INCREASE IN FEDERAL EXCISE TAX ON
TOBACCO PRODUCTS
Manufacturers of Tobacco Products, Manufacturers of
Cigarette Papers and Tubes, and Others Concerned:
Purpose. This Industry Circular is to inform you of an
upcoming increase in the Federal excise tax rates for
tobacco products and cigarette papers and tubes.
Increase in Federal excise tax rates. Public Law
101-508, 104 Stat., 1388, enacted on November 5, 1990,
increased the rate of Federal excise tax on tobacco products
and cigarette papers and tubes in two increments, effective
January 1, 1991, and January 1, 1993. As of January 1,
1993, all such products removed from bonded premises on or
after the effective date will be subject to the second tax
rate increase imposed by the law. For your reference, the
old and new tax rates are set forth in Exhibit 1.
There are several provisions of the law which will directly
affect businesses which manufacture, import, and distribute
these articles.
Effect on bond coverage. Manufacturers who do not
already have a maximum bond, should re-evaluate their bond
coverage. The increased tax rate may increase the liability
which must be covered by a manufacturer's bond. Proprietors
should recompute their bond coverage in ccordance with
applicable regulations, using the new higher tax rates. If
present coverage is found to be insufficient, a
strengthening or superseding bond must be filed.
Effect on electronic fund transfer tax payments. The
increase in tax rates may place a taxpayer in the EFT
category for the first time. As a general rule, all
taxpayers who pay more than $5,000,000 in tobacco products
excise taxes during a calendar year are required to pay
taxes by EFT the following year. It is the taxpayer's
responsibility to determine if EFT payment is necessary and,
if it is, to begin paying taxes by EFT. If you need
additional information or instructions for EFT payments,
contact your local ATF office.
FLOOR STOCKS TAX
As a transition to the new tax rates, the law imposes a
floor stocks tax on cigarettes held for sale on January 1,
1993. This floor stocks tax does not apply to
unmerchantable cigarettes or to cigarettes held in vending
machines.
A floor stocks tax is a one-time excise tax placed on a
commodity undergoing a tax increase. The amount of the
floor stocks tax is equal to the difference between the old
and new tax rates. In this case the floor stocks tax rates
are, $2.00 per 1,000 for small cigarettes, and $4.20 per 1,000 for large cigarettes. Cigarettes more than 6.5 inches
long will be taxed at the small cigarette rate counting each
2.75 inches, or fraction thereof, as one cigarette.
The floor stocks tax imposed by Public Law 101-508, 104
Stat., 1388, applies to cigarettes held for sale by
wholesale and retail dealers as well as to taxpaid or tax
determined products held by manufacturers of tobacco
products factories or other facilities. Other tobacco
products and cigarette papers and tubes are not subject to
the floor stocks tax.
Floor stocks tax inventory. Liability for the floor
stocks tax must be established either by a physical
inventory or a record (book) inventory supported by the
appropriate source records. Only persons with adequate
records of receipt and disposition may utilize a book
inventory. Records (such as invoices) used in support of a
book inventory must include (1) the name and address of the
consignor and consignee, (2) date of receipt or disposition,
(3) brand name, (4) kind of cigarettes (large or small), and
(5) quantity. Persons without such source records must take
a physical inventory. The inventory may be taken anytime
between December 26, 1992, and January 10, 1993. However,
the inventory must be reconciled (adjusted) to the beginning
of business, January 1, 1993. This reconciliation must
reflect the inventory as if it had actually been taken at
the beginning of business on January 1.
In-transit shipments. All merchandise subject to floor
stocks tax which is in-transit must be inventoried and the
tax paid by the person who owns the merchandise on January
1, 1993. Generally, with FOB shipments the shipper retains
title until delivery. All levels (manufacturers,
wholesalers and retailers) should be aware that ATF will be
checking in-transit shipments, as well as on hand
inventories, for payment of floor stocks tax.
Unmerchantable cigarettes. Unmerchantable cigarettes
are not taxable. In this context, unmerchantable means
cigarettes which are being returned through the
merchandising chain because of some defect. Cigarettes
which are being returned because of poor market demand or to
reduce inventory are not considered unmerchantable. All
persons holding cigarettes for sale on January 1, 1993, must
physically segregate any unmerchantable cigarettes and
include them in a separate section of their inventory
record. Unmerchantable cigarettes should not be included
when determining exemption or credit limits. If for any
reason the cigarettes are not subsequently returned or
destroyed, floor stocks tax must be paid on them and the
taxpayer must file an amended floor stocks tax return.
Failure to comply with these provisions can result in the
assessment of interest and penalties.
Exemptions and credits. Public Law 101-508, 104 Stat.,
1388, contains provisions designed to remedy some of the
adverse aspects of the tax as it affects wholesale and
retail dealers. If the total amount of cigarettes available
for sale on January 1, 1993, does not exceed 30,000
cigarettes, the proprietor does not owe any floor stocks
tax. Also, cigarettes held in any vending machine are
exempt from floor stocks tax.
Proprietors with more than the above specified amounts on
hand are allowed a maximum credit of $60.00 that may be
taken on the tax return.
Controlled groups. All members of a controlled group
are considered as a single taxpayer for purposes of the
exemption allowance and tax credit. Basically, a "Controlled Group" means any group of incorporated or
non-incorporated businesses that have common ownership
interests (including individuals, partnerships,
corporations, and States or political subdivisions of
States). A business is considered to be part of a
controlled group if more than 50 percent of the business is
owned either by, or in common with, another business (or
businesses).
