Tobacco Excise Tax
In the United States tobacco products are taxed at both the federal and state levels, in addition to any local sales taxes and local tobacco-specific taxes. The term tobacco means any product that includes tobacco material, this includes cigarettes and Other Tobacco Products (OTP).
Tobacco is regulated by states, so to be able to sell tobacco into a state or within a state you must have a tobacco licenses. Most states they require separate permits for cigarettes and OTP. There are three types of tobacco licenses, wholesale or distributor, manufacturer, and retailer licenses. Wholesale distributor license can be classified as instate or out of state licenses. Different type or class of tobacco permits may be required to file different tax returns forms and schedules. Tobacco permits must be renewed annually, most states charge $50 to $100 to renew tobacco license. Licensed distributors must file tax returns at end of each month even if they had no sales. Late tobacco tax returns result in penalties and late fees. Not filing a no activity tax return results in state estimating your tax due with penalty and late filing fees.
Cigarettes Tax
In the United States cigarettes are taxed at both the federal and state levels, in addition to any local sales taxes and local tobacco-specific taxes. The term cigarettes means any product that includes tobacco ingredients with wrapper or cover of which is made of paper, this includes cigarettes and little cigars.
Cigarettes must be stamped before shipment from wholesale warehouses to other distributors or retailers. Manufacturers can ship to distributors cigarettes without stamps affixed.
States General Attorney (GA) office monitors the cigarettes shipments to their states for verifications while the states Department of Revenue (DOR) is responsible for auditing and collecting taxes.
Tax Stamps
A stamp is printed or made under the authorization of a taxing authority and used to pay cigarette or other tobacco products taxes.
Stamps Inventory
To purchase and affix cigarettes stamps, a distributor must have cigarettes license and stamping machine to affix the stamps on cigarettes packs of 20s or 25s sizes. Stamps are packaged in rolls of 30,000 and 7,200. The rolls of 30,000 are affixed to packages of cigarettes containing 20 sticks. The rolls of 7,200 stamps are affixed to packages of cigarettes containing 25 sticks. Keeping track of actual inventory of stamps and affixed stamps inventory is important to be in compliance with Department of Revenue and Attorney General office tax rules. The unused stamps will be used as the ending inventory of stamps on hand. Rolls of stamps should be kept in save place and a list with check out/in dates, quantities, and handlers names for record. The purpose of the inventory of all states stamps is to ensure that the distributor has enough stamps on hand to cover the packs of cigarettes.
Cigarettes Returned
There are two types of returns, returns from retailers back to distributors and returns from distributors back to manufacturers.
Cigarettes Returned From Customers
Returns of stamped cigarettes from customers (retailers or other distributors) back to you can be classified as sellable or unsellable items. Unsellable returned products (i.e. damaged) need to be accounted for differently than sellable products that you can sell again to customers in the same stamped jurisdiction.
Unsellable returned cigarettes are usually returned to manufacturers for credit if damaged. This means to redeem your stamps values from the tax jurisdictions you will need credit memos from the vendors or manufacturers who received back the damaged cigarettes.
Sellable returned cigarettes, not damaged items, will require you (distributor) to account for the stamp quantity as reused stamps, i.e. your stamps usage, on tax return, should not include these stamps again since you already reported them used before. Failing to handle cigarettes stamps usage numbers correctly results in enlarged stamps usage and hence auditors can discover mismatch between stamps used and stamps purchased numbers during an audit.
Cigarettes Returned To Manufacturers
Distributors return cigarettes to their vendors or manufacturers for two reasons, get credit for the product and get stamps credit memos from tax jurisdictions for the stamps on the items. Once you receive your credit memos, then you can apply for credit for the stamps values since you paid for them but not used them to sell to your customers. Some states, like Kentucky, require you to put on the tax return details about the credit memos like dates, numbers, brands, manufacturers names, and amounts (face values of stamps).
Lost, Damaged, or Stolen Cigarettes
Lost or damaged stamps, affixed on products or not affixed, can be refunded as credit from the states or local jurisdictions. There is special schedule on tax returns for requesting stamps credits for lost or damaged cigarettes items since they were never sold. Manufacturers credit memos are required for each return to manufacturers.
Reconciliation of Stamps Inventory
Using correct beginning and ending inventories is important when determining total cigarettes stamped to account for and total stamps. Tax returns require beginning inventory and ending inventory of stamps, affixed stamps, cigarettes stamped, and cigarettes. At the end of each tax filing period, the beginning inventory is the ending inventory from the last tax period. The ending inventory minus the beginning inventory must match sales minus purchases in the same period.
Physical inventory
A floor cigarettes count of stamped cigarettes and cigarettes with no stamps affixed at the end of each month is important to make sure there are no variances between physical inventory and invoicing system calculated inventory. Any inventory numbers differences should be verified to be in compliance with states tax rules.
