Colorado Reworks Tobacco Tax on Remote Sales of Cigars and Pipe Tobacco Effective 2024
With the governor’s signature on May 1, 2023, the state of Colorado enacted HB 23-1015, which makes significant tax changes for distributors and retailers of tobacco products. Barring a referendum petition, HB 23-1015 will take effect starting January 1, 2024, and will apply Colorado’s tobacco tax to certain remote retail sales of cigars, pipe tobacco, and other tobacco products along with other updates. If you or your clients sell tobacco products in Colorado through any ecommerce method, read below and take note of how the new law could affect your business moving forward.
What Remote Retail Sales of Tobacco Products Are Subject to the Tax?
For background, Colorado has two components of its tobacco tax. The first comes from C.R.S. 39.28.5.102 with a current rate of 36 percent, and the second part of the tax is the 20 percent rate from Section 21 of Article 10 of the state constitution, which is a tax for health-related purposes. See § 39.28.5.102.5.
HB 23-1015 specifically defines a “remote retail sale” as the sale of cigars or pipe tobacco to a consumer in Colorado through a non-over-the-counter method (e.g., phone, internet, or online). All other types of tobacco products sold through methods other than over-the-counter the bill defines as a “delivery sale”.[JD1] [GS2] Both types of tobacco sales are subject to the combined Colorado tobacco tax rate, currently set to 56 percent.
Changes to the Taxable Base of Tobacco Products Sold or Delivered in Colorado Under HB 23-1015
Generally, the taxable base for calculating Colorado’s tobacco tax is the “manufacturer’s list price”, which is the invoice price exclusive of any discounts or reductions applied to the sale. See C.R.S. 39-28.5-101. However, HB 23-1015 makes a few changes to this definition that could affect how you calculate tobacco tax in the future.
First, the bill expands the definition to include the “acquisition cost” [JD3] [GS4] [GS5] in the case of remote retail sales of cigars or pipe tobacco. Second, when determining the invoice price would be impracticable, the bill would allow distributors and retailers to use the average actual price paid (exclusive of discounts or rebates) for the tobacco product’s stock keeping unit during the previous calendar year. However, the state could force you to calculate tax using the invoice price if it finds your use of the average price paid was to avoid tax. Third, the definition explains that the taxable base for manufacturers that make delivery sales or remote retail sales is the manufacturer’s cost, including overhead, direct materials, and direct labor.
We could see the Colorado Department of Revenue (CDOR) initiate rulemaking in the coming months to clarify aspects of HB 23-1015 before it takes effect in 2024. For example, guidance on when determining the invoice price would be impracticable and would allow for businesses to use their average price paid.
Key Takeaways to Prepare for Colorado’s Tobacco Tax Changes in HB 23-1015
Businesses that participate in the distribution chain of tobacco products into Colorado, especially through ecommerce methods will want to consider their compliance needs moving forward. Remote retail sellers will have the same obligations as distributors and retailers located in Colorado, including the following:
- Registering with the CDOR to get a tobacco sale license.
- Filing tobacco tax returns and remitting payments to the CDOR.
- Maintaining accurate records to verify their collection and payment of tobacco tax in the event of an audit.
With questions about how, or if, Colorado’s tobacco tax on remote retail sales could impact your operations, please schedule a free consultation with Tobacco Tax Refund, Inc. We are a consulting group of tobacco tax professionals who assist tobacco companies across the country in managing audits, assessment appeals, licensing, and other aspects of their state and federal tobacco tax compliance.