Trying to figure out why one little federal excise “sin” tax is not based solely on weight, volume, or potency (alcohol content), I’ve been stumped. And I still am. It’s the tax on large cigars — 52.75% of sales price but not to exceed $402.60 per 1,000. The key advantage for expensive cigars is not the percentage base, but the 40-cent per unit cap — regardless of weight. Meanwhile, it turns out that makers of small cigars, taxed, like cigarettes, at $1.01 per pack of 20, have deliberately increased their size to cross over into the “large cigar” category – and pay only the ad valorem tax. To be sure, the excise tax on firearms in section 4181 is imposed by percentage of price — how could it not be? (Note that one other federal excise tax, the 12% retail tax on heavy trucks, is collected at retail, unlike the standard sin taxes. Code section 4051. Here’s more on the collection point, from A.I.:
Major Retail-Level Federal Excise Taxes
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Retail tax on heavy vehicles — A 12% excise tax applies to the first retail sale of truck, trailer, and semitrailer chassis and bodies, and highway tractors with a gross vehicle weight of 33,000 pounds or more. The tax includes the total sale price, including trade-ins, and is reported on IRS Form 720 under IRS No. 33.
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Indoor tanning services — The 10% federal excise tax on indoor tanning applies directly to the consumer, collected by the salon at the point of sale and remitted by the service provider on Form 720.
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Retail sales of firearms and certain hunting gear (under special circumstances) — If a manufacturer sells directly to consumers (e.g., at retail or in non-arm’s-length transactions), the federal excise tax on firearms, ammunition, and bows applies at the retail level rather than wholesale. This is determined under Internal Revenue Code §4216(b) and the Pittman–Robertson Wildlife Restoration Act.
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Airline tickets — Although technically collected by airlines rather than retailers, the federal passenger ticket tax functions as a retail-level excise: it is included in the price paid by the traveler and remitted by the airline on Form 720.)
Why do we have this unique tax base? Asking around among tax people, I get these explanations for the ad valorem (percentage of price) tax base: “It appears that in 1868 the tax on cigars was not based on sale price . The concept of taxing large cigars at different rates based upon the sales price dates back to the Revenue Act of 1917. There is not much easily findable history to this except that it was intended to raise money for World War I.”
And “Sam Gibbons was a fierce defender of cigars.. Gibbons was on the Committee on Ways and Means for years, and while he may not have been the originator of the rate, but he was always there to preserve low rates when cigars came up. (Loved those “Tampas” named for the main city in his district.)
And “There currently remain big politics behind the taxation of cigars. The Cuban community in Florida being significant. Sam Gibbons of Tampa and W&M a long time protector/advocate for the Florida émigré cigar community.”
So I don’t know why the tax base for large cigars is different.
The Center for New Revenue 