Illinois ~ Tobacco Tax: Rates Increased; New Cigarette Machine Tax Enacted

Cigarette Machine Operators’ Occupation Tax Act

Beginning August 1, 2012, a new tax is imposed on all persons engaged in the business of operating a cigarette machine. Persons engaged in the business of renting, leasing or selling cigarette machines are exempt from the Act, but they must provide notice of the Act’s requirements to any potential buyer, lessee or lessor of a cigarette machine.

The tax is set at the rate of 99 mills per cigarette made or fabricated. Any increase in the state’s cigarette tax after July 1, 2012, along with the effective date of the increase, also will apply to the rate imposed on operators, although they will not be applied any earlier than August 1, 2012.

A “cigarette machine” is a machine, equipment or device used to make or fabricate cigarettes, but does not include a handheld, manually operated device used by consumers to make roll-your-own cigarettes. A “cigarette machine operator” (operator) is any person who is engaged in the business of operating a cigarette machine in Illinois and is licensed by the Department of Revenue as an operator.

Operators may reimburse themselves for their tax liability by separately stating the tax as an additional charge to users of the cigarette machines. The reimbursement charge must not include any credits against the tax for which the operator qualifies. A customer can claim a refund from the operator if the customer was charged a reimbursement fee on cigarettes not subject to the tax or paid a fee greater than the actual tax. If the customer does not ask for a refund, the operator must remit the amounts to the department.

Operators must be licensed before engaging in the business of operating a cigarette machine. Each place of business at which a person wants to procure a cigarette machine operator license requires a license application, payment of a $250 annual license fee, and filing of a joint and several surety bond in an amount of $2,500. Applicants also must meet several eligibility requirements. Taxpayers licensed and bonded for five years and who have not been delinquent or deficient in payment of the tax will not be required to furnish a bond to renew their license.

The Act places restrictions on the type of tobacco used in cigarette machines and the tubes to be used in such machines. Cigarettes made or fabricated by a cigarette machine operator may not be sold or distributed to, or possessed by, manufacturers, distributors, secondary distributors, manufacturer representatives, or retailers, except for operators. An operator may not purchase unstamped cigarettes from a manufacturer or distributor. The Act places requirements on operators and the sale of cigarettes, including a requirement that a cigarette machine have a secure meter that counts the number of cigarettes made.

Returns must be filed and tax must be remitted by the 15th day of each month covering the preceding calendar month. Operators may take a credit against tax due for taxes imposed and paid under the state’s tobacco products tax law on qualifying tobacco products sold to a customer and used in a rolling machine located at the operator’s place of business.

The Act also covers audits of returns, failure to file returns, taxpayer protests, claims for credit or refunds, the maintenance of records, penalties, and civil and criminal legal proceedings for violations of the Act. The department and (for specifications relating to cigarette tubes) the Attorney General are authorized to issue regulations under the Act.

Cigarette Tax, Cigarette Use Tax

Beginning on June 24, 2012, the rate of cigarette tax and cigarette use tax will increase to 99 mills (formerly, 49 mills) per cigarette. That translates to a rate of $1.98 (formerly, $0.98) per 20-pack.

For purposes of both the cigarette and the cigarette use taxes, the definition of “cigarette” is expanded. The definition for any cigarette that has a wrapper or cover made of paper is not changed. However, beginning July 1, 2012, the term will also include any roll for smoking made wholly or in part of tobacco labeled as anything other than a cigarette or not bearing a label, if it meets at least two of the following criteria:

– the product is sold in packs similar to cigarettes;

– the product is available for sale in cartons of 10-packs;

– the product is sold in soft packs, hard packs, flip-top boxes, clam shells, or other cigarette-type boxes;

– the product is of a length and diameter similar to commercially manufactured cigarettes;

– the product has a cellulose acetate or other integrated filter;

– the product is advertised or marketed to consumers as a cigarette or cigarette substitute; or

– other evidence that the product fits within the definition of “cigarette.”

In addition, the definition of “contraband cigarettes” includes cigarettes made or fabricated by a person holding a cigarette machine operator license under the terms of the Cigarette Machine Operators’ Occupation Tax Act in the possession of manufacturers, distributors, secondary distributors, manufacturer representatives, or other retailers for the purpose of resale. Such cigarettes fall within the definition regardless of whether the tax has been paid on them.

Retailers are not required to pay the tax increase on stamped cigarette packages in their possession as of June 24, 2012. Distributors who have either cigarette packages with tax stamps affixed to them or unaffixed stamps in their possession on that date must pay the tax increase to the extent the calendar year 2012 average monthly volume of cigarette stamps in the distributor’s possession exceeds the average monthly volume of cigarette stamps purchased by the distributor in calendar year 2011. Generally, the payment amount, less the distributor’s discount, is due on the increased tax by the earlier of June 24, 2012, or the first due date of a cigarette or cigarette use tax return occurring on or after that date. However, distributors may elect to make the payments over a 12-month period, although they will not be entitled to the discount on those payments.

Tobacco Products Tax

Beginning July 1, 2012, tobacco products will be taxed at a rate of 36% (formerly, 18%) of the wholesale price of tobacco products sold. Beginning January 1, 2013, moist snuff will be taxed at a rate of $0.30 per ounce, and the tax rate imposed per ounce of moist snuff may not exceed 15% of the tax imposed upon a package of 20 cigarettes.

P.A. 97-688 (S.B. 2194), Laws 2012, effective June 14, 2012, and applicable as noted