Update on Proposition 56

December 27, 2016

Due to the passage of Proposition 56, effective April 1, 2017, section 30121 (b) of the Revenue and Taxation Code is amended to add little cigars to the definition of "tobacco products" for state taxation purposes. Prior to April 1, 2017, little cigars are considered "cigarettes" for state taxation purposes. Products labeled as little cigars will not be subject to the April 1, 2017 floor stock tax on cigarettes required under Proposition 56. 

Proposition 56 added section 30130.52 to the Revenue and Taxation Code imposing a floor stock/stamp adjustment tax on all retailers, wholesalers and distributors of cigarettes, on each stamped package of cigarettes in their posession or control as of April 1, 2017 at 12:01 a.m., and distributors will also pay a stamp adjustment tax on affixed or unaffixed cigarette tax stamps in their possession or control as of April 1, 2017 at 12:01 a.m. The floor stock tax does not apply to "other tobacco products" as defined under section 30121 (b) of the Revenue and Taxation Code. 

On and after April 1, 2017, the state excise tax will apply to the distribution of little cigars at the same rate as other tobacco products. Currently, the tax rate on the distribution of tobacco products is 27.30 percent of the wholesale cost of the tobacco product. Effective April 1, 2017, distributors of little cigars will be responsible for remitting the Tobacco Product Tax on their distributions of their product. Distributors with stamped packages of small cigars in their inventory on and after April 1, 2017 can distribute the stamped packages of little cigars as "tax paid" tobacco products to wholesalers and retailers until their inventories of stamped packages of little cigars are exhausted. Any unstamped packages of little cigars distributed on and after April 1, 2017 within a distributor's inventory should remain unstamped, and their subsequent distribution to wholesalers and retailers must be substantiated by invoices showing the 27.30 percent of the wholesale cost of the tobacco product charged as tax. 

Effective April 1, 2017, Proposition 56 increases the cigarette tax rate from $0.0435 to $0.1435 per cigarette (the tax on a package of 20 cigarettes will increase from $0.87 to $2.87). The tax on distributions of tobacco products, including little cigars, will also increase at a rate equivalent to the Proposition 56 increase on cigarettes. In April 2017, the Board will determine the tax rate on tobacco products for Fiscal Year 2017-18, which will be based on the wholesale price of cigarettes as of March 1, 2017, and will be equivalent to the tax on cigarettes. We estimate that the tobacco products tax rate will be between 65 and 68 percent on the wholesale cost of the distribution. The tax rate increase on tobacco products will take effect July 1, 2017. There will not be a floor stock tax on other tobacco products.