Cigarette Tax Audit/Refund – What to Expect
As cigarettes and other tobacco products are taxed on both the federal and state level, the tax compliance burdens are steep. The tobacco tax scheme is very different from other tax schemes because the product is taxed both at the federal and state level. Further, depending on the type of tobacco product being sold the taxes vary on both the federal and state level, bringing another tier to the analysis of the tax exposure. It is important to have a seasoned tobacco tax attorney that understands the ins and out of the tobacco licensing and tax scheme to ensure compliance on all fronts.
Federal Excise Tax
On the federal side, the manufacturer or the wholesaler/distributor that brings the product into the U.S. owes the federal government federal excise tax (“FET”). As the product is sold down the chain, the FET is passed along either separately stated or worked into the product cost. This is where most tax issues begin because if the FET is not separately stated, and instead worked into the product cost it is difficult to determine and prove exactly how much FET was passed along. This distinction is important because in most states only cigarettes or other tobacco products are subject to tobacco and/or sales tax; however, FET is not subject to these taxes. As a result, many businesses overpay tobacco taxes or get hit with large audits on amounts they don’t owe tax on when the FET is included in the product cost. For this reason, we are successful in receiving refunds of large sums of tax overpayments.
Below is a chart from the Alcohol Tobacco Tax and Trade Bureau that lays out how different types of tobacco are taxed on the federal level.
| Product | Tax Rate effective March 31, 2009 | Tax Rate effective
April 1, 2009 |
Floor Stocks Tax Rate
(difference between the rates) |
| Small Cigarettes – Class A
(Weigh 3 lbs. or less per 1,000) |
$19.50 per 1,000
equivalent to: $3.90 per carton $0.39 per pack |
$50.33 per 1,000
equivalent to: $10.066 per carton $1.0066 per pack |
$30.83 per 1,000
equivalent to: $6.166 per carton $0.6166 per pack |
| Large Cigarettes – Class B*
(Weigh more than 3 lbs. per 1,000) |
$40.95 per 1,000 | $105.69 per 1,000 | $64.74 per 1,000 |
| Small Cigars
(Weigh 3 lbs. or less per 1,000) |
$1.828 per 1,000 | $50.33 per 1,000 | $48.502 per 1,000 |
| Large Cigars
(Weigh more than 3 lbs. per 1,000) |
20.719% of sales price but not to exceed $48.75 per 1,000 | 52.75% of sales price but not to exceed $0.4026 per cigar (or $402.60 per 1,000) | NOT PART OF FLOOR STOCKS TAX |
| Chewing Tobacco** | $0.195 per pound | $0.5033 per pound | $0.3083 per pound |
| Snuff** | $0.585 per pound | $1.51 per pound | $0.925 per pound |
| Pipe tobacco** | $1.0969 per pound | $2.8311 per pound | $1.7342 per pound |
| Roll-your-own tobacco** | $1.0969 per pound | $24.78 per pound | $23.6831 per pound |
| Cigarette papers*** | $0.0122 per 50 | $0.0315 per 50 | $0.0193 per 50 |
| Cigarette tubes*** | $0.0244 per 50 | $0.0630 per 50 | $0.0386 per 50 |
*If more than 6 ½ inches in length, the cigarettes are taxable at the rate prescribed for small cigarettes, counting each 2¾ inches, or fraction thereof, as one small cigarette.
**The tax rate is set forth per pound and a proportionate tax at the same rate applies to all fractional parts of a pound.
***The tax rate for less than 50 cigarette papers or cigarette tubes is not prorated. If more than 6 ½ inches in length, the cigarette papers or cigarette tubes shall be taxable at the rate prescribed for that product, counting each 2¾ inches, or fraction thereof, as one cigarette paper or cigarette tube, as appropriate.
U.S. Department of the Treasury, Alcohol Tobacco Tax and Trade Bureau, Federal Excise Tax Increase and Related Provisions, https://www.ttb.gov/main_pages/schip-summary.shtml.
State Tobacco Tax
As stated above, state tobacco taxes vary by state. For example, in Connecticut the state taxes tobacco based on weight or cost, etc., depending on the type of tobacco product it is. Most states follow a similar tobacco taxing scheme. Connecticut imposes a tobacco tax on cigarettes and other tobacco products, including snuff, pipe, and chewing tobacco and cigars. The cigarette tax is $4.35 per pack and the tobacco products tax is $3.00 per ounce on snuff tobacco and 50% of the wholesale sales price for other tobacco products. However, the tax on cigars is capped at 50 cents. The tax is levied on licensed distributors and unclassified importers when the tobacco products are manufactured, imported, or purchased. This essentially means the products are taxed when they are brought into the state, which is logical and makes it easy for the government to track the products coming in and out of the state. The tax is imposed at the wholesale level but almost always passed along to the end user as part of the product cost, like FET.
State Sales and Use Tax
Many states also apply sales tax on all tangible personal property, which typically includes cigarettes and other tobacco products to the end user. This adds yet another layer to the tax burdens brought along with selling cigarettes and other tobacco products. In Connecticut, cigarettes and tobacco products are subject to the state’s 6.35% sales and use tax.
Conclusion
It is imperative to have a tobacco tax expert on your side to ensure you are compliant with both federal and state laws. Further, if you are already going through a tobacco tax audit on the federal or state side you want us on your side to fight for you.