State 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 cigarette relates to 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 unstamped cigarettes.
The state General Attorney (GA) office monitors the cigarette shipments to their states for verifications while the state 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 cigarette stamps, a distributor must have cigarette license and stamping machine to affix the stamps on cigarette 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 affixed and un-affixed stamps inventory is important to be in compliance with the Department of Revenue and Attorney General offices. The unused stamps will be used as the ending inventory of stamps on hand. Rolls of stamps should be kept in a safe place and a list with check in/out dates, quantities, and handler 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 unstamped 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, and you should not include these stamps again since you already reported them used before. Failing to handle cigarette 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, to get credit for the product and to get stamp credit memos from tax jurisdictions for the stamps on the items. Once you receive your credit memos, you can then apply for credit for the stamps values since you paid for them but did not use 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, damaged stamps or stolen 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 un-affixed stamps. Tax returns require beginning and ending inventory of un-affixed stamps, affixed stamps, cigarettes stamped, and cigarettes unstamped. At the end of each tax filing period, the beginning inventory is the ending inventory from the last tax period. The difference between the ending and beginning inventory must equal the difference between the sales and purchases during the same reporting period.
Physical Inventory
A floor cigarette count of stamped and unstamped cigarettes at the end of each month is important to make sure there are no variances between the physical inventory and the invoicing system inventory. Any inventory differences should be verified to be in compliance with state tax rules.
72-Hour Rule
States don't want to see large pile unstamped cigarettes in storage. They want cigarette distributors to stamp as soon as possible. Some states have a 72-hour rule which require distributors to stamp cigarettes within 72 hours of receiving the shipments. This rule is usually not enforced. States that have this rule include TX, SC, and WV.
Best Practices
Reject and return to manufacturers all cigarette returns from customers instead of reselling returned cigarettes.
Master Settlement Agreement (MSA)
Signed in 1998 between participating tobacco manufacturers and participating states; the MSA exempts the tobacco manufacturers from tort liability from state governments in exchange the companies agreed to cut back on certain tobacco marketing practices, and 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.
Non-Participating Manufacturer (NPM)
A tobacco manufacturer who did not participate in the Master Settlement Agreement. NPMs 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 cigarette manufacturers who are NPM and require distributors to file a tax return schedule to list all NPM brands sales. Some states also list cigarette manufacturers whose brands are not allowed to be sold in these states.
Cigarette Brand Code Table
FTA Tobacco Uniformity introduced the brand code table to accurately identify cigarette brands and unit of measures. This solves the issues with manufacturers reusing UPCs for different brand promotions, and wholesalers using different descriptions for cigarette brands in their systems databases. The FTA Uniformity committee hopes to streamline cigarette reporting with the brand codes table.
FTA Brand Code Table for Cigarette 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.