Taxation and New
Products
Gregory N Connolly DMD, MPH
National Smokeless and Spit Tobacco
Summit
September 22,2009
New Smokeless Products and Acquisitions
by the Cigarette Industry
Swisher $4.5 Billion RRJ – 2005
 PM Acquired USSTC $16 Billion 2008
 PM – Swedish Match International Joint
Venture
 Introduction of New Forms: Snus,
Dissolvables ?
Today 88% of the Smokeless Market
Owned by the Cigarette Industry

Components of a Tin of Moist Snuff and a Pack of Cigarettes (2008)
Retail Price
State Tax
Manufacturers Price
Fed Tax
MSA Payments
Adv
Profits
Moist Snuff (P)
$
%
$5.39
100%
$0.79
14.6%
$2.62
48.6%
$0.04
0.7%
$0.01
0.2%
$0.30
5.6%
$1.63
30.2%
Cigarettes
$
%
$7.17
100%
$1.00
13.9%
$4.20
58.6%
$0.39
5.4%
$0.38
5.3%
$0.70
9.8%
$0.50
7.0%
P=Premium brands
Sources: FTC Reports, Annual Report of Altria and USSTC, Tax Burden on
Tobacco, NAAG, USB.
Tobacco Products Sales
25,000
Moist Snuff (Tins)
1200
20,000
Cigarettes
15,000
800
10,000
Roll Your Own
400
5,000
Cigarettes
Million Packs Sold
Small cigars and RYO CPEs
Moist Snuff Tins
Million Units Sold
1600
Small Cigars
0
0
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source data:
1
Statistical report–tobacco. United States Department of Treasury, Alcohol and Tobacco Tax and
Trade Bureau. http://www.ttb.gov/tobacco. Accessed July 8, 2009.
2
Tobacco stocks. United States Department of Agriculture, Agricultural Marketing Service.
http://www.ams.usda.gov/AMSv1.0. Accessed July 8. 2009.

“This flurry of smokeless category activity
reflects the overall strength and growth of the
OTP market. In addition to smokers’ desire for
new smokeless alternatives, that growth is driven
by new product introductions and flavor
innovations.”
www.awmanet.org/dc/dc_cover0706.html
Dual Users are a Big Driver of Current MST
Growth

“Based on our research, we believe the bulk of
smoker migration into MST is coming from dual
users (consumers that dip and smoke). We
estimate that about 30% of dippers also smoke.
The proliferation of smoking bans has
effectively increased the number of dipping
occasions.
Source: UBS Research, 2007, Nat’l Tobacco Incidence Study [UST]
Effective Prices of Other Tobacco Products and Cigarettes per
Alternative Tax Rates
Price /Tax
$4.69
$1.01
Moist
Snuff
(1.2 oz)
$2.62
$0.11
30% Ad Valorem State Tax Rate
$1.41
$0.79
$0.69
$0.31
$0.61
Total with 30% Ad valorem
$7.11
$3.52
$3.10
$2.15
$3.64
90% Ad Valorem State Tax Rate
$4.22
$2.36
$2.08
$0.94
$1.82
Total with 90% Ad valorem
$9.92
$5.09
$4.48
$2.77
$4.85
$0.60
$0.50
$0.26
Total with 50¢ weight-based
$3.33
$2.90
$2.09
$1.00 per ounce State Tax Rate
$1.20
$1.00
$0.52
Total with $1 weight-based
$3.93
$3.40
$2.35
Average Retail Price
2009 Federal Tax Rate
50¢ per ounce State Tax Rate
Cigarettes
(20)
Dry
RYO Small
Snuff
(20) Cigars
(1.0 oz)
(20)
$2.31 $1.04 $2.02
$0.09 $0.80 $1.01
Camel Orbs
Snus (15)
(20)
$3.94 $4.87
$0.04 $0.01
$1.18
$1.46
$5.16 $6.34
$3.55
$4.38
$7.53 $9.26
$0.21
$0.06
$4.19 $4.94
$0.43
$0.12
$4.41 $5.00
Data sources: Average price (except for cigarettes) from AC Nielsen ScanTrak; Average
cigarette price from Tax Burden on Tobacco (2008). State tax rates from Tobacco Free
kids. Federal Tax Rates from U.S Department of Treasury
Recent Changes in Federal Excise Taxes for
Smokeless Other Tobacco Products
Moist Snuff
2008 Federal Tax Basis
$0.585 per pound
2008 Federal Tax Rate
$0.04 per tin
2009 Federal Tax Basis
$1.51 per pound
2009 Federal Tax Rate
$0.11 per tin
Δ Federal Tax per Package
$0.07 per tin
Camel Snus
Small Cigars
Roll-Your-Own
$0.585 per pound $1.828 per 1,000 $1.0969 per pound
$0.02 per pack (20) $0.04 per pack (20)
$0.04
$1.51 / pound
$50.33 per 1,000 $24.78 per pound
$0.04 per pack (20) $1.01 per pack (20)
$0.79 per 20
$0.02 per pack (20) $0.97 per pack (20)
$0.75 per 20
Smokeless Tobacco – Prices
Data Sources: ACNielsen Scan Track; Orzechowski, Walker (2008)
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
Moist Snuff Dry Snuff
RYO
Small
Cigars
Camel Snus Camel Orbs
Average Retail Price (2007)
Skoal
Bandits
Federal Tax Rate
Prices and taxes are based on the following units:
Moist snuff (1.2 oz); Dry Snuff (1.0 oz); Skoal Bandits (1.2 oz);
Camel Snus (20 pouches); Camel Orbs (15 tablets);
RYO (20 pieces); Small Cigars (20 pieces); Cigarettes (20 pieces)
Cigarettes
Weight-based Taxation of New versus Traditional Smokeless Products
TFK
Quotes:

