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California Cigar Tax More Than Doubles

Cigars in California will suddenly be more expensive.

Starting July 1, California’s tax rate for other tobacco products (OTP), including cigars, will increase from 27.3 to 65.08. The reason for this massive increase is Proposition 56, a ballot measure which passed overwhelmingly in November that increased the state’s tax on cigarettes from 87 cents to $2.87.

California taxes other tobacco products by dividing the tax rate per cigarette by the average wholesale cost per cigarette, that number is then the OTP tax. Since 2011, this has generally stayed around 30 percent, but because of the massive cigarette tax increase, the OTP tax has more than doubled.

Consumers are likely already feeling the effects of the cigarette tax. It went into effect on April 1 and because of the turns, i.e. how quickly stores sell their inventory of cigarettes, the higher-taxed cigarettes are likely already being bought.

For cigars, the change will take additional time.

First, because of how the OTP taxes are set, the change was delayed until July. Secondly, the new tax rate only applies to cigars coming into the state beginning July 1. Any product that is already in a retailer’s humidor as of today will still be taxed at the old rate.

Once the changes take affect, they will be substantial. Per halfwheel estimates, a cigar with an MSRP of $9.50 likely retails for around $12.09 in California before the state’s 7.25 percent sales tax. Under the new tax, that price will increase to $15.68. When all is said and done, that $9.50 cigar will cost $16.82 with the new tax and sales tax, a total increase of $3.85.

While many manufacturers have encouraged California retailers to load up on stock under the old rate, at least one manufacturer actually shipped new cigars to California early, just so the retailers could enjoy the old tax rate. Tatuaje shipped its TAA 2017 early, a move that will likely save consumers around $4.85 per cigar.

Though it might take consumers a while to feel the effects, the industry will see negative impacts much earlier. Attendance at the 2017 IPCPR Convention & Trade Show, which begins July 11, is expected to be negatively impacted by the California tax situation. At least three companies have told halfwheel they will not be attending the show because they believe attendance will be light due to the California tax.

Per halfwheel’s estimates, California will now have the third highest tax on cigars in the U.S., it previously ranked 17th.

Charlie Minato: I am an editor and co-founder of halfwheel.com/Rueda Media, LLC. I previously co-founded and published TheCigarFeed, one of the two predecessors of halfwheel. I handle the editing of our written content, the majority of the technical aspects of the site and work with the rest of our staff on content management, business development and more. I’ve lived in most corners of the country and now entering my second stint in Dallas, Texas. I enjoy boxing, headphones, the Le Mans 24-hour, wearing sweatshirts year-round and gyros. echte liebe.

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  • Just out of curiosity which companies are not attending the show because of California?

    • The highest uncapped rate is Utah at 85%, followed by Alaska at 75%. You can see every state's tax rate here: http://halfwheel.com/cigar-taxes-by-state

  • That's too bad about California's OTP tax, but no one should be surprised. While tax hikes are near-impossible to pass in California's legislature, they are somewhat easier to secure via the ballot box, as long as the people petitioning to put it on the ballot do their homework. Tobacco tax hikes failed on the ballot the last 2 times because they pushed for a tax way higher than any other state had at the time. This time, they selected a number on the higher end (I'm referring to cigarettes, which is what most people thought about with this tax) but not the highest tax in the US. It passed easily.