SB 883
Department of Legislative Services
Maryland General Assembly
2021 Session
FISCAL AND POLICY NOTE
Enrolled - Revised
Senate Bill 883 (Senator Guzzone)
Budget and Taxation and Finance Ways and Means and Economic Matters
Tobacco Tax and Sales and Use Tax - Out-of-State Sales of Premium Cigars and
Pipe Tobacco and Tobacco Smoking Devices
This emergency bill establishes licensure requirements for remote (out-of-state) tobacco
sellers. Accordingly, a person located outside of Maryland must be a licensed remote
tobacco seller in order to sell premium cigars or pipe tobacco to consumers in the State.
An applicant for a remote tobacco seller license must identify the premium cigars and pipe
tobacco that the applicant intends to sell and ship into the State, utilize third-party age
verification for purchases and deliveries, and consent to being subject to the State tobacco
tax. The bill also alters the definition of an “out-of-state seller” as it applies to the tobacco
tax and makes various other modifications to tobacco tax provisions as they apply to
out-of-state sellers of premium cigars and pipe tobacco. Finally, the bill modifies the
definition of “other tobacco products” (OTP), as it applies to OTP licensing and tobacco
tax provisions, to exclude tobacco pipes, and specifies that the sales and use tax rate for
tobacco pipes is 12% of the taxable price. The bill’s provisions related to out-of-state
sales and their tax rates take effect July 1, 2022.
Fiscal Summary
State Effect: General fund revenues are not materially affected in FY 2021 or 2022 but
increase minimally beginning in FY 2023, as discussed below. General fund expenditures
may increase minimally to the extent that penalties are imposed. The Comptroller’s Office
and the Alcohol and Tobacco Commission (ATC) can implement the bill with existing
budgeted resources.
Local Effect: Local government expenditures may increase minimally to the extent that
penalties are imposed. Local government finances are not otherwise directly affected.
Small Business Effect: Minimal; the bill primarily affects businesses located outside of
the State.
 Analysis
Bill Summary: A person located outside the State must have a remote tobacco seller
license before the person may sell premium cigars or pipe tobacco to a consumer in the
State. A remote tobacco seller license authorizes the licensee to sell premium cigars and
pipe tobacco through a common carrier or private delivery service to a consumer in the
State by receiving and filling orders that the consumer transmits by electronic means.
License Issuance and Renewal
The Executive Director of ATC must issue a license to each applicant who meets the
requirements for licensure as specified under the bill. An applicant must pay to the
executive director a fee of $25 or an amount set by regulation. The executive director must
pay all license fees collected under the bill into the State general fund. The bill further
specifies that the General Assembly intends that these license fees be used to administer
the bill’s licensure provisions.
Unless renewed, the license expires June 30 after its effective date. The issuing official
must mail a specified renewal notice to the licensee at least one month before the expiration
of the license. The licensee may renew the license for an additional one-year term if the
licensee is otherwise entitled to be licensed, submits a renewal application, and pays to the
issuing official the $25 license fee. The issuing official must renew the license of
each licensee who meets the applicable requirements. A licensee may not assign the
license.
Before the issuance or renewal of any license, the executive director must conduct an
investigation with regard to the applicant, the business to be operated, and the facts set
forth in the application.
Authorized Disciplinary Actions
Subject to specified hearing provisions, the executive director may deny a license to an
applicant, reprimand a licensee, or revoke a license if the applicant or licensee commits
specified acts of fraud, is convicted of specified crimes, violates specified laws or
regulations relating to the sale of tobacco, or fails to utilize third-party age verification for
purchases and deliveries. The executive director must deny a license to any applicant who
has had a license revoked under the above circumstances until one year has passed since
the revocation and the executive director is satisfied that the applicant will comply with
relevant State laws and regulations.
The bill further specifies administrative procedures for the revocation of a license by the
executive director. A party to a proceeding before the executive director who is aggrieved
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by a final decision of the executive director in a contested case is entitled to judicial review
as provided under Maryland’s Administrative Procedure Act.
