OHIO LEGISLATIVE SERVICE COMMISSION
Office of Research Legislative Budget
www.lsc.ohio.gov and Drafting Office
S.B. 40 Final Analysis
134th General Assembly
Click here for S.B. 40’s Fiscal Note
Version: As Passed by the General Assembly
Primary Sponsor: Sen. Schaffer
Effective date: September 30, 2021
Effective Date:
Chris Kelleher, Research Analyst
SUMMARY
Qualifies the manner in which cigarettes’ wholesale minimum sale price is calculated by
referring to the manufacturer’s gross invoice cost as the basis of a wholesaler’s cost.
Prescribes the manner by which a wholesaler must obtain the Tax Commissioner’s
approval before using its actual cost of doing business in pricing cigarettes instead of a
default statutory cost.
Explicitly permits one wholesaler to sell cigarettes to another wholesaler without having
to recover the minimum wholesale cost as is required when selling to a retailer.
Explicitly requires a competitor’s price to be approved by the Commissioner before
another wholesaler may match the competitor’s price.
Requires a retailer or wholesaler to obtain approval from the Commissioner before
conducting cigarette sales exempt from the minimum pricing law.
Clarifies an existing offense prohibiting a wholesaler from selling cigarettes at less than
the applicable minimum sale price.
DETAILED ANALYSIS
Cigarette minimum pricing and offenses
Continuing law prohibits cigarette retailers and wholesalers from selling cigarettes for
less than statutory minimum prices with the intent to injure competition. A dealer violating the
minimum pricing law risks suspension or revocation of its dealer license, may be sued for
damages and costs by injured competitors, and may be found guilty of a fourth degree
misdemeanor.
The act makes several modifications to the law governing the statutorily prescribed
minimum sales prices of cigarettes in Ohio. First, it further specifies the cost basis on which
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Office of Research and Drafting LSC Legislative Budget Office
cigarettes’ wholesale minimum sale price is calculated and prescribes procedures a wholesaler
must follow to obtain the Tax Commissioner’s approval to use a cost of doing business in pricing
cigarettes that is lower than a statutorily prescribed cost. Second, the act expressly
incorporates into law the continuing policy of allowing one wholesaler to sell cigarettes to
another wholesaler without having to charge the seller’s entire cost, as is required for sales to
retailers. Third, the act explicitly requires a competitor’s price to be approved by the
Commissioner before other wholesalers or retailers may match that competitor’s price. Fourth,
it requires a retailer or wholesaler to obtain approval from the Commissioner before
conducting any cigarette sales that are exempt from the minimum pricing law under continuing
law. Fifth, the act clarifies an existing offense prohibiting a wholesaler from selling cigarettes at
less than the applicable minimum sale price.
Cigarette minimum pricing
Continuing law prescribes a minimum price that cigarettes may be sold for in Ohio. This
minimum pricing law is administered by the Department of Taxation and directed primarily at
discouraging unfair competition through underpricing competitors at the wholesale and retail
level of trade. Distinct minimum prices, detailed in the table below, apply to sales of cigarettes
for resale (wholesale) and to sales for customers’ use (retail).
Minimum Cigarette Sales Prices
Wholesale Price Retail Price
Wholesaler’s invoice cost Retailer’s invoice cost
+ +
Wholesaler’s mark-up = [3.5% (or actual cost of Retailer’s mark-up = [8% (or actual cost of doing
doing business) X invoice cost] business) X (retailer’s invoice cost – county excise
+ taxes)]
State and county excise taxes +
= If the retailer pays cartage costs, the actual
cartage costs or 0.75% of the wholesaler’s cost,
Minimum wholesale sale price less any state or county excise taxes paid by the
wholesaler
=
Minimum retail sale price
Minimum pricing modifications
In calculating the wholesale minimum sale price, the act specifies that the wholesaler’s
invoice costs – the base cost from which each wholesaler’s minimum sale price is calculated – is
the “manufacturer gross” invoice cost. Former law did not define “invoice cost,” and the act
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does not further define the term other than adding the descriptor “manufacturer gross” to the
term.
The act also specifies that a wholesaler may use a mark-up other than 3.5% of the
invoice price only if it provides proof to the Tax Commissioner that its actual costs of doing
business deviates from that amount and the Commissioner approves the modified mark-up. In
addition, the act allows a retailer to use cartage costs other than 0.75% of its invoice costs only
if it obtains approval of its actual cartage costs in a similar manner. Former law, in both
instances, simply required that those actual amounts be proved without specifying the manner
in which they may be proven.
