Was federal tobacco excise tax included in the wholesale-price base for Illinois Tobacco Products Tax?

Plain-English summary

An Illinois pipe-tobacco distributor asked whether federal excise tax could be excluded when calculating the wholesale-price base for Illinois Tobacco Products Tax.

IDOR declined to issue the requested Private Letter Ruling and gave general guidance. This August 11, 2014 GIL rescinded ST 14-0038, the Department's earlier response.

The letter stated that Illinois imposed Tobacco Products Tax at 36% of wholesale price in 2014. Wholesale price was the manufacturer's established list price before discounts and similar reductions or, without an established list price, the manufacturer's invoice price to unaffiliated distributors. Manufacturer or distributor surcharges were part of taxable wholesale price.

Federal tobacco excise tax was imposed on the manufacturer or importer. IDOR treated it as a manufacturer cost of doing business included in wholesale price for Illinois tax purposes, regardless of whether the manufacturer embedded it in the price or separately stated it on the invoice.

What this means for you

Separately identifying federal excise tax did not remove it from the Illinois wholesale-price base under this 2014 guidance. The rate stated here is historical and should not be used as current-rate confirmation.

Common questions

Was federal excise tax excluded from wholesale price? No.

Did separate invoice presentation change the answer? No.

Did IDOR issue the requested PLR? No.

Citations and references

• 35 ILCS 143/10-5 and 143/10-10.
• 86 Ill. Adm. Code 660.5.
• 26 U.S.C. §§ 5701 and 5703.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2014.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2014/st-14-0042.pdf

Original ruling text

ST 14-0042-GIL 08/11/14 TOBACCO PRODUCTS TAX
This letter rescinds General Information Letter ST 14-0038. This letter clarifies that federal excise tax
is imposed on the manufacturer, is a cost of doing business of the manufacturer and is included in the
manufacturer’s wholesale price of tobacco products sold to distributors for purposes of calculating the
Tobacco Products Tax. 35 ILCS 143/10-5. (This is a GIL.)
August 11, 2014
Dear Xxxx:
This letter is in response to your letter dated February 10, 2014, in which you request
information and supersedes the letter to you dated August 6, 2014 (ST-14-0005-PLR). The
Department issues two types of letter rulings. Private Letter Rulings (“PLRs”) are issued by the
Department in response to specific taxpayer inquiries concerning the application of a tax statute or
rule to a particular fact situation. A PLR is binding on the Department, but only as to the taxpayer
who is the subject of the request for ruling and only to the extent the facts recited in the PLR are
correct and complete. Persons seeking PLRs must comply with the procedures for PLRs found in the
Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General Information Letter
(“GIL”) is to direct taxpayers to Department regulations or other sources of information regarding the
topic about which they have inquired. A GIL is not a statement of Department policy and is not
binding on the Department. See 2 Ill. Adm. Code 1200.120. You may access our website at
www.tax.illinois.gov to review regulations, letter rulings and other types of information relevant to your
inquiry.
The nature of your inquiry and the information you have provided require that we respond with
a GIL. In your letter you have stated and made inquiry as follows:
My office has been retained to request a private letter ruling on behalf of my client,
COMPANY. An executed power of attorney is attached. Please accept this letter as a
request for a private letter ruling by the Illinois Department of Revenue regarding the
determination of the appropriate tax base with respect to the Tobacco Products Tax Act
of 1995, 35 ILCS 143/10-1.
The applicable tax year for this fact pattern is 2014, however this has been an ongoing
matter for several years. To the best of counsel and client’s knowledge, the Illinois
Department of Revenue has not previously ruled on the same or a similar issue for the
taxpayer or a predecessor. The taxpayer has not directly or indirectly submitted the
same or similar issue to the Illinois Department of Revenue. No audit or litigation is
pending with the Illinois Department of Revenue.
Statement of Facts
COMPANY is an active Illinois domestic corporation located at ADDRESS in CITY,
Illinois. The President of COMPANY is NAME.
COMPANY is a pipe tobacco distributor. In previous years, COMPANY has received
invoices from pipe tobacco manufacturers which contained a total invoice price that
incorporated the Federal tax amount due into the total invoice price without any
distinction between list price, Federal tax due, and total invoice price. Illinois taxes
under the Tobacco Products Tax Act were paid on the total invoice price, which
included the Federal tax. This resulted in taxes being paid to the Illinois Department of

