3 Reasons You May Be Eligible for a Refund on Your Tobacco Product Taxes

As a tobacco distributor or retailer, we know how important cash flow management is for the success of your business. A sizeable portion of that management is undoubtedly on your tobacco products taxes or other related excise taxes, which are often due the month or quarter following transfer or purchase into a state for a first sale. However, your business may be able to recover or offset some of those upfront costs in situations where they have a right to a tobacco tax refund. We discuss three common situations that could lead to overpayment of tobacco taxes and create a potential refund claim or credit.

1. You Paid OTP Tax on Nontaxable Products and Charges

Taxes on other tobacco products (OTP), e-cigarettes, cannabis, and similar items can vary from state-to-state in terms of their assessment. For example, some states apply the tax based on the item’s weight or quantity sold while others base the tax on the wholesale sales price. Additionally, states may have different definitions for what items are included or excluded from those taxable bases.

A common example we see are distributors that overpay tobacco taxes on the wholesale price because they include amounts that aren’t necessarily subject to tax, like reimbursements for federal excise tax (FET). Another possible issue are state laws that make it unclear on the taxability of novel tobacco products such as e-cigarettes or blunt wraps. When state revenue departments fail to update their tax rules to encompass new products, it may mean those items are not subject to the tax, which could create cause for a refund.

2. You Delivered Tax-Paid Products to Another State

Just because you bring tobacco products into a state for a first sale does not mean they will ultimately be sold there. You may eventually transfer the products to another part of your operation in a different state or sell them to an out-of-state wholesaler. Either way, these out-of-state transfers that take place after payment of tobacco taxes could provide a refund opportunity. Keep track of these sales through your invoicing systems to show tax was paid on the inventory transferred out-of-state, including detailed information about the acquirer (i.e., name, business address, and taxpayer ID if available).

3. Your Tobacco Products Were Lost, Destroyed, or Became Unfit for Sale

Accidents, like fires or flooding, along with other incidents can lead to the loss of your tobacco products when they are unfit for future sale or use. When these issues arise, it’s important to consider the potential for a tax refund on damaged or destroyed tobacco. Many states offer tobacco tax refunds for these reasons, but the key for business owners is compliance with the process for receiving their claim.

This requires attention to the necessary documentation and details to support the refund claim. For example, photo and video evidence or third-party reports from insurance providers. Additionally, some states, like California, may require the presence of a state representative to destroy or dispose of damaged tobacco products. Failing to follow these rules could keep you liable for the tax and limit the chances of a refund you’d otherwise have a right to receive.

Get Help Starting a Tobacco Tax Refund Claim or Appeal Process

Applying for available tobacco tax refunds or credits are an essential part of your tax strategy that can provide relief toward current cash flow or future tax liability. Awareness for the issues that could lead to a refund opportunity is the first step for success followed by a consultation with one of our professional consultants. We assist with the necessary paperwork, communications with auditors or state agents, and other efforts required to secure your refund claim. Remember that most states limit the time to file a refund claim starting from the time you paid the original tax or filed the related tax return.

If you have questions or need help with a potential refund claim, schedule a meeting with us today.