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DEPARTMENT OF TAXATION ANNOUNCEMENT NO. 2003-07
June 24, 2003
RE: Increase in the Cigarette Tax After June 30, 2003

Act 246, Session Laws of Hawaii 2002 (Act 246), Relating to the Cigarette and Tobacco Tax, increases the tax on cigarettes from 6 cents per cigarette to:

The tax is collected by the Department of Taxation (Department) when cigarette and tobacco wholesalers and dealers purchase cigarette tax stamps and place the stamps on cigarette packs prior to distribution. The current cigarette tax stamps are yellow;1 new pink tax stamps will be issued to implement the increase in the tax rate.2

I. Impact on Consumers

Consumers will see cigarette packs with yellow stamps and cigarette packs with pink stamps. It is legal for retailers to sell cigarette packs with the yellow stamps on or after July 1, 2003, under certain circumstances described immediately below.

II. Impact on Retailers

Retailers may sell cigarette packs stamped with the current yellow tax stamps if: (1) the retailers have the cigarette packs with yellow stamps affixed in their inventory as of July 1, 2003; or (2) the cigarette packs with yellow stamps affixed were received from licensed wholesalers and dealers on or after July 1, 2003. Retailers may have to explain to consumers the reason for the different colored stamps.

Act 246 does not require retailers, who purchase cigarettes from licensed wholesalers and dealers, to collect the increase in cigarette taxes on July 1, 2003, as the tax is imposed on wholesalers and dealers. Retailers may pass on the additional tax to consumers when wholesalers and dealers pass on the additional tax to the retailers.

III. Impact on wholesalers and dealers

A. Filing of a Cigarette Tax Stamps Floor Stock Return; Use of Pink Stamps

Act 246 requires every wholesaler and dealer to pay a tax of 6.5 cents per cigarette for each cigarette sold, used, or possessed after June 30, 2003 and before July 1, 2004.

Pink stamps will be sold to implement the new tax rate. All whole rolls (15,000 stamps per roll) of unused yellow stamps should be returned to the Department of Taxation for credit prior to June 30, 2003, by using Form M-108, Credit for Cigarette Tax Stamp Rolls. In order to avoid wholesalers and dealers returning partial rolls of unused yellow stamps and cigarette packs with yellow stamps, all wholesalers and dealers must file Form M-107 (Rev. 2003), Cigarette Tax Stamps Floor Stock Return. The purpose of the floor stock return is to collect the difference in price ($1.30 per pack vs. $1.20 per pack, or $.065 per cigarette vs. $.06 per cigarette) between the yellow stamp (current stamp) and pink stamp (new stamp) for every unused or affixed stamp in the wholesalers and dealers= ending inventory on June 30, 2003. Once the floor stock return has been filed and the difference in the tax has been paid, the yellow stamps of the partially-used rolls as of June 30, 2003, may be used until depleted. Wholesalers and dealers, therefore, may affix yellow stamps to cigarette packs after June 30, 2003, after filing the floor stock return and paying the difference in tax rates. The stamp fee imposed under section 245-26,3 HRS, and the discount provided under section 245-22, HRS,4 will be applicable to the difference in the tax reported on the floor stock return. Please note that the floor stock returns are subject to audit.

The pink stamps will be available for purchase from First Hawaiian Bank. The price of a roll of pink stamps will be: $1.3169 x 15,000 = $19,753.50.

B. Purchasing Stamps on a Deferred Payment Plan

Wholesalers and dealers purchasing stamps on a deferred payment plan may increase the amount of their deferred payment purchases by 8.3% (($1.30 - $1.20)/$1.20) if their cigarette tax stamp deferred payment agreement was approved when the cigarette tax was 6 cents per cigarette, or by 28.3% (8.3% plus 20% (see Announcement No. 2002-19)) if their cigarette tax stamp deferred payment agreement was approved when the cigarette tax was 5 cents per cigarette. No increase in bond coverage is necessary for the July 1, 2003 rate increase.

C. Cigarette and Tobacco Tax Forms

When completing current Form M-19 (Rev. 9/2002), Cigarette and Tobacco Products Monthly Tax Return, for June 2003, the following lines must be added to Part V, Cigarette Tax Stamps Inventory, in order to calculate the correct amount of yellow stamps in ending inventory on June 30, 2003:

Line 10. Number of unused cigarette tax stamps returned to the Department of Taxation for credit during June 2003.

Line 11. Adjusted number of cigarette tax stamps on hand at end of month (line 9 minus line 10)

The Department has revised the cigarette and tobacco tax forms to reflect the increase in the tax rate for sales, use, or possession of cigarettes after June 30, 2003.

Current forms and other tax information are available at the Department's website at www.hawaii.gov/tax. On Oahu, forms may be ordered by calling the Department's Forms Request Line at: 587-7572. Persons who are not calling from Oahu may call: 1-800-222-7572 (toll-free) to receive forms by mail or by fax.

/s/
Kurt Kawafuchi
Director of Taxation

HRS Section Explained: HRS Sections 245-3, 245-22, and 245-26.]
FOOTNOTES
1 The yellow stamps have been sold from October 1, 2002, prior to that green stamps were sold, beginning January 1, 2001.

2 The denominated value of the yellow stamp is $1.20; the denominated value of the pink stamp will be $1.30.

3 Section 245-26(a), HRS, provides: Stamps shall be sold at their denominated values, plus a stamp fee of 1.7 percent of the denominated value of each stamp sold, composed of the aggregate of:

(1) .2 percent of the denominated value of the stamp to pay for the cost to the State of providing the stamps, with such amount to be deposited to the credit of the department of taxation=s cigarette tax stamp administrative special fund; and

(2) 1.5 percent of the denominated value of the stamp to pay for the cost of enforcing the stamp tax, with such amount to be deposited to the credit of the department of the attorney general=s tobacco enforcement fund; provided that the department of taxation by rule may modify the stamp fee to reflect actual costs incurred by the State in providing the stamps.

4 Section 245-22(e), HRS, allows stamps to be sold with a 0.4 percent discount to defray the cost of affixing the stamps incurred by vendors. The Department may adjust the discount by rule. The discount is effective beginning September 1, 2001.