Revenue which included as part of the tax base a significant portion of Federal taxation,
which caused COMPANY to pay Illinois tax on top of Federal tax.
On Month XX, 20XX, COMPANY received an invoice from COMPANY A for
$X,XXX.XX. COMPANY A is not an affiliated company of COMPANY. The invoice
from COMPANY A has been attached to this request as Exhibit A. The actual list of the
pipe tobacco sold to COMPANY was $X,XXX.XX. The Federal tax amount was
$X,XXX.XX. The total invoice price was $X,XXX.XX.
Under a taxation scheme that permits Illinois Tax to be levied upon Federal Tax,
COMPANY would pay 36% of the wholesale price of tobacco products according to 35
ILCS 143/10-10(a)(i). Hence, the total Illinois tax COMPANY would pay is $X,XXX.XX *
36% = $X,XXX.XX. Under taxation scheme that does not permit Illinois Tax to be levied
upon Federal Tax, COMPANY would pay 36% of $X,XXX.XX, or $X,XXX.XX, resulting
in a tax differential of $XXX.XX.
Applicable Rules
35 ILCS 143/10-10 dictates that 36% of the “wholesale price of tobacco products sold”
is the proper taxation rate. “Wholesale Price” is defined according to 35 ILCS 143/10-5
as “[T]he established list price for which a manufacturer sells tobacco products to a
distributor, before the allowance of any discount, trade allowance, rebate, or other
reduction. In the absence of such an established list price, the manufacturer’s invoice
price at which the manufacturer sells the tobacco product to unaffiliated distributors,
before any discounts, trade allowances, rebates, or other reductions, shall be presumed
to be the wholesale price.” However, such tax “[I]s not imposed upon any activity in that
business in interstate commerce or otherwise, to the extent to which the activity may
not, under the Constitution and the Statutes of the United States, be made the subject
of taxation by this State.” 35 ILCS 143/10-5 (2014). (Emphasis added)
86 Il. Adm. Code 660.5 (a) states that “[T]he Tobacco Products Tax is imposed upon
the last distributor [. . .] at a rate of 18% of the wholesale price of Tobacco products sold
or otherwise disposed of in this state. (eff. 2010). 18% is the previous statutory tax rate
prior to the amount increasing in July of 2012 to 36%, and the reference represents a
non-updated administrative code provision.
86 Il. Adm. Code 660.5 (d)(1) states that “[T]he Wholesale price for purpose of imposing
the Tobacco Products Tax on the last distributor is the invoice price at which products
are sold by the last distributor, before the allowance of any discount, trade allowance,
rebates, or other reductions. Surcharges added by distributors are considered part of
the wholesale price subject to tax. (Emphasis added) (Contrary statement of authority)
Analysis
Under 86 Il. Admin. Code 660.5 (d)(1), the “Wholesale Price” is the invoice price,
including any surcharges added by the distributor. However, under 35 ILCS 143/10-10,
the “Wholesale Price” is the list price, and does not make reference to any surcharges
added by distributors. Therefore, under 86 Il. Admin. Code 660.5 (d)(1), the “Wholesale
Price” of the COMPANY A invoice is $X,XXX.XX. The “Wholesale Price” of the

