DEPARTMENT OF THE TREASURY
Alcohol and Tobacco Tax and Trade Bureau

Industry Circular

Number: 2009-1

Date: March 16, 2009

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Increase in Federal Excise Tax and Imposition of Floor Stocks Tax on Tobacco Products, Cigarette Papers, and Cigarette Tubes

To:  Manufacturers and Importers of Tobacco Products, Cigarette Papers or Cigarette Tubes; Export Warehouse Proprietors; Dealers in Tobacco Products, Cigarette Papers, or Cigarette Tubes; and Others Concerned

PURPOSE

The purpose of this Industry Circular is to inform you of an increase in the Federal excise tax rates on tobacco products, cigarette papers, and cigarette tubes and of floor stocks taxes imposed on tobacco products (except large cigars), cigarette papers, and cigarette tubes.  The tax increases and the floor stocks taxes were imposed by the Children’s Health Insurance Program Reauthorization Act of 2009 (the “Act,” Pub. L. 111-3), which was signed into law on February 4, 2009.  The excise tax increase and the floor stocks tax are effective on April 1, 2009.  A Treasury Decision soon to be published in the Federal Register, which will amend 27 CFR parts 40, 41, 44, 46, and 71 to comply with the provisions of the Act, will provide for the requirements described in this Industry Circular.

FEDERAL EXCISE TAX

Increase in Federal Excise Tax Rates

The Act increases the rates of Federal excise tax on all tobacco products and cigarette papers and cigarette tubes imported into or manufactured in the United States.  Starting April 1, 2009, the excise tax on all such products removed from a manufacturer’s premises subject to tax, or released from customs custody subject to tax will be taxed at the new rates.  The new tax rates are set forth in the appendix to this circular.

Effect on Bond Coverage

The increased Federal excise tax rates will increase the tax liability that must be covered by the bond of a manufacturer of tobacco products, cigarette papers, or cigarette tubes, or of an export warehouse proprietor.  Industry members who do not currently have the maximum amount of bond coverage, as prescribed in the TTB regulations, should review their bond coverage and compute the amount of bond coverage required using the new tax rates.  If the present bond amount is insufficient to cover liability under the applicable new tax rate, a strengthening bond must be filed.

For manufacturers of tobacco products, the pertinent TTB regulations regarding bonds are in the Code of Federal Regulations (CFR) at:

• 27 CFR 40.133, Amount of individual bond.
• 27 CFR 40.134, Amount of blanket bond.
• 27 CFR 40.135, Strengthening bond.

For manufacturers of cigarette papers or cigarette tubes, the pertinent TTB regulations regarding bonds are:

• 27 CFR 40.404, Amount of bond.
• 27 CFR 40.405, Strengthening bond.

For export warehouse proprietors, the pertinent TTB regulations regarding bonds are:

• 27 CFR 44.123, Amount of bond.
• 27 CFR 44.124, Strengthening bond.

Effect on Payment of Tax Through Electronic Funds Transfer (EFT)

Because of the increase in Federal excise tax rates, some taxpayers may find at the end of the year that they are subject to the requirement to make future excise tax payments using EFT.  In general, any person who, in a 12-month period ending December 31, had a total tax liability of $5,000,000.00 or more on tobacco products, cigarette papers, and cigarette tubes must pay excise tax during the following calendar year using EFT.  Taxpayers are reminded to review their tax liability for calendar year 2009 at the end of the year to see if the EFT requirement will apply to them.  See 26 U.S.C. 5703(b)(3).

FLOOR STOCKS TAX

As part of the transition to the new Federal excise tax rates, the Act imposes a floor stocks tax on tobacco products (except large cigars) and cigarette papers and cigarette tubes held for sale on April 1, 2009.  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 new tax rate and the immediately prior tax rate.  The floor stocks tax rates also appear, along with a description of the products, in the appendix to this circular.

Tobacco products subject to this floor stocks tax are cigarettes, small cigars (that is, cigars weighing 3 pounds or less per 1,000), snuff, chewing tobacco, pipe tobacco, and roll-your-own tobacco, as those terms are defined at 26 U.S.C. 5702.  All persons liable for the tax must complete and file a floor stocks tax return, TTB F 5000.28T09 on or before July 31, 2009.  The rules regarding application of the floor stocks tax are summarized below.  For more detail regarding liability for, and calculation of, the floor stocks tax, see the Instructions for TTB F 5000.28T09.

Persons Liable for the Floor Stocks Tax

Any person who holds tobacco products (except large cigars) or cigarette papers or cigarette tubes for sale on April 1, 2009, other than under TTB bond or in customs custody, is liable for the floor stocks tax.  This includes, for example, wholesale and retail dealers, as well as manufacturers and importers who are holding taxpaid or tax determined products.

