Should the Kansas cigarette tax be included in the base when calculating retailers' sales tax on cigarettes?

Plain-English summary

A taxpayer asked a "tax on a tax" question: should the cigarette tax be included in the base for calculating retailers' sales tax? The Department's answer is yes.

Why — the legal-incidence test. The controlling question is whose tax it legally is. The Department explained that the location of the economic impact of a tax does not fix its legal incidence. The legal incidence falls on the purchaser only if state law imposes a legal obligation on the purchaser to pay the tax, or to reimburse the vendor for it. This test comes from U.S. Supreme Court decisions, including Gurley v. Rhoden, 421 U.S. 200, 204-5 (1975). Because the legal incidence of the Kansas cigarette tax is not on the final user (purchaser) but on the vendor, the cigarette tax is properly treated as part of the retailer's cost and the selling price — so it belongs in the taxable base for sales tax.

The Kansas statute. Separately, Kansas law specifically addresses the sale of cigarettes. K.S.A. 79-3603(a) requires that sales of cigarettes be subject to Kansas retailers' sales tax, and the selling price is the amount on which the sales tax is based. Since the cigarette tax is embedded in that selling price, sales tax is computed on the price inclusive of the cigarette tax.

Bottom line. Compute Kansas sales tax on cigarettes using the full selling price, including the cigarette tax — do not back the cigarette tax out of the base.

What this means for you

Cigarette retailers

When you ring up cigarettes, calculate sales tax on the full selling price, which already includes the cigarette (tobacco) tax. You do not deduct the cigarette tax before applying sales tax — it is part of the base.

The line-item question

Even if a tax is economically "passed through" to the customer, it stays in the sales tax base when its legal incidence is on the seller. That is the same principle Kansas applies to federal fuel excise taxes and to line-item franchise fees — the label doesn't remove it from the base.

Confirm current rates

Cigarette and sales tax rates change over time. This ruling addresses the method (the cigarette tax stays in the base), not a specific current rate — confirm the applicable rates before computing tax on a present-day sale.

Common questions

Q: Is the cigarette tax included when I calculate sales tax?
A: Yes. The Department advised that the cigarette tax is part of the selling price and is included in the base for calculating Kansas retailers' sales tax.

Q: Why is it included?
A: Because the legal incidence of the cigarette tax is on the vendor, not the final purchaser, so it is part of the selling price (applying the Gurley v. Rhoden legal-incidence test).

Q: What does the Kansas statute say?
A: K.S.A. 79-3603(a) makes sales of cigarettes subject to Kansas retailers' sales tax, computed on the selling price.

Q: Do I back the cigarette tax out before applying sales tax?
A: No. Sales tax is calculated on the full selling price, which includes the cigarette tax.

Citations and references

• K.S.A. 79-3603(a) — imposes Kansas retailers' sales tax on the gross receipts / selling price from retail sales, and specifically reaches sales of cigarettes.
• Gurley v. Rhoden, 421 U.S. 200, 204-5 (1975) — the legal-incidence test: a tax's economic impact does not fix its legal incidence; the incidence is on the purchaser only if the law obliges the purchaser to pay or reimburse it.
• K.A.R. 92-19-59 — the regulation authorizing Kansas private letter rulings.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2002-063

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

July 23, 2002

XXXXXXXXXXXX
XXXXXXXXXXXXX
XXXXXXXXXXXXXXXX

Dear XXXXXXXXXXX:

The purpose of this letter is to respond to your letter dated July 10, 2002. The contents of you letter are duly noted.

Your question is, “Should the cigarette tax be included in base for the calculation of retailers’ sale tax?”

Since the legal incidence of the cigarette tax is not on the final user (purchaser), it is appropriate for the cigarette tax to be included in the taxable base for the calculation of sales tax. The basic test was established by United States Supreme Court decisions. These decisions point out that the location of the economic impact of a tax does not fix the legal incidence of a tax. It is only if the state law imposes a legal obligation on the purchaser either to pay the tax, or to reimburse the vendor for the tax payment, that the legal incidence of the tax falls on the purchaser. In Gurley v. Rhoden, 421 US 200, 204-5 (1975).

Also, Kansas law, See K.S.A. 79-3603(a), specifically addresses the sale of cigarettes. This statute requires that the sales of cigarettes be subject to Kansas retailers’ sales tax. The selling price is the amount that the sales tax is based.

This is a private letter ruling pursuant to K.A.R. 92-19-59. It is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to an accurate determination by the department, this ruling is null and void. This ruling will be revoked by operation of law without further department action if there is a change in the controlling statutes, administrative regulations, revenue rulings or case law that materially effects this determination.

Sincerely,

Mark D. Ciardullo
Tax Specialist

MDC

Date Composed: 07/18/2002 Date Modified: 07/19/2002

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