The act authorizes the Commissioner to require a wholesaler who requests that the
Commissioner approve a different cost of doing business to submit documents supporting the
differing cost, including a certification from a certified public accountant (CPA) verifying that
the cost has been determined in accordance with generally accepted accounting principles. The
Commissioner is required to approve or deny a wholesaler’s request within 90 days after the
later of the date the request is made or a verifying document is submitted. A wholesaler may
appeal the Commissioner’s rejection of a request for an alternative cost of doing business to
the Board of Tax Appeals.1
Sales to other wholesalers
Former law did not expressly contemplate transactions between two cigarette
wholesalers, with the possible implication that when one wholesaler sold cigarettes to another
wholesaler, the seller was required to comply with the wholesale minimum price level, as
described above, including both the seller’s invoice cost and the mark-up representing the
seller’s cost of doing business. The act specifies that, in such a wholesaler-to-wholesaler sale,
the selling wholesaler may exclude the wholesaler’s “cost” – presumably its actual, proven
costs of doing business or the 3.5% mark-up – when determining the minimum selling price.
However, a wholesaler selling to a retailer must continue to charge that wholesaler’s minimum
sales price.2 This amendment appears to expressly codify the Department’s policy as stated in a
2017 information release.3
Competitive sales adjustments
Under continuing law, a retailer or wholesaler may advertise or sell cigarettes at a price
less than the applicable minimum sale price if the purpose in doing so is to match the price of
another retailer or wholesaler, respectively. (Pursuant to this provision, a recent Department
1
R.C. 1333.11(C).
2
R.C. 1333.13.
3
See Information Release XT 2017-01 (April 2017), available at https://tax.ohio.gov/wps/portal/gov/tax
/business/ohio-business-taxes/excise/information-releases/index-excise/XT2017-01.
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information release permits a wholesaler mark-up of 0.39% in lieu of 3.5% on the basis of at
least one wholesaler demonstrating a significantly lower cost of doing business.4)
The act explicitly allows a wholesaler to match a competitor’s price only if the
competing wholesaler has obtained approval from the Tax Commissioner that its costs of doing
business are lower than the otherwise-prescribed 3.5% mark-up, subject to any financial
documentation requirement and appeal rights described above (see “Minimum pricing
modifications”).5 A retailer may continue to match a competing retailer’s price without the
competitor having received the Commissioner’s approval.
Minimum pricing exemptions
Under continuing law, the following cigarette sales are exempt from the minimum
pricing law:
Isolated transactions not in the usual course of business;
Discontinued product clearance sales;
Damaged cigarettes;
Liquidation sales;
Court-ordered sales.
The act requires a cigarette retailer or wholesaler to obtain prior approval from the
Commissioner before selling any cigarettes that are to be exempted from the minimum pricing
law on those grounds.6
Prohibitions
Continuing law prohibits a retailer or wholesaler, with the intent to inhibit competition,
from selling cigarettes at less than the applicable minimum sale price. Any such act is a fourth
degree misdemeanor.
The act clarifies that a wholesaler may charge a price that incorporates a mark-up lower
than 3.5% without committing a crime if it has obtained approval from the Tax Commissioner
that its cost of doing business is lower than that amount.7
4
See Information Release XT 2017-02 (April 2017, rev. 2018), available
at https://tax.ohio.gov/wps/portal/gov/tax/business/ohio-business-taxes/excise/information-
releases/index-excise/XT2017-02.
5
R.C. 1333.15.
6 R.C. 1333.14.
7 R.C. 1333.12.
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HISTORY
Action Date
Introduced 02-02-21
Reported, S. Ways & Means 04-28-21
Passed Senate (33-0) 05-05-21
Reported, H. Ways & Means 06-23-21
Passed House (95-0) 06-24-21
21-SB40-134/ec
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Statutes affected: As Introduced: 1333.11, 1333.12, 1333.14, 1333.15
As Reported By Senate Committee: 1333.11, 1333.12, 1333.14, 1333.15
As Passed By Senate: 1333.11, 1333.12, 1333.14, 1333.15
As Reported By House Committee: 1333.11, 1333.12, 1333.14, 1333.15
As Passed By House: 1333.11, 1333.12, 1333.14, 1333.15
As Enrolled: 1333.11, 1333.12, 1333.14, 1333.15