Audits of out-of-state distributors differ from those of in-state distributors. Tax is assessed on cigars and other tobacco product sales or distributions into Texas rather than on the purchases of cigars and tobacco products. While a Manufacturer's Comparative Reconciliation is prepared in an audit of a Texas distributor, this analysis is not performed for an out-of-state distributor. Taxes owed are based on the amount of cigars and tobacco products sold into Texas.
As in any audit, test internal controls before proceeding with fieldwork. Randomly select six months to use as test months. Evaluate the taxpayer's process of recording sales and reconcile the amounts to the summary records and to the reports. Analyze the effect of any discrepancies.
Actual sales into Texas are used to measure the amount of tax owed on cigars and tobacco products. An out-of-state permitted distributor cannot sell un-taxed cigars and other tobacco products to a distributor in Texas. The first sale in Texas occurs when the products are shipped from the out-of-state distributor to a Texas distributor, wholesaler or retailer.
See Chapter 4 for a more detailed description of these audit procedures.
Distributors must report based on the classification of the cigar or tobacco product. The classifications are:
Class A tobacco reported by taxable value. Class A was discontinued as of 08/31/2009.
Class W tobacco (effective 09/01/2009) reported type of product which include chewing tobacco, snuff, pipe tobacco or roll your own), and has two categories:
Class B – F cigars reported by volume or number of cigars.