Why is the OTP Tax Rate Going Up?
In response to the CDTFA’s tax increase announcement, we asked the question “why is the OTP tax rate going up”. Here is the official correspondence from CDTFA…
Sent: Friday, May 21, 2021 2:58 PM
To: Charles Janigian <charles@ retailtobacconists.com >
Subject: RE: New Tax Rate on Other Tobacco Products Effective July 1, 2021 through June 30, 2022
Your inquiry regarding the new OTP tax rate for fiscal year 2021-22 has been forwarded to me for a response. You asked if the OTP rate notice (L-808) is accurate and question why the OTP tax rate is going up from 56.93% to 63.49% on July 1, 2021. You state the wholesale cost of cigarettes has gone up not down over the past year and thus, the new OTP tax rate should have gone down.
The special notice em-1103/L-808, New tax Rate on Other Tobacco Products Effective July 1, 2021, through June 30, 2022, issued by California Department of Tax and Fee Administration (CDTFA), is accurate, and the OTP tax rate for fiscal year (FY) 2021-22 is 63.49 percent, an increase of 6.56 percentage points from the 56.93 percent rate effective FY 2020-21.
The tax rate is required by statute to be equivalent to the combined rate of tax imposed on cigarettes (RTC section 30123(b)). The calculation of the tax rate on other tobacco products must be based on the wholesale cost of cigarettes as of March 1 and the tax rate is to be effective during the next fiscal year (RTC section 30126). The tax rate for other tobacco products is calculated by dividing the tax rate imposed on cigarettes by the average wholesale cost of cigarettes.
The tobacco products tax rate calculation formula itself has not changed. The CDTFA updated its data source and methodology to increase the accuracy of its tobacco products tax rate calculation. These changes are reflected in the tobacco products tax rate beginning with FY 2021-22.
The CDTFA implemented standardized cigarette tax reporting starting with the May 2020 filing period. When this new reliable data source became available, the CDTFA was able to utilize the data in determining the average wholesale cost of cigarettes. The CDTFA utilized the most recent three months (November, December, and January) of cigarette manufacturer and importer reported cigarette sales to determine the average cigarette sales price (wholesale cost of cigarettes) for the FY 2021-22 OTP tax rate. The new data includes all classes of cigarettes (premium and non-premium) covering the California cigarette industry and provides up-to-date wholesale cost of cigarettes. These changes provide CDTFA with current and reliable California cigarette price data for the tobacco product tax rate calculation.
Hope this information helps address your question on our OTP tax rate.
Business Taxes Specialist
California Department of Tax and Fee Administration
Program Administration Branch
450 N Street, MIC: 31, Sacramento, CA 95814