The California Department of Tax and Fee Administration (CDTFA) is the agency responsible for administering the licensing of businesses that sell tobacco products in the state. In many cases, your business will need several different licenses and permits depending on the type of tobacco products you sell and the nature of your business. These factors will also impact your obligations when it comes to reporting and paying applicable taxes on your tobacco sales. Our guide explains these different requirements, giving your tobacco business a framework for understanding your possible obligations for compliance.
Who Needs a License to Sell or Transfer Tobacco Products in California?
Every business that moves tobacco products in California will need some type of licensing. Unique licenses exist for retailers, distributors, wholesalers, manufacturers, and importers, each of which we discuss in more detail below. You will need a license for each type of tobacco sales activity (e.g., a business that does retail and distribution needs a separate retail license and distribution license). You can apply for the necessary licenses through CDTFA’s central online services platform, which will require creating an account if you are new to business in the state.
Tobacco Retailer Licensing
A California retailer of tobacco products is someone who sells directly to the public from a location within the state (including through vending machines). You will need a retail license for each location where you sell tobacco products. Retail licenses are valid for 12 months. Retailers should also be mindful that California prohibits the mobile sale of tobacco products (e.g., from a food truck or other mobile facility).
As a retailer, you may also need a distributor or wholesaler’s license depending on how you source your tobacco products for resale. For example, retailers must generally have a distributor’s license to account for untaxed tobacco products purchased from an out-of-state seller. Other responsibilities for retail license holders to stay in compliance include:
- Having a seller’s permit.
- Publicly displaying your retail license.
- Maintaining detailed purchase invoices for four years.
- Keeping each location’s purchase invoice records for one year after the date of sale at that location.
- Purchasing tobacco products only from California licensed distributors or wholesalers (you are responsible for verifying your supplier has a valid license).
- Maintaining Transfer logs (for retailers with multiple locations that share or transfer their tobacco product inventory between locations).
CECET Permits for Retailers of Electronic Cigarettes
Starting July 1, 2022, California will impose an excise tax (CECET) on the retail sale of electronic cigarettes that contain nicotine. Retailers located inside and outside the state (i.e., online retailers) are responsible for obtaining a CECET permit and collecting applicable tax for sales made to consumers in California. Taxpayers must submit quarterly returns and payments to the CDTFA, and you can find more information on this new excise tax through the CDTFA’s tax guide.
Tobacco Wholesaler Licensing
A wholesaler is someone who sells tax-paid tobacco products for future resale through a specific location in California. In other words, holding a California wholesaler’s license means you cannot purchase or possess untaxed tobacco products (i.e., hold a distributor’s license), nor can you sell tobacco products from an out-of-state location. In addition to the same compliance requirements as retailers, California tobacco wholesalers must also maintain sale invoices of their transactions with retailers or other wholesalers who buy their products. Wholesale licenses are valid for one calendar year, and you must renew your license prior to its expiration to continue operations.
Tobacco Distributor Licensing
A distributor is someone who holds tobacco products before any payment of California’s wholesale tobacco tax. They are responsible for remitting that tax to the state after making a first sale to a retailer, wholesaler, or another distributor in the state. California prohibits distributors from holding a wholesaler license too.
When making a sale as a distributor, you must calculate the tobacco product tax using the wholesale cost and provide payment along with a monthly tax return. Distributor license holders generally have the same compliance requirements as retailers and wholesalers (e.g., keeping purchase and sale invoices). However, they must also provide a minimum $1,000 security in the form of a cash deposit or surety bond as part of their tax collecting obligations. Distributor licenses are good for one calendar year, and you must renew your license prior to its expiration to continue operations.
Distinguishing In-State and Out-Of-State Distributors of Tobacco Products
California requires distributor licensing for both in-state and out-of-state distributors engaged in business in California. You are likely engaged in business in California if you do either of the following:
- You have a tobacco business located in California (this broadly includes locations that are temporary or provided through indirect methods such as through an agent or subsidiary).
- You have a representative within California who makes sales or deliveries on your behalf.
Warehouse and storage locations in California are not immediately labeled as distribution locations unless you directly distribute tobacco products from that location (e.g., allow delivery or pickup to other distributors, retailers, or wholesalers from that location).
Manufacturer or Importer Licensing
Tobacco product manufacturers are those who do any of the following:
- Participate in the creation of a finished tobacco product (e.g., fabricate, assemble, process, etc.).
- Repackage or relabel a tobacco product.
- Own a tobacco brand or formula (even though you may contract with third parties for final processing).
- Retailers who combine non-consumable tobacco products (e.g., liquid nicotine) to create a finished consumable product.
Tobacco importers are those who purchase products from outside the U.S. to make a first sale or distribution in the country. California requires both to have a manufacturer/importer license. To stay in compliance with their California licensing, manufacturers and importers must do the following:
- Have a seller’s permit.
- Provide (and update as necessary) a list to the CDTFA of all the brand families you import or manufacture.
- Have a California registered agent for service of process and provide their contact information to the CDTFA.
- Maintain sales invoices.
- File tax returns and reports.
What Needs to Be in Your Tobacco Purchase or Sale Invoice?
Compliance with the CDTFA’s standards for maintaining tobacco purchase and sale invoices are essential for keeping your licensing and for avoiding unnecessary tax payment or penalty. These invoices are how you and the state of California track your tobacco product transactions along with their sales and use tax consequences. Generally, your invoices must include the following information:
- Contact information for the buyer and seller (name, address, phone number, applicable license number).
- An itemized list of the tobacco products sold (distinguished by brand, type, flavor, packaging type, quantity, and sales price).
- Date of purchase.
- The amount of tobacco product taxes due by the distributor (a distributor who is also a retailer or manufacturer, must provide either a statement that taxes are included in the total amount on the invoice or provide the amount of tax due from the sale).
California Taxes on the Sale of Tobacco Products
California imposes a wholesale tax on tobacco products in addition to standard sales tax when a consumer purchases OTP from a retailer. The distributor is responsible for collecting and reporting the wholesale tax on tobacco products sold into the state. Retailers will then collect and report sales tax for their sales to consumers. As a prerequisite to getting your necessary tobacco license(s), you will obtain a seller’s permit through the CDTFA to report and pay any taxes related to your tobacco sales.
Your tax filing obligations (including reporting frequency and tax payments) will depend on if you are a retailer, distributor, wholesaler, manufacturer, importer, or some combination. Monthly reports and returns are generally due on the 25th of the money following the reporting period (e.g., December’s reports are due on January 25th). You can reference the CDTFA’s Tobacco Products Online Filing Guide for more information and return templates. In any event, you will need to maintain invoices and other records showing that wholesale tobacco products tax has been paid on all the inventory in your possession.
Questions on Your Tobacco Tax and Licensing Needs in California?
California and the CDTFA closely regulate the movement and sale of tobacco products and e-cigarettes. Inspectors and other agents will routinely check your business for compliance with tax reporting or licensing obligations. These audits can put your tobacco business at risk through suspension or termination of your license in addition to substantial tax penalties. Do not hesitate to meet with one of our tobacco consultants when facing an audit or tobacco tax issue with the CDTFA. We work to defend your reporting and tax payments, so you can continue operations without interruption or at an unnecessary financial cost.
Contact Tobacco Tax Refund Inc. for a consultation on your tobacco tax or licensing issues in California.