Prohibited Acts and Penalties
A person who acts, attempts to act, or offers to act as a licensed remote tobacco seller
without an appropriate license is guilty of a misdemeanor and is subject to a fine of up to
$1,000 and/or imprisonment for up to 30 days. Each day that a violation continues is a
separate offense. Similarly, a person who violates any other specified provision of the bill
related to remote tobacco sellers is guilty of a misdemeanor and subject to a fine of up to
$1,000 and/or imprisonment for up to 30 days.
Adoption of Regulations by the Executive Director
The executive director must adopt regulations to implement the bill’s provisions applicable
to the licensure of remote tobacco sellers. The regulations must include minimum standards
for third-party age verification services that a remote tobacco seller must use, as well as
minimum standards for the types of delivery services a tobacco seller is authorized to use.
Tobacco Tax for Out-of-state Sellers
The bill expands the definition of an “out-of-state seller” as it applies to Title 12 of the
Tax General Article (Tobacco Tax) to mean a person (1) located outside of the State that
sells, holds for sale, ships, or delivers premium cigars or pipe tobacco to consumers in the
State, if specified minimum sale thresholds are met (as provided under current law) and
(2) who is required to hold a remote tobacco seller license as provided under the bill. Any
person who meets the definition of an out-of-state seller as modified by the bill must pay
the State tobacco tax on pipe tobacco and premium cigars on which the tobacco tax has not
been paid.
The bill further specifies that, for premium cigars and pipe tobacco sold by an out-of-state
seller, the tobacco tax rate applies to the actual price paid by an out-of-state seller for a
stock keeping unit or, if the actual price paid by an out-of-state seller for a stock keeping
unit is not available, the average of the actual price paid by an out-of-state seller for a stock
keeping unit over the 12 calendar months before January 1 of the year in which the sale
occurs. (Under current law, the tax applies to the wholesale price of the product.) The
Comptroller must adopt regulations to implement these provisions.
An out-of-state seller must file an information return required by the Comptroller. The
Comptroller must adopt regulations that (1) require an out-of-state seller to maintain
records of the cost of premium cigars and pipe tobacco acquired for sale into the State and
(2) specify the period for which an out-of-state seller must maintain these records. An
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out-of-state seller must allow the Comptroller to examine records maintained in accordance
with the bill.
An out-of-state seller must pay the tobacco tax on pipe tobacco and premium cigars by
filing a tax return with any supporting schedules on forms provided by the Comptroller by
the twenty-first day of the month after a sale of premium cigars or pipe tobacco is made or
on dates specified by the Comptroller by regulation. For the covered period, the return must
state (1) the stock keeping unit number for any premium cigars and pipe tobacco sold and
(2) for each stock keeping unit, the quantity and price of premium cigars and pipe tobacco
sold.
The Comptroller may require an out-of-state seller to post security for the tax in the amount
of $5,000 plus the amount, if any, by which the tobacco tax due for any reporting period
exceeds $5,000. The Comptroller may exempt a person from posting security for the
tobacco tax if the person is and has been licensed to act as a remote tobacco seller for the
past five years and is in continuous compliance with tobacco tax laws and the conditions
of the person’s posted security. However, a person is not in continuous compliance with
the tobacco tax laws for a period if the person has violated specified provisions of the bill
with respect to remote tobacco sellers.
Other Changes to Tobacco Taxes
The bill defines “tobacco pipe” to mean a pipe made primarily of meerschaum, wood, or
porcelain with a bowl designed to be used without a screen or filter and modifies the
definition of OTP to exclude tobacco pipes. Thus, these products are not subject to the OTP
excise tax. (Under current law, as enacted by Chapter 37 of 2021, the OTP tax rate for all
products other than cigars and pipe tobacco is 53% of the wholesale price.) Instead, the bill
specifies that tobacco pipes are subject to the 12% sales and use tax rate that, under current
law (as enacted by Chapter 37), generally applies to electronic smoking devices (ESD).
