Understanding and Navigating Cigar Taxation
Did you know that premium cigars are exempt from taxes in Florida, New Hampshire, and Pennsylvania? But are taxed differently throughout the United States?
Now imagine a tax team trying to determine the intricate details of taxing cigars like where the tax is imposed, how much tax, product definitions, and much more – for each transaction.
Our subject matter experts in the tobacco industry created this complete guide on the intricacies of taxing cigars, challenges for tax teams, the effects of legislation, and more.
Challenges for Tax Teams
Conducting business with products like cigars across several jurisdictions requires tax professionals to understand multiple state statutes. Within the statutes, crucial details will assist teams in calculating excise taxes on cigars, definitions of different types of cigars, and the cigar attributes specific to each jurisdiction.
In addition, staying updated on new products and understanding their attributes can be challenging for tax teams. A company may have hundreds of products that must be correctly input into the back-office system with each detail and attribute to calculate excise tax correctly.
Different Types of Cigars
There are three main categories of cigars:
- Large/premium cigars
- Little cigars
- Filtered cigars
Cigarillo and cheroots are also types of cigars; however, they are not widely focused on by jurisdictions compared to the others.
Jurisdictions determine definitions for each type of cigar, and they are not all the same. For example, Montana defines cigarettes in a way that little cigars falls under the cigarette definition:
Any product that contains nicotine, wrapped in paper or any material, not tobacco or tobacco, in any form, that is functional in the product and that, because of its apperance, the type of tobacco used in a filler, or its packaged and labeled, is likely to be offered or purchased by a consumer as a cigarette.
But Ohio defines little cigars as:
Roll for smoking made of tobacco and uses a cellulose acetate filter or other filter, wrapped in a substance containing tobacco, other than natural leaf tobacco.
Knowing the definition of premium cigars in each jurisdiction is crucial because it will determine if tax is imposed or exempt.
Five attributes are taken into consideration when defining a type of cigar:
- Filter tip
- Hand rolled
- Natural leaf
- 100% tobacco
State statutes will clearly define each product with its attributes, so it's crucial to understand the statutes in each jurisdiction you're conducting business so that excise tax is accurately calculated.
Variables That Determine Taxes on Cigars
There are six variables considered when determining excise tax on cigars. They include:
- Hand rolled: Is the cigar hand rolled or machine made?
- Filter tip: Does the cigar have a cellulose acetate filter, another filter type, or no filter at all?
- Tobacco content: Is the cigar 100% tobacco?
- Natural leaf: Is the wrapper a whole leaf of tobacco?
- Weight: What is the weight of the product per thousand?
- Price: Price of the product, whether it's greater than or less than a certain amount.
Definitions of cigars vary from jurisdiction to jurisdiction, and they also differ in the level of detail. For example, Alabama defines little cigars as:
Filtered cigar made of tobacco or any substitute. Weighing not more than three pounds per 1,000.
Vermont defines little cigars as:
Any rolls of tobacco wrapped in leaf tobacco or a substance containing tobacco. One thousand units cannot weigh more than four and a half pounds.
Now imagine different variations of definitions for each jurisdiction.
Seems complex, right?
Understanding each product definition can be challenging for tax teams conducting business in several jurisdictions, so it's crucial to be aware of state statutes where each definition is indicated.
How Tax is Imposed on Cigars
There are five ways that jurisdictions can tax cigars:
- Percentage of the price
- Per cigar/per stick
- Per pack
- Lower percentage of price versus per stick (also known as a cigar cap)
Each jurisdiction imposes taxes differently, which can be challenging for tax teams conducting business in several jurisdictions.
For example, Georgia taxes large cigars at 23% of the selling price and little cigars at $.0025 per cigar; however, Texas taxes large cigars at $7.50 to $15 per 1,000 cigars and little cigars at $.02 per 20 cigars.
Rate changes on general tobacco products can change monthly, semi-monthly, quarterly, semi-annually, and annually per a jurisdiction; however, rates on cigars rarely change due to a price cap on premium cigars. In some cases, if a rate change goes into effect on other tobacco products, that can also raise the price cap on cigars.
In addition, a federal tax is imposed on large and little cigars that needs to be calculated.
Legislation and Sales Tax
Crucial details about cigars like definitions, tax rates, and other details are found in state statutes however those are subject to change. If legislation changes, so do necessary excise tax calculations within those jurisdictions, which is why tax teams must stay up to date on the most current state statute.
When compiling details and calculations for excise tax, it’s essential for tax teams to keep sales tax in mind in addition to excise tax. Calculating sales tax on top of excise tax means additional filing forms and reporting, which can be challenging to keep track of.
Here are two pieces of legislation that are focused on sales tax that can affect calculations:
Wayfair Sales Tax
This law allows states to require out-of-state sellers to collect and remit sales tax on the sale of products to in-state consumers, which means there could be an additional tax on top of excise tax in some jurisdictions.
Online sellers must pay a tobacco tax if they meet a certain number of transactions; however, if they don't meet that threshold, they don't need to pay sales tax.
From legislation to sales tax rules, tax teams must know where they are conducting business and with what products so that all tax calculations are correct.
Best Practices for Tax Teams
From definitions to variables that determine the type of cigar and how much excise tax is imposed, tax teams can be flooded with information. Here are some best practices tax teams can utilize while conducting business with cigars:
Keep an Eye on Legislation
Legislation for each state has crucial information like product definitions, tax rates, point of taxation, and more. Tax teams must stay up to date on legislation impacting jurisdictions they do business in so that excise taxes are calculated and reported correctly.
Work Alongside Sales Teams
As companies bring in new products for promotions or sales, working alongside the sales team is crucial. Tax teams need to know all the details and attributes of the new products so that they are set up correctly in the back-office system, and the correct tax is calculated. In addition, knowing each new customer's details and the licenses they hold is essential in the back-office system and crucial in calculating excise tax.
Accounts & Back-Office Set Up
Back-office systems are critical to generating returns and calculating taxes, but they also house important information about client accounts and product information. Taxing a product or category of products incorrectly could result in under-reporting, under-taxing, or owing tax back.
Calculating and reporting excise taxes on cigars is crucial to staying compliant; however, it can be challenging for tax teams due to the variables, legislation, and how jurisdictions impose tax.
Charging the incorrect amount of tax or failing to tax a product can result in penalties, interest payments, possible revoked licenses, or even jail time.
A tax compliance platform can assist tax teams in the ever-changing tax landscape by getting intricate details out of the way so generating crucial information for calculating excise tax is accurate and efficient.