Tobacco Products Tax Guide

Part 3: Tobacco Products Tax

In general, Colorado imposes its tobacco products tax on any tobacco products manufactured in or transported into Colorado for sale in Colorado. The distributor or remote retail seller is liable for the tax but, if the distributor has not paid the tax, anyone who possesses untaxed tobacco products in Colorado may be held liable for the tax. The tax is generally calculated as a percentage of the manufacturer’s list price for the tobacco product, but special rules apply to the calculation of the tax on modified risk tobacco products and moist snuff. This Part 3 provides information regarding the imposition and calculation of the tobacco products tax in Colorado.

The tobacco products tax is levied upon the sale, use, consumption, handling, or distribution of all tobacco products in Colorado, except for cigarettes, which are taxed separately. Taxable sales include any transfer, exchange, or barter, in any manner or by any means whatsoever, for consideration, including delivery sales and remote retail sales described below. Additionally, any gift by a person engaged in the business of selling tobacco products is treated as a taxable sale, whether such gift was made for the purpose of advertising, in an effort to evade the tax, or for any other purposes whatsoever.

Delivery and remote retail sales

The tobacco products tax applies not only to tobacco products sold over-the-counter in Colorado, but also to any tobacco products delivered to any consumer in Colorado. The tax applies whenever a consumer in Colorado submits an order to a seller located outside of the state by any means including, but not limited to, telephone or other voice transmission, the mail or other delivery service, or the internet or other online service and the tobacco products are delivered to the consumer in Colorado by use of a common carrier, private delivery service, mail, or any other means.

Imposition of the tax

The tobacco products tax is imposed at the time the distributor does any of the following:

• brings tobacco products into Colorado for sale;
• causes tobacco products to be brought into Colorado for sale;
• makes, manufactures, or fabricates tobacco products in Colorado for sale in Colorado;
• ships or transports tobacco products to retailers in Colorado to be sold by those retailers; or
• makes a sale of tobacco products delivered to a consumer in Colorado by use of a common carrier, private delivery service, mail, or any other means.

In the case of a remote retail sale of cigars or pipe tobacco, the tax is imposed at the time the remote retail seller makes the sale. 

Liability for the tax

In general, tobacco products tax is imposed upon the distributor or remote retail seller who is liable and responsible for the tax. Distributors and remote retail sellers are required to file returns and remit taxes as described in Part 4 of this publication.

However, if anyone who is not a distributor possesses tobacco products in Colorado for which taxes have not otherwise been remitted, they are liable and responsible for the uncollected tax and must file a Tobacco Products Tax Return for Non-Licensed Distributors (DR 0225). The person or entity must file the return and make the payment of the tax due to the Department within 30 days of first taking possession of the tobacco product. Anyone who fails to remit the required tax is subject to a penalty of up to 500% of the tax due. Forms and instructions are available online at Tax.Colorado.gov/cigarette-nicotine-tobacco-forms.

Tobacco products tax is generally calculated as a percentage of the manufacturer’s list price for the product. The tax rate increases incrementally from December 31, 2020, to July 1, 2027. Special rules apply to the calculation of tax for modified risk tobacco products and moist snuff.

Manufacturer’s list price

The manufacturer's list price used for calculating the tax is the invoice price for which a manufacturer or supplier sells a tobacco product to a distributor or  remote retail seller. The manufacturer’s list price is determined without regard to any discounts or other price reductions allowed by the manufacturer or supplier. Special rules, discussed later in the publication, apply in determining the manufacturer’s list price for delivery and remote retail sales and for manufacturers who make retails sales directly to consumers.

The taxable invoice price includes all consideration the manufacturer or supplier receives from the distributor in whatever form and regardless of the time of receipt. It also includes any and all charges reflected on an invoice from the manufacturer or supplier to the distributor, whether separately stated or not, including, but not limited to, any federal excise tax and any charge for shipping, transportation, and storage.

However, any charges separately stated on the invoice for any tangible personal property that is not a tobacco product are excluded from the invoice price upon which the tax is calculated. If services provided in connection with the purchase of both tobacco products and non-tobacco products are aggregated on an invoice, the portion of any aggregated service charges that are properly allocable to non-tobacco products may be excluded from the taxable invoice price. The portion of any aggregated service charges that are properly allocable to non-tobacco products is determined by multiplying the service charges by a fraction, the numerator of which is the sum total of all non-tobacco products on the invoice and the denominator of which is the sum total of all charges for tobacco and non-tobacco products on the invoice, excluding from both the numerator and denominator any discounts or other price reductions allowed by the manufacturer or supplier.

