| Date: | 12/23/2008 |
|---|---|
| Organization: | Massachusetts Department of Revenue |
| Referenced Sources: | Massachusetts General Laws |
Tax Administration/Miscellaneous
IR 08-17 supplements TIR 08-9 and supersedes TIR 97-1
I. Introduction
The Massachusetts Legislature recently rewrote G.L. c. 64C, § 7B to move the imposition of the cigar and smoking tobacco excise from the retail to the wholesale level, effective October 1, 2008. Section 7B accomplished this by making cigar distributors liable for the excise on cigars and smoking tobacco that they import or cause to be imported into Massachusetts.
The purpose of this Technical Information Release ("TIR") is to explain how § 7B will be implemented. Other recent changes in the law relating to tobacco products are discussed in TIR 08-7, TIR 08-9, TIR 08-13, and TIR 08-16, all of which are available at www.mass.gov/dor.
II. Law Change
Since 1996, when Massachusetts first imposed an excise on cigars and smoking tobacco, the excise has been imposed at the retail level. [1] However, § 38 of c. 182 of the Acts of 2008 rewrote § 7B of G.L. c. 64C to impose the excise on cigar distributors, beginning with sales on October 1, 2008. As of that date, distributors of cigars and smoking tobacco are primarily responsible for paying the cigar excise on sales of these products in Massachusetts.
The Law
Under new § 7B, an excise is imposed on all cigars and smoking tobacco in Massachusetts, as set out below. It is the intent of the law that the excise be paid only once. The excise is not imposed on cigars and smoking tobacco if they are exported outside of Massachusetts or are not subject to taxation in Massachusetts under federal law. The burden of proof that the products are not subject to the excise is on the person on whose premises the products are found.
General Effect Of Law
In general, the effect of the law is to make the wholesaler of cigars - a cigar distributor - responsible for payment of the cigar excise. See Example A. in Section III. A cigar wholesaler who has a physical presence in Massachusetts is considered an in-state taxpayer and is required to be licensed as a cigar distributor by the Department. See "Distributor's License - Required For Business With Physical Presence In Massachusetts." A cigar wholesaler who has no physical presence in Massachusetts may voluntarily become licensed as a cigar distributor by the Department. See "Distributor's License - Voluntary For Business With No Physical Presence In Massachusetts." If more than one cigar distributor is in the distribution chain, the distributor who sells cigars to the retailer will be responsible for the cigar excise. The first distributor must, however, verify that the second distributor is a licensed cigar distributor. See Example D. in Section III.
In most cases, a cigar retailer will not be responsible for the cigar excise. See "When Retailer Must Pay The Excise" for exceptions to that rule.
Definitions Of Cigar And Smoking Tobacco
A "cigar" is a roll of tobacco wrapped in leaf tobacco or in any substance containing tobacco, but does not include a cigarette or a so-called "little cigar." Since July 1, 2008, "little cigars" have been considered cigarettes in Massachusetts. [2]
The term "smoking tobacco" includes roll-your-own tobacco, pipe tobacco, and other forms of tobacco suitable for smoking.
Whenever the word "cigar" or "cigars" is used in this TIR, it includes "smoking tobacco," unless the context clearly requires otherwise.
Calculation Of The Excise
The excise is imposed on all cigars held in Massachusetts at the rate of 30 per cent of their "wholesale price."
The "wholesale price" is:
- in the case of a manufacturer, the price set for the cigars, or, if no price has been set, the wholesale value of the cigars;
- in the case of a cigar distributor who is not a cigar manufacturer, the price at which the cigar distributor purchased the cigars; or
- in the case of a cigar retailer or a consumer, the price at which the retailer or consumer purchased the cigars.
Imposition Of The Excise
The excise is imposed on cigar distributors when cigars are manufactured, purchased, imported, received or acquired in the Commonwealth.
A cigar distributor must state on all invoices to its retailers whether the Massachusetts cigar excise has been paid. If this statement does not appear on the invoice, the retailer should assume that the excise has not been paid and that the retailer therefore must pay the excise.
Definition Of "Cigar Distributor"
As a general rule, a cigar distributor must pay the cigar excise. A "cigar distributor" is:
- any person who imports, or causes to be imported, cigars into Massachusetts for sale;
- any person who manufactures cigars in Massachusetts; or
- any person, within or without the Commonwealth, whom the Commissioner of Revenue authorizes to file returns and pay the excise on cigars that the person sells, ships or delivers to any person in Massachusetts.
