Details & Impacts of the Cigar Cap and Remote Sellers Legislation
On July 1, 2023, two pieces of legislation went into effect, impacting the tobacco industry, cigar companies, and their tax teams.
In Idaho, Montana, and Nevada a cigar cap legislation was signed into law, affecting cigar businesses.
In Indiana, a law on remote sellers went into effect.
On January 1, 2024, Maine will establish a separate definition for "remote retail sellers" for premium cigars and pipe tobacco.
So, how will tax teams feel the impact? Keep reading below to find out!
Cigar Cap
The cigar cap legislation places a price cap on premium cigars or cigars. For example, the cigar cap legislation in Idaho states that:
Tax should be collected on the sale, use, consumption, handling, or distribution of cigars at a rate of 40% of the purchase price or $0.50 per cigar – whichever is lesser of the two.
However, in Montana, their cigar cap legislation says:
The tax on premium cigars is the lesser of 50% of the wholesale price or $0.35 per premium cigar.
Pro tip: Be aware of what products each jurisdiction notes in the legislation. While Montana specifically mentions premium cigars, Idaho just says cigars.
Knowing the different types of cigars and their definitions will be crucial in understanding the legislation. For example, the definition of a premium cigar in Montana may differ from how Idaho defines it.
With these calculating intricacies, tax teams need to calculate tax in two ways, per stick rate and the percentage of the price, to determine which is the lesser amount and ultimately gets charged as the tax.
In addition, tax teams will need to calculate tax on each product line of an invoice instead of the entire invoice at once.
Not being aware of the changes in calculating tax could cause undercharging and, therefore, underpayment.
Remote Sellers Legislation
The remote sellers legislation requires that online sellers of taxable products charge the tax of the state they are selling products into.
Indiana defines a remote seller as:
A retail dealer that sells taxable products to an ultimate consumer under either of the following circumstances:
- By means of a telephone or other method of voice transmission, the mail, or the Internet or other electronic service.
- When the taxable products are delivered to the consumer by a common carrier, private delivery service, or other method of delivery.
Maine defines a remote seller as:
A retail dealer that sells taxable products to an ultimate consumer under either of the following circumstances:
- The person's gross sales from sales of tangible personal property or taxable services into this State in the previous calendar year or current calendar year exceeds $100,000
- The person made sales of tangible personal property or taxable services for delivery into this State in at least 200 separate transactions in the previous calendar year or current calendar year.
Businesses determined as remote sellers need to obtain the proper licensing for the state they are selling in, even if it’s online.
Tax teams must also determine details about their products and business to navigate the remote seller's legislation. They will need to verify what products fall under the legislation, what type of license or licenses you need in that state, and who you are allowed to sell to.
The legislation impacts more than just cigar companies, depending on their jurisdiction and statutes.
For example, Colorado’s legislation, which goes into effect on January 1, 2024, says that remote retail sales mean any sale of cigars or pipe tobacco, while Indiana's legislation says that remote sales are the sale of any taxable tobacco product, including tobacco products, alternative nicotine products, closed system cartridges, or any combination. In Maine, remote sales are the sale of premium cigars or pipe tobacco.
These details about the product and jurisdiction you're selling in are crucial in calculating the tax and correctly charging it to the customers.
It’s essential that tax teams understand the intricate details of the legislation and products to calculate the correct excise tax.
Download this checklist for tax teams, where our subject matter experts lay out the top five ways to prepare for the new legislation.
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Tobacco Tax Subject Matter Expert