Floor Stocks Tax Inventory

Any person liable for the floor stocks tax must take an inventory to establish tax liability.  The inventory may be 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 record (book) inventory.  Persons without adequate source records must take a physical inventory.

The inventory must be taken after March 25, 2009, and before April 11, 2009, and if taken on any day other than April 1, 2009, it must be reconciled (adjusted) to reflect the actual quantity of products held at the beginning of business, April 1, 2009.

Shipments in Transit

All products subject to floor stocks tax that are in transit must be included in the inventory if you hold title to those products.  If you have transferred the title, you must document the title transfer in writing.  For example, you may mark the bill of lading with a written statement that indicates the time and place of the title transfer.

Unmerchantable Products

The floor stocks tax does not apply to unmerchantable products.  For purposes of the floor stocks tax, the term “unmerchantable” refers to products that are being returned through the distribution chain due to a defect or damage.  Tobacco products and cigarette papers and tubes that are being returned through the distribution chain because of poor market demand, or in order to reduce inventory, are not considered unmerchantable.  All persons holding tobacco products (except large cigars) or cigarette papers or cigarette tubes for sale on April 1, 2009, must physically segregate any unmerchantable products and include them in a separate section of their inventory record.  Unmerchantable products should not be included when determining the floor stocks tax.  If, for any reason, the tobacco products or cigarette papers or tubes that were identified in the inventory as unmerchantable are not subsequently returned or destroyed, the taxpayer must file an additional floor stocks tax return and pay the tax.

Tax Credit

Each person is allowed a credit of up to $500 against the total floor stocks tax liability.  If a person has less than $500 in total floor stocks liability, the person is exempt from the floor stocks tax but still must file a return.  The credit against the floor stocks tax cannot be used as a basis for a claim for refund.  A controlled group (see below) is eligible for only one credit for the entire group.  The credit may be divided equally among the members of the controlled group or apportioned in any other manner agreeable to the members.

Controlled Groups

All members of a controlled group are considered as a single taxpayer for purposes of the tax credit.  A “controlled group” is any group of corporations or non-incorporated businesses that have common ownership interests.  Generally, a business is considered to be part of a controlled group if more than 50 percent of the business is either owned by, or in common with, another business.

Filing and Payment Dates

A floor stocks tax return (TTB F 5000.28T09) must be filed, and the floor stocks tax must be paid, by July 31, 2009.  A return must be filed even if there is no liability after taking the $500 credit.

Payment by EFT

Any taxpayer who currently uses EFT to pay Federal excise tax to TTB must make the floor stocks tax payment by EFT.  To ensure proper credit, a separate EFT transfer should be made to cover the floor stocks tax; do not combine the floor stocks tax payment with a regular excise tax remittance.

Retention of Records

You must maintain records in support of the floor stocks tax return, including your inventory records, for three years from the date the return was filed, or until July 31, 2012, whichever date is later.  TTB may request, in writing, that you retain the records for an additional three years, for a total of six years.  You must maintain the records at your principal place of business.  All records must be made available to TTB upon request.

Penalties for Failure to Comply

If a person fails to comply with the law, TTB may apply applicable civil and criminal penalties under the Internal Revenue Code of 1986.  For example, failure to file and failure to pay penalties may be assessed against a person who does not timely file a tax return or timely pay the taxes due.  In addition, interest may accrue for any underpayment of tax and on all assessed penalties until paid.  See 26 U.S.C. 6621.  Anyone in charge of a premises who refuses to admit any appropriate TTB officer or who prevents any appropriate TTB officer from examining records or taxable articles may be liable for penalties.  See 26 U.S.C. 7342 and 7212.

FURTHER INFORMATION

Further information, including updated regulations, forms and detailed guidance will be made available in the near future.  In the meantime, if you have any questions regarding the Federal excise tax increase or the floor stocks tax imposed by the Act, please contact the TTB National Revenue Center by email at FloorStocksTax@ttb.gov or by telephone at 1-877-882-3277 or 513-684-3334.

John J. Manfreda
Administrator
Alcohol and Tobacco Tax and Trade Bureau

APPENDIX TO INDUSTRY CIRCULAR 2009–1

The Federal excise tax rates for tobacco products and cigarette papers and tubes in effect on April 1, 2009, and just previous to the increase, as well as the floor stocks tax, are shown in the table below.

1. If more than 6 ½ inches in length, large cigarettes are taxable at the rate prescribed for small cigarettes, counting each 2 ¾ inches, or fraction thereof, as one small cigarette.
2. The tax rate is set forth per pound and a prorated tax at the same rate applies to all fractions of a pound.
3. If more than 6 ½ inches in length, the cigarette papers or cigarette tubes shall be taxable at the rate prescribed for that product, counting each 2 ¾ inches, or fraction thereof, as one cigarette paper or cigarette tube, as appropriate.