OFFICIAL OPINION No. 1

OFFICIAL OPINION No. 1 Unfair cigarette sales-Act of May 20, 1949, P. L. 1584-Cigareltes-Trading stamps-Department of Revenue. It is not a violation of the Unfair Cigarette Sales Act to give trading stamps with the sale of cigarettes at retail when they are issued in good faith with all merchandise on a uniform basis as a general business practice and not as a subterfuge for the purpose of evading the act. Harrisburg, Pa., August 27, 1957. Honorable Gerald A. Gleeson, Secretary of Revenue, Harrisburg, Pennsylvania. Sir: You have requested this department to advise you if it is a violation of the Unfair Cigarette Sales Act, the Act of May 20, 1949, P. L. 1584, 73 P. S. §§ 231.1-231.5, for a cigarette dealer to give trading stamps in connection with the sale of cigarettes at retail. Section 3 of the Unfair Cigarette Sales Act makes it unlawful for any retailer, with intent to injure competitors or destroy or sub- stantially lessen competition, to advertise, offer to sell or sell cigarettes at less than cost to such retailer. Cost to the retailer is defined as his basic cost of cigarettes plus his cost of doing business and must include, without limitation, labor costs including salaries of executives and officers, rent, depreciation, selling costs, maintenance of equipment, delivery costs, and all types of licenses, insurance and advertising. In the absence of proof of a lesser or higher cost of doing business by the retailer making the sale, his cost of doing business is presumed to be 6% of the basic cost of the cigarettes to him. It would, of course, also include the cost of the trading stamps. Basic cost of cigarettes is defined as the invoice cost of the cigarettes or the replacement cost within thirty days prior to the date of sale in the quantity last purchased, whichever is lower, less all trade dis- counts and customary discounts for cash, to which shall be added the full face value of any cigarette tax not already included in the price. As a practical matter, with respect to a retailer who sells items other than cigarettes, it is almost impossible to compute his actual "cost to the retailer." Therefore, in order to determine the minimum price at which he may sell cigarettes the retailer adds 6% thereof to 32 OPINIONS OF THE ATTORNEY GENERAL his basic cost of cigarettes. For example, if his net invoice cost is 15¢ per pack and there is a tax of 5¢ per pack the basic cost of the cigarettes is 20¢ per pack to which is added 6% thereof or 1 and 2/10 cents per pack making a minimum retail price of 21 and 2/10 cents per pack; thus, one pack could be sold for 22¢ or more; two packs for 43¢ or more; three packs for 64¢ or more; four packs for 85¢ or more, and five packs for $1.06 or more. If the value of the trading stamps to be given with each pack of cigarettes in any particular case is less than the difference between the minimum price at which that pack of cigarettes can be sold and the selling price, which in many cases will be the next higher even cent, the trading stamps can, without question, be given with the cigarettes, since even if the value of the stamps is deducted from the selling price of the cigarettes the remaining price is still more than the minimum price at which the cigarettes can be sold, and there can be in such a situation no violation of the provisions of the Unfair Cigarette Sales Act. However, the question arises in the case where the value of the trading stamps is greater than the difference between the minimum price at which the cigarettes can be sold and the selling price. Returning to our earlier example, we find that the minimum price at which five packs of cigarettes could be sold would be $1.06 even. Therefore, if trading stamps were given with the sale of five packs of cigarettes at $1.06, the value of those trading stamps de- ducted from the selling price of the cigarettes would result in a selling price lower than the minimum price at which the cigarettes could be sold. The question would thus be limited to whether a sale of cigarettes under such circumstances is a sale at less than cost to the retailer if such an inquiry were not precluded by existing decisions of the Pennsylvania Supreme Court in an analogous area. If this question were being approached without the benefit of any appellate cases in Pennsylvania, it could be argued that the giving of trading stamps in this situation was the equivalent of a discount and, therefore, that the value of the stamps would have to be con- sidered in determining whether or not the cigarettes were being sold above, at, or below the cost to the retailer. However, there are two Pennsylvania Supreme Court cases both holding, under the Pennsyl- vania Fair Trade Act, the Act of June 5, 1935, P. L. 266, as amended, that trading stamps, when issued in good faith with all merchandise as a general business practice and not as a subterfuge for the purpose of evading the act, are not a price-cutting device but rather a form OPINIONS OF THE ATTORNEY GENERAL 33 of advertising: Gever v. American Stores Co., 287 Pa. 206, 127 A. 2d 694 (1956); Bristol-Myers Co. v. Lit Brothers, Inc., 336 Pa. 81, 6 A. 2d 843 (1939). In the Gever case, the Court speaking through Mr. Chief Justice Horace Stern stated (p. 212) : "Viewed realistically, the giving of trading stamps may be regarded as nothing more than the equivalent of a normal cash discount, which is merely a term of payment and not a price reduction. Indeed, in a sense, the stamps have no value in themselves but acquire it only if the stipulated amount of other purchases is made. They cannot be regarded as cutting prices any more than free delivery service or free parking could be so regarded although these are practices which ob- viously save money for the customers of stores offering such advantages. Accordingly, the use of trading stamps, pursued as a general business practice by a commercial establishment, does not violate either the letter or the spirit of the Fair Trade Act." Section 4 of the Unfair Cigarette Sales Act does not refer specifically to trading stamps, nor does the Pennsylvania Fair Trade Act. In the Gever case, the Court noted that subsequent to its decision in the Bristol-Myers Company case, the Legislature amended the Milk Con- trol Law of April 28, 1937, P. L. 417, by the Act of July 24, 1941, P. L. 443, and added a specific provision barring the use of trading stamps as a method or device whereby milk would be sold at a price less than the applicable minimum price, thus showing that when the Legislature wished to ban trading stamps in connection with the sale of a fixed price article, it indicated such intention by an express pro- vision to that effect. No such amendment has been made to the Pennsylvania Fair Trade Act nor to the Unfair Cigarette Sales Act, which itself was passed approximately ten years after the Bristol- Myers Company case had been decided. It should also be noted that Mr. Justice Drew wrote a vigorous dissent in the Bristol-Myers Company case in which he was joined by Mr. Chief Justice Kephart, but that the Gever case was decided by a unanimous Court. Although both the Bristol-Myers Company case and the Gever case were decided under the Fair Trade Act and this opinion is concerned with the Unfair Cigarette Sales Act, the rationale of those cases is completely applicable to the question here involved and we feel bound by those decisions. It is, therefore, the opinion of this department and you are accord- ingly advised that it is not a violation of the Unfair Cigarette Sales 34 OPINIONS OF THE ATTORNEY GENERAL Act to give trading stamps with the sale of cigarettes at retail when they are issued in good faith with all merchandise on a uniform basis as a general business practice and not as a subterfuge for the purpose of evading the act, even though by deducting the value of the stamps from the price of the cigarettes a figure is arrived at which is less than the cost to the retailer. Very truly yours, DEPARTMENT OF JUSTICE, STEPHEN B. NARIN, Deputy Attorney General. THOMAS D. McBRIDE, Attorney General.