The Massachusetts Legislature recently amended G.L. c. 62C, G.L. c. 64C, and G.L. c. 64H to:
A. expand the definition of "cigarettes" for purposes of the cigarette excise to include "little cigars," effective July 1, 2008;
B. move the imposition of the cigar and smoking tobacco excise to the wholesale level, effective October 1, 2008;
C. require the licensing of cigar and smoking tobacco distributors and retailers, effective October 1, 2008; and
D. require wholesalers of tobacco products (cigarettes, cigars, smokeless tobacco and smoking tobacco) to collect and prepay sales tax on wholesale sales of those products, effective September 1, 2008.
The purpose of this Technical Information Release ("TIR") is to explain the changes listed above. A related change in the law, an increase in the cigarette excise of $1.00 per pack of twenty cigarettes, which took effect July 1, 2008, is discussed in TIR 08-7, available at www.mass.gov/dor.
II. Law Changes
A. Little Cigars Defined As Cigarettes
1. Explanation of the Expanded Definition
Section 35 of chapter 182 of the Acts of 2008 expanded the definition of "cigarette" in G.L. c. 64C, § 1 to include "little cigars," which are defined as "rolls of tobacco wrapped in leaf tobacco or any substance containing tobacco and as to which 1,000 units weigh not more than 3 pounds." The amended definition is effective as of July 1, 2008. As of that date, "little cigars," as defined, are taxed as cigarettes. The tax rate is $2.51 per pack of twenty. All packs of little cigars sold in Massachusetts must be stamped with the current Massachusetts cigarette stamp. Sales of unstamped little cigars to retailers are illegal. Sales of unstamped little cigars by retailers are illegal, except to the extent provided in the transition rules discussed below.
The Department has posted a list of little cigar brands on its website at www.mass.gov/dor. Any errors or omissions in the list should be brought to the attention of the Department's Cigarette Excise Unit at 200 Arlington Street, Chelsea, MA 02150.
The minimum price requirements of G.L. c. 64C will apply to little cigars. Once the Department has calculated these prices in accordance with G.L. c. 64C and 830 CMR 64C.14.1, the Department will post them on its website. In addition, pursuant to G.L. c. 64C, § 33A, little cigars must be sold in packs of twenty or more.
Because the fire-safe cigarette requirements of G.L c. 64C apply only to tobacco rolled in paper or in any other substance not containing tobacco, little cigars are not required to be fire-safe. Also, the classification of little cigars as cigarettes under Massachusetts law has no effect on federal law (e.g., for purposes of the Master Settlement Agreement).
2. Transitional Rules
a. Through the Second Quarter of 2008 (through June 30, 2008)
The amended definition of cigarettes has no effect on the taxation of little cigars until the third quarter of 2008. With respect to the second quarter of 2008, the due date for the submission by retailers of Form Cigar-1, and for the payment of the cigar and smoking tobacco excise, remains July 20, 2008.
b. Commencing the Third Quarter of 2008 (commencing July 1, 2008)
Retailers are not responsible for payment of the cigar excise on stamped packs of little cigars because the stamp indicates that the excise has already been paid. However, retailers are responsible for the cigarette excise of $2.51 per pack of 20 little cigars on all unstamped packs they may sell, generally from inventory obtained before the law change. Retailers may add $2.51 a pack to their selling price of unstamped packs and claim a credit for the 30 percent cigar excise, if any, that they paid with a Form Cigar-1 for a prior quarter. The Form Cigar-1 for the third quarter of 2008, which the Department will mail to retailers shortly, will have a line for claiming the credit. Retailers must maintain appropriate documentation to substantiate the payment of the excise for which they claim a credit. The Form Cigar-1 for the third quarter of 2008 will be due on or before October 20, 2008.
Unstamped packages of little cigars held by retailers or other non-stampers are subject to seizure by the Department beginning September 1, 2008.
B. Taxation of Cigar and Smoking Tobacco at the Wholesale Level
Effective July 1, 2008, "little cigars," as defined in G. L. c. 64C, § 1, are taxed as cigarettes. See Section A. above. Therefore, Section B. does not apply to "little cigars."
Section 38 of chapter 182 of the Acts of 2008 rewrote G.L. c. 64C, § 7B, effective October 1, 2008. Cigars and smoking tobacco have been subject to an excise in Massachusetts since 1996, and, in accordance with TIR 97-1, the excise has been collected from retailers on a quarterly basis. Section 38 moves the imposition of the cigar and smoking tobacco excise from the retail to the wholesale level. Retailers will no longer be responsible for collecting or remitting the cigar or smoking excise or filing Form Cigar-1, the cigar and smoking tobacco excise return. The Form Cigar-1 for the third quarter of 2008 will be the final Form Cigar-1 to be completed by retailers.
