Cigar Taxes: Here’s What You Need to Know
Mark Twain once said, “I have made it a rule never to smoke over one cigar at a time. I have no other restriction as regards smoking.” Most cigar enthusiasts would agree with Twain. The government has a long tradition of smoking restrictions, including taxation. Cigar makers have been at odds with the tax collector since the Civil War. Here’s a little history in the ever-evolving realm of the only absolute other than death — cigar taxes.
Cigar Taxes: The Early Resistance
About 150 years ago, the cigar industry didn’t look much different than it does today. Small independent factories wanted to provide premium products for cigar smokers. Like any other product, the government eventually wanted a piece of the burgeoning industry. There was plenty of resistance especially because there was plenty of corruption.
When tax collectors came to collect from factories, they saw a vast array of single cigars. Here’s where it got complicated. They started counting inventory. Conveniently for the taxman, it was difficult to determine which cigars they counted the month before and they had not. This led to double-counting and plenty of dirty deals on both ends.
This arrangement didn’t last long. Eventually, Congress mandated that cigars be boxed or bundled by 10s, 20s, or 50s, so they could manage the counting and the collection process. Then, each box required a prepaid revenue stamp. Of course, the costs were exorbitant, sometimes double the cost of the cigars.
These days aren’t much different. There are federal excise taxes importers must pay besides state taxes. Add in the rise of internet commerce, sales tax, and new laws that pass every few years and confusion persists. Like any product, the costs pass down to the consumer. Here’s what you should know.
What Cigar Taxes Mean for Consumers
Unlike cigarettes and other tobacco products, cigars are taxed a percentage of their wholesale price. Before your imported premium cigar even hits the shelf, it is taxed nearly 53%. Sounds like echoes of the Civil War tax. Fortunately, this federal tax caps at roughly 40 cents per individual cigar. Most companies roll this cost directly into their wholesale price. The taxes don’t end there. Retailers then need to factor in their individual state tobacco tax along with sales tax.
To make this all more concrete, let’s take a cigar with a wholesale price of $4.00 and to keep the math simple assume a 25% state tobacco tax. Remember, this is after the federal government has already taken their 40-cent share. That cigar has an effective cost to retailers of $5.00 after the $1.00 state excise tax. After a 100% markup to assume a 50% gross margin for a typical MSRP, the shelf price comes to $10.00. Add in sales tax at 10% (an additional $1.00), and the consumer pays $11.00. Confusing enough? When all is said and done, taxes drive well over a quarter of the cost. This is only a hypothetical. Each state sets its own distinct tobacco tax ranging from 0 to 95% of the wholesale price, so depending where you are the cost can be even higher.
Be Mindful When Traveling
It’s no surprise that many cigar enthusiasts traveling for business or pleasure are walloped by sticker shock when they want to indulge in a good smoke. California and New York have two of the highest tax rates. There are, however, a handful of states like Florida and New Hampshire that don’t charge any additional tobacco tax. Some states, like Minnesota, charge an absurd 95% state excise tax, but cap individual cigars at 50 cents. This is like the federal cap of 40 cents.
If you’re traveling, bring your own sticks or check out a breakdown of the excise for each individual state at the Cigar Association of America, Inc. Many retailers will build the tax into the shelf price and just charge the sales tax, but plenty of stores list a shelf price that is far less than what you’ll pay.
Internet Sales and Cigar Taxes
Of course, those taxes only apply to retail stores, right? Wrong. In the early days of the internet, e-commerce was tax-free. The cigar business was no different, but just like in the Civil War era, tax collectors eventually wanted their cut. In 2018, the Supreme Court ruled in South Dakota vs. Wayfair, Inc. that individual states can charge sales tax on out-of-state transactions. But what does it mean for the tobacco tax? States are acting.
In 2019, Maryland began to require out-of-state sellers to pay the tobacco tax besides the sales tax. More states will follow, if history teaches anything. Yet, it’s too difficult to track. For now, internet sellers still provide the best deals. Since they do not have the same overhead as brick-and-mortar stores and can (for now) avoid state excise tobacco taxes. This assumes they ship from a low or no excise tax state, as most do. They provide premium cigars at the lowest cost.
You’ll pay more, sometimes a lot more, at your local shop, but retailers can still provide the experience and the ambiance that is a touchstone of the cigar lifestyle. Think of the extra tax as an occasional surcharge.
The “Sin” Tax Will Never Go Away
Sin taxes. They’ve been around as long as taxes themselves. Unfortunately, cigars get paired with alcohol and gambling, and lawmakers and supporters feel justified in charging unreasonable fees for hobbies they consider vices. The intent is to reduce consumption, but sometimes it looks more like a ploy to inflate a state’s pocketbook. Either way, a true smoker won’t let restrictions and taxes interfere with their lifestyle.