The Indiana Department of Revenue published new guidance on its state tobacco and vapor product taxes in August 2023. Information Bulletin #206 explains major changes made to these taxes from the 2022 and 2023 legislative sessions. Among these changes are the following updates with more details below:
- A $1 cap per cigar on the 24 percent tobacco products tax (Effective January 1, 2024).
- OTP tax registration and remittance obligations for remote sellers (Effective July 1, 2023).
- A new taxability matrix in Appendix A of Bulletin #206 for vapor products and accessories.
The Indiana Tobacco Products and Alternative Nicotine Products Tax
Indiana applies a tax on the distribution of tobacco products in the state and applies to the following items under IC 6-7-2-7:
- A $0.40 per ounce for moist snuff (or the proportional rate for fractional quantities less than an ounce).
- A $0.40 per ounce for alternative nicotine products (or the proportional rate for fractional quantities less than an ounce).
- A 24 percent tax on the wholesale price of cigars capped at $1 per cigar for sales starting on January 1, 2024.
- A 24 percent tax on the wholesale price of other tobacco products, including pipe tobacco, chewing tobacco, snus, and similar types of tobacco.
The obligation to collect and remit this tax generally belongs to the distributor who transports or manufactures the tobacco product for sale in Indiana. However, this obligation could also fall to an Indiana retailer who purchases tobacco products from an unlicensed distributor.
The Obligations of Remote Sellers That Deliver Tobacco Products into Indiana
As of July 1, 2023, this obligation also applies to a remote seller in transactions where an Indiana distributor has not already collected the tax. Out-of-state businesses that distribute tobacco products in Indiana and meet the state’s economic nexus requirements will need a remote seller distributor’s license under IC 6-7–2-8.5, which also requires registration for a retail merchant certificate.
Indiana’s economic nexus thresholds apply when you have more than $100,000 in sales or at least 200 separate transactions in the current or preceding calendar year (IC 6-2.5-2-1). The distributor license only applies to tobacco products and a separate license may be needed if you sell other items such as cigarettes or electronic vapor products.
How Indiana Taxes Vapor Products and Additional Licensing Requirements
Indiana has two excise taxes that apply to the sale of vapor products in addition to the state’s retail sales tax. Outside of certain accessories and parts, your vapor products will likely be subject to one of these taxes at the distributor or retailer level.
Closed System Cartridge Tax
The first is the closed system cartridges (CSC) tax, and it is the responsibility of the distributor. As of July 1, 2023, remote sellers are also responsible for collecting and remitting the CSC tax. Additionally, Indiana wholesalers or retailers that purchase CSC products from an unlicensed distributor must register to collect and remit this tax. The CSC tax rate is 15 percent of the wholesale price and applies to all closed system cartridges, including disposable products that cannot be refilled. If the cartridge is sold with a battery device, then the entire price could be subject to CSC tax unless you separately list the items and their price on the bill. You must also obtain a distributor’s license to sell, manufacture, or deliver these products in Indiana.
Electronic Cigarette Tax
Indiana also has an electronic cigarette tax that applies to the retail sale of consumable materials used in vapor products, including open system containers. The rate for the electronic cigarette tax is 15 percent of the gross retail income received from the sale. The retailer has the responsibility of collecting this tax and must register for a separate Open System Retail Dealer’s Certificate (Form ECG-1A) before selling e-cigarette products in Indiana. The electronic cigarette tax applies to the following items under Appendix A of Bulletin #206:
- Disposable atomizer/pod
- E-liquid
- Open system device
- Tank
- Rebuildable atomizer (e.g., RBA, RTA, or RDA)
- Replacement glass or plastic tube component of a tank meant to contain e-liquid
- Atomizer head/heating element
- A complete kit that doesn’t include e-liquid
Vapor Product Parts and Accessories Not Subject to Indiana’s CSC or E-Cigarette Tax
Appendix A also lists certain parts and accessories that are not subject to either the CSC or e-cigarette tax in Indiana. However, you must still collect sales tax on the retail sale of the following items:
- Spare parts (e.g., screws, conductive pins, electric connectors)
- Tool set for rebuilding or servicing an atomizer
- Spooled resistance wire or mesh
- Cotton
- Storage devices
- Silicone protector, sleeve, or band
- O-rings and seals
- Mouthpieces
- Battery chargers
Key Issues That Could Affect Your Tobacco and Vapor Tax Compliance in Indiana
Indiana’s tobacco and vapor product taxes have undergone significant changes over the last couple of years because of new developments in the industry. As online retail becomes more common and novel vapor products hit shelves, retailers and distributors will need to adjust their reporting and compliance practices to keep up. We regularly see the following issues that could create a risk of audit and exposure to additional assessments, fines, and penalties:
- Not having the proper tax permits and licensing for the different tobacco and vapor products you sell
- Over-collecting taxes on cigars after the $1 cap goes into effect
- Combined transactions with vapor products and nontaxable parts or accessories
- Purchasing tobacco or CSC products from an unlicensed distributor and not assuming the distributor role for tax collection purposes
- Being a remote seller with economic nexus to Indiana and not reporting taxes to the Department of Revenue
A business that sells or operates in the tobacco and vapor product space in Indiana could face criminal charges ranging from a Class A misdemeanor to a Level 6 felony for failing to register or pay taxes depending on their knowledge and intent. In addition to criminal prosecution, you could also face a financial penalty. For example, the civil penalty for purchasing taxable products from an unlicensed distributor is the greater of 100 percent of the value of the taxable product or $5,000 under IC 6-7-2-24.
You can contact us with concerns about tobacco or vapor tax compliance in Indiana or if you need help with an audit or assessment appeal against the Department of Revenue. Our tobacco and vapor product tax professionals guide distributors and retailers across the country with their regulatory compliance, tax audit, and administrative appeal or refund needs.