Questions Answered in Federal Excise Tax Increase on Tobacco

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Questions Answered in Federal Excise Tax Increase on Tobacco

WASHINGTON -- With just a little more than two weeks before the effective date, the U.S. Treasury’s Alcohol and Tobacco Tax and Trade Bureau (TTB) issued instructions and forms for submitting the floor stocks tax return for all tobacco products except large cigars, which is exempt from the floor stocks tax. The floor stocks tax came as part of a federal excise tax (FET) increase on all tobacco products to fund an expansion of the State Children's Health Insurance Program (SCHIP).

The instructions also answer some questions raised by the tobacco industry and retailers after the bill expanding SCHIP was passed. Some of which were the potential inclusion of promotional offers such as buy-one, get-one packs, or payments made related to products that later expire and are returned to manufacturers.

Due July 31, all manufacturers, wholesalers and retailers are required to inventory their tobacco products (excluding large cigars) as of April 1, and calculate a payment based on the difference between the old and new tax rates. Inventory for that date can be taken between March 26 and April 11, but if not done on April 1, must be reconciled to reflect the actual quantity of products held at the beginning of business on the effective day. All companies will receive a $500 floor stocks tax credit, and a company can file a consolidated return for multiple locations.

The TTB recommended retailers maintain all records used to determine the quantity of products on hand on the tax increase date, along with a record of all calculations made to determine the amount of tax owed. The records should include the quantity and type of products; the date and time the inventory was taken; the name of individual(s) conducting the inventory and the name of the person for whom the inventory was taken; and the street address, city, and state where the inventory was taken. Records must be kept for three years after the date of filing, and in the case where an overpayment was made, the company may file a claim for a refund, and in the instance of an underpayment, an additional tax return must be made.

The instructions also state the floor stocks tax includes tobacco products that have been taxpaid or tax determined and are being held for sale on April 1. However, tax does not apply to tobacco products that have not been removed from the manufacturer’s premises subject to tax or have not been released from customs custody subject to tax.

Products in transit must be included in the inventory count if the title is held for those products, and records must show title transfers, if applicable. The guidelines for establishing title ownership follows state laws, if applicable. In the absence of state law, the Uniform Commercial Code allows the seller and buyer to agree when title passes, which states that title transfer depends on the product's shipment by the seller:

-- Free on board (F.O.B.) destination states the title transfer occurs when the seller completes the performance of the physical delivery of the products.
-- F.O.B. shipping point states the title transfer occurs when the seller transfers the title at the time and place of shipment, which is generally by common carrier.

For unmerchantable products held in inventory April 1, for return to a supplier because of some defect or damage, the holding party is not required to pay the floor stocks tax. However, these products must be physically segregated and included in a separate section of the inventory record. And if those products are not subsequently returned or destroyed, that party must file an additional floor stocks tax return and pay tax on such products.

Moreover, products marked "not for sale" or "complimentary" that are part of a promotion are subject to the floor stocks tax and must be included in the inventory, according to the TTB's instructions. The same applies for products in vending machines.

The forms can be obtained from the TTB via its Web site --, by e-mail at [email protected], or by calling (877) 882-3277 or (513) 684-3334.

Returns must be filed even if there is no payment calculated. The floor stocks tax return must be postmarked and paid no later than July 31, in the form of a check or money order sent with the TTB forms. Payments must be made out to "ALCOHOL AND TOBACCO TAX AND TRADE BUREAU," and sent to:

Alcohol and Tobacco Tax and Trade Bureau
2009 Floor Stocks Tax
P. O. Box 790208
St. Louis, MO 63179-0208