Tobacco Products Tax

Table of Contents

Background

The state excise tax on tobacco products was enacted in 1986 and expanded in 2004 and 2020.¹  The tax applies to all tobacco products other than cigarettes, including cigars, pipe tobacco, chewing tobacco, and snuff, at the time when they are manufactured, brought into the state, or shipped to retailers.  The tax is based on the invoice price of tobacco products sold from a manufacturer or supplier, including out-of-state retailers selling tobacco products online, to a distributor, prior to discounts or other price reductions.

The tax on tobacco products consists of three components.  The first is a 20 percent statutory tax enacted in 1986, revenue from which is subject to the limitations of the TABOR Amendment.  Voters approved an additional 20 percent tax with the passage of Amendment 35 in 2004, the revenue from which is exempt from the TABOR limitations on state revenue and spending.  In 2020, voters again approved an additional tobacco products tax with the passage of Proposition EE.  The additional tax under Proposition EE is 10 percent in 2021, and increases incrementally, to 22 percent, until 2027 when it is fully phased in.  The revenue from Proposition EE is also exempt from TABOR limitations.

The Department of Revenue is responsible for administering the three tax components, which in practice are collected as a single 50 percent tax.  Tobacco product distributors must file a quarterly tobacco products tax return by the twentieth day of the first month of the quarter following collections.  Tobacco product distributors are entitled to retain 1.6 percent of taxes they collect to cover expenses related to tax collection.

Tax Rate

The tax rate on tobacco products is 50 percent of the invoice price paid by distributors to manufacturers or suppliers.  In addition, all tobacco products are subject to the 2.9 percent state sales tax as well as any applicable local and special district sales taxes.  No tax exemptions or credits are available for tobacco products.

Distribution

With the exception of Proposition EE revenue, for which collection and distribution began in 2021, the distribution of revenue from the tobacco product tax and cigarette tax is illustrated below.  Through the Old Age Pension Fund, revenue from the original 20 percent tax on tobacco products and the Proposition EE 10 percent tax is credited to the General Fund.²  Proposition EE revenue is distributed to K-12 education, housing, rural schools, and tobacco prevention programs. Starting in 2023, revenue will go primarily to preschool programs, in addition to tobacco prevention and health care programs.³  The additional 20 percent tax resulting from the passage of Amendment 35 is constitutionally required to be distributed primarily to funds that provide funding for tobacco prevention and health care.⁴

Federal Taxes

The federal government collects excise taxes on tobacco products, most of which are assessed at fixed-dollar amounts rather than as a percentage.  Tax rates differ by tobacco product.  The highest rate applies to “roll‑your‑own” tobacco, assessed at $24.78 per pound, or $1.55 per ounce.  Pipe tobacco, snuff, and chewing tobacco are taxed at $2.83, $1.51, and $0.50 per pound, or $0.18, $0.09, and $0.03 per ounce, respectively.  Cigars are taxed at 52.75% of the wholesale price, up to a cap of 40.26¢ per cigar.

State Comparisons

All 50 states tax tobacco products. Like Colorado, most states levy ad valorem (percentage of the value) taxes on wholesale or manufacturers’ prices.  Among these states, Minnesota and Washington levy the highest taxes for most types of tobacco products (at a rate of 95 percent), while South Carolina assesses the lowest rate (5 percent).  Nine states tax fixed-dollar amounts on quantities of cigars and/or chewing tobacco.  Two states, Florida and Pennsylvania, have no tax on cigars.