April 6, 2009
MINIMUM PRICING LAWS
By: Meghan Reilly, Legislative Analyst
You asked for a list of goods in Connecticut subject to minimum markup laws or other price-fixing laws, the rationale for setting the price, and the estimated price if open competition were allowed.
We were able to identify minimum markup laws for (1) milk, (2) cigarettes, and (3) alcohol. The rationale behind many minimum pricing laws is to protect smaller businesses from predatory pricing.
Federal law governs the price paid to dairy farmers for milk. Generally, USDA marketing orders set the price for milk and milk products by region. One order prescribes the price paid in New England and the Mid-Atlantic states. The order is broken down into class 1 (fluid) milk and various other classes of milk products.
Critics of this pricing scheme argue that the price a dairy farmer receives is not tied in any significant way to the cost of production. New England farmers typically need $15.40 per hundredweight to break even, according to a 2006 study, but the price set by federal milk order has often fallen below that in the past several years. From 1996-2001, the Northeast Interstate Dairy Compact assisted New England dairy farmers when prices dropped too low, but Congress did not renew the compact, which expired in 2001.
The law generally prohibits cigarette distributors and dealers from buying or selling cigarettes below cost if the intent is to injure competitors or to destroy or substantially lessen competition. It presumes that “cost” includes a mark-up based on the types of businesses selling and buying the cigarettes (CGS § 12-326b).
The law establishes three classes of cigarette distributors. “Stamping agents” are distributors, other than buying pools, who (1) buy cigarettes wholesale to sell to licensed dealers, (2) maintain an established place of business with a stock of cigarettes, and (3) sell 75% of their cigarettes to retailers. “Subjobbers” are distributors who buy stamped cigarettes wholesale to sell to dealers. “Chain stores” are distributors who operate five or more retail stores or 25 or more cigarette vending machines, and who buy cigarettes wholesale from another distributor, or from the manufacturer, to sell exclusively in the retail stores or vending machines.
For a stamping agent the mark-up is presumed to be (1) 0.875% of basic cost when selling to subjobbers and chain stores and (2) 5.75% of basic cost when selling to dealers. For a subjobber, it is presumed to be 4.875% of basic cost when selling to dealers. If a stamping agent or subjobber delivers, he may add 0.75% of basic cost. “Basic cost” is defined as the invoice or replacement cost, plus the face value of the stamps if not included in the invoice cost, minus any trade discounts (CGS § 12-326a).
For a dealer, cost is presumed to be 8% of invoice cost and the cost of doing business, which is defined to include labor, rent, equipment, insurance, and other items. Distributors and dealers are authorized by the act to submit evidence of greater or lesser cost to the revenue services commissioner.
The retail price of cigarettes varies by state. In Connecticut, the retail price per pack without taxes is $4.01. In Massachusetts and New York prohibit sale below cost. In Massachusetts, the price is $4.18 and in New York (also prohibits sale below cost) it is $4.22 (http://tobaccofreekids.org/research/factsheets/pdf/0099.pdf). Neither New Hampshire nor Vermont has below-cost prohibitions, and their prices are $3.29 and $3.99, respectively (http://archive.leg.state.mn.us/docs/pre2003/other/000646.pdf, http://tobaccofreekids.org/research/factsheets/pdf/0099.pdf).
The law prohibits off-premises retailers from selling at a price below their cost. For this purpose, “cost” means the posted bottle price from the wholesaler plus charges for shipping or delivery to the retailer's place of business paid by the retailer (CGS § 30-68m(a)). “Bottle price” means the price per unit of the contents of a case, other than beer, and determined by dividing the case price by the number of units or bottles making up the case and adding at least the following amounts based on the size of the bottle: two cents for bottles one-half pint or 200 milliliters or less; four cents for bottles more than one-half pint or 200 milliliters but not more than one pint or 500 milliliters; and eight cents for bottles larger than one pint or 500 milliliters (CGS § 30-68m(b)).
Shipper, wholesaler, and manufacturer permittees are also prohibited from selling to a wholesaler below cost. In such case, the cost of domestic alcoholic liquor is the total of (1) the cost of spirits and all other ingredients, (2) all transportation charges from point of origin to point of destination, (3) all applicable federal and state taxes, and (4) the cost of containers, labels, caps, closures, all bottling charges and labor. For imported alcoholic liquor, cost is the total of (1) the invoice price from the supplier, (2) the cost of all other ingredients, (3) the cost of duties, (4) all applicable federal and state taxes, (5) insurance, (6) ocean freight and brokerage charges, (7) all transportation charges, and (8) the cost of containers, labels, caps, closures and all bottling charges and labor. (CGS § 30-68i, l).
Gerald Langlais at DCP confirms that there is no way to predict the price of alcohol if not subject to the current law, suggesting that the industry would probably operate similar to grocery store loss leaders where one or two items are sold below cost to get people in the door and the price of everything else is higher than normal. He believes that, in such a system, if all purchases were averaged out, in the end the total would be the same.
Massachusetts law also prohibits the sale of liquor below cost (http://unclefed.com/SurviveIRS/MSSP/liquor.pdf).