Delivery and remote retail sales

If determining the invoice price as described earlier in this publication is impracticable for a delivery or remote retail seller, then the tax may be calculated using an alternate method. The tax is instead calculated as a percentage of the average of the actual price paid during the preceding calendar year for the stock keeping unit (“SKU”) assigned by the distributor or remote retail seller to the tobacco product in order to track inventory.  The average of the actual price paid is determined exclusive of any rebates or discounts applied.
 

The Department may, by written notice to the delivery or remote retail seller, prospectively require a delivery or remote retail seller to calculate the tax on the invoice price if the Department finds that the delivery or remote retail seller’s use of the average price paid was for the purpose of avoiding tax.

Retail sales by manufacturers

If a manufacturer sells tobacco products exclusively to consumers and not to suppliers or distributors, the tax is calculated as a percentage of the manufacturer’s cost to manufacture the tobacco product, including the manufacturing overhead and the cost of all direct materials and direct labor used.

Tax rates

The tax rate for calculating tobacco products tax increases incrementally from December 31, 2020, to July 1, 2027, as reflected in the following table:

Modified risk tobacco products

The tobacco products tax for modified risk tobacco products is imposed at a lower rate. A tobacco product qualifies for the lower tax rate only if the Secretary of the U.S. Department of Health and Human Services (“HHS”) has issued an order authorizing the product to be commercially marketed as a modified risk tobacco product in accordance with 21 U.S.C. sec. 387k, or any successor section. Orders issued by HHS regarding modified risk tobacco products can be found online at fda.gov/tobacco-products/advertising-and-promotion/modified-risk-orders.

The tax rate for calculating tobacco products tax on modified risk tobacco products increases incrementally from January 1, 2021, to July 1, 2027, as reflected in the following table:

Minimum tax for moist snuff

Colorado law establishes a minimum tax for moist snuff. Moist snuff that is subject to the minimum tax includes any finely cut, ground, or powdered tobacco that is not intended to be smoked or to be placed in the nasal cavity. The minimum tax amounts listed in the following table apply specifically to 1.2 ounce containers of moist snuff.

The minimum tax for moist stuff increases incrementally from December 31, 2020, to July 1, 2027, as reflected in the following table:

Part 4: Filing, Remittance & Recordkeeping

All distributors and remote retail sellers are required to file returns and remit taxes every calendar quarter and maintain any records necessary for the determination of the amount of tax due. Both the filing of returns and the remittance of tax must be made electronically. A distributor or remote retail seller who remits the tax due on or before the applicable due date is allowed to retain a specified portion of the tax otherwise due. If a distributor or remote retail seller fails to file and pay the tax due by the applicable due date, the Department may impose penalties and interest. This Part 4 provides information regarding filing, remittance, and recordkeeping requirements for the Colorado tobacco products tax. 

Every distributor and remote retail seller must file quarterly returns reporting the total amount of tobacco products purchased by the distributor or remote retail seller during the quarter. A return must be filed for each calendar quarter, even if no tax is due. Quarterly returns are due on the 20^th day of the month immediately following the close of the quarter. For example, a return for the 3^rd quarter (July through September) is due October 20^th. If the 20^th falls on a Saturday, Sunday, or legal holiday, the distributor’s return and tax remittance is due the next business day.

Electronic filing

Distributors and remote retail sellers must file their tobacco products tax returns electronically at Colorado.gov/RevenueOnline. Distributors and remote retail sellers must create an account through Revenue Online prior to filing. Form instructions are available online at Tax.Colorado.gov/cigarette-tobacco-products-forms.

Any distributor or remote retail seller who is not able to file electronically should contact the Excise Tax Unit by email at DOR_ExciseTax@state.co.us or by phone at 303‑205‑8287.

Failure to file

If anyone neglects or refuses to file a return for any period for which they have an active tobacco products tax license or any return that is otherwise due, the Department will estimate the tax due based upon the best available information and issue a notice of deficiency for the estimated tax, plus any applicable penalties and interest. If no tax is due, a penalty of $25 will apply.

Other filing obligations

In addition to filing tobacco products tax returns, distributors must comply with other filing requirements relating to the Master Settlement Agreement and the PACT Act.

Master Settlement Agreement

Distributors are required to file either monthly or annual reports with the Department in relation to the Master Settlement Agreement (MSA) using form DR 1285 or DR 1286, respectively. Please see Department publication FYI Excise 18: Master Settlement Agreement for additional information regarding MSA reporting requirements. Forms, publications, and additional information are available online at Tax.Colorado.gov/excise-fuel-tax.

Preventing All Cigarette Trafficking (PACT) Act

Additionally, distributors may be subject to registration and reporting requirements under the Preventing All Cigarette Trafficking (PACT) Act. Anyone who, in interstate commerce, offers, advertises, sells, transfers, or ships for profit cigarettes, roll-your-own tobacco, or smokeless tobacco and who ships to or advertises in Colorado must register with both the state and federal governments and submit monthly filings to the state. Specific forms, instructions, and requirements are available online at atf.gov/alcohol-tobacco/prevent-all-cigarette-trafficking-pact-act and atf.gov/file/102101/download. The required registration form and monthly filings must be submitted to the Department either via web message through Revenue Online or by email to DOR_ExciseTax@state.co.us.

