Winner Winner! - FET Not Taxable in MN

In 2012, a landmark tobacco tax case was decided. Specifically, a Florida court ruled in Micjo Inc v Florida DBPR, that the wholesale sales price upon which tax is calculated does not include federal excise tax or shipping charges. Being that most states calculate their state tobacco taxes on the “wholesale sales price,” the Micjo case had far reaching effects.

One such state is Minnesota. Like Florida, Minnesota imposes a 95% tax on the “wholesale sales price” of a “tobacco product.” Further, nearly identical to most states, Minnesota has prescribed that the “wholesale sales price is “the price stated on the price list in effect at the time of sale for which a manufacturer or person sells a tobacco product to a distributor, exclusive of any discount promotional offer.”

To more clearly illustrate the issue, suppose a tobacco distributor purchases the tobacco products for $100. Included in that $100, is $60 for the tobacco, $30 of Federal Excise Tax (FET), and $10 for shipping. What is the price at which the manufacturer sells the distributor the tobacco? $100? $60? Some other amount?

Just as Florida tackled that issue in Micjo, I handled a case last year in Minnesota involving the same dilemma. In Winner Tobacco v COR, the wholesaler argued the tax should only be on the $60 in my example, not the full invoice inclusive of FET ($100 in my example). On August 6, 2018, the Minnesota Tax Court ruled that state tobacco tax is not due on separately stated FET. Specifically, the Court held that for the invoices in which the FET was separately stated, Winner paid Minnesota tax on “more than the price for which a manufacturer sells a tobacco product.”

Because of the similar tobacco laws across the country, if you or your client is paying tobacco taxes on the full invoice, there may be an overpayment of tobacco tax. At a minimum it is worth exploring the possibility through a potential refund action. The wholesale could be entitled to thousands of dollars in overpaid tax and not even know it.

Not only do we handle tobacco tax refund, but we are also happy to assist in tobacco tax audits and assessments. While most tax professionals are well versed in federal tax, few have the experience necessary to evaluate tobacco tax related issues. Further, even fewer have every gone to court on a state tobacco tax case.

If you are a tobacco wholesaler located in Alaska, California, Colorado, Connecticut, Delaware, Illinois, Indiana, Iowa, Maine, Montana, New Hampshire, Oregon, North Dakota, Utah, Wisconsin, or other states with similar laws, then you may have an opportunity for a refund based on the technicality of the law discussed above.

About the Author: In his law practice Mr. Donnini's primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini obtained his LL.M. in Taxation at NYU. Mr. Donnini is licensed to practice law in Florida. If you have any questions please do not hesitate to contact him via email [email protected] or phone at 954-639-4496 .