Distributor's License - Required For Business With Physical Presence In Massachusetts
Under Quill Corp. v. North Dakota, 504 U.S. 298 (1992), the Commonwealth may require a taxpayer to collect and pay over sales taxes to Massachusetts if the taxpayer has a "physical presence" in the Commonwealth. Physical presence includes, but is not limited to, stores, offices, sales representatives (including independent agents), or more than a negligible amount of property or equipment. The cigar excise, like the sales tax, is a tax on a commodity for sale that will be incorporated into the price of the commodity and ultimately passed on to the customer. Accordingly, the Quill standard applies to the cigar excise, and the Commonwealth may tax a cigar manufacturer or wholesaler who has a physical presence in Massachusetts as an in-state taxpayer. Therefore, a cigar manufacturer or wholesaler with a physical presence in Massachusettsmust be licensed by the Department as a cigar distributor and is liable for the payment of the cigar excise on cigars it imports or causes to be imported into Massachusetts, or that it sells, ships or delivers into Massachusetts.
An exception to this rule applies if a cigar manufacturer or wholesaler with a physical presence in Massachusetts sells cigars to a cigar distributor licensed by the Department, who sells the cigars in turn to a Massachusetts licensed cigar retailer. In such a case, although the cigar manufacturer or wholesaler with a physical presence in Massachusetts must be licensed by the Department and must report its sales into Massachusetts on Form Cigar-2, it is not required to pay the cigar excise , provided it has verified that the distributor to which it sells cigars is in fact licensed in Massachusetts. See Example B. in Section III.
Distributor's License - Voluntary For Business With No Physical Presence In Massachusetts
A person located outside Massachusetts and having no physical presence in Massachusetts who ships, delivers, or transports cigars to cigar retailers in Massachusetts for sale by them, may be, but is not required to be, licensed by the Department as a cigar distributor. Once licensed by the Commissioner, the nonresident cigar distributor is subject to all the provisions of § 7B, including the requirements to file returns and pay the excise. See Example C. in Section III.
Cigar Retailer
A "cigar retailer" is "any person who sells or furnishes cigars or smoking tobacco in small quantities to consumers for individual use," provided that the cigars are not purchased to be resold. A cigar retailer must be licensed by the Department. [3] As a general rule, a cigar distributor, not a cigar retailer, must pay the cigar excise. A cigar retailer who purchases cigars from a licensed cigar distributor who has already paid the cigar excise is required to hold a cigar retailer license, but is not required to pay the cigar excise.
There are, however, exceptions, to this rule. It is possible for a cigar dealer to be both a cigar distributor and a cigar retailer, in which case both a cigar retailer license and a cigar distributor license are required. See the following Section of this TIR. [4]
When Retailer Must Pay The Excise
When Distributor Fails To Pay Excise
If a cigar distributor is on the Department's list or provides the retailer with a copy of a valid cigar distributor license, the retailer may assume that the distributor is a licensed cigar distributor and therefore responsible for paying the cigar excise. A licensed distributor must state on every invoice to a retailer whether the cigar excise has been paid. If this statement appears on the invoice, the retailer may rely on that statement and is not responsible for filing a return or paying the excise.
However, a cigar retailer is required to pay the cigar excise on cigars in his possession if the excise was not paid by the cigar distributor. If the required statement does not appear on the invoice, it is the retailer's responsibility to inquire of the distributor why it does not and to ask the distributor to correct the invoice. If a cigar retailer cannot, upon the request by a representative of the Department, produce an invoice from a licensed cigar distributor for any cigars in the retailer's possession with this statement on it, it is presumed that the cigar excise has not been paid. In that case, the cigar retailer must file Form Cigar-2 along with payment of the excise.
When Retailer Is Distributor - Purchases From Unlicensed Distributor
Because an out-of-state wholesaler or manufacturer who does not have physical presence in Massachusetts is not required to be licensed by the Department, a cigar retailer who purchases cigars directly from an out-of-state wholesaler or manufacturer should be especially careful that it understands its filing and payment obligations. If a cigar retailer purchases cigars directly from a person who is not licensed as a Massachusetts cigar distributor, the retailer is considered a cigar distributor. In addition to being licensed as a cigar retailer, it must alsobe licensed as a cigar distributor and is responsible for filing Form Cigar-2 and paying the cigar excise.
