Importation of Tobacco Products and Calculating the Tax on Imported Large Cigars
To: Manufacturers and Importers of Tobacco Products and Others Concerned
The purpose of this Industry Circular is to respond to industry requests that the Alcohol and Tobacco Tax and Trade Bureau (TTB) publish guidance on the calculation of the Federal excise tax on imported large cigars, in particular, with regard to what sales transaction creates the "sale price" that is the basis for the tax. This circular is also intended to remind all importers of tobacco products of the statutory provisions that prevent imported tobacco products from being transferred without payment of tax from one customs bonded warehouse or foreign trade zone to another, unless the tobacco products are destined for export.
2. DETERMINATION OF TAX ON IMPORTED LARGE CIGARS.
a. Background – Increase in the Tax Liability on Imported Large Cigars.
The Federal excise tax on large cigars (that is, cigars that weigh more than 3 pounds per 1,000) is based on the price for which the cigars are sold by the importer or domestic manufacturer, and is a percentage of the sale price up to a maximum per-cigar amount, or "cap". Prior to April 1, 2009, the tax was 20.719 percent of the price for which the cigars are sold, but not more than $48.75 per 1,000. In effect, large cigars that sold for $235.294 per 1,000 or less were taxed at 20.719 percent of the sale price, while cigars that sold for more than $235.294 per 1,000 were taxed at $48.75 per 1,000, or 4.875 cents per cigar. The tax increase on large cigars that went into effect on April 1, 2009, as a result of the Children's Health Insurance Program Reauthorization Act of 2009 (Pub. L. 111-3) raised the tax rate as well as the "cap" on the tax rate. The tax rates are set forth in the Internal Revenue Code of 1986 (IRC) at 26 U.S.C. 5701(a) and in the TTB regulations at 27 CFR 40.21 and 41.31.
Currently, the tax on large cigars is 52.75 percent of the sale price, but not more than 40.26 cents per cigar. In effect, this means that large cigars that are sold for $763.222 per 1,000 or less are taxed at 52.75 percent of the sale price, while cigars sold for more than $763.222 per 1,000 are taxed at 40.26 cents per cigar. As a result of the increase in the "cap" rate of tax, many more importers of large cigars have been importing cigars with price ranges that fall below the "cap" rate of tax, and such importers must now determine the tax by applying the tax rate to the sale price rather than by merely relying on the "cap" rate of tax.
b. Determining Tax Liability.
As a general rule, the tax imposed on large cigars is computed based on the sale price (the price for which the large cigars are sold by the manufacturer or the importer). In addition to money, goods or services exchanged for cigars may be considered as part of the sale price. (See 26 U.S.C. 5701(a)(2) and 27 CFR 40.22(a) and 41.39.) It should be noted that, when the term "manufacturer" is used in the TTB regulations, it does not refer to companies that manufacture tobacco products outside of the jurisdictional limits of the IRC.
A person must have a TTB permit to engage in the business of manufacturing or importing tobacco products. (See 26 U.S.C. 5712 and 5713). In general, the domestic manufacturer of tobacco products is liable for the tax upon removal of the products from the bonded factory premises, while the importer is liable for the tax upon the release of the products from customs custody. (See 26 U.S.C. 5703(a).)
TTB reminds industry members that in accordance with the above-cited provisions of the laws and regulations, the "sale price" that is the basis for the tax is generally the price for which the domestic manufacturer or importer sells the packaged cigars in an arm's length transaction to an unrelated party, typically a wholesaler or distributor. For imported large cigars, the price the importer paid the foreign manufacturer to purchase the products is not the sale price for purposes of calculating the tax. Rather, the pertinent sale for purposes of calculating the tax is the sale by the importer (not the sale to the importer) in an arm's length transaction to an unrelated party.
The release of imported large cigars from customs custody that triggers the tax liability may occur before a sale takes place, that is, cigars may be imported upon payment of tax and held pending a sale. In these situations, the actual sale price has not yet been determined at the time the products are released from customs custody and, therefore, the "sale price" used to calculate the excise tax due at that time is the importer's standard list price for the cigar before any discounts or other adjustments to the price are applied. Once an actual sale takes place, the importer will, if necessary, make an adjustment based on the actual sale price by either paying an additional amount of tax (with interest) or filing a claim for refund or credit (with interest). (See 27 CFR 41.39 and 40.22.)
c. Use of Constructive Sale Price.
Constructive sale price rules apply to cigars sold by an importer or domestic manufacturer at retail, sold on consignment, or sold (otherwise than through an arm's length transaction) at less than the fair market price. Sales of cigars between affiliated corporations and sales to certain retailers may be analyzed under the constructive sale price rules. (See 26 U.S.C. 5702(l)(3) and 27 CFR 40.22(b) and 41.39.) If there is any question concerning the applicable sale price for tax purposes, the appropriate TTB officer will determine such price, applying rules similar to the constructive sale price rules in 26 U.S.C. 4216(b) and the implementing regulations in 26 CFR 48.4216(b)–1 through 48.4216(b)–4.
d. Release of Tobacco Products from Customs Custody that are Not Put Up in Packages.
