Cigars sold in the state of New York will now be much more expensive.
The tax paid on cigars has increased from an effective rate of 28.5 percent of the wholesale price to 75 percent. For context, a cigar with an MSRP of $9.50 likely retailed for around $12.21 under the old tax system. It will now increase to $16.63 before sales tax.
What’s confusing is that the tax in New York has been set at 75 percent for years. However, due to a lawsuit, the state allowed for an alternative tax method that was based on something known as industry standard. The idea is that New York’s law was written to tax the products on the price a retailer might pay if they bought them directly from a factory but didn’t take into account the idea of a distributor or the costs of importing the cigars from the factory to the state of New York.
So, the state allowed for something known as industry standard which it said retailers could use if there wasn’t a listed wholesale price. If there wasn’t an established wholesale price, then an industry standard method would be used to create one. Whatever price the retailer paid would be multiplied by 38 percent to create an effective wholesale price, that was then taxed at 75 percent. For example, if a retailer purchased that $9.50 it would expect to pay half of that from the manufacturer, a $4.75 wholesale cost. The industry standard price, 38 percent of $4.75, would be $1.805 and the taxes owed on it would be $1.35, or 28.5 percent of $4.75.
In April, the New York Assembly passed a budget that would remove the adjustments. At the time, cigar retailers told halfwheel one of the primary reasons behind the change wasn’t because the state wanted more tax revenue, rather, the New York Department of Taxation and Finance was tired of paying out refunds to retailers who claimed that the industry standard rate was outdated and too high. The retailers would then argue that they had been overtaxed—some arguing for an industry standard rate as low as 25 percent—and requesting refunds.
Those days are now over.
The New York Department of Taxation and Finance has updated its website to read:
The tobacco products definition of wholesale price has been revised to be the price for which the tobacco products are sold to a distributor, before the allowance of any discount, trade allowance, rebate or other reduction, and including the federal excise taxes paid by the seller. The invoice received by a distributor for its purchase of a tobacco product is presumptive evidence of the wholesale price of the tobacco product.
This definition applies to all tobacco products possessed in this state for sale on or after October 1, 2020. No floor tax is due on inventory acquired before October 1, 2020.
New York’s uncapped 75 percent tax means it joins Alaska as the state with the second-highest tax rate for cigars in the U.S.