When Retailer Is Distributor - Retailers Who Export Cigars Outside Massachusetts
Because cigars exported outside Massachusetts are not subject to the cigar excise, a cigar distributor is not required to pay the cigar excise on the exported products. The cigar distributor must, however, file a return on Form Cigar-2, with respect to the exported cigars, providing all information regarding its exports required by the Form. In order to avoid having to pay the excise on cigars it ships outside Massachusetts, a licensed cigar retailer who exports cigars to a consumer outside the Commonwealth must hold a cigar distributor license with respect to his out-of-state sales in addition to a cigar retailer license with respect to his in-state sales. Every cigar distributor must maintain invoices and other written evidence of all its exports.
Verification Of Licenses
Verification of distributor licenses relieves the verifying party of the obligation to pay the cigar excise. Verification of distributor licenses is required in two instances. First, a cigar retailer must verify that its supplier is a licensed Massachusetts cigar distributor. Second, a distributor whose customer sells cigars directly to a retailer (and is therefore responsible for paying the excise) must verify that its customer is a licensed cigar distributor. For example, if Distributor D1, a cigar manufacturer or distributor, sells cigars to its customer, Distributor D2, who sells cigars directly to a retailer, D2 is required to pay the excise, so D1 must verify that D2 is a licensed cigar distributor. [5] If D1 is a cigar manufacturer, it must also be licensed as a cigar distributor and file Form Cigar-2 reporting its sales into Massachusetts. A distributor license may be verified by asking the distributor fora copy of its license or by checking the list of licensed Massachusetts cigar distributors posted on the Department's website at www.mass.gov/dor.
Potential Consumer Liability
Every consumer in Massachusetts is required to pay the cigar excise on cigars in his possession on which the excise was not paid by the cigar distributor or cigar retailer. Form CTS-8B, available on the Department's website, should be used for this purpose.
Penalties - Failure To Be Licensed Or To Purchase From Or Sell To An Unlicensed Person
The Department may impose a civil penalty, as well as any other penalty provided by G.L. c. 62C or G.L. c. 64C, on any person who:
sells cigars, offers cigars for sale, possesses cigars with intent to sell them, or acts as a cigar distributor or cigar retailer, without being licensed by the Department;
knowingly purchases or possesses cigars not manufactured, purchased, or imported by a cigar distributor or cigar retailer who is required to be licensed by the Department, but is not so licensed; or
knowingly sells or solicits orders for cigars to be shipped, mailed, sent, or brought into Massachusetts to anyone other than a licensed cigar distributor or retailer, unless the cigars are to be sold to or through a licensed cigar distributor or retailer.
The civil penalty will range from up to $5,000 for the first offense to $25,000 for every subsequent offense.
Calculation Of Sales Tax
The amount of the cigar excise paid is added to the sales price of cigars for purposes of calculating the prepaid sales tax on tobacco products at the wholesale level [6] or the sales tax at the retail level.
Contacting The Department
Any questions relating to this TIR should be directed to the Department at the following address:
Massachusetts Department of Revenue
Cigarette Excise Unit
200 Arlington Street
Boston, MA 02150.
The telephone number of the Cigarette Excise Unit is 617-887-5090, and the fax number is 617-887-6987.
III. Examples
The following Examples are intended to clarify this TIR.
A. Entire Distribution Chain In Massachusetts
A is a cigar manufacturer located in Massachusetts. It sells some of its cigars to D, a licensed cigar distributor in Massachusetts, and it sells the rest of its cigars to licensed cigar retailers in Massachusetts. Because A manufactures cigars in Massachusetts, it falls within § 7B's definition of "cigar distributor" and must be licensed by the Department as such.
A is responsible for the cigar excise on its direct sales to cigar retailers. The excise is imposed when the cigars are manufactured. The excise rate is 30 percent of the price set for the cigars, or, if no price has been set, the wholesale value of the cigars. A must report these sales on Form Cigar-2 and pay the appropriate amount of excise with the Form.