Products that are not put up in packages may only be released from customs custody without payment of tax for delivery to a manufacturer of tobacco products. (See 26 U.S.C 5704(c).) The term "package" is defined in the TTB regulations at 27 CFR 40.11 and 41.11, in pertinent part, as "the immediate container in which tobacco products…are put up by the manufacturer or the importer (prior to release from customs custody) and offered for sale or delivery to the ultimate consumer." If tobacco products, including large cigars, are released from customs custody without payment of tax for delivery to the bonded premises of a tobacco product manufacturer, the tax liability is transferred to that manufacturer, who is liable for the tax when the products, in packages, are removed from the factory premises for distribution in the United States. (See 26 U.S.C. 5704(c) and 5703(a)(2).)
e. Responses to Specific Questions.
(1) Who is liable for the tax on imported tobacco products?
The importer of tobacco products is liable for the tax upon their release from customs custody, except when the products are not in consumer packages, in which case they may only be released from customs custody under the bond of a manufacturer of tobacco products for delivery to its bonded premises. The manufacturer may package the tobacco products on its premises and then remove them from the factory for distribution, at which time the manufacturer would be liable for the tax on the packaged products.
(2) Who is the "importer" of tobacco products for TTB purposes?
The importer of tobacco products is the person in the United States to whom nontaxpaid tobacco products manufactured in a foreign country, Puerto Rico1 , the Virgin Islands, or a possession of the United States are shipped or consigned. The term "importer" also includes any person who removes cigars or cigarettes for sale or consumption in the United States from a customs bonded manufacturing warehouse, and any person who smuggles or otherwise unlawfully brings tobacco products into the United States. (See 26 U.S.C. 5702(k) and 27 CFR 41.11.) A person engaged in the business of importing tobacco products must have a TTB permit to operate. TTB will examine both the form of the import transaction and the facts that underlie the substance of the import transaction to determine the identity of the importer under 26 U.S.C. 5702(k) and 27 CFR 41.11. As a general rule, TTB does not consider an agent working on behalf of the actual importer to be an importer for permit and tax liability purposes.
(3) What is the "sale price" of large cigars that forms the basis for the excise tax?
In general, the sale price is the price for which the products are sold by a domestic manufacturer or importer to an unrelated purchaser in an arm's length transaction. The sale price is not the price the importer paid for the products to a foreign manufacturer. If imported bulk tobacco products (that is, products not in consumer packages) are transferred to a domestic manufacturer's premises under bond for packaging, the applicable sale price would be the price for which the packaged products are sold by the domestic manufacturer. If the domestic manufacturer or importer sells the cigars at retail, on consignment, to an affiliated corporation, to certain retailers, or to another entity in a transaction that is not at arm's length and at less than fair market price, TTB encourages the manufacturer or importer to contact TTB for further information regarding the application of the constructive sale price rules of 26 U.S.C. 4216(b) and the implementing regulations in 26 CFR 48.4216(b)–1 through 48.4216(b)–4 to its specific scenario.
(4) What does the "sale price" include and what must be excluded?
Industry Circular 91-3 provides a summary of the statutory and regulatory provisions that apply to determining exclusions and inclusions for purposes of calculating the tax on large cigars. (See also 26 U.S.C. 5702(l) and the TTB regulations at 27 CFR 40.22 and 41.39.)
(5) How does the importer determine the tax on imported large cigars when importation occurs before a sale has taken place?
In general, tax liability for imported large cigars is triggered when the products are released from customs custody, which can occur before a sale of the cigars takes place. In these situations, the sale price used to calculate the excise tax is the importer's standard list price for the cigar, before any discounts or other adjustments to the price are applied. Once an actual sale has taken place, if the importer sold the cigars for a price different from the standard list price, the importer will make an adjustment by either paying an additional amount of tax (with interest) or filing a claim for refund or credit (with interest). Any person who imports large cigars for sale in the United States must keep records necessary to establish and verify the sale price, and also must keep a copy of each customs entry or withdrawal form associated with a taxable importation of large cigars.
(See 27 CFR 41.181 and 41.81.)
3. IMPORTATIONS OF TOBACCO PRODUCTS AND ENTRY FOR WAREHOUSING.
For imported tobacco products the taxable event is generally release from customs custody. (See 26 U.S.C. 5703 and 5704.) However, there is an exception in the case of products that are transferred directly to a customs bonded warehouse (CBW) or foreign trade zone (FTZ): the tax is determined and becomes payable, within the time periods prescribed by law, upon the removal of the product from the first such CBW or FTZ, even if the products are removed from that CBW or FTZ for transfer to another. This rule does not apply, however, to any article so removed that is shown to the satisfaction of the Secretary to be destined for export. (See 26 U.S.C. 5703(b)(2)(B).)
If you have any questions concerning this circular, please contact the Regulations and Rulings Division at (202) 453-2265 or at Regulations@ttb.gov.
1 Because the regulations authorize the tax payment of cigars by the manufacturer in Puerto Rico prior to shipment to the United States, different rules may apply in determining the identity of the "importer" of tobacco products manufactured in Puerto Rico.
John J. Manfreda
Alcohol and Tobacco Tax and Trade Bureau