The amount of cigar taxes in California will be decreasing and some cigar companies could be receiving a tax refund.

It’s not because of a decrease in the percentage of taxes—it remains 56.93 percent—rather, because of how the taxes can be calculated.

Effective today, the California Department of Tax and Fee Administration has reversed a 2019 decision that banned cigar manufacturers from charging taxes based on a factory price, a method that companies had used to reduce the amount of taxes paid on cigars in the state.

In most states, cigars are taxed on either a fixed basis—such as 25 cents per cigar—or on a percentage of the wholesale price. In California, cigar companies were using a method where cigars were sold as “tax paid” to retailers. In short, companies would establish a “factory price” that was less than what retailers would pay, pay the taxes themselves, and then charge retailers a “tax paid” price.

The “factory price” varies both cigar-to-cigar and company-to-company, but is typically based on the price a company pays on import and before the company has added in its profit margins.

For example, a company might establish a “factory price” of $1, pay 56.93 cents of taxes—based on California’s tax rate of 56.93 percent—and then charge a retailer a “tax paid” price of $4.57.

Last year, California banned this method to the objection of the cigar industry.

Under the same example, if the manufacturer wanted to keep its same revenue of $4 per cigar, the tax paid would increase from 56.93 cents to $2.28 per cigar, meaning the retailer would be paying $6.28 per cigar instead of $4.57.


The savings will vary, but it’s likely to be more significant for higher-priced products where manufacturers enjoy the best margins.

Factory PriceMarginWholesaleTaxes (56.93 Percent of Wholesale Price)Price Paid by RetailerRetail Price (Price Paid Doubled)
Cigar A$1.25$0.75$2$1.14$3.14$6.28
Cigar B$2$9$11$6.26$17.26$34.52

Under the old system, the tax was paid on the price retailers paid for the cigars.

Factory PriceMarginWholesaleTaxes (56.93 Percent of Factory Price)Price Paid by RetailerRetail Price (Price Paid Doubled)
Cigar A$1.25$0.75$2$0.71$2.71$5.42
Cigar B$2$9$11$1.14$12.14$24.28

Under the new system, the tax is based on the “factory price,” oftentimes the price paid upon import to the country. Cigar companies would then charge retailers a “tax paid” price that combined the “factory price,” the taxes paid on the “factory price,” and their profit margins.


Cigar companies objected to the change, arguing that the California Department of Tax and Fee Administration had imposed the change unconstitutionally because it had not gone through a required period of notice and comment.

Last month, the California Department of Tax and Fee Administration issued a notice saying that was repealing its 2019 directive which banned the practice, meaning that the “factory price” and “tax paid” measurements are once again legal.

As part of the change back to the tax paid model, the state has said that it will allow for companies to request refunds for the overpaid taxes based on the difference between the “factory price/tax paid” practice and the tax structure that has been in place for the last year. California outlawed the “factory price/tax paid” scheme effective Oct. 1, 2019.

Oliva told halfwheel that it intends to file for the refund and then distribute the refund to its retailers. Given the recency of the change, it’s unclear whether more companies will follow suit.

Furthermore, it’s also unclear whether California intends on going through the process of trying to ban the “factory price/tax paid” method again through a more formal process.

Update (Oct. 6, 2020) — The original version of this article incorrectly stated the tax rate as 59.63 percent. It is 56.93.

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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 have written about the cigar industry for more than a decade, covering everything from product launches to regulation to M&A. In addition, I handle a lot of the behind-the-scenes stuff here at halfwheel. I enjoy playing tennis, watching boxing, falling asleep to the Le Mans 24, wearing sweatshirts year-round and eating gyros. echte liebe.