California Cracks Down on Dual Distributor/Wholesale Licenses

One method used to reduce the tax burden on cigars in the state of California will be going away next year.

Last week, the California Department of Tax and Fee Administration issued a notice stating it would no longer allow companies to hold both a tobacco distributor license and a tobacco wholesaler license. The decision will affect 2019 licenses with the state saying that persons—which also includes companies and organizations—may not renew both licenses for next year.

Many companies had acquired both licenses in an effort to reduce taxes paid to the state. Cigar companies would import products at a lower price than their typical wholesale price, thus reducing the tax burden. Companies would then often charge an additional fee, such as a marketing fee, before selling the products to retailers.

This strategy became particularly popular within the last year due to a massive tax increase on cigars. It’s also similar to a strategy some companies are using in other high tax areas like Canada.

In July 2017, the tax on other tobacco products, including cigars, more than doubled to 65.08 percent of the wholesale price. This meant a cigar that had an MSRP of $9.50 likely retailed for around $12.09 before the tax hike. Under the new tax law, that cigar would retail for $15.68.

The tax hike was a result of a ballot measure passed by citizens. While the ballot measure explicitly focused on cigarette taxes, California’s unique tax structure means that the tax on cigars is directly tied to cigarette taxes.

Per halfwheel estimates, California has the third highest taxes on cigars in the U.S. It previously ranked 17th.