On the other hand, A is not responsible for the cigar excise on its sales to D. As the licensed distributor in the chain that sells A's cigars to retailers, D is responsible for the cigar excise on its sales of A's cigars to retailers. The excise rate is 30 percent of the price which D paid for the cigars. D must report these sales on Form Cigar-2 and pay the appropriate amount of excise with the Form.
Cigar retailers are not responsible for the excise, whether they purchase cigars from A or from D, so long as they: a) verify that A or D, as applicable, is a licensed cigar distributor; and b) the invoice states that the cigar excise has been paid.
B. Manufacturer/Wholesaler Based Outside Massachusetts; Physical Presence
B is a cigar manufacturer/wholesaler based outside Massachusetts, but it has a sales force in Massachusetts. B therefore has a physical presence in Massachusetts. B is required to be, and is, licensed as a cigar distributor. It sells some of its cigars to D, a licensed cigar distributor in Massachusetts, and it sells its remaining cigars directly to R, a licensed cigar retailer.
B is responsible for payment of the cigar excise on its direct sales to R, and the excise is imposed when the cigars are imported into Massachusetts. On the other hand, B is not responsible for the cigar excise on its sales to D , although B must file Form Cigar-2 reporting its sales into Massachusetts and must verify that D is a licensed distributor. Because D is the distributor in the chain that sells the cigars directly to Massachusetts retailers, D is responsible for the cigar excise on its sales of B's cigars to the retailers. D must report these sales on Form Cigar-2 and pay the appropriate amount of excise with the Form.
Cigar retailers are not responsible for the excise, whether they purchase cigars from B or from D, so long as they: a) verify that B or D, as applicable, is a licensed cigar distributor; and b) the invoice states that the cigar excise has been paid.
C. Manufacturer/Wholesaler Based Outside Massachusetts; No Physical Presence
C is a cigar manufacturer/wholesaler based outside Massachusetts and has no physical presence in Massachusetts. Therefore, C is not required to be licensed by the Department, and it has chosen not to be licensed. C is not required to pay the Massachusetts cigar excise on its sales to customers in Massachusetts. Every customer in Massachusetts to whom C sells cigars directly, regardless of whether the customer is normally considered a cigar wholesaler or retailer, falls within the definition of a "cigar distributor." Consequently, every Massachusetts customer to whom C sells directly is required to obtain a cigar distributor license and pay the cigar excise. However, cigar retailers who purchase C's cigars through a licensed Massachusetts cigar distributor are not responsible for the excise and are required to be licensed only as cigar retailers.
Although C has no physical presence in Massachusetts, it may voluntarily apply to be licensed by the Department. In that case, C would be treated as B is in Example B.
D. Sale By Licensed Distributor To Another Licensed Distributor
D1 is a licensed cigar distributor who imports cigars into Massachusetts from an unlicensed out-of-state manufacturer. D1 sells cigars to D2, also a licensed cigar distributor. D2 sells the cigars directly to a Massachusetts cigar retailer as well as to cigar retailers outside Massachusetts. Because D2 makes sales directly to the retailer, D2, not D1, is responsible for paying the cigar excise on the sales. [7] So long as D2 pays the excise with regard to its sales to Massachusetts retailers, D1 need not do so. D1 must, however, verify that D2 is a licensed cigar distributor.
E. Direct Sale To Massachusetts Resident From Outside Massachusetts
E, an Internet cigar dealer with no physical presence in Massachusetts, sells cigars to a Massachusetts resident and ships them by common carrier to the resident's home in Massachusetts. Because the resident buys the cigars in small quantities for his individual use and not for resale, the Internet dealer falls within the definition of "cigar retailer" in § 7B. However, because the Internet dealer has no physical presence in Massachusetts, it is not required to be licensed by the Department or to collect the excise in Massachusetts, although it may voluntarily do so. Because the cigar excise has not previously been paid on the cigars he purchases, the Massachusetts resident must pay the excise on them at the rate of 30 percent of his purchase price. The excise is due by the twentieth day of the month following the date of purchase and should be remitted with Form CTS-8B, which is available on the Department's website. However, if the Massachusetts resident plans to resell the cigars he purchases, he must obtain a cigar distributor license and pay the cigar excise with Form Cigar-2.
/s/Navjeet K. Bal
Navjeet K. Bal
Commissioner of Revenue
NKB:MFT:ar
December 23, 2008
TIR 08-17