COVID-19 shutdown of reserve tobacco manufacturing leads to a spike in off-reserve sales
Study establishes a direct link between the closure of tobacco manufacturing on First Nations reserves, and an increase in off-reserve tobacco sales.
TORONTO — A new study conducted for the Convenience Industry Council of Canada (CICC) by Ernst & Young LLP (EY) has revealed the extent of the First Nations reserve cigarette market in Canada — and the cost to provincial treasuries in foregone tax revenue.
The study establishes a direct link between the closure of tobacco manufacturing operations and smoke shops on First Nations reserves, and an increase in off-reserve tobacco sales. It finds this temporary closure at the onset of the COVID-19 pandemic in mid-March was followed by a gradual, sustained uptick in off-reserve cigarette sales across Canada.
Data from stores included in the study shows that cigarette sales peaked in June 2020, representing a 24% increase over sales in this same period of time in 2019. Notably, when on-reserve stores and cigarette factories re-opened in July, legal sales plummeted back down to pre-pandemic levels.
The increase in sales during the shutdown was most dramatic in Atlantic Canada. Off-reserve cigarette sales in June 2020 were up 44.9% in New Brunswick, 47% in PEI and 44.3% in Newfoundland and Labrador, compared to June 2019. The study indicates that the closure of the Atlantic border was a one of the factors restricting the movement of illegal tobacco traffickers.
The temporary shutdown of the illegal cigarette trade across Canada had noticeable, positive impacts on provincial treasuries. In the month of June alone, the increased sales in the stores studied brought an additional $50 million in tax revenue to provinces ($32M) and the federal government ($18M). Ontario and Quebec saw revenues increase by $6.3M and $6.7M, respectively, while in New Brunswick the province took in an extra $5.1M in June.
A number of alternative explanations and factors for an increase in sales – including seasonality of sales, price or tax decreases, cross border travel implications and an increased prevalence in smoking during this period were evaluated and eliminated by the authors of the study as a rationale for explaining these increases.
“Gauging the size of the unlicensed cigarette market in Canada has historically been difficult. But major manufacturing and distribution shutdowns in response to COVID-19, demonstrated a significant change in sales,” said Fred O’Riordan, EY Canada’s Tax Policy Leader and the lead author of the report.