Laws, Regulations & Annotations
Business Taxes Law Guide – Revision 2017
Cigarette and Tobacco Products Tax Regulations
Title 18 of the California Code of Regulations
Article 13. Particular Transactions
Regulation 4076. WHOLESALE COST OF TOBACCO PRODUCTS
Reference: Authority cited: Section 30451, Revenue and Taxation Code. Reference: Sections 30008, 30010, 30011, 30017, 30105, 30121, 30123, 30126, 30131.1, 30131.2, 30131.5, 30201, and 30221, Revenue and Taxation Code.
(1) Arm’s-length transaction. An "arm’s-length" transaction means a sale entered into in good faith and for valuable consideration that reflects the fair market value in the open market between two informed and willing parties, neither under any compulsion to participate in the transaction.
(2) Discounts or trade allowances. "Discounts or trade allowances" are price reductions, or allowances of any kind, whether stated or unstated, and include, without limitation, any price reduction applied to a supplier’s price list. The discounts may be for prompt payment, payment in cash, bulk purchases, related-party transactions, or “preferred-customer” status.
(3) Finished tobacco products; finished condition. "Finished tobacco products" and tobacco products in “finished condition” are tobacco products that will not be subject to any additional processing before first distribution in the state.
(b) WHOLESALE COST.
(1) If finished tobacco products are purchased by a distributor from a supplier in an arm’s- length transaction, the "wholesale cost" of the tobacco product is the amount paid for the tobacco product, including any federal excise tax, but excluding any transportation charges for shipment originating within the United States. Discounts and trade allowances must be added back when determining "wholesale cost."
(2) If a manufacturer or an importer is also the distributor, the wholesale cost of tobacco includes all manufacturing costs, the cost of raw materials (including waste materials not incorporated into the finished tobacco product) prior to any discounts or trade allowances, the cost of labor, any direct (including freight-in) and indirect overhead costs, and any federal excise and/or U.S. Customs taxes paid. Wholesale cost includes all freight or transportation charges for shipment of materials and/or unfinished product from the supplier to the manufacturer concurrently licensed as a distributor, but excludes domestic freight or transportation charges for shipment of finished tobacco products as defined in subdivision (a)(3).
(3) If tobacco product costs include express, implicit, or unstated discounts or trade allowances, the correct wholesale costs to be reported by the distributor may be determined using any of the methods provided in subdivision (c).
(4) If tobacco products are not purchased in an arm’s-length transaction, the correct wholesale costs to be reported by the distributor may be determined using any of the methods provided in subdivision (c).
(c) ALTERNATIVE METHODS OF ESTIMATING OR CALCULATING WHOLESALE COST.
The following resources or methods may be used.
(1) A publicly or commercially available price list that the distributor used to determine the prices of tobacco products sold to customers in arm’s-length transactions during the time period at issue, less an estimate based on best available information of the distributor’s or a similarly situated distributor’s profit.
(2) If a publicly or commercially available price list is not available, industry data from the time period to be estimated or calculated that provides reasonable evidence of typical tobacco product costs during such time period, including, but not limited to:
(A) Evidence reasonably indicative of the typical costs of the same or similar tobacco products for similarly situated distributors, with appropriate adjustments to such costs as indicated by all the facts and circumstances.
(B) All the direct and indirect costs that the supplier paid or incurred with respect to acquisition, production, marketing, and sale of the tobacco products sold by the supplier to the distributor, with appropriate adjustments to such costs as indicated by all the facts and circumstances, plus a reasonable estimate of the supplier’s profit.
(C) The price of the same or similar tobacco products as reflected in a supplier’s price list, with appropriate adjustments to such price as indicated by all the facts and circumstances.
(D) The retail price of the same or similar tobacco products as reflected in a retailer’s price list, with appropriate adjustments to such price as indicated by all the facts and circumstances, less reasonable estimates of the retailer’s and distributor’s profits.
(E) Additional methods not mentioned above, with Board approval.
(d) SALES NOT AT ARM’S-LENGTH.
(1) Presumption. Sales, purchases, and transfers of tobacco products are rebuttably presumed to not be at arm’s-length if they are between related parties such as: relatives (by blood or marriage, which relationships include, but are not limited to, spouses, parents, domestic partners, children and siblings); partners or a partnership and its partners; a limited liability company or association and its members; commonly controlled corporations; a corporation and its shareholders; or persons, as defined in Revenue and Taxation Code section 30010, and entities under their control or between commonly controlled entities.
(2) Rebuttal of presumption. If the Board determines that a sale, purchase, or transfer of tobacco products was between related parties, the distributor may rebut the presumption that the sale, purchase, or transfer was not at arm’s-length by showing that the price, terms, and conditions of the transaction were substantially equivalent to those that would have been negotiated between unrelated parties.
(e) EXAMPLES OF ESTIMATING OR CALCULATING THE WHOLESALE COST OF TOBACCO:
(1) Example 1: Distributor B produces handmade cigars. B’s tobacco product costs include: all manufacturing costs, the cost of raw materials (including waste materials not incorporated into the final product), the cost of labor, any direct and indirect overhead costs, and any federal excise and/or U.S. Customs taxes paid. The cost does not include freight or transportation charges for shipment from the supplier to the distributor.
(2) Example 2: Distributor C purchases tobacco products from a subsidiary corporation in which it owns or controls more than 50 percent of the voting stock. Due to this corporate relationship between seller and buyer, the Board presumes that the sale and purchase were not at arm’s-length, and the presumption is not rebutted by C. In the absence of an arm’s-length transaction, the methods discussed in subdivision (c) may be used to determine the correct wholesale cost.
(3) Example 3: Distributor D acquires tobacco product free of charge and reports no wholesale cost for the product on its Tobacco Products Distributor Tax Return. However, D acquired such tobacco product at a 100 percent discount or trade allowance. In the absence of an arm’s-length transaction, the methods discussed in subdivision (c) may be used to determine the correct wholesale cost.
(4) Example 4: Distributor E, with a tobacco products importers license, acquires tobacco products or finished tobacco products from a supplier outside the United States. E’s tobacco product costs include, in addition to all other production or acquisition costs, the costs of all U.S. Customs fees and federal excise taxes paid or incurred by E with respect to such tobacco products.
(5) Example 5: Distributor F receives three tobacco products packaged as one unit, as a “three for the price of two” promotional package, labeled with a single UPC barcode. As the products are packaged together as one inseparable unit, tax is based on the total package price.
(6) Example 6: Distributor G receives 2 units, to sell as a “buy one, get one free” promotion. Each unit is separately packaged and each unit is labeled with a UPC barcode. Because one unit is being provided for free, tax would apply to the wholesale cost of each separate unit as calculated by a method discussed in subdivision (c).
(7) Example 7: Distributor H receives a three percent discount for paying their supplier within 10 days of receipt of their items. To calculate the wholesale cost, Distributor H must add the three percent discount to the price paid for the products.
(f) RATE SETTING.
The Board’s annual determination of the rate of tax that applies to other tobacco products shall be made based on the wholesale cost of tobacco products as of March 1 of the current calendar year and shall be effective during the next fiscal year, beginning July 1.
History: Adopted May 24, 2016, effective October1, 2016.