Distributors and remote retail sellers must remit payment of all tax due on or before the applicable due date for the filing of the distributor’s return. Tax payments not made by the applicable due date are subject to penalty and interest, as described later in this publication. A distributor or remote retail seller who remits the applicable tax on or before the due date is allowed to deduct and retain a service fee, as described later in this publication.

Electronic funds transfer (EFT)

Distributors and remote retail sellers are required to remit tobacco products tax via electronic funds transfer (EFT). Information about electronic payment options is available online at Tax.Colorado.gov/pay-excise-fuel-tax.

In general, payments made by EFT must be made by the end of the day on the due date. Please see 1 CCR 201-1, Rule 39-21-119.5 for additional information regarding the timeliness of payments made via EFT.

Service fee

Unless a distributor or remote retail seller is delinquent in remitting the tax due, the distributor may retain a service fee that is generally equal to a certain percentage of the tax otherwise due to cover their expenses for remitting the tax. If any distributor or remote retail seller is delinquent in remitting the tax due, the distributor may not retain any service fee.

In general, the service fee is calculated as a percentage of tax otherwise due. The percentage varies depending on the filing period and whether the tobacco products are modified risk tobacco products (“MRTP”), as reflected in the following table. However, the actual amount of the service fee may differ for moist snuff subject to the minimum tax. The allowable service fee is calculated automatically by the Department’s electronic filing system.

If a distributor has appropriately retained a service fee as described above and, subsequent to the applicable due date, owes additional tax for the filing period as the result of an amended return or an adjustment made by the Department, the distributor is not allowed to retain any service fee from the additional tax, but the distributor is allowed to retain the service fee from the original return, so long as the distributor filed the original return in good faith.

Penalties and interest are imposed under Colorado law whenever a distributor or remote retail seller fails to file a required return or to pay any tax due by the applicable due date.

Penalties

A distributor or remote retail seller who neglects or refuses to file any required return is subject to a penalty of $25 if no tax is due for the filing period.

If a distributor or remote retail seller fails to pay any tax due by the applicable due date, the distributor will owe a penalty equal to 10% of the unpaid tax, plus an additional 0.5% for each month the tax remains unpaid, not to exceed a total of 18%.

Additionally, distributors are subject to criminal penalties if they willfully make a false or fraudulent return or false statement on any return or if they willfully evade the payment of any tax.

Interest

Interest accrues on any late payment of tax from the original due date for the tax to the date the tax is paid. The rate of interest accrual depends on the calendar year(s) over which the deficiency continues. Additionally, a discounted rate is allowed if the distributor:

• pays the tax in full prior to the issuance of a notice of deficiency;
• pays the tax in full within 30 days of the issuance of a notice of deficiency; or
• within 30 days of the issuance of a notice of deficiency, enters into an agreement with the Department to pay the tax.

The discounted and non-discounted, regular interest rates for recent years are listed in the following table:

Every distributor must keep at each licensed place of business complete and accurate records for that place of business for a period of at least three years. These records must include itemized invoices for all tobacco products that are or were:

• held, purchased, manufactured, or sold;
• brought into Colorado or caused to be brought into Colorado from outside the state;
• shipped or transported to retailers in Colorado; or
• transferred to other retail outlets owned or controlled by that licensed distributor.

The distributor’s records must show the names and addresses of purchasers, the inventory of all tobacco products on hand, and other pertinent papers and documents relating to the purchase, sale, or disposition of tobacco products.

Distributors are not required to retain invoices for any sales they make at their licensed business location in Colorado to the ultimate consumer of the tobacco products.

Every remote retail seller must keep complete and accurate records necessary for the determination of the correct tax liability, including itemized invoices, to validate the actual costs they paid for all cigars and pipe tobacco offered for sale to consumers in Colorado. 

The following is a list of statutes, regulations, forms, and guidance pertaining to filing, remittance, and recordkeeping requirements for tobacco products tax. This list is not, and is not intended to be, an exhaustive list of authorities that govern the tax treatment of every situation. Individuals and businesses with specific questions should consult their tax advisors.