A "cigar distributor," defined in G.L. c. 64C, § 7B as a person who imports cigars or smoking tobacco into Massachusetts, must collect the excise from a customer as part of the sale price and submit to the Department a return along with the excise due. The first cigar and smoking tobacco excise return to be completed by cigar distributors will be due on or before January 20, 2009. If the cigar distributor has not paid the excise due, the "cigar retailer," as defined in G.L. c. 64C, § 7B, must do so.
It is permissible for a retailer to purchase its product directly from a manufacturer, so long as the excise is collected and paid. Anyone who acts as both a cigar distributor and a cigar retailer must have a license for each capacity in which he operates, unless the Department determines otherwise.
The cigar and smoking tobacco excise rate continues to be 30 percent, but, as of October 1, 2008, the rate will be 30 percent of the "wholesale price," as defined in G.L. c. 64C, § 7B.
As noted above, the Form Cigar-1 for the third quarter of 2008 will be the final Form Cigar-1 to be completed by retailers. The Department will send cigar and smoking tobacco wholesalers a return similar to the current Form Cigar-1 to be completed by wholesalers for the fourth quarter of 2008. Any wholesaler that does not receive a return may download one from the Department's website at www.mass.gov/dor. Taxpayers wishing to file consolidated cigar and smoking tobacco excise returns must contact the Cigarette Excise Unit at (617) 887-5090.
The new G.L. c. 64C, § 7B subjects any person who sells cigars or smoking tobacco without a license, as well as any person who knowingly purchases or possesses cigars or smoking tobacco that is not manufactured, purchased, or imported by a cigar licensee, to civil penalties. In addition, G. L. c. 64C, § 7B authorizes the Department and the police to seize untaxed cigars and smoking tobacco.
C. Cigar and Smoking Tobacco Dealer Filing and Licensing Requirements
Section 20 of chapter 182 of the Acts of 2008 added a subsection (c1/2) to G.L. c. 62C, §16, which requires that every person licensed to sell cigars and smoking tobacco under new G.L. c. 64C, § 7B file either a monthly or quarterly return with the Department, as the Department may require, stating the quantity of cigars and smoking tobacco sold in the preceding month or quarter.
Sections 27 through 31 of chapter 182 of the Acts of 2008 amended G.L. c. 62C, § 67 to require the licensing of cigar distributors and cigar retailers. Cigar retailer licenses will expire every other year, and cigar distributor licenses every year, on dates prescribed by the Department. The Department may issue combined forms of licenses and license applications (e.g., a single license for a retailer of cigars and cigarettes). These provisions take effect on October 1, 2008. The Department will post applications for cigar licenses on its website prior to that date.
D. Collection and Prepayment of Sales Tax on All Tobacco Products
Section 40 of chapter 182 of the Acts of 2008 created a new section 3A in G.L. c. 64H, which requires wholesalers of tobacco products (cigarettes, cigars, smokeless tobacco and smoking tobacco) to collect and prepay sales tax on wholesale sales of those products, beginning with sales on September 1, 2008.
New G. L. c. 64H, § 3A requires that every person selling tobacco products to others for resale in Massachusetts pay the sales tax on such products held for retail sale. The sales tax will be calculated on each sale by multiplying the sales tax rate set by G.L. c. 64H, § 2 (currently 5 percent) by the price at which such person sells the tobacco products at wholesale. The amount of the sales tax must be separately stated on the customer invoice or other record. Section 3A does not apply to manufacturers and unclassified acquirers to the extent they distribute tobacco products through a licensed wholesaler or unclassified acquirer.
Retailers should continue to collect sales tax on retail sales of all tobacco products. Section 3A allows a retailer of tobacco products to deduct the amount of the sales tax paid to its tobacco wholesalers from the total amount of sales tax on all taxable items due by the retailer for that period. The Department will revise the sales tax returns to accommodate this deduction.
Beginning September 1, 2008, a tobacco wholesaler must include the amount of any excise it has paid on a tobacco product in the wholesale price of that product when the wholesaler calculates the 5 percent sales tax on its tobacco sales. As discussed in Section A. above, cigars and smoking tobacco will be taxed at the wholesale level beginning October 1, 2008. Therefore, wholesalers must include the 30 percent cigar and smoking tobacco excise in the wholesale price when calculating the sales tax on sales of those products occurring on and after October 1, 2008.
Any wholesaler that is not currently registered to file a Massachusetts sales tax return must register through the Department's WebFile for Business application at www.mass.gov/dor. A booklet explaining the Massachusetts sales tax, "A Guide to Sales and Use Tax," is also available on the website.
/s/ Navjeet K. Bal
Navjeet K. Bal
Commissioner of Revenue
July 23, 2008