COMPANY A invoice according to 35 ILCS 143/10-10 is the established list price of the
pipe tobacco, or $X,XXX.XX.
Although the Illinois Tobacco Products Tax act [sic] does not make any reference to any
“surcharges” being included as part of the “Wholesale Price”, the Illinois Administrative
Code purports to include all “surcharges added by the distributors.” A “surcharge” is
defined as “to charge an extra fee.” (Webster 2014). The Federal Tax appears to be a
“surcharge” that has been added by a distributor on behalf of the Federal government.
“List Price” is defined by Webster as “The basic price of an item as published in a
catalog, price list, or advertisement before any discounts are taken.”
Therefore, under the definition of “wholesale price” as provided for under the Illinois
Administrative Code, the Wholesale Price is the total invoice price which includes the
surcharge of Federal taxation. Under the definition of “wholesale price” as provided for
under the Illinois Tobacco Products Tax Act, the wholesale price is the established list
price, prior to the addition of any surcharges.
There do [sic] not appear to be any decisions or rulings from the Illinois Department of
Revenue that explicitly answer what the proper calculation of “wholesale price” should
be. Although not directly on point, a supportive previous Illinois Department of Revenue
private letter ruling on March 11, 2009 indicates that the proper tax base for the
Tobacco Products Tax should be the “established list price” equal to the actual invoice
price. A copy of the private letter ruling is attached as Exhibit B.
COMPANY asserts that the proper definition of “wholesale price” should be as provided
for under the Illinois Tobacco Products Tax Act, and not as provided for under the
Illinois Administrative Code. In further support of COMPANY’s assertion, we submit
Micjo v. AB & T, 78 So. 3d 124 (2012), a Florida decision that interprets a similar
contrast between the Florida Definition statutory definition of “wholesale” and the
administrative definition of “wholesale”. A copy of the decision is attached as Exhibit C.
COMPANY believes the Florida decision is the correct structural analysis framework for
interpreting the different definitions of “wholesale price”. In addition to the administrative
code contravening the express statement of the statute, the administrative code
interpretation includes as part of the “cost of pipe tobacco” federal taxation, resulting in
a state tax levied upon a federal tax which bears no actual relation to the actual cost of
the good sold.

Request for Ruling
COMPANY respectfully requests the Illinois Department of Revenue rule that the proper
interpretation of “wholesale price” should be as provided for by statute: “The
established list price.”
DEPARTMENT’S RESPONSE:

The Department’s regulation “Public Information, Rulemaking and Organization” provides that
“[w]hether to issue a private letter ruling in response to a letter ruling request is within the discretion of
the Department. The Department will respond to all requests for private letter rulings either by
issuance of a ruling or by a letter explaining that the request for ruling will not be honored.” 2 Ill. Adm.
Code 1200.110(a)(4). The Department recently met and determined that it would decline to issue a
Private Letter Ruling in response to your request. We hope however, the following General
Information Letter will be helpful in addressing your questions.
The Tobacco Products Tax Act of 1995 imposes a tax upon any person engaged in the
business as a distributor of tobacco products at the rate of 36% of the wholesale price of tobacco
products sold or otherwise disposed of to retailers or consumers located in Illinois. 35 ILCS 143/1010. “Wholesale price" means the established list price for which a manufacturer sells tobacco
products to a distributor, before the allowance of any discount, trade allowance, rebate, or other
reduction. In the absence of such an established list price, the manufacturer's invoice price at which
the manufacturer sells the tobacco product to unaffiliated distributors, before any discounts, trade
allowances, rebates or other reductions, shall be presumed to be the wholesale price. 35 ILCS
143/10-5.
The Tobacco Products Tax is paid on the wholesale price. The wholesale price is the
established list price for which a manufacturer sells tobacco products to a distributor, or for which the
last distributor sells tobacco products to a retailer or consumer located in Illinois, before the allowance
of any discounts, trade allowances, rebates or other reductions. Surcharges added by manufacturers
or distributors are considered part of the wholesale price subject to tax. 86 Ill. Adm. Code 660.5.
The federal government imposes an excise tax on cigars and cigarettes manufactured in or
imported into the United States. 26 U.S.C § 5701. The manufacturer or importer is liable for the tax.
26 U.S.C § 5703. The federal excise tax is a cost of doing business of the manufacturer and is
included in the manufacturer’s wholesale price of tobacco products sold to distributors for purposes of
calculating the Tobacco Products Tax, regardless of whether the manufacturer includes the tax in the
wholesale price to a distributor or states it separately on an invoice provided to a distributor.
I hope this information is helpful. If you have further questions, you may contact me at 7822844. If you have further questions related to the Illinois sales tax laws, please visit our website at
www.tax.illinois.gov or contact the Department’s Taxpayer Information Division at (217) 782-3336.

Very truly yours,

Richard S. Wolters
Associate Counsel
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