by Dale Scott

Proposition 10, the California Children and Families First Act, has proven to be precisely the scourge the tobacco industry feared it would.

Charles Janigian, a principal of San Jose-based tobacco products distributor JMG International, Inc. and head of the California Association of Retail Tobacconists (CART), admits that the early defeats in the fight to repeal Prop 10 were expected. By April, the California Supreme Court had refused to hear CART’s constitutional challenge to the implementation of Prop 10’s 35% inventory tax on tobacconists. Janigian expects California’s Board of Equalization to deny the retailers’ claim for a refund of this tax. This leaves no alternative but to fight the battle from the California Superior Court upward, a long and extremely expensive endeavor.

“CART is continuing to raise funds via our Internet site and the print media,” explained Janigian, “and is receiving support from friends nationwide. We cannot maintain our legal battle, though, without substantial financial contributions from the major manufacturers of OTP (other tobacco products): cigars, pipe and smokeless tobacco, pipes, and smoking accessories.

“CART accepts no contributions from major cigarette interests,” states Janigian. “CART, and the industry in general, must remain firm in separating itself from Big Cigarettes, convince the public of this, and persuade legislators to tax and regulate cigarettes and OTP differently.”

On the legislative front, California Assembly Bill 1143 is a possible bright spot on the otherwise dismal landscape. It would amend the present law to effectively eliminate the July 1, 1999 increase in tax on OTP to approximately 74%. According to AB1143, the rate of taxation of the California Children and Families First Act would be in conflict with California’s Tobacco Tax and Health Protection Act of 1988. “This bill is critical to every California tobacco merchant,” says Janigian, “and we should all actively urge our state legislators to support it.”

Donna Brown, of the Mission Pipe Shop in San Jose, Calif., has set up CART’s official website at www.beatprop10.com. The organization intends to update all of its activities on the site in an effort to keep California retailers and the industry at large informed about developing events in a timely manner.

Rebellion Among the Ranks
On February 15, the due date for the 35% floor tax, non-compliance was rampant, with 40,000 tobacco retailers out of 135,000 failing to return their tax forms and checks to the State. Clearly, many are unable to pay the tax, and this non-compliance may portend the failure of a large number of tobacco-related businesses.

Although Janigian has no firm figures on store closures, he says they are increasing weekly. Full-line tobacconists seem to be weathering the storm, with the cigars-only shops being hardest hit. “As of April 1st,” he reports, “sales are off 15-35% from last year, for traditional tobacconists and mass-marketers alike. This is directly attributable to Prop 10, and it is hitting cigarette retailers equally hard. Philip Morris is offering dealer incentives, and we hear they just lowered their price by $5.50 per carton. This comes on the heels of a $4.50 per carton increase due to their share of the settlement of the nationwide Attorneys General suits against the cigarette manufacturers.

“At the administrative level,” Janigian continues, “all the counties are setting up the required commission boards to implement Prop 10 programs. But with no state oversight, they are struggling with non-uniform guidelines.”

Perhaps the most ominous consequence of the new law, just like that of Prohibition, is the upsurge in gray- and black-market activity. According to Janigian, “Gray-market cigarettes are manufactured for export. These cigarettes are now reappearing in the U.S., for sale in California.” Since they do in fact bear California excise tax stamps, the State is not concerned. “Their low price comes at the expense of legitimate distributors, however, who must pay the going cost for domestic products,” notes Janigian.

Even worse are black-market cigarettes - those acquired by burglary or outright robbery, which has been on the rise in California. In late March, eight armed robbers forced their way into Allied Merchandising, Inc., in Corona, forced warehouse personnel to load over $1 million worth of cigarettes into a truck, and drove away. And on March 13, midnight thieves entered the JMG facility and stole a large inventory of cigars, then drove up to Brisbane, California, and did the same at Russ Kunkle’s warehouse.

At the moment, California tobacco retailers are suffering, while Internet and out-of-state mail-order houses are reaping huge windfall sales. This may not continue for long. “The (Federal) Jenkins Act prohibits the interstate transportation of cigarettes above certain quantity levels without state taxation,” Janigian says. “Legislation may be brewing at the federal level to expand the Jenkins Act to include OTP. This could seriously curtail the mail-order tobacco business. Such a law would be very attractive to the states, covetous of tax revenues any way they can get them.”

Reiner’s Bureaucracy Lumbers Forth
And what of Rob Reiner and his supporters? Rumors are circulating that newly-elected governor Gray Davis - no friend of smokers - has cut a deal with Reiner to install him as czar of the commission that oversees the pork-barrel agencies. Rumors persist that Reiner, buoyed by his success as a social engineer, may be talking to other states on the same issue.

Campaign Disclosure Forms released by the San Francisco Department of Elections identify all donors on each side of last year’s election campaign. These documents have provided a number of interesting revelations. Opponents to Prop 10 built a seemingly hefty war chest of $30 million in contributions from 16 donors for the Committee Against Unfair Taxes. The major players were Philip Morris ($21 million); Brown & Williamson ($5 million); Lorillard ($3 million); R.J. Reynolds ($730,000); U.S. Tobacco ($294,000); the Tobacco Institute ($210,000); and Consolidated Cigar Corp., General Cigar Corp., Conwood Co., Swisher International, Havatampa, and John Middleton ($10,000 each).

In contrast, Reiner gathered contributions totaling a relatively meager $7.2 million from 153 contributors, soliciting funds for the Children and Families First Committee. High-visibility entities included the Cancer and Heart Societies ($540,000 and $50,000, respectively); the National Center for Tobacco Free Kids ($100,000); several election campaigns for state politicians ($10,000 each); entertainment luminaries Tom Cruise and Nicole Kidman ($35,000); Susie Tompkins ($15,000); Billy Crystal ($10,000); Tom Hanks, Dustin Hoffman, Meg Ryan, and Anne Bancroft ($5,000 each); Quincy Jones ($3,500); and Barbara Streisand ($2,500). Reiner tapped his father, Carl Reiner, for $22,500.

Prop 10’s largest supporting contributors, though, were largely mystery men - Stephen L. Bing ($1.8 million), Ron Burkle ($1 million), and Haim Saban ($500,000). CART is researching their interest in the issue, and I will write to each, requesting an interview or their written response to my inquiry. It would be revealing to know what their motivations were, and if their expectations had been met. This is especially interesting, in light of Charlton Heston’s letter of retraction and regret for having publicly endorsed Prop 10 before the election. It would further be interesting to query the other Hollywood celebs to determine whether they still were supportive of the measure, or whether they, like many California voters, felt duped over the OTP issue.

Finally, and as a topic for further inquiry, Reiner himself donated not one penny! According to the Election Disclosure Report, Rob loaned $1.4 million to Prop 10, and has been paid back $250,000 to date. I intend to interview him on this subject - I understand he becomes virulent when pricked - so it should be fun.

Dale Scott (dscott@smokeshopmag.com) is the author of How to Select and Enjoy Premium Cigars, currently in its second printing.