72 Hours Rule
States don't want to see large pile cigarettes without stamps affixed in storage. They want cigarette distributors to stamp as soon as possible. Some states have 72 hours rule which require distributors to stamp cigarettes within 72 hours of receiving the shipments. This rule usually not enforced. States that have this rule includes TX, SC, WV and others.
Best Practices
Reject and return to manufacturers all cigarettes returns from customers instead of reselling returned cigarettes.
Master Settlement Agreement (MSA)
Signed in 1998 between participating tobacco manufacturers and participating states exempts the tobacco manufacturers from tort liability from state governments in exchange the companies agreed to cut back on certain tobacco marketing practices, as well as to pay various annual payments to the states for their tobacco-related health-care costs.
Original Participating Manufacturer (OPM)
A tobacco manufacturer who agreed and signed the Master Settlement Agreement with the states. The original signatories to the Master Settlement Agreement were Brown & Williamson Tobacco, Lorillard, Philip Morris, and R.J. Reynolds and other tobacco manufacturers.
Non-Participating Manufacturer (NPM)
A tobacco manufacturer who did not participate in the Master Settlement Agreement. NPM manufacturers place a specified amount of funds into a qualified escrow account for each year they sell cigarettes into a state.
Subsequent Participating Manufacturer (SPM)
A tobacco manufacturer who signed the MSA agreement but was not one of the original participants of the Master Settlement Agreement.
Most states publish on their websites the names of cigarettes manufacturers who are NPM and require distributors to file a tax return schedule list all NPM brands sales. Some states also list cigarettes manufacturers whose brands are not allowed to be sold in these states.
Cigarettes Brand Code Table
FTA Tobacco Uniformity introduced brand code table to accurately identify cigarettes brands and unit of measures. This solves the issues with manufacturers reusing UPCs for different brand promotions, and wholesalers using different descriptions for cigarettes brands in their systems databases. The FTA Uniformity committee hopes to streamlining the cigarettes reporting with brand codes table.
FTA Brand Code Table for Cigarettes Report
The brand code table includes the manufacturer name, brand family, brand style and UPC information for case, carton and pack. This brand code table is posted on the FTA website under the “Tobacco Tax Section.” By providing this information via the FTA website, wholesalers and state users can download the data for their internal use.
Other Tobacco Products Tax
In the United States Other Tobacco Products are taxed at both the federal and state levels, in addition to any local sales taxes and local tobacco-specific taxes. The term OTP means any product that is not cigarettes and includes tobacco ingredients. OTP includes cigars, smokeless tobacco, wraps, pipe tobacco, and vapor. OTP is taxed on weight, price, cost (wholesale price), or count (sticks or cans).
Smokeless Tobacco
Any tobacco product that consists of cut, ground, powdered, or leaf tobacco and that is intended to be placed in the oral or nasal. Smokeless tobacco includes moist snuff, dry snuff, and chewing tobacco.
Smoking Tobacco
Any tobacco product smoked into the mouth, and then releasing it. Smoking tobacco includes cigars, hookah or pipe tobacco, roll you own and little cigars.
Tobacco Accessories
Accessories include e-cigarettes, pipes, lighters, and other accessories.
Tax Electronic Filing
Electronic Filing or EDI is the structured transmission of data between organizations by electronic means, which is used to transfer electronic documents or business data from one system to another system, i.e. from taxpayer invoicing system to the state system without human intervention. Tobacco electronic filing includes portal data entry, online file upload, or other forms of file transfer (SFTP). The file can be of different format like CSV/Excel, XML, or other form of EDI.
XML E-file
XML is a markup language much like HTML that is designed to describe data by using tags. XML is a platform and software independent tool for storing, carrying, and exchanging data. Most states are migrating to XML electronic filing systems. The latest states to adapt XML e-filing, as recommended by the FTA Tobacco Uniformity technical committee, include Kentucky, Oregon, Ohio, and Michigan. The IRS XML electronic filing as defined by Tigers e-standards committee is leading the way for XML technology as the future format for filing taxes in the United States. The latest tobacco tax schema is available on the FTA website.
Uniform Filing
The FTA Tobacco Tax Section assists in establishing uniform reporting guidelines among the states for exchanging information on the distribution of cigarette and tobacco products. Uniform electronic filing using XML technology is the recommended media for exchanging tax returns data between taxpayers and the states.
Tobacco Tax Audit
Audit of the taxpayer’s records is conducted by state field auditor to determine if additional money is owed to the State Department of Revenue.
An audit starts with test internal controls before proceeding with fieldwork. Randomly select three to six months to use as test months. Evaluate the taxpayer' process of recording purchases or sales and reconcile the amounts to the summary data and to the reports. Analyze the results of any discrepancies. If adjustments are necessary, the auditor decides whether to proceed in detail or to consider a sample and projection.