The Akron Legal News

House mulls fix to antiquated provisions of state's cigarette sales law

KEITH ARNOLD
Special to the Legal News
Published: March 29, 2019

The cigarette wholesale business is nothing like it was even two generations ago.

By all accounts, it was very basic - tobacco companies sold to wholesalers to supply retailers that sold the product to the consumer.

Now, the middle ground occupied by the wholesaler is a much more crowded field as more wholesalers buy and sell cigarettes to and from each other before finally selling the product to ever more specialized retailers.

It's big business for the wholesalers the Ohio Wholesale Marketers Association represents.

The association's executive director Beth Wymer said membership comprises wholesalers to convenience stores, mom-and-pop corner stores and other similar retailers.

"They sell much more than just tobacco, but the category accounts for 70 to 80 percent of a typical wholesaler's overall sales volume," she said. "For the smallest wholesalers, the category can be up to 90 percent of overall sales."

Part of the problem with the state's current Cigarette Sales Act, according to the lawmakers proposing its remedy, is that it applies to a wholesale market that is markedly different than it was when the law was enacted.

"The historical intent of the law is to prevent predatory pricing," Circleville Republican Rep. Gary Scherer told Ways and Means Committee members in the Ohio House of Representatives. "For the most part, the law has remained unchanged since it was originally adopted in the 1940s, but the distribution channel has changed, making clarifications to the law necessary."

The law has required wholesalers and retailers apply a mark-up associated with the cost of doing business before selling cigarettes.

The statutory mark-ups are 3.5 percent at wholesale and 8 percent at retail and remain unchanged by the proposed House Bill 71.

Wymer explained that all of those wholesaler-to-wholesaler transactions taking place go unrecognized by the state's current mark-up law.

"HB 71 adds that in sales of cigarettes between wholesalers, the statutory mark-up is not required, but the wholesaler who sells to retailers is required to apply the mark-up.

"This is consistent with industry practice, other states that have addressed sales between wholesalers in their laws and guidance from the Tax Department."

Wholesaler Keilson Dayton Co. President Gregory Wellinghoff offered more historical context in testimony before the committee.

"When the law was originally written, wholesalers purchased cigarettes from manufacturers, applied the tax stamp and then sold the cigarettes directly to retailers," he said. "However, over the past 20-or-so years, new wholesalers who cannot buy directly from major cigarette manufacturers have become established businesses by buying already tax-paid cigarettes from wholesalers who buy directly from the manufacturer.

"These new wholesalers often serve niches of the market that may be unserved or underserved by wholesalers today."

He suggested a vibrant wholesale market is in the best interest of all wholesalers and that current circumstances work well when the intent of the minimum mark-up law is respected.

"I do find it ironic that I am here today testifying for the need to make changes to preserve the original intent of a law that my late grandfather, Gregg Wellinghoff, helped to implement more than 70 years ago when he worked for the Keilson family," he said.

"Changes in this industry and trade practices dictate that this law needs updates, this time to address gray areas that are loopholes to get around the original intent of the law."

Another provision of HB 71 concentrates on wholesalers' and retailers' ability to meet a competitor's below statutory mark-up price.

"The legislation makes it clear that a competitor's price can be met only if the competitor has demonstrated to the department that his cost is less than the stated mark-up," said HB 71 joint sponsor Rep. Jack Cera, D-Bellaire.

The remaining provisions address further clarification of the meaning of "cost to the wholesaler" and soliciting or offering prices that are below cost.

The latter making it illegal for a retailer to solicit the wholesaler for a price that is below the wholesale minimum price.

HB 71, which has garnered cosponsor support of 10 fellow House members, was not scheduled a fourth hearing at time of publication.

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