An investigation by the Ministry of Health has found tobacco companies have probably been breaking the law by offering retailers cash and other incentives to sell their products.
The ministry says tobacco companies have been giving dairies and other retailers incentives ranging from free display cases to rebates for high volume sales and, in some cases, cash cheques.
Tobacco control head Karen Evison says legal advice concludes these incentives most likely breach the law.
She says the ministry has asked tobacco companies to stop offering them and has warned they face prosecution if they continue.
However, the ministry has limited powers to investigate and she admits the ministry will be reliant on the industry's cooperation.
An anti-smoking lobby group says tougher regulation is needed to stop tobacco companies offering inducements to retailers.
ASH spokesperson Michael Colhoun says the ministry investigation has lifted the lid on practices in the tobacco industry.
He says ASH will continue to campaign for a complete ban on in-store cigarette displays.