| Date: | 03/15/2002 |
|---|---|
| Organization: | Massachusetts Department of Revenue |
| Referenced Sources: | Massachusetts General Laws |
Tax Administration
Introduction
The Massachusetts Department of Revenue is responsible for the enforcement of the taxation of cigarettes in Massachusetts pursuant to General Laws chapter 64C. It also has the authority to regulate cigarette prices under the fair pricing provisions of the statute. G.L. c. 64C, §§ 12 - 21 and 830 CMR 64C.14.1. The purpose of this Directive is to clarify what trade discounts are allowed to be applied in calculating the base cost of cigarettes when determining the presumptive minimum price of cigarettes.
Issue
Does the Department consider payments made under certain cigarette manufacturers' promotional pricing programs such as "buy‑downs" and "master‑type" programs trade discounts that may be used to reduce the applicable presumptive minimum price of cigarettes under G.L. c. 64C and 830 CMR 64C.14.1?
Directive
Payments made under cigarette manufacturers' promotional pricing programs such as "buy‑downs" and "master‑type" programs are not trade discounts and may be not used to reduce the applicable presumptive minimum price of cigarettes under G.L. c. 64C and 830 CMR 64C.14.1 without the prior approval of the Commissioner. Manufacturers, wholesalers or retailers that advertise, offer to sell, or sell cigarettes at less than the applicable presumptive price may be subject to the suspension of any license for a period of five days. The Commissioner may also revoke any license for multiple violations. G.L. c. 62C, § 68(5) and 830 CMR 64C.14.1(5), (6). In addition to license suspension or revocation and to any other penalties established by law, licensees that sell cigarettes under these programs without the prior approval of the Commissioner may be subject to a fine of not more than five hundred dollars under G.L. c. 64C, § 14.
Discussion
Massachusetts General Laws chapter 64C, § 14 makes it unlawful for any retailer or wholesaler to intentionally injure competitors or to destroy or substantially lessen competition or advertise, offer to sell, or sell cigarettes at a price below their cost, as defined by G.L. c. 64C, § 13.
Massachusetts defines the base cost of cigarettes as the invoice cost of the cigarettes to the retailer or wholesaler (licensee) or the replacement cost of the cigarettes within thirty days prior to the date of sale in the quantity last purchased, whichever is lower, less all trade discounts except customary discounts for cash. 830 CMR 64C.14.1(2). The cigarette excise imposed by G.L. c. 64C is not part of the invoice cost of the cigarettes to the licensee [1]. Id. The applicable presumptive minimum cost of selling cigarettes is 125 percent of the base cost of the cigarettes for retailers, 102 percent for wholesalers and 100.5 percent for wholesalers selling to chain stores. G.L. c. 64C, § 13.
A trade discount within the meaning of section 13 of G.L. c. 64C is one that is non-discriminatory and deducted from the invoice cost of cigarettes. Such a discount, for purposes of subsection 13(c) of the statute, is the difference between the manufacturer's list price and the price at which the manufacturer actually sells cigarettes to a wholesaler or other licensee authorized to purchase cigarettes for purposes other than sales to the ultimate consumer. Similarly, such a discount, for purposes of subsections 13(a), (b) and (d), is the difference between the wholesaler's list price and the price at which the wholesaler actually sells cigarettes to a retailer, vending machine operator or other licensee authorized to sell at retail. The amount allowed as a discount must be separately stated as a trade discount on the point of sale invoice of the manufacturer or wholesaler, as the case may be. A trade discount does not include either a rebate or any other price discount that is not expressly reflected on the point of sale invoice in a specific amount expressed in dollars and cents. No trade discount that is offered after the original invoice is a trade discount within the meaning of section 13 of the statute. See, e.g., 20 NYCRR 80.2(a)(2)(iii).
Generally, under a "buy‑down" program, a manufacturer or a manufacturer's representative offers a retail dealer a rebate for sales of a particular brand of cigarettes either for a specific quantity of cigarettes or for a quantity of cigarettes sold over a predetermined period of time. These rebates are not deducted from the manufacturer's list price shown on the invoice, but rather are paid or credited separately subsequent to the sale to the retailer. Therefore, such subsidies are not trade discounts because the buy-down is applied after the sale. Consequently, they cannot be used to reduce the minimum resale price of cigarettes below the applicable presumptive cost.
A "master‑type" promotional program is a program sponsored by a manufacturer and administered through a cigarette wholesaler. The wholesaler agrees to pay the retailer a rebate and is later reimbursed by the manufacturer. The wholesaler may also be paid a fee to administer the program. The payments are not deducted from the manufacturer's list price shown on the invoice from the manufacturer but are paid or credited separately after the sale to the retailer. Therefore, these payments are not trade discounts because they are applied after the sale. Consequently, they cannot be used to reduce the minimum resale price of cigarettes below the applicable presumptive cost.
/s/Alan LeBovidge
Alan LeBovidge
Commissioner of Revenue
AL:DMS:jet
March 15, 2002
DD 02-2