Moist smokeless tobacco volume is
increasing faster in the nine US states
that have a weight-based tax than in
those with a percentage tax based on
the wholesale price, indicating “there’s a
latent growth in the category that may be
realized if states convert to a weightbased tax.” – Retail and foodservice
consulting firm, Willard Bishop.
State Weight-based and Ad Valorem
Smokeless Tobacco Taxes
(Number of States)
Moist Snuff
Weight-Based
18
Chewing and
Smoking
Tobacco
9
Ad Valorem
31
41
Pennsylvania currently has no tax on non-cigarette tobacco
products. Kentucky taxes snuff 19 cents per unit.
Current Moist Snuff Among Youth
Ages 12-17 Years
0.030
R2 = 0.8377
Proportion current users
0.025
0.020
0.015
0.010
0.005
0.000
2001
2002
2003
2004
2005
2006
2007
2008
Data source: U.S. Substance Abuse and Mental Health Services
Agency, National Survey on Drug Use and Health, 2002 - 2007
Top Five Cigarette Brands U.S. Sales Dollars for 2007
Top Snus Brands U.S. Dollar Sales for 2007
$3,500,000,000
$30,000
$3,000,000,000
CAMEL SNUS
TABOKA
$2,500,000,000
Dollar Sales
$25,000
Sales Dollars
$20,000
$15,000
$2,000,000,000
$1,500,000,000
$10,000
$1,000,000,000
$5,000
$500,000,000
MARLBORO
BASIC
NEWPORT
VIRGINIA SLIMS
CAMEL
$0
$0
Top Five Moist Snuff Brands U.S. Sales Dollars for 2007
$60,000,000
SKOAL
$50,000,000
COPENHAGEN
GRIZZLY
Dollar Sales
$40,000,000
KODIAK
TIMBER WOLF
$30,000,000
$20,000,000
$10,000,000
$0
*Note –Sales and price data were derived from ScanTrak scanner data licensed from ACNielsen, a global provider of marketing research information services, in US food
stores with at least $2 million in annual sales, US drug stores with at least $1 million in annual sales and all US mass merchandisers, with the exception of WalMart.
“New Snus Products not Expected to Hurt Cigarette Volumes
The majority of our survey respondents (64%) do not believe either of the new snus
products will affect cigarette volumes by promoting current smokers to quit at a faster
rate. Rather, the new snus product will most likely (1) attract smokers that have
previously quit, (2) that are currently using moist snuff, (3) smokers that are looking
for a temporary nicotine “kick” when they cannot smoke, or (4) smokers that would
have quit anyway. This bodes well for RAI and MO share holders as these new snus
products don’t appear to be cannibalizing either Marlboro or Camel brands.”
Citigroup Investment Research, 2007
“New Snus Products not Expected to Hurt Cigarette Volumes
The majority of our survey respondents (64%) do not believe either of the new snus
products will affect cigarette volumes by promoting current smokers to quit at a faster
rate. Rather, the new snus product will most likely (1) attract smokers that have
previously quit, (2) that are currently using moist snuff, (3) smokers that are looking
for a temporary nicotine “kick” when they cannot smoke, or (4) smokers that would
have quit anyway. This bodes well for RAI and MO share holders as these new snus
products don’t appear to be cannibalizing either Marlboro or Camel brands.”
Citigroup Investment Research, 2007

“When scientists have identified undesired
compounds in a product, we have seen it
as our responsibility to reduce or eliminate
these compounds, if feasible.”
www.myeval.net (Swedish match No America)

We focused on innovation, introducing a variety
of more approachable new products that would
appeal to smokers. We also ramped up our
communication with smokers, acquainting them
with smokeless tobacco products.”
Butler, President USSTC (USSTC, May, 2008)
Revenue Losses From Standard Weight-Based Tax on Moist Snuff (in
constant dollars)
$100
$90
$80
$70
$60
$50
Base Year
Year 1
Year 2
Year 3
Year 4
Projections assume stable consumptionand sales over time, with inflation at 2% per year.
TFK
Year 5
Differences in State Revenues From Different Ways of Taxing Moist Snuff
-- An Historical Perspective -Weight-Based Tax
Percentage-of-Price Tax
Percentage-of-Price w/ Minimum
$140.0
$130.0
$120.0
$110.0
$100.0
Base Year
Year 1
Year 2
Year 3
Year 4
Year 5
[Based on actual 2000 to 2005 moist snuff sales price and volume data for from the U.S. Federal Trade Commission, and
on recent industry data on the moist snuff market share and average prices of premium, value and discount brands.]
TFK
Domestic Smokeless Advertising and Promotional
Expenditures 1998 – 2006 (Millions of dollars)
400
354.1
350
Millions of Dollars
300
250.8
236.7 234.6 242.5 231.1
224.6
250
200
150
170.2
145.5
100
50
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
Source: Federal Trade Commission Smokeless Tobacco Report for 2006