Floor Stocks Tax Return, ATF F 5000.28T. All
proprietors holding, for sale, cigarettes subject to floor
stocks tax on January 1, 1993, must complete and file a
Floor Stocks Tax Return, ATF F 5000.28T. Taxpayers
qualifying for the 30,000 cigarette exemption need only make
a record of their inventory and complete parts I, II, and Vof ATF F 5000.28T. Detailed information and general
instructions will be sent out with the floor stocks tax
return form.
Proprietors will need to do some mathematical conversions since commercial packages of taxable cigarettes
are not in the same unit of measure as used in the
computation of the tax. Cigarettes, both large and small,
are taxed by the thousand. Proprietors will have to convert
their count of cigarette packs, carton and cases to
thousands of cigarettes. Further information on converting
inventories is provided as part of the tax return package.
Proprietors who normally file monthly reports with ATF may
continue to use the customary conversion factor used for
their regular reports. There is no need to do conversions
twice.
Proprietors should convert to taxable units at the time the inventory is taken, rather than waiting until making tax payments. Upon completion of the conversion of the
inventory to taxable units, the taxpayer must enter the
inventory for each product on the lines provided on the tax
return, ATF F 5000.28T, and multiply by the applicable tax
rates. Tax credits are deducted. Controlled groups get
only one such credit for all the associated businesses. The
credit may be taken in full by one member of the controlled
group, or divided among the members. For further
information on controlled groups or tax returns covering
more than one location, and associated recordkeeping
requirements, see 27 CFR 296.197(b) and (c), and 27 CFR
296.199.
Filing and payment dates. Although the inventory is
required on January 1, 1993, proprietors are not required to
file the floor stocks tax return and submit the remittance
until June 30, 1993.
Electronic Fund Transfer. Manufacturers of tobacco
products who pay their Federal excise tax by Electronic Fund
Transfer (EFT) during 1993 will be required to make their
floor stocks tax payment by EFT. To insure proper credit, a
separate EFT transfer should be made for the floor stocks
tax. It should not be combined with the regular excise tax
remittance.
Retention of records. The physical inventory will be
recorded in writing as it is being taken, and retained at
the place of business to which the inventory pertains for a period of at least three years after the filing date of the
Floor Stocks Tax Return. Similarly, proprietors using a
record inventory must retain the summary and supporting
records for a period of three years after the filing date of
the Floor Stocks Tax Return. The record must be made
available at each proprietor's place of business for
inspection by ATF officers. Civil and criminal penalties
are imposed by law for failure to file, failure to pay,
failure to allow officers access to premises where taxable
articles are stored, failure to furnish officers access to
records pertinent to tax liabilities, filing a fraudulent
return, etc.
If an ATF officer discovers evidence of a tax liability and
the taxpayer fails or refuses to make or amend a return, or
to voluntarily pay the tax due, the ATF officer has the
right to use the information available to prepare and sign a
return for the taxpayer. On the basis of that return, the
tax, along with appropriate penalties and interest, will be
assessed. It will then be the taxpayer's responsibility to
prove that the amount is not due.
Inquiries. If you have any questions, please contact
the following ATF office in your area:
Taxpayers in: Call or write, Technical
Services, Bureau of Alcohol,
Tobacco and Firearms at the
following:
Illinois, Indiana, Kentucky, 550 Main Street, Room 6525
Michigan, Minnesota, North Dakota, Federal Office Bldg.
Ohio, South Dakota, Wisconsin, Cincinnati, OH 45202
West Virginia (513) 684-3335
FAX (513) 684-3168
Connecticut, District of Columbia, The Curtis Center, Suite 875
Delaware, Massachusetts, Maryland, Independence Square West
Maine, New Hampshire, New Jersey, Philadelphia, PA 19106
New York, Pennsylvania, (215) 597-2246
Rhode Island, and Vermont: FAX (215) 597-7255
Alabama, Florida, Georgia, 2600 Century Parkway NE,
Mississippi, North Carolina, Suite 305
South Carolina, Tennessee and Atlanta, GA 30345
Virginia: (404) 679-5080
FAX (404) 679-5099
Taxpayers in: Call or write, Technical
Services, Bureau of Alcohol,
Tobacco and Firearms at the
following:
Arkansas, Colorado, Iowa, 1114 Commerce Street
Kansas, Louisiana, Missouri, 7th Floor
Nebraska, New Mexico, Oklahoma, Dallas, TX 75242
Texas, and Wyoming: (214) 767-2277
FAX (214) 767-2750
Alaska, Arizona, California, 221 Main Street
Hawaii, Idaho, Montana, Nevada, 11th Floor
Oregon, Utah, Washington: San Francisco, CA 94105
(415) 744-7011
FAX (415) 744-9443

Director
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Exhibit 1
NEW EXCISE TAX RATES EFFECTIVE JAN. 1, 1993
TOBACCO PRODUCTS
Tobacco Product Old Rate New Rate
Small Cigars $.9375 per $1.125 per
thousand thousand
Large Cigars 10.625% of 12.75 of
price not price not
to exceed to exceed
$25 per $30 per
thousand thousand
Small $10.00 per $12.00 per
Cigarettes thousand thousand
Large $21.00 per $25.20 per
Cigarettes thousand thousand
Cigarette 0.625 cent 0.75 cent
Papers /50 papers /50 papers
Cigarette 1.25 cent 1.5 cent
Tubes /50 tubes /50 tubes
Smokeless 30 cents 36 cents
Snuff per pound per pound
Chewing 10 cents 12 cents
Tobacco per pound per pound
Pipe Tobacco 56.25 cents 67.5 cents
per pound per pound |