Tax Law

Daniel G. Mudd on Federal & State Tobacco Taxes

by Daniel G. Mudd *

[1] Introduction

For those in the business, manufacturers, wholesalers, distributors, importers, dealers and retailers of tobacco products, there are a staggering amount of Federal and state excise tax compliance obligations and responsibilities that must be fully considered prior to the commencing of such operations, as well as on an on-going basis...

 [2] Basics of Tobacco Products and Types of Businesses for Purposes of the FET

As an initial matter, when evaluating a business' FET liability, if any, one must first determine the specific type of tobacco product being manufactured, imported, sold or otherwise distributed by same, as the tax rate and reporting responsibilities vary greatly for cigarettes, cigars and other tobacco products. The term tobacco products, for purposes of the FET, includes cigars, cigarettes, and several other tobacco products. 1 While most think of cigarettes and cigars only in terms of the FET, many other tobacco products are also subject to the FET and related reporting requirements for same, including actual tobacco products such as chewing tobacco, snuff, pipe tobacco, roll-your-own tobacco, as well as tobacco components such as cigarette papers and tubes, all of which are statutorily defined. 2 There are, however, limited exemptions from the FET for certain types of tobacco products and cigarettes papers and tubes. 3

...

[3] Overview of Applicable FET Rates, 2009 Floor Stock Tax and Related FET Requirements and Recent Legislative Changes to Same

Once the specific type of tobacco product and the exact operations involved with same have been identified, and the proper permits have been obtained, one can then look to the specific FET rate and Federal reporting, compliance, and other requirements for such products and activities.


As a general matter, the FET applies to and is imposed on tobacco products and cigarette papers and tubes that are manufactured in, or imported into, the United States pursuant to Chapter 52 of the Internal Revenue Code of 1986, as amended ("Code"). 10 The FET is imposed on the manufacturer or importer of the tobacco product, and collected on the basis of a return filed based upon the time of removal from the manufacturer's facilities, or in the case of importers, upon release from the customs custody or bond. 11 In general, payment of the FET on tobacco products and cigarettes papers and tubes falls on the fourteenth day after the last day of each semimonthly period where such products are removed; certain timing requirements for imported products and other exceptions may, however, apply. 12 Upon removal, tobacco products (and cigarette papers and tubes) must be properly packaged and bear all marks, labels, and notices as required by relevant regulations. 13 Additionally, strict record retention and inventory and sales reports must also be complied with on an ongoing basis. 14

...

[4] Enforcement of the FET

The FET is unique from most Federal taxes as it is not enforced by the Internal Revenue Service, but instead by the Alcohol and Tobacco Tax and Trade Bureau ("TTB"). Pursuant to the Homeland Security Act of 2002, 26 the TTB was created to be "responsible for the administration and enforcement of the tax laws relating to alcohol, tobacco, and firearms and certain non-tax laws relating to alcohol." 27 In contrast, the TTB's counterpart, the Bureau of Alcohol, Tobacco, Forearms and Explosives ("ATF"), an agency of the Department of Justice, is instead responsible for the enforcement of criminal laws and regulations relating to, among other things certain situations involving tobacco, such as the trafficking of "contraband cigarettes" (i.e., cigarettes without affixation or payment of applicable State taxes). 28

...

In addition to the TTB's authority over these products, one must also be aware that there are other registration, payment, reporting, etc. requirements from other Federal (U.S. Department of Agriculture, the U.S. Food and Drug Administration, and Bureau of Alcohol, Tobacco, Firearms and Explosives) and state agencies and laws (Federal legislation requiring certain state reporting requirements, state departments of revenue, state attorney general offices, local government, Master Settlement Agreement, etc.) for the sale of such products.

 

* Daniel G. Mudd, Esq., is an Associate and tax attorney resident in the Louisville, Kentucky office of regional law firm Frost Brown Todd, LLC. Daniel's practice focuses on controversy, litigation and planning relating to tax matters, primarily in state and local tax matters and incentives. Through his representation of a number of prominent local and national clients, Daniel has gained experience and expertise in the areas of Federal and state tobacco tax, sales and healthcare-related tax, and energy exemptions. Daniel has also represented a variety of corporate and individual clients in Federal tax controversy and collection matters.

[1] 26 USC § 5702(c) (defining tobacco products).

[2] 26 USC § 5702(a), (b), (e), (f), (m)-(o).

[3] 26 USC § 5704.

[10] See 26 USC § 5701.

[11] 26 USC § 5703 (a) & (b). Moreover, although outside the scope of this article, note that Sections 5731-34 of the Code imposes an annual special occupational tax on manufacturers and export warehouse proprietors (not importers).

[12] 26 USC § 5703(b)(2)(A) & (B).

[13] 26 USC § 5723 (a) & (b); 27 CFR §§ 40.211- 40.217, 41.71-41.75.

[14] 26 USC §§ 5721, 22, and 5741; 27 CFR §§ 40.181- 40.187, 40.201 & 40.202; 41.181-41.182.

[26] PL 107-296, HR 5005, 107th Cong § 1111 (Nov 25, 2002).

[27] Id.; The Jurisdiction and Responsibilities of the Alcohol and Tobacco Tax and Trade Bureau, Joint Committee on Taxation, JCX-43-08, at 2 (May 19, 2008).

[28] PL 107-296, supra. See also, The Jurisdiction and Responsibilities of the Alcohol and Tobacco Tax and Trade Bureau, Joint Committee on Taxation, JCX-43-08, at 2 (May 19, 2008).

...

LEXIS users can view the complete commentary HERE. Additional fees may apply. (Approx. 9 pages)

RELATED LINKS: For more information on Federal excise tax obligations as they relate to tobacco products, including basic procedure for challenging assessments of FET liabilities, see:

Discover the features and benefits of LexisNexis® Tax Center

For quality Tax & Accounting research resources, visit the LexisNexis® Store