California Tobacco Taxes - How They Impact The Cigar Consumer
Most cigar consumers in California are aware that the state imposes tobacco taxes on cigarettes, cigars and other tobacco products. But how exactly do these taxes impact the cigar consumer? Surprisingly, many cigar purchasers don't have the correct answers, and are often confused. So here is my quick effort to explain this issue, help people understand the implications of their actions, and hopefully, avoid potential tax bills and/or surprises from state authorities.
First, let's define what the tobacco tax is in California. The voters of the state voted for a tax increase during the election cycle of November, 2016, via Proposition 56. By passing this ballot measure the voters approved and turned into law a $ 2 per pack cigarette tax increase. Since cigarettes and other tobacco products (OTP) are by law interlinked for tax purposes in the state, the passage of the proposition automatically increased taxes on cigars by an equivalent amount.
Since cigars are taxed using a percentage of the cost of the goods, this tax increase raised the tax rate from 27% to 65%. In other words, for any cigar purchased outside the state and brought into the state of California, there is a tax liability on the purchaser in the amount of 65% of the cost of that purchase.
As a retailer, for every $100 I spend on a purchase from a manufacturer/distributor based outside of California (e.g. Arturo Fuente, Drew Estate, etc.), I turn around and pay another $65 to the state of California due to my tax liability of 65%. So, effectively, my cost for those cigars is now $165, not $100. I now have to factor in the extra cost of $65 into pricing my cigars onto the shelves of my humidor. So when a consumer buys a cigar off the shelf in my humidor, the tobacco tax has been paid for that particular cigar by the retailer - myself.
How about the scenario where a consumer goes online and buys cigars from an online outfit based in another state (e.g. Pennsylvania, Florida, North Carolina, etc.)? Whether the purchaser is a consumer or a business is irrelevant to the tax liability that arises from the importation of that purchase into the state. A consumer, much like a business, is required by law to pay tobacco taxes to the state of California for all such purchases.
Simply put, if you buy cigars online or through a catalog from another state, you have to pay the state 65% of the cost of the products you purchased. So if a box of cigars cost you $100 online, you owe the state, by law, $65. If you don't pay this tax liability, you are in violation of the law and can be billed by the state at any time (with the possibility of additional penalties and interest).
Here is the Web page at the California Department of Special Taxes and Fees, which explains this law. This is also where a consumer, who purchases cigars from out of state, is supposed to register and pay the tobacco taxes, as well as the use tax (which is equivalent to the sales tax).