These provisions of the bill take effect upon enactment and apply retroactively to any tax
imposed on OTP on or after March 14, 2021. The Comptroller must issue a refund to any
person who paid the higher tobacco tax on tobacco pipes in the intervening period and
applies for a refund.
Current Law: In the State, a person must be licensed under Title 16.5 of the Business
Regulation Article (Other Tobacco Products) in order to act as an OTP manufacturer,
storage warehouse, wholesaler, retailer, or tobacconist in the State. Chapter 37 of 2021
expanded the definition of OTP to mean a product that is intended for human consumption
or likely to be consumed, whether smoked, heated, chewed, absorbed, dissolved, inhaled,
or ingested in any manner that is made of, derived from, or contains tobacco or nicotine,
with specified exclusions. OTP (1) includes cigars, premium cigars, pipe tobacco, snuff,
snus, filters, rolling papers, pipes, and hookahs and (2) excludes cigarettes, ESD, or a drug,
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device, or combination product authorized for sale by the U.S. Food and Drug
Administration (FDA) under the federal Food, Drug, and Cosmetic Act. (Prior to the
enactment of Chapter 37, OTP was defined as any cigar or roll for smoking, other than a
cigarette, made in whole or in part of tobacco or any other tobacco or product made
primarily from tobacco, other than a cigarette, that is intended for consumption by smoking
or chewing or as snuff.)
Section 16.5-217 of the Business Regulation Article generally prohibits a person from
selling or shipping OTP, ordered or purchased by mail or through a computer network,
telephonic network, or other electronic network by a consumer or unlicensed recipient,
directly to a consumer or unlicensed recipient in the State. The provisions of Title 16.5 do
not apply, however, to a seller located outside the State when selling, holding for sale,
shipping, or delivering premium cigars or pipe tobacco to consumers in the State.
Collection of Tobacco Taxes from Out-of-state Sellers
Chapter 735 of 2019 required out-of-state sellers to pay the tobacco tax on pipe tobacco
and premium cigars on which the tobacco tax has not been paid. The Act defined
“out-of-state seller” as a person located outside the State that sells, holds for sale, ships, or
delivers premium cigars or pipe tobacco to consumers in the State if, during the previous
calendar year or the current calendar year, (1) the person’s gross revenue from the sale of
premium cigars or pipe tobacco in the State exceeds $100,000 or (2) the person sold
premium cigars or pipe tobacco into the State in 200 or more separate transactions. The
enactment of Chapter 735 followed the U.S. Supreme Court’s ruling in South Dakota v.
Wayfair, Inc. 585 U.S. __ (2018), which upheld South Dakota legislation requiring online
sellers with annual sales of over $100,000 or with more than 200 different transactions to
residents in the state to collect the state’s sales tax.
Tobacco Tax for Other Tobacco Products
The tobacco tax rate for pipe tobacco and premium cigars is 30% and 15% of the wholesale
price, respectively. For non-premium cigars, the tobacco tax rate is 70% of the wholesale
price. These revenues accrue to the general fund. Chapter 37 of 2021 increased the tobacco
tax rate for OTP other than cigars and pipe tobacco from 30% to 53%. The Comptroller
may require a person subject to the tobacco tax to post security for the tax, as specified.
“Premium cigars,” as defined under State law, means cigars that (1) have hand-rolled
wrappers made from whole tobacco leaves where the filler, binder, and wrapper are made
of all tobacco, and may include adhesives or other materials used to maintain size, texture,
or flavor or (2) are designated as premium cigars by the executive director by regulation.
“Pipe tobacco” is defined as any tobacco that, because of its appearance, type, packaging,
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or labeling, is suitable for use and likely to be offered to, or purchased by, consumers as
tobacco to smoke in a pipe.
In addition, the State sales tax rate of 6% is imposed on the final retail price of OTP.
