California recently issued a Special Notice, which changes how the California Department of Tax and Fee Administration (CDTFA) will apply the OTP excise tax to the wholesaler’s cost basis when an out-of-state California licensed tobacco products distributor sells tobacco products to wholesalers, retailers, or consumers located in California. When a shipment is made by an out-of-state distributor to an in-state customer (retailer or consumer), the tax base will be the “wholesale cost” of the in-state purchaser and not the wholesale cost of the distributor. In-state California distributors will not be impacted as they will continue to pay the tax based on their cost.
This change provides an advantage to in-state California distributors as out-of-state distributors shipping to in-state retailers will be required to collect the tax based on the retailer’s purchase price (a higher tax base). Similarly, out-of-state distributors who ship directly to consumers (e-commerce) will be required to collect the tax based on the consumer’s purchase price (an even higher tax base).
California has recently notified distributors that it will be adopting this position effective October 1, 2019.