Statutes and regulations

• § 39-28.5-102, C.R.S. Tax levied.
• § 39-28.5-102.5, C.R.S. Tax levied – state constitution.
• § 39-28.5-105, C.R.S. Books and records to be preserved.
• § 39-28.5-106, C.R.S. Returns and remittance of tax.
• § 39-28.5-110, C.R.S. Prohibited acts – penalties.
• § 39-21-109, C.R.S. Interest on underpayment.
• § 39-21-110.5, C.R.S. Rate of interest to be fixed.
• § 39-21-113, C.R.S. Reports and returns.
• § 39-21-119, C.R.S. Filing with executive director.
• § 39-21-119.5, C.R.S. Mandatory electronic filing.
• Rule 39-28.5-106. Filing Tobacco Products Tax Returns.
• Rule 39-21-119.5. Requirements for Electronic Filing and Electronic Payment.

Forms and guidance

• Tax.Colorado.gov
• Tax.Colorado.gov/tobacco-products
• Tax.Colorado.gov/cigarette-tobacco-products/file-pay
• Tax.Colorado.gov/cigarette-tobacco-products-forms
• Colorado.gov/RevenueOnline
• FYI Excise 18: Master Settlement Agreement
• Licensed Distributor Reporting Form for Cigarette Sales of Non-Participating Manufacturer Brands (DR 1285)
• Tobacco Distributor’s Certificate for Exemption MSA/Non-Participating Manufacturer Brands (DR 1286)
• atf.gov/alcohol-tobacco/prevent-all-cigarette-trafficking-pact-act

Part 5: Credits and Refunds

State law prescribes specific conditions under which a distributor or remote retail seller can claim a refund or credit for taxes previously paid. In general, distributors can claim a credit for taxes previously paid on tobacco products that are returned to the manufacturer, destroyed by the distributor, or shipped outside of Colorado. Additionally, distributors and remote retail sellers may be able to claim a refund for taxes attributable to bad debts, but only if certain conditions are met. This Part 5 provides information regarding credits and refunds allowed for tobacco products taxes.

A distributor may claim credit on their tobacco products tax return for tax the distributor paid on tobacco products that are:

• returned to the manufacturer by the distributor or destroyed by the distributor;
• shipped or transported by the distributor to retailers outside of Colorado to be sold by those retailers; or
• shipped or transported by the distributor on or after January 1, 2021 to a consumer outside of Colorado.

If the credit claimed exceeds the amount of tax otherwise due on the distributor’s return, the distributor may submit a completed form DR 0137E, Excise, Fee and Fuel Claim for Refund, to request a refund. Forms and instructions are available online at Tax.Colorado.gov/cigarette-nicotine-tobacco-forms. The distributor must submit with the refund claim appropriate documentation in support of the refund claimed.

Distributors or remote retail sellers may claim a refund of previously paid tax attributable to any portion of a debt related to a sale of tobacco products if the debt has become worthless or uncollectible in the time after the tax has been paid. Refunds are allowed only if:

• the tax is not otherwise deductible or excludable;
• the debt has been charged off as uncollectible on the books of the distributor or remote retail seller; and
• the distributor or remote retail seller is allowed an income tax deduction for the debt pursuant to section 166 of the Internal Revenue Code. 

The allowable refund is limited to the amount of tax previously paid on tobacco products that the distributor or remote retailer seller no longer possesses. No refunds are allowed for:

• any interest on the wholesale price of tobacco products;
• uncollectible amounts on property that remain in the possession of the distributor or remote retail seller;
• expenses incurred in attempting to collect any account receivable or any portion of the debt recovered;
• an account receivable that has been sold to a third party for collection; or
• repossessed property.

Claims for refunds

Licensees may claim a refund for bad debts by filing a completed form DR 0137E, Excise, Fee and Fuel Claim for Refund. Forms and instructions are available online at Tax.Colorado.gov/cigarette-nicotine-tobacco-forms. The licensee must submit the following documentation with the claim:

• a copy of the original invoice issued by the licensee;
• evidence that the tobacco products described in the invoice were delivered to the person who ordered them;
• evidence that the person who ordered and received the tobacco products did not pay the licensee for them; and
• evidence that the licensee used reasonable col-lection practices in attempting to collect the debt.

Repayment of refund for bad debts recovered

Subsequent to receiving a refund, if the licensee receives a payment for the bad debt, the licensee will be liable to the Department for payment of the tax attributable to the amount received. The licensee must remit the tax with the return filed for the quarter in which payment for the bad debt was received.

The following is a list of statutes, regulations, forms, and guidance pertaining to credits and refunds allowed for the tobacco products tax. This list is not, and is not intended to be, an exhaustive list of authorities that govern the tax treatment of every situation. Individuals and businesses with specific questions should consult their tax advisors.

Statutes and regulations

• § 39-28.5-107, C.R.S. When credit may be obtained for tax paid.

Forms and guidance

• Tax.Colorado.gov
• Tax.Colorado.gov/tobacco-products
• Tax.Colorado.gov/cigarette-nicotine-tobacco-forms
• Excise, Fee and Fuel Claim for Refund (DR 0137E)