§ 76.1. Dealer’s cost of doing business.
(a) Cigarette stamping agent.
(1) The cost of doing business for a cigarette stamping agent is presumed to be the basic cost of cigarettes to the cigarette stamping agent for sales to wholesalers.
(2) Except as provided in subsection (e), a cigarette stamping agent may not sell cigarettes to a wholesaler at less than the cost of the stamping agent.
(b) Wholesaler.
(1) The cost of doing business for a wholesaler is presumed to be 4% of the basic cost of cigarettes to the wholesaler for sales to retailers.
(2) Except as provided in subsection (e), a wholesaler may not sell cigarettes to a retailer at less than the cost of the wholesaler.
(c) Retailer.
(1) The cost of doing business for a retailer is presumed to be 6% of the basic cost of cigarettes to the retailer for sales to the ultimate consumer.
(2) Except as provided in subsection (e), a retailer may not sell cigarettes to the ultimate consumer at less than the cost of the retailer.
(d) Application to lower dealer’s cost of doing business.
(1) A dealer who wishes to lower its cost of doing business shall submit an application to the Department.
(2) An application for permission to sell at less than a dealer’s presumed cost of doing business shall contain:
(i) A copy of the dealer’s most recently filed Federal and State Income Tax return forms, including all associated schedules and attachments.
(ii) A nonrefundable fee of $200 to cover the Department’s costs of administering the application, including the review and audit of the petitioning dealer’s financial statements. If the Department determines that a field audit is necessary to approve or disapprove a request, an hourly rate, as established by the Department, will be charged to the dealer requesting approval for time spent in preparing the field audit. This amount will be in addition to the $200 nonrefundable fee.
(e) Review and determination.
(1) The Department will review and evaluate the information provided by the cigarette dealer and will determine whether the dealer’s cost of doing business is lower than the presumed cost of doing business in effect at that time.
(2) The Department’s approval of a dealer’s application to sell at less than the presumptive cost of doing business is valid for 12 months from the effective date of the approval or until the effective date of the approval of a subsequent dealer’s application, whichever occurs first.
(3) If a dealer with permission to sell at less than the presumptive cost of doing business fails to submit a new application that is approved by the Department by the expiration of the 12-month period, the permission previously given to the dealer will be automatically revoked on the last day of the 12-month period.
(4) The Department’s approval of a petitioning cigarette stamping agent, wholesaler or retailer’s lower cost of doing business will apply to all dealers throughout this Commonwealth holding the same licenses as referenced in § 72.1 (relating to licensing of dealers). For example, if the Department approves a particular retailer’s request to lower the presumptive 6% cost of doing business to 5%, all Pennsylvania retailers would also be permitted to use 5% as their cost of doing business.
(5) In determining whether an applicant/dealer’s cost of doing business is lower than the presumed cost of doing business for that particular type of dealer, the Department will divide the applicant’s operating expenses for the applicable 12-month period by the applicant’s total cost of doing business for that same period.
Example. Wholesaler is in the business of selling cigarettes, candy and various food items to retailers throughout the United States. In its application to sell cigarettes to retailers at a price lower than the 4% presumptive cost of doing business markup, Wholesaler provides the following financial information for the year ending 12/31/XX:
Total cost of goods sold $ 575 million Total cost of doing business $ 650 million
The Wholesaler’s operating expenses equal $75 million, which is its total cost of doing business less its total cost of goods sold. This amount is then divided by Wholesaler’s total cost of doing business ($75 million/$650 million), which equals approximately 11.53%. This percentage represents the wholesaler’s actual percentage cost of doing business. Because this percentage is greater than the 4% presumptive cost of doing business markup, the Wholesaler is unable to show that it can sell its cigarettes at a lower cost of doing business and the Department would deny its application.
(6) In determining a dealer’s actual cost of doing business, the Department will determine the amount of the constructive cost of property or services upon which the dealer’s actual cost of doing business is calculated when the Department determines that the dealer’s financial records are not indicative of the true value of property or services received by the dealer.
(i) The constructive cost of the dealer’s receipt of property or services shall be the cost which would be charged in an arms-length transaction.
(ii) If the purchase of property or services occurs between a parent and a subsidiary, affiliate or controlled corporation, there shall be a refutable presumption that because of the common interest the transaction was not at arms-length.
Notes of Decisions Interpretation
The regulations are a correct interpretation of the express provisions of the statute. The Department of Revenue was correct in examining the total costs of all products as opposed to examining only those costs related to cigarettes. Associated Wholesalers, Inc. v. Department of Revenue, 780 A.2d 759 (Pa. Cmwlth. 2001), appeal denied 808 A.2d 573 (Pa. 2002).
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