While it is always a good idea to focus on maintaining a healthy regulatory compliance program, the start of a new year seems like a particularly good time to review your tobacco company’s corporate hygiene with respect to state regulatory compliance. In this blog post, we provide a general overview of the state tobacco licensing and excise tax framework throughout the U.S. in a Q&A format. We also provide some general guidance about how to approach such laws and regulations. Tobacco companies, especially those operating in multiple states, should incorporate an appropriate state licensing and excise tax strategy into their compliance programs. Noncompliance with the myriad of state licensing and excise tax laws could have a significant impact on a tobacco company’s ability to operate and sell its products.
- Who Issues State Tobacco Licenses and Why?
A variety of state agencies issue tobacco licenses for a few key reasons, including: collection of taxes and to establish an audit trail for liability, public health regulation, and to track tobacco sold, bought, stored, and/or transported by persons within the state.
These state agencies go by different names depending on the state and can include, among others, departments of revenue, treasury departments, alcoholic beverage control boards, state tax commissions, tobacco control, departments of consumer protection, and departments of health.
- What are “Tobacco Products”?
Some states broadly define “tobacco products” to include cigarettes, cigars, pipe tobacco, smokeless tobacco, vapor products, electronic cigarettes, liquid nicotine, and other products containing tobacco. Other states separately define these types of products and may require a separate license depending on the type of product sold, as defined under state law.
- What Are the Various Types of State Tobacco Licenses?
States issue a number of different types of tobacco licenses that go by different names, but generally, the categories include:
- Typically, a distributor is a person that manufactures, produces, ships, transports, brings, or causes to be brought, tobacco products into a state for sale.
- Some states specify that a distributor only deals with tax-not-paid product.
- Generally, wholesalers purchase tobacco products from distributors and resell them to other wholesalers or retailers, but some states define them broadly to include any person that regularly sells tobacco products within a state.
- Some states specify that a wholesaler only deals with tax-paid product.
- Subjobbers are generally those individuals that purchase tobacco products from a wholesaler and resell them to retailers.
- Some states specify that a subjobber only deals with tax-paid product.
- This category exists in a minority of states and most states would include a person functioning as a subjobber in their definition of wholesaler.
- Manufacturers are typically the person that actually makes tobacco products or the person that causes the tobacco products to be made, such as through a contract manufacturing agreement.
- Generally, importers are those persons that import tobacco products into a state for resale, but some states provide a much broader definition, which would include any person that imports tobacco products into the U.S. for resale.
- Salesperson/Manufacturer Representatives
- These persons are typically agents or employees of other licensees, like manufacturers or wholesalers, that promote, solicit orders for, or sell tobacco products on behalf of those companies.
- Retailers are generally persons that sell tobacco products to consumers for personal use.
- Which State Tobacco Licenses Would a Company Need?
Below is a general checklist of questions that could help a company determine which license(s) it would need after reviewing state requirements:
- What is the product being sold?
- The type of license depends on the type of product being sold and whether the state has a broad definition of “tobacco products,” or separately defined terms with separate licensing requirements (e.g., cigarette, little cigar that qualifies as cigarette, little cigar that qualifies as other tobacco product, pipe tobacco, ENDS, e-liquid, etc.).
- Who is the entity selling or shipping the product?
- Many large companies have affiliated, parent, and subsidiary entities. The entity that sells the tobacco product to customers should be the entity that obtains the license.
- To whom does the entity sell or ship? In which jurisdiction?
- The customer type (e.g., distributor, wholesaler, retailer, etc.) and the location of the sale, shipment, or delivery are critical to determining which type of license a company needs.
- Is there a physical presence in the jurisdiction?
- There may be constitutional arguments against requiring an out-of-state company to obtain a tobacco license without minimum contacts or physical presence in the state.
- Physical presence could include sales representatives, other employees, a storage warehouse, business offices, etc. and may trigger a licensing requirement in a particular state.
- Is there some other type of “nexus”?
- Related to the above question, without a physical presence, there may be other types of activities with a state that could constitute “nexus” and create minimum contacts for an out-of-state company (e.g., sales volumes, number of transactions, other licenses or registrations, etc.).
- What is the Connection between State Tobacco Licenses and Excise Taxes?
Many states require a tobacco license in order to pay excise taxes owed to the state. For example, a licensed distributor may be required to submit a monthly or quarterly return with which the excise taxes must be remitted. In some states, a company may be required to obtain and maintain a tobacco license, but may not also be required to pay excise taxes for various reasons.
- On What Prices are State Excise Taxes Calculated?
For other tobacco products, the starting point is how the state defines the excise tax base, which is the number to which the excise tax rate is applied to calculate the total taxes due. State laws define the excise tax base in different ways, including:
- Wholesale cost;
- Wholesale purchase price;
- Wholesale price;
- Cost price;
- Manufacturer’s list price;
- Manufacturer’s invoice price;
- Factory list price;
- Total purchase price; or
- Retail sales price.
It is also increasingly common for states to tax the volume of liquids in vapor products, rather than a certain price. So, for example, a state may require tax payment based on the number of milliliters sold.
A licensee should not assume that these defined terms mean the same thing that they would mean in plain English. It is important to read the statutory definitions carefully, then review regulatory or agency guidance on the topic. These sources should provide the information needed to understand how to account for, for example, discounts, federal excise tax, shipping costs, other taxes, etc. It is worth taking extra time to understand these calculations because if a licensee gets the excise tax base wrong, it could have serious consequences down the road.
- How are State Excise Taxes Paid?
Generally, states may require licensees to purchase tax stamps from the state and apply them to tobacco products or they require liable licensees to remit excise tax payment with returns that are required to be filed every month or quarter. The former category is most common with cigarettes and, in some states, little cigars. The latter category is most common with other tobacco products. Note that many states require licensees to submit returns, even if no sale occurred during the taxable period or if no taxes or due.
The information above barely scratches the surface on the issues that varying, and sometimes counterintuitive, state laws create for a multistate, regulatory compliance program. Please reach out if you have a need to discuss any particular issue in more detail.