The Tax Court of New Jersey issued a recent opinion in Barrister Cigars, LLC v. Taxation (2025) regarding each party’s respective summary judgment motions related to a disputed tobacco product tax assessment. The case concerned several issues related to how Barrister Cigars, LLC (the “Taxpayer”) had calculated its New Jersey Tobacco Product Tax on products acquired from out-of-state sellers during the audited period. The Court’s opinion addressed each of these issues in detail and provides useful information and context for how tobacco retail businesses may need to view their New Jersey tobacco product tax obligations when purchasing inventory from out-of-state manufacturers or distributors.
New Jersey Statutes Governing a Distributor’s Obligation to Report and Remit Tobacco Product Tax
New Jersey imposes a 30 percent excise tax on the wholesale price of a tobacco product upon its sale, use, or distribution in the state under N.J.S.A. 54:40B-3(a). The Tobacco Product Tax Act in N.J.S.A. 54:40B(2) defines the “wholesale price” as “the actual price for which a manufacturer sells tobacco products to a distributor.” The tobacco product excise tax is generally the obligation of the distributor or wholesaler that first brings the product into the state. The Tobacco Product Tax Act defines a “distributor” as “a person engaged in the business of selling tobacco products in this State who brings, or causes to be brought into this State, a tobacco product for sale.” If the distributor does not pay the tax after its sale or transfer to a retailer or consumer, then that receiving party becomes responsible for paying a 30 percent use tax on the price paid or charged for the tobacco product. See N.J.S.A. 54:40B-3(c).
Calculating New Jersey Tobacco Product Tax on Inventory from Out-of-State Distributors in Barrister Cigars, LLC v. Taxation
In Barrister Cigars, LLC v. Taxation, the Taxpayer was a premium cigar retailer that purchased its inventory from out-of-state suppliers.
The dispute arose after the Division of Taxation audited the Taxpayer from 2016 to 2020 and assessed $153,324.48 for underpayment of tobacco product tax related to the following issues:
- The Taxpayer had classified itself as a distributor and calculated its Tobacco Product Tax based on the wholesale price (i.e., the manufacturer’s actual price) as opposed to 30 percent of the price paid to its supplier.
- The Taxpayer had relied on a letter from its suppliers providing blanket estimates of 40 percent on the manufacturer’s actual price to determine its “wholesale price.”
- The Taxpayer had deducted from the estimated manufacturer’s actual price the estimated federal excise tax for its inventory when calculating its tobacco product tax, in part based on reliance on prior communication with an auditor in 2012.
On the first issue, both the Court and the parties accepted that the Taxpayer could classify itself as a distributor because it purchased cigars out-of-state from suppliers who did not collect and remit New Jersey’s Tobacco Product Tax. Because the Taxpayer could be both a distributor and retailer for Tobacco Product Tax purposes, there was a dispute over which price the Taxpayer could use as the base for its tax liability. The Court agreed with the Taxpayer on this issue by confirming it could use the “wholesale price” (i.e., the manufacturer’s actual price). The Court rejected the Division of Taxation’s argument that the Taxpayer could only use the wholesale price as its tax base if it purchased directly from a manufacturer. However, the Court sided with the Division of Taxation on the second issue by stating the Taxpayer cannot estimate the manufacturer’s actual price—even if it was industry practice for trade strategy reasons.
Finally, the Court confirmed that the meaning of the manufacturer’s actual price within the definition of “wholesale price” refers to the amount payable by a distributor as shown on an invoice. The Court rejected the Taxpayer’s argument that “actual price” implies an amount net of federal excise tax and denied the Taxpayer’s reliance on advice from the Division of Taxation’s auditor. In its reasoning, the Court highlighted that no formal policy or regulation from the Division of Taxation supported the deduction of federal excise tax, which prevented the Taxpayer from relying on the auditor’s mistaken belief.
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Barrister Cigars, LLC v. Taxation demonstrates the unique tax challenges of Tobacco product retailers in New Jersey who purchase their inventory from out-of-state distributors. As the Court recognized, retailers in this situation have two possible options for determining the base of their Tobacco Product Tax calculation. While applying the 30 percent tax to the “wholesale price” as a distributor may lessen overall tax liability, it may also create unnecessary risk at audit if you cannot prove the manufacturer’s actual price for the product. This scenario seems likely the further removed a retailer is from the manufacturer in its supply chain. The safer option from a tax reporting perspective for some retailers may be to pay the compensating use tax on 30 percent of the price paid to an out-of-state supplier.
The answer to this complicated decision will usually depend on the circumstances of the retailer’s business, such as the transparency on pricing in their invoicing, communications, or contracts with suppliers. Equally important to remember is that the taxpayer almost always has the burden of substantiating their tax reporting and remittance when faced with a dispute of their audit or assessment. For additional questions about this case or concerns about state tobacco product taxes, contact our team of tobacco excise tax professionals for an initial consultation. We regularly support retailers and distributors with all aspects of their tobacco tax compliance, ranging from licensing issues to defending against an unfair audit or assessment.