taxes

Cigar & Tobacco Products Tax Manual

Chapter 5 – Audit Procedures for Out-of-State Distributors

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.

Internal Controls

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.

Cigar and Other Tobacco Products Sales

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.

  • Review Texas sales. A distributor may offset reported sales with products returned. They may also reduce their reported sales by amounts sold to federal or military establishments or Native American reservations in Texas.
  • Exempt sales must be supported by either:
    • Form 69-302), a Certificate of Tax Exempt Sale - Unstamped Cigarettes, Untaxed Cigars and/or Untaxed Tobacco Products prior to 09/01/2009,or
    • (Form 69-315) Certificate of Tax Exempt Sale, effective 09/01/2009.

See Chapter 4 for a more detailed description of these audit procedures.

Product Class Definitions

Distributors must report based on the classification of the cigar or tobacco product. The classifications are:

  • Class A: Tobacco including snuff, pipe tobacco, twist, plug, and chew (prior to 09/01/2009)
  • Class W: Tobacco includes snuff, pipe tobacco, twist, plug, chew and roll-your own tobacco products effective 09/01/2009
  • Class B: Little cigars with a weight of not more than 3 pounds per thousand
  • Class C: Cigars weighing more than 3 pounds per thousand selling for 3.3 cents or less each
  • Class D: Cigars weighing more than 3 pounds per thousand of natural leaf selling for over 3.3 cents each
  • Class F: Cigars weighing more than 3 pounds per thousand of substantial non-tobacco filler selling for over 3.3 cents each

Product Class Reporting Definitions

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:

  • Packages weighing 1.2 ounces or less packages reported at a tax rate equal to a 1.2 ounce package
  • Packages weighing greater than 1.2 ounces reported at a tax rate per ounce

Class B – F cigars reported by volume or number of cigars.

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(Revised 07/2012)