LARGE CIGAR TAX RATE WHEN RETAIL PRICE CHANGES
Manufacturers of tobacco products:
A revenue ruling has been approved for publication in the Internal Revenue Bulletin which
ruling sets forth the principles for determining the proper tax rate and class designation
for large cigars when the retail price changes. Specifically, the ruling deals with cigars
removed prior to the effective date of a retail price change which would result in a change
in the tax rate. The ruling will read substantially as follows:
Questions have been asked about the proper tax determination and package class
designation for large cigars removed subject to tax prior to the effective date
of a change in the retail price which would result in a change in the tax rate
imposed by section 5701, Internal Revenue Code of 1954.
Section 5701(a)(2) of the Code imposes a tax on large cigars at seven different
rates based on the ordinary retail price at which the cigars are sold. Under
section 5723 of the Code all cigars must be put up in packages that bear the
required marks, labels, and notices. Implementing regulations in 26 CFR 270.214
and 275.73 require that packages of large cigars bear the appropriate tax class
designation corresponding with the tax rate imposed on the cigars therein.
Under section 5701 of the Code the primary responsibility for determining the
proper tax rate for large cigars is the manufacturer's or importer's. There-
fore, it is his responsibility to know at the time of removal the price at which
his cigars will ordinarily be sold at retail and to determine the tax rate
accordingly. The following principles apply where there is a change in the
retail price which will cause a change in the tax rate.
The cigars the manufacturer or importer believed would be sold at the old price
and which were removed in good faith at the old tax rate, considering all infor-
mation which was or should have been available to him at the time of removal,
would be considered properly tax determined (and the packages bearing the proper
class designation), even though some of these cigars might be sold at wholesale
and retail at the new price.
Conversely, where the manufacturer or importer can reasonably know at the time of
removal that cigars will be sold at retail at the new price, then the tax rate
would be based on that new retail price, with the packages bearing the corresponding
new class designation. This is true even if the removal takes place before the
price change is announced or becomes effective. For example, price changes require
advance planning; any cigars removed after the price-change decision is made which
can logically be expected not to have been sold at retail before the retail price
change becomes effective must be tax determined on the basis of the new retail price.
Any inquiries regarding this circular should be made to the office of your Assistant
Regional Commissioner, Alcohol, Tobacco and Firearms.
Harold A. Serr, Director
Alcohol, Tobacco and Firearms Division