult hand.

“New Jersey is a difficult state for convenience stores to do business in,” said Dean Durling, president and CEO of Whitehouse Station, N.J.-based Quick Chek Food Stores. “We can’t sell liquor in our stores and we are one of the only states that requires full-service gas [Oregon is the other]. On the tobacco side, our state excise taxes were already one of the highest in the nation, and as of April 15, the government raised the legal smoking age from 18 to 19 and banned indoor smoking.”

And as of July 8, New Jersey’s uphill battle took an even harder turn. Governor Corzine passed a bill that would increase the state excise tax by 17.5 cents per pack and increased the sales tax from 6% to 7%.

The threat of Corzine’s original plan to increase the excise tax by 35 cents set retailers into motion. Several c-store operators along with suppliers and wholesalers formed a coalition called Enough Already and worked with Willard Bishop consulting (www.bishopconsulting.com) to show quantitative effects the proposed budget would have on the state. They appeared in Trenton to voice the findings and see if they could persuade the legislature to take another course of action.

While Corzine’s original 35 cent increase was dropped to 17.5 cents, it was a sour victory for New Jersey retailers.

“The increased excise tax will still have a negative result on the legal demand for cigarettes,” said David Bishop, director of Willard Bishop consulting. “We see this increase potentially leading to a 7.5% decline on the No. 1 product in c-stores, coupled with the loss of ancillary purchases those customers make.

“The second part is the sales tax increase from six percent to seven percent,” Bishop adds. “Now, New Jersey retailers’ products will be at a higher cost, which puts them at a huge disadvantage for pricing position. It looks like the passing of the bill spells a better day for Delaware and Pennsylvania retailers, because that’s where New Jersey smokers are headed.”

By the Numbers
The National Association of Convenience Stores (NACS) numbers show that cigarettes represent 47% of New Jersey c-store business, while it’s just 34% in the rest of the U.S. According to Durling, that’s because New Jersey’s c-stores can’t sell alcohol, which makes the tobacco category that much more important to retailers.

In 2003, New Jersey’s cigarette tax increased from 80 cents to $1.50. The state tax stamps sold decreased 17.6%, but state revenue was up 54.9%. In 2004, the cigarette tax increased from $1.50 to $2.05 a pack. Tax stamps sold were down 9%, but revenue was up 24.3%. And in 2005, cigarette taxes were increased from $2.05 to $2.40 a pack. Tax stamps sold were down 12.3% and the revenue was up just 2.6%.

“Follow that across and you see the state made a tremendous amount of money while retailers lost,” said Durling.

Thorofare, N.J.-based Heritage’s Dairy Stores, which operates 37 stores in southern New Jersey, has struggled through the increases over the years, and has tried to develop its foodservice program to make up for the lost revenue. But, like Quick Chek, it feels taxation has gotten out of control.

“Every time they raise taxes we chase more of our customers over state lines. It’s not changing the smoking issues, just creating a bigger negative effect on our economy,” said Jay Dempsey, director of marketing for Heritage. “In real numbers, anyone can cross into Delaware, purchase 10 cartons of cigarettes and save more than $260. While there, they can save at least 7% on any other major taxable purchase. Our neighboring states are becoming retail giants at our expense.”

Willard Bishop’s studies have helped the convenience industry better understand the customer and the marketplace. The firm first started approaching retailers, suppliers and wholesalers about this matter at this year’s NACS State of the Industry conference.

“The proposed excise tax increase impacts retailers and their ability to make money, and that’s something we care about,” said Bishop. “The state and local governments are looking to raise revenue in a way that doesn’t make a big public backlash, but the proposed budget will have detrimental effects on cstore operators’ economic model.

“It’s important because if the government has the only voice, then the taxpayer and the industry get the short end of the stick,” he added.

Willard Bishop worked with the Enough Already coalition along with the Asian-American Retail Association and the Center for Policy Research of New Jersey, an outside conservative think tank, to compile a longitudinal analysis of the tax collections of New Jersey versus other states from 1983 to 2005. It wanted to show how the state’s fiscal policy affects the legal consumer demand for cigarette products in New Jersey.

“It’s the belief of the state that if they raise the excise tax they will generate additional revenue,” said Durling. “But the Willard Bishop findings projected that the state will actually lose revenue because it’s reached a point of diminishing-return.”

According to Bishop, it’s a simple economic principle.

“Legislators fail to see the basic economic theory that you reach a point on the curve where further taxation will reduce revenue,” said Bishop. “While previous tax increases have grown revenue, regression analysis showed that New Jersey has passed the inflection point on the curve and that 35 cents won’t increase revenue, but will most likely lose between $15 and $50 million.”

As cigarettes become too costly for New Jersey patrons to bear, they’re turning to Internet, Native American reservations or simply crossing state lines into Pennsylvania and Delaware where the cost and sales tax is considerably cheaper—zero and 6%, respectively. Bishop’s study shows that per capita pack purchases in New Jersey is 37.5 packs, while it’s more than four times as much—178.8 packs—in Delaware.

With over 44% of the tobacco consumed in the state not being purchased with its retailers, there’s not much hope for New Jersey operators, unless surrounding states raise their excise taxes to level the playing field. Or maybe that an end can be put to Internet sales of tobacco products. It’s a slim hope that retailers can’t take comfort in when the hard truth is facing them.

“Many small retailers in New Jersey will be put out of business because of this,” said Durling.

Voice for the ‘Little Guy’

One of the groups that actively participated in the debate over raising New Jersey’s excise tax was the Asian-American Retail Association, a non-profit organization formed nine months ago to give independent retailers a resource for new products, services and policies in the retailer marketplace. The association, based in Springfield, N.J., has members representing more than 1,100 stores.

“New Jersey is in a unique situation because it has a lot of mom-and-pop stores compared to other states,” said Preshant Desai, secretary for the Asian-American Retail Association. “These retailers have no voice. Most owners open and close their own stores and don’t have the time to research new products and services. We help show them where the industry is going and how to compete with chain stores and outside channels.”

Desai, who operates several Krauszers stores, said that the cigarette category represents 40% to 45% of independent store sales, so the increased excise tax would
have a particularly detrimental effect on his fellow members.

“Every time they increase the excise tax we notice our volume drops dramatically. Usually between 15% to 20%, and that doesn’t include the ancillary products those customers purchase,” said Desai. That’s why the association made its presence known in Trenton, to show legislature the effect the new budget would have on independent retailers. “The state makes money on sales tax and income tax, but when they raise the excise tax it costs us. We can’t compete with Delaware and Pennsylvania, and we’re losing our customers when they purchase out of state.”

Another hit to independent New Jersey retailers was a weeklong, statewide strike of government employees and gambling while the budget was being finalized. This meant lottery sales came to a halt.

“Almost all of our retailers sell lottery in their stores,” said Desai. “For one week we had to stop selling lottery and our bottom lines suffered.”

The association held its first tradeshow in Atlantic City, where 1,500 store owners attended to meet with various vendors to find ways to replace lost cigarette volume. A second show will be held in Edison, N.J. in October.

“It gives independent owners a chance to see what’s out on the market and it provides a platform for companies to come down and talk to our members about how they can compensate for cigarette losses,” said Desai.

For more information, interested parties should check www.aarausa.com.

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