Utah cigar smokers are facing a crippling tax on cigars that will go into effect this summer, and at least one Utah cigar shop will close its doors as a direct result of the tax.
Beginning July 1, cigars purchased in Utah will be taxed at 86 percent of the manufacturers’ sale price, one of the highest such taxes in the United States. The current tax is 35 percent. The new taxes are onerous enough, but what makes this tax hike far worse for Utah retailers is the addition of a floor tax, meaning the tax they must pay on any inventory in their shops on July 1, when the law takes effect. The floor tax will require them to pay a one-time tax on the difference in tax rates, meaning a tax of 51 percent on any inventory in their shop.
“I’m going out of business because of this tax,” said Gary Klc (pronounced “kelch”) owner of Jeanie’s Smoke Shop in Salt Lake City. “I have a huge inventory. It would actually equate to about $125,000 that I would have to come up with on my existing inventory.”
The tax hike has loomed for years, and has been fought by cigar retailers in the state as well as members of various cigar organizations. Utah Gov. Gary Herbert, a politician who has said he is against new taxes, let the tax increase pass without signing it, or without vetoing the legislation.
The International Premium Cigar and Pipe Retailers Association and the Cigar Association of America lobbied unsuccessfully against the tax hike, hoping that Utah lawmakers would instead opt for a 50-cent-cap. “We were unsuccessful in convincing the legislature to include the tax cap provision in the newly approved tobacco tax increase bill,” said the IPCPR’s Chris McCalla.
Klc, who is 50, grew up in and around the store, which was owned by his family before he bought it in 1989. “During the hard times my mom had to come to work and bring me along with her,” he said. “I was four years old at the time.” He now plans to liquidate his inventory, not buy any more cigars, and said June 30 would be the last day the shop is in operation.
Cigar Taxes Kill A Family Business
When I heard the news I thought first as a reporter: Higher cigar taxes in Utah? Time for a story. I wasn’t happy, but certainly wasn’t shocked. At the end, as I’m writing this blog, I’m simply sad.
The details as they unfolded were a little more troubling. Taxes in Utah were going from 35 percent to 86 percent, not only a real steep increase, but increasing to a level that’s extraordinarily high. Then I started making some phone calls.
I clicked on the Cigar Aficionado retailer database and began talking to the people who work at Utah smoke shops. There aren’t many, first of all. Utah is a huge state, but it’s sparsely populated for its size, with fewer than 3 million people, 37th in the United States. It’s hardly the epicenter of cigar sales. I started asking about the impact of the taxes.
“You need to call Jeanie’s,” said one cigar store worker.
I placed a call to Jeanie’s, a shop in Salt Lake City. Soon I was talking to the owner, a guy named Gary Klc, pronounced “kelch.” If you have any desire to buy a cigar from Gary, do it now, because this new tax is going to drive him out of business.
You see, the Utah cigar tax increase isn’t just about a higher tax. This tax hike comes with a very nasty thing known as a floor tax, which is a tax on the inventory of a cigar shop. The new tax doesn’t go into effect until July 1, so lawmakers fear that cigar shop owners will stock up on cigars before the tax change. To prevent that, they have added a floor tax to the legislation, which means that cigar shop owners like Gary will have to pay the difference in tax on all their inventory in the shop on June 30. That’s 51 percent of the manufacturer’s selling price, and that can be a lot of money, especially in the middle of a recession.
“I’m going out of business because of this tax,” said Klc.
What do you like in a cigar shop? A big inventory? A great selection of cigar brands? Of course you do. And that’s what Gary has in his shop. When I asked him what brands he has, he answered: “Anywhere from A. Fuente to Zino, from A to Z . If my customers want it I’ll seek it out and find it.”
His strength has become his weakness. That inventory means he would have to write a big check come July 1. “I have a huge inventory,” he told me. “It would actually equate to about $125,000 that I would have to come up with on my existing inventory.”
Jeanie’s has been around for quite some time. It used to be a United Cigar Store, and Gary’s dad began working there in 1945, and bought it in 1949. In the 1970s, the name was changed to Jeanie’s, the name of Gary’s mom. Gary is 50 years old, and has been coming into this store since he was a toddler. “It’s been my life. During the hard times my mom had to come to work and bring me along with her. I was four years old at the time. I kind of grew up here in the store, I swept the floors, I stocked the shelves, whatever I needed to do.” In 1989, he bought the store from his mom when it was time for her to retire.
Gary has been through ups and downs before. The SCHIP take hike was a problem, but one that he could handle. He lost his right to have a smoking lounge, but handled that, playing jazz in the store to make customers feel welcome. Gary even fought the smoking ban for awhile, when it first came up, until the stress literally made him sick.
“I lobbied against it. It stressed me out quite a bit. I ended up with a cardiac arrest, stress, being called a liar,” he said. “I spent a week in the hospital. They’re out of control.” He had fire in his belly then, but today he speaks someone who is resigned to his fate, ready to call it quits, at peace with what has happened. “It’s been a good ride,” he says.
Gary doesn’t plan on doing business after June 30, doesn’t plan on having any inventory to write the big check to the government that taxed them out of business. Utah Gov. Gary Herbert, a politician who has said he is against new taxes, let the tax increase pass without signing it, or without vetoing the legislation. In short, he did nothing to stop it.
Jeanie’s Smoke Shop, Salt Lake City, Utah. Born into the Klc family in 1949, died 2010.