Monitoring and Enforcement
Pursuant to Chapter 12 of 2019 and Chapters 359 and 360 of 2020, alcohol and tobacco
enforcement duties are transferred from the Comptroller’s Field Enforcement Division to
ATC effective January 1, 2021. Thus, ATC is responsible for monitoring and enforcement
activity related to tobacco licenses. The Comptroller’s Office, however, retains duties
related to enforcement of tobacco taxes.
Non-Face-to-face Sale of Tobacco Products
The federal Tobacco Control Act (TCA), enacted in June 2009, requires FDA to, among
other things, issue regulations regarding the sale and distribution of tobacco products that
occur through means other than a direct, face-to-face exchange between a retailer and a
consumer in order to prevent the sale and distribution of tobacco products to individuals
who have not attained the minimum age for purchase of such products, including
requirements for age verification. In a June 2020 report to Congress, FDA advised that it
has yet to issue rules contained in TCA related to non-face-to-face sales.
State Revenues: Committee narrative in the 2020 Joint Chairmen’s Report requested that
the Comptroller’s Office study ways in which to solve difficulties in properly calculating
the correct amount of the excise tax owed for online premium cigar sales. In response, the
Comptroller’s Office issued a report on cigar excise tax application for out-of-state sellers.
According to the report, the difficulties out-of-state sellers experience in calculating the
appropriate excise tax seem to arise from identifying where in the purchasing chain the tax
applies. In addition, the report recommends that, for out-of-state sellers, the tobacco tax be
calculated by applying the tax rate to (1) the “actual cost” of each stock keeping unit sold
online directly to Maryland consumers or (2) the cost established for each stock keeping
unit in the out-of-state seller’s “actual cost list.”
The bill makes various clarifying changes to tobacco tax provisions as they apply to
out-of-state sellers that generally reflect the recommendations of the Comptroller’s report.
In addition, the bill establishes a licensure requirement for remote tobacco sellers located
outside of the State. To the extent that the bill results in increased compliance with the
tobacco tax as it applies to the remote sale of premium cigars and/or pipe tobacco, general
fund revenues increase minimally beginning in fiscal 2023, which reflects the bill’s
July 1, 2022 effective date for these provisions. Any such impact cannot be reliably
estimated but is nonetheless expected to be minimal.
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The bill also modifies the definition of OTP as it applies to the tobacco tax to exclude
tobacco pipes and specifies that tobacco pipes are subject to an enhanced State sales and
use tax rate of 12%. As discussed above, Chapter 37 of 2021 expanded the definition of
OTP to include tobacco pipes (as well as filters, rolling papers, pipes, and hookahs) and,
thus, subjected these products (which were not previously subject to the OTP tax) to an
OTP tax rate of 53%, in addition to the 6% State sales and use tax. The March 2021 Board
of Revenue Estimates forecast incorporated estimated additional general fund revenues
generated by the Chapter 37 modifications to tobacco tax rates but did not account for any
revenue increase from the imposition of the OTP tax on tobacco pipes (which, as noted
above, were not previously subject to the tax). Accordingly, it is assumed that State
revenues are not materially impacted by the above-described changes made by the bill,
particularly since those provisions are retroactive to March 14, 2021.
General fund revenues for ATC increase negligibly beginning in fiscal 2023 due to the
collection of license fees under the bill. The annual license fee established by the bill for
the remote tobacco seller license is $25. It is unknown how many sellers will be subject to
the bill’s licensure requirements and the associated fee; however, the number is expected
to be minimal.
General fund revenues increase further to the extent that monetary penalties are imposed
for violations under the bill. Any such impact cannot be reliably predicted but is likely to
be minimal.
State Expenditures: General fund expenditures potentially increase due to the bill’s
incarceration penalty. Any such impact, however, is anticipated to be minimal.
The Comptroller’s Office advises that it can implement the bill’s provisions with existing
budgeted resources. ATC can also handle its responsibilities under the bill with existing